<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE COMMISSION
FOR THE TRANSITION PERIOD FROM __________________ TO ____________________
COMMISSION FILE NUMBER 1-10633
CFX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW HAMPSHIRE 02-0402421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 352-2502
-----------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.66 2/3 PAR VALUE, LISTED ON THE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 20, 1998, was $772,052,993.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.
As of March 20, 1998, 24,500,183 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders for the fiscal year ended December 31, 1997, which is to be filed
within 120 days of the end of the Company's fiscal year, are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference
herein of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
===============================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
CFX Corporation ("CFX" or the "Company") is a bank holding company
incorporated under the laws of the State of New Hampshire. The Company's
wholly-owned subsidiary banks are CFX Bank, headquartered in Keene, New
Hampshire, Orange Savings Bank ("Orange"), headquartered in Orange,
Massachusetts, and Safety Fund National Bank ("Safety Fund"), headquartered in
Fitchburg, Massachusetts.
CFX Bank is a New Hampshire state-chartered savings bank that has
been incorporated since 1897. CFX Bank had total assets of $2.5 billion as of
December 31, 1997 and operates 43 full-service branches and 184 automated and
remote service units in its service area. CFX Bank's subsidiary, CFX Financial
Services, Inc. ("CFX Financial"), owns 51% of CFX Funding L.L.C. ("CFX
Funding"), which engages in the facilitation of lease financing and
securitization. During the fourth quarter of 1997, CFX Bank dissolved its
wholly-owned subsidiary, CFX Capital, which owned CFX Mortgage, Inc. CFX
Mortgage was also dissolved and its operations were combined with the operations
of CFX Bank. The dissolutions had no significant impact on the Company's
consolidated financial statements and were undertaken to streamline the
organizational structure of the Company.
Orange is a Massachusetts state-chartered savings bank that had
total assets of $86 million as of December 31, 1997. Orange operates two
full-service branches in Orange and Athol, Massachusetts.
Safety Fund, a national banking association, had total assets of
$340 million as of December 31, 1997 and operates 11 full-service branches in
its service area. In addition, Safety Fund operates an Investments and Trust
Services division with $506 million in assets under administration.
On August 29, 1997, the Company acquired Community Bankshares, Inc.
("Community"), a bank holding company with total assets of $616 million
headquartered in Concord, New Hampshire, and its subsidiary banks, Concord
Savings Bank and Centerpoint Bank. In connection with the merger, Concord, with
8 branches, and Centerpoint, with 4 branches, were merged into CFX Bank. A total
of 5,304,293 shares of the Company's common stock was issued in exchange for all
of the issued and outstanding shares of Community common stock. The transaction
was accounted for as a pooling-of-interests.
Also on August 29, 1997, the Company acquired Portsmouth Bank
Shares, Inc. ("Portsmouth"), a bank holding company, and its subsidiary bank,
Portsmouth Savings Bank, a state-chartered savings bank. Portsmouth had total
assets of $259 million and operated 3 full-service branches in its service area.
In connection with the Portsmouth acquisition, Portsmouth Savings Bank was
merged into CFX Bank. A total of 5,502,005 shares of the Company's common stock
was issued in exchange for all of the issued and outstanding shares of
Portsmouth common stock. The transaction was accounted for as a
pooling-of-interests.
As previously reported, on October 27, 1997, the Company entered
into a definitive agreement to be acquired by Peoples Heritage Financial Group,
Inc. ("PHFG"), a bank holding company headquartered in Portland, Maine. Pursuant
to the agreement, each of the issued and outstanding shares of the Company's
common stock (24,071,000 at December 31, 1997) will be converted into .667
shares of PHFG common stock. The PHFG transaction is expected to be a tax-free
exchange to the owners of the Company and is subject to regulatory approval. On
February 9, 1998, the shareholders of the Company and PHFG approved the
transaction. It is anticipated that the transaction will be accounted for as a
pooling-of-interests. At December 31, 1997, PHFG reported total assets of $6.8
billion, deposits of $4.8 billion and shareholders' equity of $475 million. In
connection with the acquisition, the Company's banking subsidiaries will be
merged into PHFG's banking subsidiaries. Specifically, CFX Bank will be merged
into Bank of New Hampshire, PHFG's New Hampshire subsidiary, and Safety Fund and
Orange will both be merged into The Family Bank, F.S.B., PHFG's Massachusetts
subsidiary.
In connection with the PHFG merger agreement, the Company and PHFG
entered into Stock Option Agreements whereby the Company gave PHFG an option to
purchase up to 19.9 percent of its outstanding common stock under certain
circumstances and PHFG gave the Company an option to purchase up to 10.0 percent
of its outstanding common stock under certain circumstances.
The Company serves as a financial intermediary, attracting deposits
from, and making loans to, consumers and small-to-mid sized businesses. Its
principal lines of business are mortgage banking, retail banking, commercial
banking, investment and trust services, and equipment lease funding. The
Company's primary retail banking markets are New
2
<PAGE> 3
Hampshire and central Massachusetts. The Company uses loan production offices
and correspondent banks attracting loan applications from throughout New
Hampshire, Maine, Vermont and northern Massachusetts.
CFX Bank, Orange, and Safety Fund (collectively referred to as the
"Banks") use customer deposits and loan payments to fund first mortgage loans on
residential real estate. In addition to originating mortgage loans, the Banks
also make commercial, consumer and other term and installment loans. Other
traditional services available at the Banks include: a wide range of deposit
programs designed to attract both short-term and long-term deposits from the
general public, businesses and local government; safe deposit boxes; travelers
checks and money orders; and many other banking services.
To further the Banks' goals of providing a broad range of retail
services and to generate additional fee income, the Banks operate remote service
units and automated teller machines located at various business locations in
their respective service areas providing customers with a convenient vehicle for
conducting routine banking transactions. A full line of trust and investment
management services are also available to the Banks' customers. These services
to customers were enhanced by the acquisition of Safety Fund, which has provided
trust services to its customers for many years. These services have been
expanded to CFX Bank.
CFX Bank originates and purchases residential and construction
mortgage loans and, in addition to keeping loans for their own portfolio, sells
loans to Safety Fund and Orange and in the secondary market, while retaining the
servicing for a majority of these loans. CFX Bank is an approved seller and
servicer of the Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, Department of Housing and Urban Development, Veteran's
Administration, and New Hampshire Housing Financing Authority. CFX Bank services
loans for others in an aggregate amount of $1.4 billion as of December 31, 1997.
The Company has operated a small-ticket lease financing and
securitization business through CFX Funding. CFX Funding's strategy was to
increase the availability of credit to a select group of lease originators
(lessors) while controlling the risk inherent in lease portfolios through credit
enhancements. Warehouse lines of credit provided by CFX Bank to these
originators are typically paid down every 90 to 180 days through securitization
or sales of the various lease portfolios. During the fourth quarter of 1997, the
Company discontinued future operations of CFX Funding with respect to its
securitization business. As part of this discontinuance, and as a result of
resolving a dispute between the Company and a credit insurer of certain
equipment leases held in four securitized lease pools, the Company recorded, as
previously reported, a $4.4 million after-tax charge.
The operating results of the Company depend primarily on its net
interest and dividend income, which is the difference between (i) interest and
dividend income on earning assets, primarily loans, leases, trading and
investment securities, and (ii) interest expense on interest bearing
liabilities, which consist of deposits and borrowings. The Company's results of
operations are also affected by the provision for loan and lease losses,
resulting from the Company's assessment of the adequacy of the allowance for
loan and lease losses; the level of its other operating income, including gains
and losses on the sale of loans and securities, and loan and other fees;
operating expenses; and income tax expenses.
The Company has made, and may continue to make, various
forward-looking statements with respect to earnings per share, the effect of the
PHFG merger, cost savings related to acquisitions, credit quality and other
financial and business matters for 1998 and, in certain instances, subsequent
periods. The Company cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, and that statements for
periods subsequent to 1998 are subject to greater uncertainty because of the
increased likelihood of changes in underlying factors and assumptions. Actual
results could differ materially from forward-looking statements. In addition to
those factors previously disclosed by the Company and those factors identified
elsewhere herein, the following factors could cause actual results to differ
materially from such forward-looking statements: continued pricing pressures on
loan and deposit products, actions of competitors, changes in economic
conditions, the extent and timing of actions of the Federal Reserve, customers'
acceptance of the Company's products and services, the extent and timing of
legislative and regulatory actions and reforms, changes in the interest rate
environment that reduce interest margins, estimated cost savings from recent
acquisitions and mergers cannot be fully realized within the expected time
frame, revenues following such transactions are lower than expected, and costs
or difficulties related to the integration of acquired and existing businesses
are greater than expected. The Company's forward-looking statements speak only
as of the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
3
<PAGE> 4
MARKET AREA
The Banks operate primarily in New Hampshire and central
Massachusetts. Based on total deposits as of June 30, 1996, CFX Bank had the
largest market share in Cheshire County with 55% of the total deposit base. In
each of the other three New Hampshire counties CFX Bank operates in, Belknap,
Hillsborough and Merrimack, CFX Bank has less than a 4% market share.
Collectively, CFX Bank ranks 5th in New Hampshire with 4.33% of total deposits.
Furthermore, the acquisition of Safety Fund increased the Company's market share
in Worcester County, Massachusetts from 1% to 4%.
INVESTMENT PORTFOLIO
The following table sets forth the book value of securities
available for sale and securities held to maturity at the dates indicated.
Securities available for sale are carried at estimated fair value. Securities
held to maturity are carried at amortized cost.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U. S. Treasury and agency obligations $ 115,473 $ 226,126 $ 196,875
State and municipal 447 2,005 971
Corporate bonds - 14,284 25,097
Federal agency mortgage pass-through securities 165,337 105,524 89,658
Other collateralized mortgage obligations (CMO's) 189,850 19,608 24,158
Other asset-backed securities 12,766 3,407 6,587
Other debt securities - 4,869 -
Marketable equity securities 23,973 21,493 19,431
Federal Home Loan Bank of Boston and
Federal Reserve Bank of Boston stock 26,704 17,580 13,609
------------- ------------- -------------
$ 534,550 $ 414,896 $ 376,386
============= ============= =============
SECURITIES HELD TO MATURITY:
U. S. Treasury and agency obligations $ 7,721 $ 45,883 $ 98,275
State and municipal 13,470 13,986 19,799
Corporate bonds - 2,013 4,546
Federal agency mortgage pass-through securities 6,234 28,338 33,815
Other collateralized mortgage obligations (CMO's) 359 1,184 8,098
Other 400 13,278 200
------------- ------------- -------------
$ 28,184 $ 104,682 $ 164,733
============= ============= =============
</TABLE>
In the third quarter of 1997, the acquisitions of Community and
Portsmouth necessitated a transfer of securities held to maturity with an
amortized cost of $61,170,000 and a net unrealized loss of $95,000 to securities
available for sale in order to maintain the Company's existing interest rate
risk profile. 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 reassesment 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.
4
<PAGE> 5
The following table sets forth an analysis of the maturity
distributions and the weighted average yields of all debt securities of the
Company at December 31, 1997:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
MATURING
-----------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
-----------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and other $ 13,038 6.34% $ 47,285 6.27% $ 33,365 6.80% $ 29,506 7.49%
State and municipal (1) 2,415 4.55 8,681 4.52 2,374 4.78 447 5.42
Mortgage-backed securities and
CMO's (2) 134,940 6.83 99,074 7.19 73,874 6.81 66,658 6.38
Other - - - - 400 7.34 - -
------------ ---- ------------ ---- ------------ ---- ------------ ----
Total debt securities $ 150,393 6.75% $ 155,040 6.76% $ 110,013 6.77% $ 96,611 6.72%
============ ============ ============ ============
</TABLE>
- ---------------------------
(1) Yields on tax-exempt investment securities are stated on a
taxable-equivalent basis (using a 38.62% tax rate).
(2) Included in table based on contractual maturities.
LOAN PORTFOLIO
The following table shows the Company's loan distribution, net of
unearned income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 1,159,147 $ 873,611 $ 732,725 $ 693,644 $ 632,469
Construction 35,318 18,594 13,778 12,578 14,686
Commercial 265,385 248,805 227,303 188,126 176,602
Commercial, financial, and agricultural 209,929 170,335 136,093 130,175 119,282
Warehouse lines of credit to leasing companies 1,922 18,393 12,906 15,339 5,428
Consumer lease financing 118,212 67,146 24,399 306 -
Consumer and other 244,943 197,516 179,338 142,894 124,681
------------- ------------- -------------- ------------- -------------
Total loans and leases $ 2,034,856 $ 1,594,399 $ 1,326,541 $ 1,183,062 $ 1,073,149
============= ============= ============== ============= =============
</TABLE>
The following table shows the maturity of loans (excluding residential
mortgages on 1 - 4 family residences and all consumer loans) outstanding at
December 31, 1997. Also provided are the amounts due after one year, classified
according to sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
---------------------------------------------------------------
MATURING
---------------------------------------------------------------
AFTER ONE BUT
WITHIN FIVE
WITHIN ONE YEAR YEARS AFTER FIVE YEARS TOTAL
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate--construction $ 35,318 $ - $ - $ 35,318
Real estate--commercial 166,591 80,048 18,746 265,385
Commercial, financial, and agricultural 141,211 47,681 21,037 209,929
Warehouse lines of credit to leasing companies 1,922 - - 1,922
------------- ----------- ------------ --------------
Total $ 345,042 $ 127,729 $ 39,783 $ 512,554
============= =========== ============ ==============
Loans maturing after one year with:
Fixed interest rates $ 42,789 $ 24,454
Variable interest rates 84,940 15,329
----------- ------------
Total $ 127,729 $ 39,783
=========== ============
</TABLE>
5
<PAGE> 6
The following table summarizes the Company's nonaccrual, past due, and
restructured loans and leases:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases: (1)
Real estate (2) $ 11,894 $ 8,848 $ 9,647 $ 10,118 $ 14,473
Commercial, financial, and agricultural 1,587 1,634 2,131 2,211 5,293
Consumer and other 506 301 454 128 466
----------- ---------- ----------- ----------- ----------
Total 13,987 10,783 12,232 12,457 20,232
----------- ---------- ----------- ----------- ----------
Accruing loans and leases past due 90 days or more:
Real estate (2) - - - - 3,060
Commercial, financial, and agricultural - - - - 246
Consumer and other - - - - 26
----------- ---------- ----------- ----------- ----------
Total - - - - 3,332
----------- ---------- ----------- ----------- ----------
Total nonperforming loans and leases $ 13,987 $ 10,783 $ 12,232 $ 12,457 $ 23,564
=========== ========== =========== =========== ==========
Percentage of total loans and leases 0.69% .67% .92% 1.05% 2.19%
Percentage of total assets 0.49% .46% .58% .64% 1.26%
Total restructured loans and leases $ 1,231 $ 1,895 $ 1,360 $ 3,032 $ 4,217
=========== ========== =========== =========== ==========
</TABLE>
- --------------------------------
(1) All loans past due 90 days or more as to principal or interest are
generally placed on nonaccrual status. In addition, a loan (including
an impaired loan) 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 less than 90 days past due and 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.
(2) Includes residential, construction and commercial real estate loans.
Interest income that would have been recorded under the original
terms of nonaccrual and restructured loans and the interest income actually
recognized for the year ended December 31, 1997 amounted to $647,000 and
$113,000, respectively.
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
This table summarizes the Company's loan and lease loss experience for
the years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning of year $ 20,332 $ 19,843 $ 18,940 $ 21,080 $ 17,587
Loans charged-off:
Real estate (1) 842 2,090 2,440 4,227 7,134
Commercial, financial and agricultural 1,992 1,359 1,000 2,157 3,219
Consumer and other 1,524 1,308 1,042 1,053 1,132
----------- ------------ ------------ ----------- ----------
Total loans charged-off 4,358 4,757 4,482 7,437 11,485
----------- ------------ ------------ ----------- ----------
Recoveries of amounts previously charged-off:
Real estate (1) 295 382 592 952 539
Commercial, financial and agricultural 800 320 492 485 217
Consumer and other 281 259 344 238 179
----------- ------------ ------------ ----------- ----------
Total recoveries 1,376 961 1,428 1,675 935
----------- ------------ ------------ ----------- ----------
Net loans charged-off 2,982 3,796 2,384 5,762 10,550
Provision for loan and lease losses (2) 4,548 4,285 3,814 3,622 14,030
Change in fiscal year - Community - - 143 - -
----------- ------------ ------------ ----------- ----------
Allowance for loan and lease losses, end of year $ 21,898 $ 20,332 $ 19,843 $ 18,940 $ 21,080
=========== ============ ============ =========== ==========
Net loans charged-off to average loans outstanding 0.15% 0.26% 0.19% .51% 1.00%
=========== ============ ============ ============ ===========
</TABLE>
- ---------------------------------
(1) Includes residential, construction and commercial real estate loans.
6
<PAGE> 7
(2) The amount charged to operations and the related balance in the
allowance for loan and lease losses is based upon periodic
evaluations of the loan portfolio by management. These evaluations
consider several factors including, but not limited to, general
economic conditions, loan portfolio composition, prior loan and lease
loss experience, and management's estimation of future potential
losses. The large provision in 1993 resulted in part from losses
incurred as a result of the earlier real estate decline as well as
for the losses incurred in conjunction with a bulk sale of
nonperforming assets totaling $6,600,000 to a private investor. The
amount of loss recognized on this 1993 sale was $2,473,000. The
combination of this bulk sale and a general economic strengthening
evidenced during 1994 allowed the Company to provide substantially
less to the allowance for loan and lease losses in 1994. From 1994
through 1996 the provision for loan and lease losses has remained
fairly consistent. These provisions have increased the allowance for
loan and lease losses, partially reduced by net charge-offs, each
year since 1994. The increase in the allowance was necessary, despite
a lower level of nonperforming loans and leases, due to the growth in
the loan and lease portfolio which has increased 50% since 1993.
ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION
The following table shows an allocation of the allowance for loan and
lease losses as of the dates indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $ 9,142 71.74% $ 7,249 70.99% $ 7,625 73,42% $ 6,471 75.60% $ 6,777 76.77%
Commercial, financial,
and agricultural 3,592 10.41 4,855 12.54 3,141 11.23 1,788 12.29 4,785 11.61
Consumer and other 1,922 17.85 1,971 16.46 2,102 15.35 1,834 12.10 1,562 11.61
Unallocated 7,242 - 6,257 - 6,975 - 8,847 - 7,956 -
---------- ------ ---------- ------ --------- ------ --------- ------ ---------- ------
$ 21,898 100.00% $ 20,332 100.00% $ 19,843 100.00% $ 18,940 100.00% $ 21,080 100.00%
========== ========== ========= ========= ==========
</TABLE>
DEPOSITS
The average daily balances of deposits and of rates paid on such
deposits is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 214,661 -% $ 176,423 -% $ 147,984 -%
Regular savings deposits 308,808 2.63 308,626 2.71 321,100 2.83
NOW and money market deposits 359,410 2.12 376,175 2.11 394,408 2.35
Time deposits 984,071 5.61 849,926 5.57 741,772 5.30
------------ ------------ ------------
Total $ 1,866,950 3.80% $ 1,711,150 3.72% $ 1,605,264 3.59%
============ ============ ============
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSITS(1) DEPOSITS TOTAL
-------------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
3 months or less $ 13,980 $ 62,532 $ 76,512
Over 3 through 6 months 5,035 30,389 55,424
Over 6 through 12 months 4,148 135,136 139,284
Over 12 months 4,461 78,622 83,083
------------ ----------- ------------
Total $ 27,624 $ 326,679 $ 354,303
============ =========== ============
</TABLE>
- --------------------------------
(1) Time deposits with a minimum required balance of $100,000.
7
<PAGE> 8
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of
the Company for the periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on:
Average total assets 0.71% 1.04% 1.06%
Average total shareholders' equity 7.63 10.03 9.77
Average common shareholders' equity 7.63 10.03 9.77
Average total shareholders' equity to
average total assets ratio 9.25 10.36 10.88
Common dividend payout ratio 102.53 57.43 56.99
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds with an original maturity of
one year or less. Securities sold under repurchase agreements generally mature
within 9 months. The details of these borrowings for the years 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31 (Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under repurchase agreements:
Balance at year end $ 188,558 $ 104,427
Average amount outstanding 180,214 93,226
Maximum amount outstanding at any month end 208,981 133,726
Average interest rate for the year 4.54% 4.85%
Average interest rate on year-end balance 5.26% 4.75%
Advances from Federal Home Loan Bank of Boston:
Balance at year end $ 221,000 $ 219,734
Average amount outstanding 194,333 197,312
Maximum amount outstanding at any month end 257,026 228,970
Average interest rate for the year 4.85% 5.67%
Average interest rate on year-end balance 5.51% 5.80%
</TABLE>
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 838
full-time and 270 part-time employees. The employees of the Company and its
subsidiaries are not represented by any collective bargaining unit. Relations
between management and employees are considered good.
RISK MANAGEMENT
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and interest rate.
Although it cannot eliminate these risks, the Company has risk management
processes designed to provide for risk identification, measurement, monitoring
and control.
Credit Risk. Credit risk represents the possibility that a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
results from extending credit to customers, purchasing securities and entering
into certain off-balance-sheet financial derivative transactions. Risk
associated with the extension of credit includes general risk, which is inherent
in the lending business, and risk specific to individual borrowers. The Company
seeks to manage credit risk through portfolio diversification, underwriting
policies and procedures, and loan monitoring practices.
Liquidity Risk. Liquidity represents an institution's ability to
generate cash or otherwise obtain funds at reasonable rates to satisfy
commitments to borrowers and demands of depositors and debtholders, and invest
in strategic initiatives. Liquidity risk represents the likelihood the Company
would be unable to generate cash or otherwise obtain funds at reasonable rates
for such purposes. Liquidity is managed through the coordination of the relative
maturities of assets, liabilities and off-balance-sheet positions and is
enhanced by the ability to raise funds in capital markets through direct
borrowing or securitization of assets, such as mortgage loans and lease
receivables.
8
<PAGE> 9
Interest Rate Risk. Interest rate risk arises primarily through the
Company's normal business activities of extending loans and taking deposits.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the timing, magnitude and frequency of changes
in interest rates. Interest rate risk results from various repricing frequencies
and the maturity structure of assets, liabilities, and off-balance-sheet
positions. Interest rate risk also results from, among other factors, changes in
the relationship or spread between interest rates. Many factors, including
economic and financial conditions, general movements in market interest rates
and consumer preferences, affect the spread between interest earned on assets
and interest paid on liabilities. Financial derivatives, primarily interest rate
swaps, caps and floors, are used to alter the interest rate characteristics of
assets and liabilities. The Company uses a number of measures to monitor and
manage interest rate risk, including income simulation and interest sensitivity
("gap") analyses.
For additional information relating to the Company's risk management
processes, see Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Exhibit 1 of this document.
REGULATION AND SUPERVISION
General
Bank holding companies and banks are extensively regulated under
both federal and state law. The following information describes certain aspects
of that regulation applicable to the Company and the Banks, and does not purport
to be complete. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular provisions. In addition to existing government regulation, federal
and state statutes and regulations are subject to changes that may have
significant impact on the way in which banks and bank holding companies may
conduct business. The likelihood and potential effects of such changes cannot be
predicted. Legislation enacted in recent years has substantially increased the
level of competition among commercial banks, savings banks, thrift institutions
and nonbanking companies, including insurance companies, securities brokerage
firms, mutual funds, investment banks and major retailers. Recent legislation
also has broadened the regulatory powers of the federal banking agencies in a
number of areas and has restricted the powers of state-chartered banks.
The Company
Bank Holding Company Regulation. As a bank holding company, the
Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHC
Act"), and related federal statutes, and is subject to supervision, regulation
and inspection by the Board of Governors of the Federal Reserve System and the
Federal Reserve Bank of Boston (collectively, the "Federal Reserve"). The
Company is required to file with the Federal Reserve an annual report and any
additional information as the Federal Reserve may require pursuant to the BHC
Act. The Federal Reserve possesses cease and desist powers over bank holding
companies and their non-bank subsidiaries if their actions represent unsafe or
unsound practices.
Bank Acquisitions. The BHC Act requires, among other things, the
prior approval of the Federal Reserve in any case where the Company proposes to
(i) acquire all or substantially all the assets of any bank, (ii) acquire direct
or indirect ownership or control of more than 5 percent of the voting shares of
any bank, or (iii) merge or consolidate with any other bank holding company. The
BHC Act currently permits bank holding companies from any state to acquire banks
and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state-imposed concentration limits.
The Company has the ability, subject to certain restrictions, including state
opt-out provisions, to acquire by acquisition or merger branches outside its
home state. The establishment of new interstate branches also is possible in
those states with laws that expressly permit it. Interstate branches will be
subject to certain laws of the states in which they are located. Competition may
increase further as banks branch across state lines and enter new markets.
Non-Bank Acquisitions. The BHC Act also prohibits a bank holding
company, with certain exceptions, from acquiring or retaining direct or indirect
ownership or control or more than 5 percent of the voting shares of any company
that is not a bank or bank holding company, and from engaging in any activities
other than those of banking, managing or controlling banks, or activities which
the Federal Reserve has determined to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto.
Restrictions on the Acquisition of the Company. The acquisition of
10 percent or more of the Company's outstanding shares by any person or group of
persons may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act of 1978, as amended, and the acquisition of control
of the Company by another company would be subject to regulatory approval under
the BHC Act.
9
<PAGE> 10
Source of Strength Policy. Under Federal Reserve policy, a bank
holding company is expected to act as a source of financial strength to each of
its subsidiary banks and to commit resources to support each such bank.
Consistent with its "source of strength" policy for subsidiary banks, the
Federal Reserve has stated that, as a matter of prudent banking, a bank holding
company generally should not maintain a rate of cash dividends unless its net
income available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings retention appears to be
consistent with the corporation's capital needs, asset quality and overall
financial condition.
Cross-Guarantee. As a result of the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, any or all of the
Company's subsidiary banks can be held liable under so-called "cross-guarantee"
provisions for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of any other of the Company's
subsidiary banks, or (ii) any assistance provided by the FDIC to any other of
CFX's subsidiary banks in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur without regulatory assistance.
Securities Regulation. The Company has registered its common stock
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). As a result of such registration,
the proxy and tender offer rules, periodic reporting requirements and insider
trading restrictions and reporting requirements, as well as certain other
requirements of the Exchange Act, are applicable to the Company. Because the
Company's stock is listed on the American Stock Exchange (the "AMEX"), the
Company is also subject to the rules and regulations of the AMEX. The Company
also may, from time to time, be subject to regulation by various state
securities commissions with respect to the offer and sale of its securities.
New Hampshire Corporation Law. As a New Hampshire corporation, the
Company also must comply with the general corporation laws of the state of New
Hampshire.
The Banks
Bank Regulation. As a New Hampshire state-chartered savings bank the
deposits of which are insured by the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"), CFX Bank is subject to supervision, regulation and
examination by the New Hampshire State Banking Department and the FDIC. As a
Massachusetts state-chartered savings bank the deposits of which are insured by
the BIF, Orange is subject to supervision, regulation and examination by the
Massachusetts Commissioner of Banks and the FDIC. As a national banking
association, Safety Fund is subject to supervision, regulation and examination
primarily by the Office of the Comptroller of the Currency (the "OCC"). Each of
the Banks is subject to various requirements and restrictions under federal and,
in the case of CFX Bank and Orange, state law, including (i) requirements to
maintain reserves against deposits, (ii) restrictions on the types, amount and
terms and conditions of loans that may be granted, (iii) limitations on the
types of investments that may be made, the activities that may be engaged in,
and the types of services that may be offered, and (iv) standards relating to
asset quality, earnings, and employee compensation. The approval of a Bank's
primary regulator is required prior to any merger or consolidation or the
establishment or relocation of any office. Various consumer laws and regulations
also affect the operations of the Banks.
Affiliate Transactions. The Banks are subject to federal laws that
limit the transactions by subsidiary banks to or on behalf of their parent
company and to or on behalf of any nonbank subsidiaries. Such transactions by a
subsidiary bank to its parent company or to any nonbank subsidiary are limited
to 10 percent of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20
percent of such bank subsidiary's capital and surplus. Further, loans and
extensions of credit generally are required to be secured by eligible collateral
in specified amounts. Federal law also prohibits banks from purchasing
"low-quality" assets from affiliates.
FDIC Assessment. The deposits of the Banks are insured by the FDIC
up to the limits set forth under applicable law. A majority of the deposits of
the Banks are subject to deposit insurance assessments of the BIF. However,
approximately 11% of the Company's deposits (attributable to the deposits of
Milford Cooperative Bank acquired by CFX Bank as of July 1, 1996) are subject to
deposit insurance assessments of the SAIF. Effective January 1, 1996, the FDIC
reduced the assessment rates on bank deposits insured by the BIF, and effective
January 1, 1997, the FDIC lowered the assessment rates for SAIF-insured deposits
to the same levels applicable to BIF-insured deposits. Thus, for the semi-annual
period beginning January 1, 1997, the effective rate of assessments imposed on
all FDIC deposits for deposit insurance ranges from 0 - 27 basis points per $100
of insured deposits, depending on the institution's capital position and other
supervisory factors. Legislation enacted in 1996 requires all FDIC-insured
institutions to bear the cost of bonds sold by the Financing Corporation from
1987 to 1989 in support of the former
10
<PAGE> 11
Federal Savings and Loan Insurance Corporation. To cover such obligations, the
FDIC assesses BIF-insured deposits an additional 1.26 basis points per $100 of
deposits and assesses SAIF-insured deposits an additional 6.3 basis points per
$100 of deposits, in each case on an annualized basis.
Prompt Corrective Action. Federal banking agencies possess broad
powers to take corrective action as deemed appropriate for an insured depository
institution and its holding company. The extent of these powers depends on
whether the institution in question is considered "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". At December 31, 1997, each of the Banks
exceeded the required ratios for classification as "well capitalized." The
classification of depository institutions is primarily for the purpose of
applying the federal banking agencies' prompt corrective action powers and is
not intended to be, and should not be interpreted as, a representation of the
overall financial condition or prospects of any financial institution. The
agencies' prompt corrective action powers can include, among other things,
requiring an insured depository institution to adopt a capital restoration plan
which cannot be approved unless guaranteed by the institution's parent company;
placing limits on asset growth and restrictions on activities, including
restrictions on transactions with affiliates; restricting the interest rate the
institution may pay on deposits; prohibiting the payment of principal or
interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Federal Home Loan Bank. Each of the Banks is a member of the Federal
Home Loan Bank of Boston (the "FHLB"), which is one of twelve regional Federal
Home Loan Banks. The FHLB serves as a reserve or central bank for its members
and makes advances to its members in accordance with the FHLB's policies and
procedures. As members of the FHLB, the Banks are required to purchase and hold
stock in the FHLB. As of December 31, 1997, CFX Bank, Orange and Safety Fund
held stock in the FHLB in the amount of $24,796,000, $993,000 and $634,000
respectively.
Risk-Based Capital Requirements
Under the risk-based capital guidelines applicable to the Company
and the Banks, the minimum guideline for the ratio of total capital to
risk-weighted assets (including certain off-balance-sheet activities) is 8
percent. At least half of the total capital must be "Tier 1" capital, which
primarily includes common shareholders' equity and qualifying preferred stock,
less goodwill and other disallowed tangibles. "Tier 2" capital includes, among
other items, certain cumulative and limited-life preferred stock, qualifying
subordinated debt and the allowance for credit losses, subject to certain
limitations, less required deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio
(Tier 1 capital to total adjusted average assets) guidelines providing for a
minimum leverage ratio of 3 percent for bank holding companies and banks meeting
certain specified criteria, including that such institutions have the highest
regulatory examination rating and are not contemplating significant growth or
expansion. Institutions not meeting these criteria are expected to maintain a
ratio which exceeds the 3 percent minimum by at least 100 to 200 basis points.
The federal bank regulatory agencies may, however, set higher capital
requirements when particular circumstances warrant. Under the federal banking
laws, failure to meet the minimum regulatory capital requirements could subject
a bank to a variety of enforcement remedies available to federal bank regulatory
agencies, including the termination of deposit insurance by the FDIC and seizure
of the institution.
At December 31, 1997, the total and Tier 1 risk-based capital ratios
and leverage ratios of the Company and each of the Banks exceeded the minimum
regulatory capital requirements. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Community Reinvestment
Bank holding companies and their subsidiary banks are also subject
to the provisions of the Community Reinvestment Act of 1977, as amended ("CRA").
Under the terms of the CRA, a bank's record in meeting the credit needs of the
community served by the bank, including low- and moderate-income neighborhoods,
is generally annually assessed by the bank's primary federal regulator. When a
bank holding company applies for approval to acquire a bank or other bank
holding company, the Federal Reserve will review the assessment of each
subsidiary bank of the applicant bank holding company, and such records may be
the basis for denying the application. At December 31, 1997, the Company and
each of the Banks was rated "Satisfactory" or "Outstanding" with respect to CRA.
11
<PAGE> 12
Dividend Restrictions
Under the New Hampshire Business Corporation Act, a distribution,
including dividends and the purchase or redemption of a corporation's own
shares, must be authorized by the Board of Directors and may not be paid if the
corporation, after the payment is made, would not be able to pay its debts as
they become due in the usual course of business, or the corporation's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
The principal source of the Company's revenue and cash flow is
dividends from the Banks. The Banks are subject to various statutory and
regulatory restrictions on their ability to pay dividends or otherwise make
distributions or supply funds to the Company. In addition, bank regulators may
have authority to prohibit a bank subsidiary from paying dividends, depending on
the subsidiary's financial condition, if such payment is deemed to constitute an
unsafe or unsound practice.
The Company is a legal entity separate and distinct from the Banks.
Accordingly, the right of the Company, and consequently the right of creditors
and shareholders of the Company, to participate in any distribution of the
assets or earnings of the Banks and its other subsidiaries is necessarily
subject to the prior claims of creditors of the Banks and its other
subsidiaries, except to the extent that claims of the Company in its capacity as
creditor may be recognized.
Earnings appropriated to bad debt reserves for losses and deducted
for federal income tax purposes are not available for dividends without the
payment of taxes at the current income tax rates on the amount used.
Other Regulations
The policies of regulatory authorities, including the Federal Reserve
and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to do so in the future. An
important function of the Federal Reserve is to regulate aggregate national
credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. Policies of these agencies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States government. Supervision, regulation or examination of the Company
by these regulatory agencies is not intended for the protection of the Company's
shareholders.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further deregulation of
both banks and other financial institutions. Such legislation could place the
Company in more direct competition with other financial institutions, including
mutual funds, credit unions, insurance companies and securities brokerage firms.
No assurance can be given as to whether any additional legislation will be
enacted or as to the effect of such legislation on the business of the Company.
COMPETITION
Bank holding companies and their subsidiaries are subject to
vigorous and intense competition from various financial institutions and other
"nonbank" or non-regulated companies or firms that engage in similar activities.
The Bank competes for deposits with other commercial banks, savings banks,
savings and loan associations, insurance companies and credit unions, as well as
issuers of commercial paper and other securities, including shares in mutual
funds. In making loans, the Bank competes with other commercial banks, savings
banks, savings and loan associations, consumer finance companies, credit unions,
insurance companies, leasing companies and other nonbank lenders.
The Company and the Bank compete not only with financial
institutions based in New Hampshire and Massachusetts, but also with a number of
large out-of-state and foreign banks, bank holding companies and other financial
and nonbank institutions. Some of the financial and other institutions operating
in the same markets are engaged in national and international operations and
have more assets and personnel than the Company. Some of the Company's
competitors are not subject to the extensive bank regulatory structure and
restrictive policies which apply to the Company and the Banks.
The principal factors in successfully competing for deposits are
convenient office locations and remote service units, flexible hours,
competitive interest rates and services, while those relating to loans are
competitive interest rates, the range of lending services offered and lending
fees. The Company believes that the local character of the Banks' businesses and
their community bank management philosophy enabled them to compete successfully
in their respective market areas. However, it is anticipated that competition
will continue to increase in the years ahead.
12
<PAGE> 13
ITEM 2. PROPERTIES
The Company neither owns nor leases any real property but utilizes the
premises and equipment of CFX Bank. CFX Bank owns its main office and two branch
offices in Keene, New Hampshire. CFX Bank also owns branches in Allenstown,
Amherst, Bedford, Concord, Exeter, Greenland, Greenville, Henniker,
Hillsborough, Hooksett, Jaffrey, Manchester, Milford, New Boston, Nashua, New
Ipswich, North Hampton, Peterborough, Portsmouth, Tilton, Troy, Weare and
Wilton/Lyndeborough, New Hampshire while leasing other branches in Brookline,
Gilford, Hinsdale, Laconia, Loudon, Manchester, Marlborough, Mont Vernon, North
Swanzey, Rindge, Walpole, West Chesterfield and Winchester, New Hampshire.
Included above are five "mini-branches" that are located at various retail
establishments in its market area. In addition, CFX Bank and subsidiaries also
own or lease several other properties used for administrative purposes. Orange
Savings Bank owns its main office, located in Orange Massachusetts, and leases a
branch facility in Athol, Massachusetts. Safety Fund owns its main office and
leases a branch office in Fitchburg, Massachusetts. Additionally, Safety Fund
owns branches in Gardner, Leominster and Worcester, while leasing other branches
in Gardner, Leominster, Westborough and Worcester, Massachusetts. In addition,
Prichard Plaza owns a real estate investment property in Fitchburg,
Massachusetts.
The Banks also owns 102 automated teller and remote service units
located in New Hampshire and central Massachusetts.
At December 31, 1997, the total net book value of the Company's
premises and equipment was $38,761,000.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, the Company entered into a settlement agreement
with American Credit Indemnity Company ("ACI") in connection with the resolution
of a dispute between the Company and ACI regarding the origination and servicing
by CFX Funding of certain leases held in four lease pools insured by ACI. The
settlement agreement provides mutual releases by ACI of the Company and CFX
Funding, and by the Company and CFX Funding of ACI, of all claims and
liabilities, other than those contained in the settlement agreement, relating to
the four lease pool transactions.
There are no pending legal proceedings to which the Company is a party
or any of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Banks are a party or of which the Banks' property is
subject. There are no material pending legal proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than five percent (5%) of the common stock of the Company, or any associate of
any such director, officer, affiliate of the Company or any security holder is a
party adverse to the Company or has a material interest adverse to the Company
or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on February 9, 1998, the Company's
shareholders approved the previously reported proposed merger of the company
with and into PHFG.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for the Company's common equity and
related stockholder matters is found on page 65 of Exhibit 99.1 to this report.
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data is found on page 1 of
Exhibit 99.1 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations is found on pages 2 - 23 of Exhibit 99.1 to this report.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements is found on pages 24 - 64
in Exhibit 99.1 of this report.
The opinion of KPMG Peat Marwick, LLP pertaining to The Safety Fund
Corporation:
Independent Auditors' Report
To the Board of Directors and Stockholders of
The Safety Fund Corporation:
We have audited the accompanying consolidated Statement of Operation
of The Safety Fund Corporation and subsidiaries for the year ended
December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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
principals 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 financial statements referred to above present
fairly, in all material respects, the results of operation of The
Safety Fund Corporation and subsidiaries for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 22, 1996
The opinion of KPMG Peat Marwick, LLP pertaining to Community
Bankshares, Inc. follows:
Independent Auditors' 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 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 the year 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.
14
<PAGE> 15
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 the results of their operations and their cash flows for the year
ended December 31, 1996, the six months ended December 31, 1995 and
the year ended June 30, 1995 in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 22, 1997
The opinion of Shatswell, MacLeod & Company, P.C. pertaining to
Portsmouth Bankshares, Inc. follows:
Independent Auditors' Report
The Board of Directors
Portsmouth Bank Shares, Inc.
Portsmouth, New Hampshire
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 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 consolidated financial
statements are free of material misstatement. Au 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 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
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data is found on
page 63 of the Exhibit 99.1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement
for its 1998 annual meeting of shareholders to be filed within 120 days
of the registrant's fiscal year ended December 31, 1997, or, if such
proxy statement is not filed within such period, by reference to an
amendment to this Form 10-K to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement
for its 1998 annual meeting of shareholders to be filed within 120 days
of the registrant's fiscal year ended December 31, 1997, or, if such
proxy statement is not filed within such period, by reference to an
amendment to this Form 10-K to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement
for its 1998 annual meeting of shareholders to be filed within 120 days
of the registrant's fiscal year ended December 31, 1997, or, if such
proxy statement is not filed within such period, by reference to an
amendment to this Form 10-K to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G, the information required by this item is
incorporated herein by reference to the registrant's proxy statement
for its 1998 annual meeting of shareholders to be filed within 120 days
of the registrant's fiscal year ended December 31, 1997, or, if such
proxy statement is not filed within such period, by reference to an
amendment to this Form 10-K to be filed within 120 days of the
registrant's fiscal year ended December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are included in exhibit 99.1 of
this document.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE REFERENCES
-------------------- ---------------
<S> <C>
Consolidated Balance Sheets......................................24
Consolidated Statements of Income................................25
Consolidated Statements of Shareholders' Equity..................27
Consolidated Statements of Cash Flows............................28
Notes to Consolidated Financial Statements......................30-63
Report of Independent Auditors...................................64
</TABLE>
(2) Financial Statement Schedules
See Item 14 (d)
(3) Exhibits Required by Item 601
See Item 14 (c)
16
<PAGE> 17
(b) Reports on Form 8-K
On February 2, 1998, a Form 8-K was filed providing disclosure
of material expense incurred as a result of settling potential
litigation involving American Credit Indemnity Corporation and
CFX Funding, L.L.C.
On December 13, 1997, the Company filed in a Current Report on
Form 8-K restated audited consolidated financial statements of
the Company and its 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, giving effect
to the Company's acquisitions of Community and Portsmouth.
On November 4, 1997, the Company filed a Current Report on
Form 8-K to report the proposed merger of CFX with and into
PHFG and disclose the underlying transaction documents.
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated herein
by reference to other filings.
EXHIBIT NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger by and between CFX and PHFG dated
as of October 27, 1997, incorporated by reference from the
exhibits to the Current Report on Form 8-K filed by PHFG
(Commission File No. 0-16947) on November 3, 1997.
3.1 Articles of Incorporation of CFX, as amended, incorporated
herein by reference to from the Exhibits to the Current Report
on Form 8-K by CFX filed on September 15, 1997.
10.1 1992 CFX Corporation Profit Sharing/Bonus Plan, incorporated
herein by reference to the Exhibits to the Annual Report on
Form 10-K of CFX for the year ended December 31, 1992.
10.2 1986 CFX Corporation Stock Option Plan, incorporated herein by
reference to the Exhibits to the Registration Statement on
Form S-8 of CFX No. 33-17071 effective in 1987.
10.3 1995 CFX Corporation Stock Option Plan, incorporated herein by
reference to the Exhibits 1.c to the Registration Statement on
Form S-8 of CFX No. 33-61787 effective in 1995.
10.4 CFX Corporation 1997 Long-Term Incentive Plan, incorporated
herein by reference to the Exhibits to the Current Form 8-K by
CFX Corporation filed on November 14, 1997.
10.5 CFX Corporation 1992 Employee Stock Purchase Plan,
incorporated herein by reference to the Exhibits to the
Registration Statement on Form S-8 of CFX No. 33-52598
effective in 1992.
10.6 Employment Agreement dated as of August 29,1997 by and between
CFX and Douglas Crichfield, incorporated herein by reference
to the Exhibits to the Current Report on Form 8-K by CFX filed
on September 15, 1997.
10.7 Employment Agreement dated as of August 12,1997 by and between
CFX and Peter J. Baxter, incorporated herein by reference to
the Exhibits to the Current Report on Form 8-K by CFX filed on
September 15, 1997.
10.8 Employment Agreement dated as of August 11,1997 by and between
CFX and Mark A. Gavin, incorporated herein by reference to the
Exhibits to the Current Report on Form 8-K by CFX filed on
September 15, 1997.
10.9 Employment Agreement dated as of August 14,1997 by and between
CFX and Christopher W. Bramley, incorporated herein by
reference to the Exhibits to the Current Report on Form 8-K by
CFX filed on September 15, 1997.
17
<PAGE> 18
10.10 Change of Control Agreement by and between CFX Corporation and
Gregg R. Tewksbury, incorporated herein by reference to the
Exhibits to the Form 10-Q by CFX Corporation filed on November
14, 1997.
10.11 Change of Control Agreement by and between CFX Corporation and
Edwin L. Herbert, incorporated herein by reference to the
Exhibits to the Form 10-Q by CFX Corporation filed on
November 14, 1997.
10.12 Change of Control Agreement by and between CFX Corporation and
David N. Rasmussen, incorporated herein by reference to the
Exhibits to the Form 10-Q by CFX Corporation filed on November
14, 1997.
10.13 Stock Option Agreement, dated as of October 27,1997, between
CFX (as the issuer) and PHFG (as the grantee) incorporated by
reference from the Exhibits to the Current Report on Form 8-K
filed by PHFG (Commission file No. 0-16947) on November 3,
1997.
10.14 Stock Option Agreement, dated as of October 27,1997, between
PHFG (as the issuer) and CFX (as the grantee) incorporated by
reference from the Exhibits to the Current Report on Form 8-K
filed by PHFG (Commission file No. 0-16947) on November 3,
1997.
10.15 The Safety Fund Corporation 1994 Incentive and Nonqualified
Stock Option Plan, incorporated herein by reference to the
Exhibits to the Annual Report on Form 10-KSB for the year
ended December 31, 1994 of The Safety Fund Corporation.
10.16 The Safety Fund Corporation 1984 Incentive Stock Option Plan,
incorporated herein by reference to the Exhibits to the
Registration Statement on Form S-8 of The Safety Fund
Corporation No. 33-19325 effective in 1984.
10.17 Community Bankshares, Inc. 1992 Stock Option Plan,
incorporated herein by reference to the Exhibits to
Post-Effective Amendment No. 1 on Form S-8 to Registration
Statement on Form S-4 of CFX No. 333-29243 effective in 1997.
10.18 Centerpoint Bank 1989 Stock Option Plan, incorporated herein
by reference to the Exhibits to Post-Effective Amendment No. 1
on Form S-8 to Registration Statement on Form S-4 of CFX No.
333-29243 effective in 1997.
10.19 Concord Savings Bank 1988 Stock Option Plan, incorporated by
reference to the Exhibits to Post-Effective Amendment No. 1 on
Form S-8 to Registration Statement on Form S-4 of CFX No.
333-29243 effective in 1997.
10.20 Concord Savings Bank 1985 Employee Stock Option Plan,
incorporated herein by reference to the Exhibits to
Post-Effective Amendment No. 1 on Form S-8 to Registration
Statement on Form S-4 of CFX No. 333-29243 effective in 1997.
10.21 Portsmouth Bank Shares, Inc. Revised 1987 Stock Option and
Stock Appreciation Rights Plan, incorporated herein by
reference to the Exhibits to Post-Effective Amendment No. 1 on
Form S-8 to Registration Statement on Form S-4 of CFX No.
333-29229.
10.22 Employment and Change of Control Agreement between The Safety
Fund Corporation and Stephen R. Shirley, dated June 1, 1994,
assumed by the Company as of July 1, 1996 incorporated herein
by reference to The Safety Fund Corporation's Annual Report on
Form 10-KSB for the year ended December 31, 1994.
21 Subsidiaries of the Company, filed herewith.
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of KPMG Peat Marwick LLP (with respect to The Safety
Fund Corporation and Community Bankshares, Inc.)
23.3 Consent of Shatswell, MacLeod & Company, P.C. (with respect to
Portsmouth Bank Shares, Inc.)
18
<PAGE> 19
27 Financial Data Schedule
27.1 Financial Data Schedule - Fiscal Year End 1997.
27.2 Financial Data Schedule - Fiscal Year Ends 1995, 1996 and
Quarters 1, 2 and 3 of 1996.
27.3 Financial Data Schedule - Quarters 1, 2 and 3 of 1997.
99.1 Audited consolidated balance sheets of CFX Corporation and
subsidiaries as of December 31, 1997 and 1996, and the
consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three-year period
ended December 31, 1997, and the independent auditor's report
thereon.
(d) Financial Statement Schedules.
Schedules to the Consolidated Financial Statements required by Article
9 of Regulation S-X are not required under the related instructions or
are inapplicable, and therefore have been omitted.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CFX CORPORATION
Date: March 27, 1998 By: /s/ PETER J. BAXTER
--------------------------
Peter J. Baxter, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ RICHARD F. ASTRELLA Director March 27, 1998
- -----------------------------------
Richard F. Astrella
/s/ WILLIAM E. AUBUCHON, III Director March 27, 1998
- -----------------------------------
William E. Aubuchon, III
/s/RICHARD B. BAYBUTT Director March 27, 1998
- -----------------------------------
Richard B. Baybutt
/s/ PETER J. BAXTER President and Director March 27, 1998
- ----------------------------------- (Principal Executive Officer)
Peter J. Baxter
/s/ CHRISTOPHER V. BEAN Director March 27, 1998
- -----------------------------------
Christopher V. Bean
/s/ CHRISTOPHER W. BRAMLEY Director March 27, 1998
- -----------------------------------
Christopher W. Bramley
/s/ JOHN N. BUXTON Director March 27, 1998
- -----------------------------------
John N. Buxton
/s/ P. KEVIN CONDRON Director March 27, 1998
- -----------------------------------
P. Kevin Condron
/s/ TIMOTHY J. CONNORS Director March 27, 1998
- -----------------------------------
Timothy J. Connors
/s/ DOUGLAS CRICHFIELD Director March 27, 1998
- -----------------------------------
Douglas Crichfield
/s/ CALVIN L. FRINK Director March 27, 1998
- -----------------------------------
Calvin L. Frink
/s/ EUGENE E. GAFFEY Director March 27, 1998
- -----------------------------------
Eugene E. Gaffey
/s/ DAVID R. GRENON Director March 27, 1998
- -----------------------------------
David R. Grenon
/s/ ELIZABETH SEARS HAGER Director March 27, 1998
- -----------------------------------
Elizabeth Sears Hager
/s/ DOUGLAS S. HATFIELD, JR. Director March 27, 1998
- -----------------------------------
Douglas S. Hatfield, Jr.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
/s/ PHILIP A. MASON Director March 27, 1998
- -----------------------------------
Philip A. Mason
/s/ WALTER R. PETERSON Director March 27, 1998
- -----------------------------------
Walter R. Peterson
/s/ SETH A. RESNICOFF, MD Director March 27, 1998
- -----------------------------------
Seth A. Resnicoff, MD
/s/ MARK E. SIMPSON Director March 27, 1998
- -----------------------------------
Mark A Simpson
/s/ ROBERT W. SIMPSON Director March 27, 1998
- -----------------------------------
Robert A. Simpson
/s/ L. WILLIAM SLANETZ Director March 27, 1998
- -----------------------------------
L. William Slanetz
/s/ GREGG R. TEWKSBURY Chief Financial Officer March 27, 1998
- ----------------------------------- (Principal Financial and
Gregg R. Tewksbury Accounting Officer)
</TABLE>
21
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Form 10-K of our report dated January 30,
1998, except for Note W as to which the date is February 9, 1998, on the
consolidated balance sheets of CFX Corporation and subsidiaries as of December
31, 1997 and 1996, 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, 1997.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 27, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in CFX Corporation's December 31,
1997 Annual Report on Form 10-K of our report dated January 22, 1996, relating
to the consolidated balance sheets of The Safety Fund Corporation and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended, which report appears in the December 31, 1995 annual report on Form
10-KSB of The Safety Fund Corporation.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in CFX Corporation's December 31,
1997 Annual Report on Form 10-K of our report dated January 22, 1997, relating
to the consolidated balance sheets of Community Bankshares, Inc. and
subsidiaries as of December 31, 1996 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 years in the three year period ended June 30, 1995, which
report appears in the December 31, 1996 annual report on Form 10-K of Community
Bankshares, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our report January 13, 1997, except for
Note 20 as to which the date is February 13, 1997, relating to Portsmouth Bank
Shares, Inc. and Subsidiary for the year ended December 31, 1996 incorporated
by reference in the Form 10-K filed by CFX Corporation on March 27, 1998.
/s/ Shatswell, MacLeod & Company, P.C.
West Peabody, Massachusetts
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 87,636
<INT-BEARING-DEPOSITS> 35
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 534,550
<INVESTMENTS-CARRYING> 28,184
<INVESTMENTS-MARKET> 28,495
<LOANS> 2,034,856
<ALLOWANCE> 21,898
<TOTAL-ASSETS> 2,873,767
<DEPOSITS> 1,941,996
<SHORT-TERM> 435,358
<LIABILITIES-OTHER> 33,689
<LONG-TERM> 217,007
0
0
<COMMON> 16,078
<OTHER-SE> 229,639
<TOTAL-LIABILITIES-AND-EQUITY> 2,873,767
<INTEREST-LOAN> 155,480
<INTEREST-INVEST> 41,778
<INTEREST-OTHER> 2,281
<INTEREST-TOTAL> 199,539
<INTEREST-DEPOSIT> 71,009
<INTEREST-EXPENSE> 101,252
<INTEREST-INCOME-NET> 98,287
<LOAN-LOSSES> 4,548
<SECURITIES-GAINS> 2,547
<EXPENSE-OTHER> 92,550
<INCOME-PRETAX> 26,731
<INCOME-PRE-EXTRAORDINARY> 18,934
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,934
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 3.99
<LOANS-NON> 13,987
<LOANS-PAST> 39,632
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,332
<CHARGE-OFFS> 4,358
<RECOVERIES> 1,376
<ALLOWANCE-CLOSE> 21,898
<ALLOWANCE-DOMESTIC> 21,898
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,242
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 69,085 77,123 65,517 76,465 76,549
<INT-BEARING-DEPOSITS> 25,442 287 82,656 78,063 67,177
<FED-FUNDS-SOLD> 57,958 53,983 11,300 7,100 0
<TRADING-ASSETS> 0 0 24,153 0 0
<INVESTMENTS-HELD-FOR-SALE> 376,386 414,896 378,168 393,592 441,598
<INVESTMENTS-CARRYING> 164,733 104,682 172,516 185,475 101,309
<INVESTMENTS-MARKET> 165,865 104,783 172,516 185,475 101,309
<LOANS> 1,331,622 1,594,399 1,372,009 1,447,868 1,513,817
<ALLOWANCE> 19,843 20,332 19,775 19,722 20,203
<TOTAL-ASSETS> 2,110,155 2,369,257 2,199,772 2,311,359 2,338,055
<DEPOSITS> 1,637,831 1,751,141 1,705,935 1,720,543 1,749,320
<SHORT-TERM> 196,117 324,161 196,431 288,576 289,693
<LIABILITIES-OTHER> 22,987 26,937 28,640 32,033 30,027
<LONG-TERM> 21,645 27,182 36,468 34,465 33,438
0 0 0 0 0
0 0 0 0 0
<COMMON> 15,030 15,670 11,177 11,228 11,260
<OTHER-SE> 216,545 224,166 221,121 224,514 224,317
<TOTAL-LIABILITIES-AND-EQUITY> 2,110,155 2,369,257 2,199,772 2,311,359 2,338,055
<INTEREST-LOAN> 109,601 128,533 30,177 61,716 94,330
<INTEREST-INVEST> 35,994 35,842 8,584 17,605 26,598
<INTEREST-OTHER> 3,213 3,930 1,120 2,216 3,194
<INTEREST-TOTAL> 148,808 168,305 39,881 81,537 124,122
<INTEREST-DEPOSIT> 57,674 63,634 15,854 31,367 47,277
<INTEREST-EXPENSE> 67,865 79,583 18,789 38,319 58,394
<INTEREST-INCOME-NET> 80,943 88,722 21,092 43,218 65,728
<LOAN-LOSSES> 3,814 4,285 1,180 2,230 3,210
<SECURITIES-GAINS> 2,383 2,780 918 1,450 1,823
<EXPENSE-OTHER> 63,251 71,270 16,258 32,485 54,012
<INCOME-PRETAX> 31,616 35,429 8,938 18,986 24,609
<INCOME-PRE-EXTRAORDINARY> 21,554 23,553 6,170 13,020 16,034
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 21,465 23,553 6,170 13,020 16,034
<EPS-PRIMARY> 0.93 1.01 0.27 0.56 0.69
<EPS-DILUTED> 0.89 0.99 0.27 0.55 0.68
<YIELD-ACTUAL> 4.33 4.25 4.36 4.30 4.25
<LOANS-NON> 1,301 10,783 12,651 11,549 10,712
<LOANS-PAST> 30,299 31,075 28,092 21,902 23,702
<LOANS-TROUBLED> 0 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 18,940 19,843 19,843 19,843 19,843
<CHARGE-OFFS> 4,482 4,757 1,482 2,841 3,598
<RECOVERIES> 1,428 961 234 490 748
<ALLOWANCE-CLOSE> 19,843 20,332 19,775 19,772 20,203
<ALLOWANCE-DOMESTIC> 19,843 20,332 19,775 19,772 20,203
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 6,975 6,257 6,975 6,975 6,975
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 87,896 91,717 70,833
<INT-BEARING-DEPOSITS> 53,607 40,801 814
<FED-FUNDS-SOLD> 3,000 10,000 47,190
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 544,202 567,055 585,452
<INVESTMENTS-CARRYING> 96,261 97,286 37,396
<INVESTMENTS-MARKET> 95,446 97,286 37,644
<LOANS> 1,649,128 1,793,241 1,913,377
<ALLOWANCE> 20,437 20,953 21,408
<TOTAL-ASSETS> 2,588,015 2,734,357 2,821,182
<DEPOSITS> 1,828,305 1,876,789 1,935,614
<SHORT-TERM> 185,192 223,966 412,591
<LIABILITIES-OTHER> 56,826 25,311 26,631
<LONG-TERM> 37,709 32,828 200,655
0 0 0
0 0 0
<COMMON> 11,849 11,946 16,010
<OTHER-SE> 229,453 236,763 229,681
<TOTAL-LIABILITIES-AND-EQUITY> 2,588,015 2,734,357 2,821,182
<INTEREST-LOAN> 35,304 72,071 113,138
<INTEREST-INVEST> 8,753 19,698 40,080
<INTEREST-OTHER> 940 1,671 2,126
<INTEREST-TOTAL> 44,997 93,440 146,496
<INTEREST-DEPOSIT> 16,236 33,729 52,306
<INTEREST-EXPENSE> 21,695 45,753 73,232
<INTEREST-INCOME-NET> 23,302 47,687 73,264
<LOAN-LOSSES> 942 1,962 3,385
<SECURITIES-GAINS> 261 732 1,421
<EXPENSE-OTHER> 17,532 35,685 65,419
<INCOME-PRETAX> 10,740 21,713 22,003
<INCOME-PRE-EXTRAORDINARY> 7,573 15,432 14,990
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 7,573 15,432 14,990
<EPS-PRIMARY> 0.32 0.64 0.63
<EPS-DILUTED> 0.31 0.63 0.66
<YIELD-ACTUAL> 4.15 4.07 4.06
<LOANS-NON> 11,346 9,687 11,914
<LOANS-PAST> 29,105 34,786 31,020
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 20,332 20,332 20,332
<CHARGE-OFFS> 1,302 2,174 3,636
<RECOVERIES> 465 833 1,327
<ALLOWANCE-CLOSE> 20,437 20,953 21,408
<ALLOWANCE-DOMESTIC> 20,437 20,953 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 6,257 6,257 6,257
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
FINANCIAL CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SELECTED FINANCIAL DATA................................................................. 1
MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................... 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................................... 24
Consolidated Statements of Income..................................................... 25
Consolidated Statements of Shareholders' Equity....................................... 27
Consolidated Statements of Cash Flows................................................. 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Significant Accounting Policies.................................................... 30
B. Restrictions on Cash and Due From Bank Accounts.................................... 37
C. Investment Securities.............................................................. 37
D. Loans and Leases................................................................... 40
E. Allowance for Loan and Lease Losses................................................ 41
F. Premises and Equipment............................................................. 41
G. Foreclosed Assets.................................................................. 41
H. Deposits........................................................................... 42
I. Advances from Federal Home Loan Bank of Boston..................................... 43
J. Other Borrowed Funds............................................................... 44
K. Preferred Stock.................................................................... 44
L. Income Taxes....................................................................... 44
M. Charges Related to CFX Funding..................................................... 47
N. Employee Benefit Plans............................................................. 48
O. Stock Compensation Plans........................................................... 49
P. Commitments and Contingencies...................................................... 51
Q. Related Party Transactions......................................................... 53
R. Derivative Financial Instruments................................................... 53
S. Financial Instruments with Off-Balance-Sheet Lending Risk.......................... 54
T. Fair Value of Financial Instruments................................................ 55
U. Regulatory Capital Requirements and Other Restrictions............................. 58
V. Mortgage Loan Servicing............................................................ 60
W. Acquisition of the Company......................................................... 60
X. CFX Corporation (Parent-Company-Only) Condensed Financial Statements .............. 61
Y. Quarterly Results of Operations (Unaudited)........................................ 63
Report of Wolf & Company, P.C., Independent Auditors.................................. 64
Information on Common Stock........................................................... 65
</TABLE>
<PAGE> 2
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for Years Ended December 31,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $ 2,873,767 $ 2,369,257 $ 2,110,155 $ 1,935,530 $ 1,870,169
Debt and equity securities, net (1) 562,734 519,578 541,119 586,075 638,901
Total loans, net (2) 2,012,958 1,574,067 1,311,779 1,164,122 1,052,069
Goodwill and other intangibles 8,698 9,235 9,884 10,476 11,121
Deposits 1,941,996 1,751,141 1,637,831 1,541,002 1,517,393
Borrowings 652,365 351,343 217,762 165,482 90,702
Shareholders' equity 245,717 239,837 231,575 210,984 208,084
Nonperforming assets (3) 16,983 14,132 15,054 17,310 31,741
Book value per share 10.21 10.17 10.00 9.29 9.33
Tangible book value per share 9.85 9.78 9.58 8.83 8.83
OPERATIONS DATA:
Interest and dividend income $ 199,539 $ 168,305 $ 148,808 $ 126,796 $ 125,936
Interest expense 101,252 79,583 67,865 51,654 53,001
------------- ------------- ------------- ------------- -------------
Net interest income 98,287 88,722 80,943 75,142 72,935
Provision for loan losses 4,548 4,285 3,814 3,622 14,030
------------- ------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 93,739 84,437 77,129 71,520 58,905
Noninterest income 25,542 22,262 17,738 14,400 15,453
Noninterest expense (4) 92,550 71,270 63,251 61,709 58,980
------------- ------------- ------------- ------------- -------------
Income before income tax expense 26,731 35,429 31,616 24,211 15,378
Income taxes 7,797 11,876 10,062 7,474 2,573
------------- ------------- ------------- ------------- -------------
Net income 18,934 23,553 21,554 16,737 12,805
Preferred stock dividends - - 89 287 294
------------- ------------- ------------- ------------- -------------
Net income available to common stock $ 18,934 $ 23,553 $ 21,465 $ 16,450 $ 12,511
============= ============= ============= ============= =============
Earnings per common share $ 0.79 $ 1.01 $ 0.93 $ 0.73 $ 0.57
Earnings per common share - assuming dilution $ 0.78 $ 0.99 $ 0.89 $ 0.71 $ 0.56
Common dividends per share $ 0.81 $ 0.58 $ 0.53 $ 0.39 $ 0.37
OTHER DATA (5):
Return on average assets 0.71% 1.04% 1.06% 0.86% 0.70%
Return on average equity 7.63 10.03 9.77 7.80 6.12
Average equity to average assets 9.25 10.36 10.88 11.02 11.42
Net interest margin (6) 3.99 4.25 4.33 4.30 4.38
Tier 1 leverage capital ratio at end of period 8.32 9.74 10.83 10.72 10.98
Dividend payout ratio 102.53 57.43 56.99 53.42 64.91
Nonperforming assets as a percent of total
assets at end of period (3) 0.59 0.60 0.71 0.89 1.70
</TABLE>
(1) All securities were classified as available for sale at December 31,
1997, 1996 and 1995, except for $28.2 million, $104.7 million and
$164.7 million of securities which were classified as held for
investment at such dates, respectively.
(2) Does not include loans held for sale.
(3) Nonperforming assets consist of nonaccrual loans, other real estate
owned and repossessed assets, net of related reserves where
appropriate.
(4) The 1997 period includes $11.0 million of one-time pre-tax
reorganization and restructuring costs related to the acquisitions of
Community Bankshares, Inc. and Portsmouth Bank Shares, Inc. On an
after-tax basis, such costs amounted to $.35 per share of CFX Common
Stock during the indicated period.
(5) With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated period.
(6) Net interest margin represents net interest income as a percent of
average interest-earning assets, in each case calculated on a
fully-taxable equivalent basis.
1
<PAGE> 3
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE COMPANY
- --------------------------------------------------------------------------------
CFX Corporation (the Company) 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 one wholly-owned
subsidiary: CFX Financial Services, Inc. (CFX Financial). CFX Financial
owns 51% of CFX Funding L.L.C. (CFX Funding), which engages in the
facilitation of lease financing and securitization.
During the fourth quarter of 1997, the Company discontinued future
operations of CFX Funding with respect to its securitization business. As a
result of that decision, the Company recorded an after-tax charge of $4.4
million in the fourth quarter related to this business. See "Results of
Operations - General".
Also during the fourth quarter of 1997, CFX Bank dissolved its
wholly-owned subsidiary, CFX Capital, which owned CFX Mortgage, Inc. CFX
Mortgage, Inc. was also dissolved and its operations were combined with CFX
Bank. The dissolutions had no significant impact on the Company's
consolidated financial statements and were undertaken to streamline the
organizational structure of the Company.
The principal business of the Company consists of attracting deposits
from the general public through its offices and using such deposits and
other sources of funds to originate residential mortgage loans, commercial
business loans and leases, commercial real estate loans and a variety of
consumer loans and leases. The Company also invests in mortgage-backed
securities and securities issued by the United States Government and
agencies thereof as well as other investment securities. In addition, the
Company engages in the sale of other financial products through its
investment services function, provides trust services, and services
residential loan and small-ticket lease loans for investors.
The Company's goal has been to sustain profit, controlled growth by
focusing on increased loan and deposit market share in New Hampshire and
central and western Massachusetts, developing new financial products,
services and delivery channels, closely monitoring yields on earning assets
and rates on interest bearing liabilities, increasing non-interest income
through expanded trust and investment advisory services and mortgage banking
activities; all while controlling non-interest expenses. To supplement its
internal growth, the Company's goals include the acquisitions of other
financial institutions in its market areas and those bordering them. During
1997, the Company acquired two financial institutions in New Hampshire.
More significantly, the Company entered into a definitive agreement to be
acquired by Peoples Heritage Financial Group, Inc. See the "Mergers and
Acquisition" discussion in this section.
- --------------------------------------------------------------------------------
MERGERS AND ACQUISITIONS
- --------------------------------------------------------------------------------
On August 29, 1997, the Company acquired Community Bankshares, Inc.
("Community"), a $616 million bank holding company and its subsidiary banks,
Concord Savings Bank, a state-chartered savings bank headquartered in
Concord, New Hampshire, and Centerpoint Bank, a commercial bank
headquartered in Bedford, New Hampshire. In connection with the merger,
Concord Savings Bank and Centerpoint Bank were merged into CFX Bank. A
total of 5,304,293 shares of the Company's common stock was issued in
exchange for all of the issued and outstanding shares of Community common
stock. The transaction was accounted for as a pooling-of-interests and as
such, the consolidated financial statements have been restated to include
Community for all periods presented. The acquisition of Community provided
an expanded presence in the central corridor of New Hampshire, the most
attractive business section of the State.
Also on August 29, 1997, the Company acquired Portsmouth Bank Shares,
Inc. ("Portsmouth"), a $259 million bank holding company, and its subsidiary
bank, Portsmouth Savings Bank, a state-chartered savings bank, headquartered
in Portsmouth, New Hampshire. In connection with the Portsmouth
acquisition, Portsmouth Savings Bank was merged into CFX Bank. A total of
5,502,005 shares of the Company's common stock was issued in exchange for
all of the issued and outstanding shares of Portsmouth common stock. The
transaction was accounted for as a pooling-of-interests and as such, the
consolidated financial statements have been restated to include Portsmouth
for all periods presented. The Portsmouth acquisition extended the
franchise into the seacoast area of New Hampshire, completing the Company's
statewide presence.
2
<PAGE> 4
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERGERS AND ACQUISITIONS
- --------------------------------------------------------------------------------
As previously reported, on October 27, 1997, the Company entered into a
definitive agreement to be acquired by Peoples Heritage Financial Group,
Inc. ("PHFG"), a bank holding company headquartered in Portland, Maine.
Pursuant to the agreement, each of the issued and outstanding shares of the
Company's common stock (24,071,000 at December 31, 1997) will be converted
into .667 shares of PHFG common stock. The PHFG transaction is expected to
be a tax-free exchange to the owners of the Company and is subject to
regulatory approval. On February 9, 1998, the shareholders of the Company
and PHFG approved the transaction. It is anticipated that the transaction
will be accounted for as a pooling-of interests. At December 31, 1997, PHFG
reported total assets of $6.8 billion, deposits of $4.8 billion and
shareholders' equity of $475 million. In connection with the acquisition,
the Company's banking subsidiaries will be merged into PHFG's banking
subsidiaries. Specifically, CFX Bank will be merged into Bank of New
Hampshire, PHFG's New Hampshire subsidiary, and Safety Fund National Bank
and Orange Savings Bank will both be merged into The Family Bank, FSB,
PHFG's Massachusetts subsidiary. These transactions are anticipated to be
consummated in the second quarter of 1998.
In connection with the PHFG agreement, the Company and PHFG entered into
Stock Option Agreements whereby the Company gave PHFG an option to purchase
19.9 percent of its outstanding common stock under certain circumstances and
PHFG gave the Company an option to purchase 10.0 percent of its outstanding
common stock under certain circumstances.
- --------------------------------------------------------------------------------
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 taken as a whole.
3
<PAGE> 5
- --------------------------------------------------------------------------------
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,
--------------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
% of % of
Balances Portfolio Balances Portfolio
------------- ----------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential $ 1,153,612 56.41% $ 872,187 54.47%
Construction 35,350 1.73 19,828 1.24
Commercial 265,848 13.00 247,517 15.46
Commercial, financial, and agricultural 209,492 10.24 169,880 10.61
Warehouse lines of credit to leasing companies 1,922 0.09 18,393 1.15
Consumer lease financing 134,293 6.57 76,343 4.77
Indirect and other consumer 244,635 11.96 197,014 12.30
------------- ----------- ------------- -----------
2,045,152 100.00% 1,601,162 100.00%
Unearned income (17,303) =========== (10,733) ==========
Deferred origination costs, net 7,007 3,970
------------- -------------
Total loans and leases 2,034,856 1,594,399
Less: allowance for loan and lease losses 21,898 20,332
------------- -------------
Net loans and leases $ 2,012,958 $ 1,574,067
============= =============
</TABLE>
Net loans and leases were $2.0 billion, or 70% of total assets, at
December 31, 1997, compared with $1.6 billion, or 66% of totals assets, at
December 31, 1996. Although primarily all categories of loans and leases
have increased from 1996 to 1997, the majority of the $439 million increase
in net loans and leases has been in the residential mortgage portfolio,
increasing $281 million during this timeframe. In addition, the consumer
lease financing portfolio had significant growth in 1997 of nearly $58
million. 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.
As previously discussed, during the fourth quarter of 1997 the Company
discontinued its operations in the CFX Funding small-ticket leasing program,
and a significant portion of the warehouse lines of credit to leasing
companies were sold to an unrelated third party at carrying value. The
remaining balance at December 31, 1997 is expected to either amortize down
or be sold. See "Results of Operations - General."
During 1997, 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. In the first
quarter of 1997, as part of the acquisition of Portsmouth, the Company
commenced a leverage strategy to utilize the higher capital levels at
Portsmouth. During 1997, the Company purchased or originated in excess of
$300 million in investment securities and residential loans, which were
funded by additional advances from the Federal Home Loan Bank of Boston and
brokered deposits. The leverage strategy was designed to optimize the use of
capital, enhance earnings and the return on equity. As traditional retail
opportunities become available, it is the Company's intent that the
leveraged assets, or wholesale assets, will be redeployed into higher
yielding assets and wholesale funding will be replaced with core deposits.
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.
4
<PAGE> 6
- --------------------------------------------------------------------------------
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, 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 .69% of total loans and leases at
December 31, 1997, compared to .68% 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) 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 less than 90 days
past due and 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,
-----------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 13,987 $ 10,783
Foreclosed assets 2,996 3,359
Valuation allowance on foreclosed assets - (10)
---------- ----------
Total nonperforming assets $ 16,983 $ 14,132
========== ==========
Nonaccrual loans as a percent of total loans 0.69% 0.68%
========== ==========
Nonperforming assets as a percent of total loans
and leases and foreclosed assets 0.83% 0.88%
========== ==========
</TABLE>
5
<PAGE> 7
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table provides the composition of the Company's
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996
----------------------------- --------------------------
% of % of
Balances Total Balances Total
---------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
Residential $ 7,966 56.95% $ 6,944 64.40%
Commercial 3,928 28.08 1,904 17.66
Commercial, financial, and agricultural 1,587 11.35 1,634 15.15
Consumer and other 506 3.62 301 2.79
---------- -------- ---------- --------
13,987 100.00% 10,783 100.00%
---------- ======== ---------- ========
Foreclosed assets:
Residential 1,645 54.91% 2,108 62.95%
Construction 387 12.92 467 13.94
Commercial 253 8.44 496 14.81
Repossessed assets (non-real estate) 711 23.73 288 8.60
Valuation allowance - - (10) (0.30)
---------- -------- ---------- --------
2,996 100.00% 3,349 100.00%
---------- ======== ---------- ========
Total nonperforming assets $ 16,983 $ 14,132
========== ==========
</TABLE>
The following table provides a rollforward of the Company's foreclosed
assets:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Balance at beginning of year, net $ 3,349 $ 2,753
Real estate additions 5,981 3,619
Real estate pay-offs/sales/other (6,658) (3,023)
Net increase in other repossessed assets 324 -
--------- ---------
Balance at end of year, net $ 2,996 $ 3,349
========= =========
</TABLE>
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses realized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loan and lease losses based on
current economic conditions and historical experience.
6
<PAGE> 8
- --------------------------------------------------------------------------------
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,
-------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 20,332 $ 19,843 $ 18,940
Provision for loan and lease losses 4,548 4,285 3,814
Loans and leases charged-off (4,358) (4,757) (4,482)
Recoveries of loans and leases previously
charged-off 1,376 961 1,428
Change in fiscal year - Community - - 143
---------- ---------- ----------
Balance at end of year $ 21,898 $ 20,332 $ 19,843
========== ========== ==========
Allowance for loan and lease losses as
a percent of total loans and leases 1.08% 1.28% 1.49%
========== ========== ==========
Allowance for loan and lease losses as
a percent of total nonaccrual loans 156.56% 188.56% 161.31%
========== ========== ==========
</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" of the Notes to Consolidated
Financial Statements.
Management considers the allowance for loan and lease losses to be
adequate in view of its evaluation of the Company's loan and lease
portfolio, the level of nonperforming loans and leases, current economic
conditions and historical experience with loan and lease losses. However,
no assurance can be given that the provision for loan and lease losses will
be adequate in the future; appropriate additional allowances may be required
if there are significant changes to any of the foregoing factors.
7
<PAGE> 9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRADING SECURITIES AND INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities consist of the following at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Securities available for sale $ 534,550 $ 414,896
Securities held to maturity 28,184 104,682
----------- -----------
Total $ 562,734 $ 519,578
=========== ===========
</TABLE>
As a result of the Company's acquisitions of Portsmouth and Community on
August 29, 1997 (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 1997
acquisitions of Portsmouth and Community:
<TABLE>
<CAPTION>
Net
Amortized Unrealized
Cost Losses
---------- ----------
(In thousands)
<S> <C> <C>
U.S. Treasury and agency obligations $ 42,985 $ 58
Federal agency mortgage pass-through securities 18,185 37
---------- ----------
$ 61,170 $ 95
========== ==========
</TABLE>
During 1997 and 1996, 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 1997 and 1996 were $95,000 and
$15,220,000, respectively.
8
<PAGE> 10
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWED FUNDS
- --------------------------------------------------------------------------------
The following table shows the various components of deposits and borrowed
funds at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
Amount % of Total Amount % of Total
------------- ---------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 227,508 11.72% $ 193,579 11.05%
Regular savings deposits 337,203 17.36 299,411 17.10
NOW and money market deposits 349,849 18.01 367,266 20.97
Time deposits 778,461 40.09 820,925 46.88
------------- -------- ------------- --------
Total retail deposits 1,693,021 87.18 1,681,181 96.00
Brokered time deposits 248,975 12.82 69,960 4.00
------------- -------- ------------- --------
Total deposits $ 1,941,996 100.00% $ 1,751,141 100.00%
============= ======== ============= ========
Borrowed funds:
Advances from Federal Home Loan
Bank of Boston $ 453,755 69.56% $ 246,593 70.19%
Other borrowed funds 198,610 30.44 104,750 29.81
------------- -------- ------------- --------
Total borrowed funds $ 652,365 100.00% $ 351,343 100.00%
============= ======== ============= ========
</TABLE>
The increase in total deposits of $191 million in 1997 primarily came in
the higher cost brokered time deposits, and to a lesser extent, demand
deposits. The decrease in retail time deposits resulted primarily from
disintermediation as depositors moved maturing certificates to non-banking
products. Demand deposit growth of $34 million, or 18%, 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 and the leverage strategy.
See "Financial Condition - Loans and Leases" section of this Management's
Discussion and Analysis. 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.
9
<PAGE> 11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS--GENERAL
- --------------------------------------------------------------------------------
CFX Corporation reported 1997 net income of $18,934,000, or $.79 ($.78
diluted) per share, compared to net income of $23,553,000, or $1.01 ($.99
diluted) per share, for the prior year. Return on assets and return on
equity were .71% and 7.63%, respectively, for 1997 compared to 1.04% and
10.03%, respectively, for 1996. Excluding charges for mergers and other
adjustments, net income and earnings per share were $31,729,000 and $1.33
per share, respectively, in 1997 and $27,275,000 and $1.17 per share,
respectively, in 1996, representing an increase of $4,454,000, or 16%.
Return on assets and return on equity, excluding merger charges and other
adjustments, were 1.18% and 12.78%, respectively, for 1997, and 1.02% and
10.99%, respectively, for 1996.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996
---------- ----------
(In thousands, except per share data)
<S> <C> <C>
Net income available to common stock $ 18,934 $ 23,553
---------- ----------
Add back after-tax charges:
Merger costs 8,372 3,722
Charges related to CFX Funding 4,423 -
---------- ----------
12,795 3,722
---------- ----------
Net income available to common stock
before merger and other charges $ 31,729 $ 27,275
========== ==========
Basic earnings per common share:
Net income available to common stock $ 0.79 $ 1.01
Net income available to common stock
exclusive of merger and other charges $ 1.33 $ 1.17
</TABLE>
During 1997 and 1996, the Company incurred charges associated with the
mergers of Portsmouth and Community, and The Safety Fund Corporation and
Milford Co/operative Bank, respectively, totaling $8,372,000 and $3,722,000
(after tax), respectively. See the "Other Expense" section of this
discussion. In 1997, the Company also incurred costs totaling $4,423,000
(after tax) applicable to the resolution of a dispute between the Company
and American Credit Indemnity Company ("ACI"), a credit insurer, regarding
the origination and servicing by CFX Funding of certain equipment leases
held in four securitized lease pools insured by ACI, as well as the
discontinuance of future operations of CFX Funding with respect to its
securitization business. See the "Other Income" and "Other Expense"
sections of this discussion.
During 1997, net interest and dividend income increased $9,565,000 due
primarily to leveraging the Company's balance sheet with loans and leases
which increased $440 million, or 28%, during the year. The increase in
non-interest income of $3,280,000 in 1997 over that in 1996 primarily came
from mortgage banking activities, gains on the sales of investment
securities, and the increase in the investment in bank-owned life insurance.
Non-interest expense for 1997 totaled $92,550,000 and was $74,313,000
excluding merger-related charges and charges related to CFX Funding. The
comparable amounts in 1996 totaled $71,270,000 and $66,748,000,
respectively.
10
<PAGE> 12
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
Taxable-equivalent net interest and dividend income was $99,297,000 in
1997, up 10.6% from $89,764,000 in 1996. The $9,533,000 increase in net
interest and dividend income was due to an increase in average interest
earning assets of $381 million in 1997, partially offset by a decline in the
Company's net interest margin from 4.25% in 1996 to 3.99% in 1997.
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 decrease in the net interest margin during 1997 of 26 basis points was
primarily due to the increase in costs of interest-bearing liabilities
outpacing the increase in yields on interest-earning assets, indicative of
an increasingly competitive market for retail deposits and an increase in
rates on advances from the Federal Home Loan Bank of Boston (FHLBB). Most
of the interest earning assets were funded by higher cost products such as
certificates of deposit or borrowings. The cost of advances from the FHLBB
increased from 5.67% in 1996 to 5.85% in 1997. 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. Conversely, the
net interest margin was positively impacted in 1997 by an increase in
non-interest bearing demand deposits and a higher percentage of interest
earning assets being represented by loans versus lower yielding investment
securities.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
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 $386,000, $346,000, and $294,000 for the years ended December
31, 1997, 1996, and 1995, respectively. The taxable-equivalent income
adjustments for investment securities are $624,000, $696,000, and $776,000
for the years ended December 31, 1997, 1996, and 1995, respectively. These
adjustments, however, are for comparison purposes only and have no impact on
reported net income.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997
----------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loan and leases (1) $ 1,814,156 $ 154,730 8.53%
Tax-exempt loans and leases (2) 10,984 1,136 10.34
Taxable securities (3) 594,193 40,787 6.86
Tax-exempt securities (4) 21,791 1,615 7.41
Other 49,608 2,281 4.60
------------- -----------
Total interest earning assets 2,490,732 200,549 8.05
Noninterest earning assets 194,390 -----------
-------------
Total $ 2,685,122
=============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 668,218 15,758 2.36
Time deposits 984,071 55,251 5.61
Advances from FHLBB 374,620 21,915 5.85
Other borrowed funds 163,554 8,328 5.09
------------- -----------
Total interest bearing liabilities 2,190,463 101,252 4.62
-----------
Noninterest bearing liabilities:
Demand deposits 214,661
Other 31,740
Shareholders' equity 248,258
-------------
Total $ 2,685,122
=============
Net interest and dividend income $ 99,297
==========
Interest rate spread 3.43%
Net interest margin 3.99%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996
----------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
-------------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loan and leases (1) $ 1,458,970 $ 127,860 8.76%
Tax-exempt loans and leases (2) 8,925 1,019 11.42
Taxable securities (3) 535,450 34,736 6.49
Tax-exempt securities (4) 30,228 1,802 5.96
Other 76,468 3,930 5.14
------------- -----------
Total interest earning assets 2,110,041 169,347 8.02
-----------
Noninterest earning assets 156,998
-------------
Total $ 2,267,039
=============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 684,801 16,323 2.38
Time deposits 849,926 47,311 5.57
Advances from FHLBB 197,312 11,196 5.67
Other borrowed funds 99,863 4,753 4.76
------------- -----------
Total interest bearing liabilities 1,831,902 79,583 4.34
-----------
Noninterest bearing liabilities:
Demand deposits 176,423
Other 23,952
Shareholders' equity 234,762
-------------
Total $ 2,267,039
=============
Net interest and dividend income $ 89,764
===========
Interest rate spread 3.68%
Net interest margin 4.25%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995
--------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loan and leases (1) $ 1,246,880 $ 109,030 8.74%
Tax-exempt loans and leases (2) 7,332 865 11.80
Taxable securities (3) 550,217 34,761 6.32
Tax-exempt securities (4) 29,523 2,009 6.80
Other 56,383 3,213 5.70
------------- -----------
Total interest earning assets 1,890,335 149,878 7.92
-----------
Noninterest earning assets 128,395
------------
Total $ 2,018,730
=============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 715,508 18,337 2.56
Time deposits 741,772 39,337 5.30
Advances from FHLBB 122,247 7,441 6.09
Other borrowed funds 52,138 2,750 5.27
------------- -----------
Total interest bearing liabilities 1,631,665 67,865 4.16
-----------
Noninterest bearing liabilities:
Demand deposits 147,984
Other 19,454
Shareholders' equity 219,627
-------------
Total $ 2,018,730
=============
Net interest and dividend income $ 82,013
===========
Interest rate spread 3.76%
Net interest margin 4.33%
</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.
12
<PAGE> 14
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
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>
1997 vs 1996 1996 vs 1995
------------------------------------------ -----------------------------------------
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 $ 30,312 $ (3,442) $ 26,870 $ 18,580 $ 250 $ 18,830
Tax-exempt loans and leases 219 (102) 117 183 (29) 154
Taxable securities 3,951 2,100 6,051 (941) 916 (25)
Tax-exempt securities (563) 376 (187) 44 (251) (207)
Other (1,269) (380) (1,649) 1,057 (340) 717
---------- ---------- ---------- ---------- ---------- ----------
Total interest and
dividend income 32,650 (1,448) 31,202 18,923 546 19,469
---------- ---------- ---------- ---------- ---------- ----------
Interest paid on:
Savings deposits (420) (145) (565) (764) (1,250) (2,014)
Time deposits 7,594 346 7,940 5,909 2,065 7,974
FHLBB advances 10,353 366 10,719 4,299 (544) 3,755
Other borrowings 3,223 352 3,575 2,292 (289) 2,003
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 20,750 919 21,669 11,736 (18) 11,718
---------- ---------- ---------- ---------- ---------- ----------
Change in net interest
and dividend income $ 11,900 $ (2,367) $ 9,533 $ 7,187 $ 564 $ 7,751
========== ========== ========== ========== ========== ==========
</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 1997 was $4,548,000, compared
to $4,285,000 in 1996. Total net charge-offs amounted to $2,982,000 for
1997, compared to $3,796,000 for 1996. The higher net charge-offs in 1996 as
compared to 1997 were primarily attributable to the resolution of certain
long-term problem loan relationships during 1996.
At December 31, 1997, nonaccrual loans stood at $13,987,000, or .69% of
total loans and leases, compared to $10,783,000, or .68% of total loans and
leases, as of December 31, 1996. The allowance for loan and lease losses as
a percentage of nonaccrual loans as of December 31, 1997 and December 31,
1996 amounted to 156.56% and 188.56%, respectively.
The 1997 coverage of allowance for loan losses to nonaccrual loans ratio
returned to that of the 1995 level. The decrease in this coverage ratio
from 1996 to 1997 is primarily due to two factors. First, there were two
large commercial loan relationships put on nonaccrual status during 1997
totaling over $2 million representing the majority of the increase in
nonperforming loans suggesting there is not an overall declining trend in
asset quality. These loans are collateralized and no significant losses
are anticipated. Secondly, most of the remaining increase in nonperforming
loans appeared in the residential loan portfolio. Real estate prices have
steadily increased over the past year in the Company's primary market areas
providing additional protection for losses in the event of foreclosure
proceedings.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
The increase of $263,000 in the 1997 provision for loan and lease losses
over 1996 was due to the continued growth in the loan and lease portfolio.
- --------------------------------------------------------------------------------
OTHER INCOME
- --------------------------------------------------------------------------------
Other income totaled $25,542,000 for 1997, up $3,280,000, or 15%, when
compared to $22,262,000 for 1996. Excluding the pension settlement gain of
$877,000 recognized in 1996, year-over-year increases in non-interest income
totaled $4,157,000, or 19%. Although service charges on deposit accounts
and trust fees were up 3% and 28%, respectively, the significant increases
came in the areas of mortgage banking services and income earned on an
investment in bank-owned life insurance.
Income generated from leasing activities totaled $1,663,000 in 1997, down
$824,000, or 33%, from 1996 levels. The decrease is the result of a
reduction in the amortization of deferred credits relating to leasehold
residuals as well as the reduced number of securitization transactions
executed by CFX Funding during 1997 as compared to 1996. As previously
discussed, the Company discontinued the operations of CFX Funding with
respect to its securitization business during 1997. CFX Funding earned fee
income from assimilating securitizations and structured lease sales as well
as received fees from servicing the lease portfolios for investors. Both of
these revenue sources were diminished in 1997 as a result of discontinuing
this line of business and future revenues in the area are expected to be
negligible. The reduction of this fee income is not expected to have a
material impact on the financial position of the Company in future periods.
Mortgage banking income includes servicing fees as well as net gains on
sales of loans and servicing rights. Net gains on sales of loans totaled
$3,252,000 in 1997 compared to $2,250,000 in 1996, a 45% increase. This is
primarily due to the higher level of mortgage production in 1997 compared to
1996, resulting from a more favorable interest rate environment as well as
an expanded correspondent network. Loans sold in 1997 totaled $255,620,000
as compared to $146,894,000 in 1996. Total loan servicing fees in 1997 were
down $61,000, or 2% compared with 1996, as a result of the high level of
refinancing activity and the accelerated amortization of related mortgage
servicing rights, and a sale of servicing rights in 1997. Loans serviced
for others amounted to $1.4 billion and $1.1 billion at December 31, 1997
and 1996, respectively.
During 1996, 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 N - "Employee
Benefit Plans" of the Notes to Consolidated Financial Statements for more
detail on this transaction.
During 1997 the Company earned $2,251,000 of income from the Company's
investment in bank-owned life insurance (BOLI), an increase of $1,276,000
from 1996. As of December 31, 1997, the Company has $60 million invested 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 several
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 1997 totaled $92,550,000, compared to
$71,270,000 for 1996. During 1997, the Company incurred $11,031,000 in
merger-related costs associated with the acquisition of Portsmouth and
Community, and $7,206,000 in charges related to CFX Funding. 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 $74,313,000 and $66,057,000 for 1997 and 1996, respectively, an
increase of $8,256,000, or 12% over 1996 totals.
14
<PAGE> 16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER EXPENSE
- --------------------------------------------------------------------------------
Salaries and employee benefits increased 14% in 1997 due to increases in
wage rates and incentive compensation resulting from increased profitability
(excluding merger - related charges and other adjustments), additional hires
to staff new initiatives, and a full year of salary expense for new branches
opened in 1996, partially offset by employee reductions resulting from
efficiencies gained from the mergers. The increase in occupancy and
equipment expenses resulted from the opening of an operations center in
1997, new branches, and the enhancement of data processing equipment to meet
customer needs in several of the Company's subsidiary banks. Professional
fees are down 9% from the prior year as a result of the mergers and the
elimination of certain services required as separate institutions.
In the fourth quarter of 1997, the Company made the decision to
discontinue the operations of CFX Funding and to resolve a dispute between
CFX Funding and a credit insurer regarding the origination and servicing by
CFX Funding of certain equipment leases held in four securitized lease
pools. In association with the aforementioned decision, the Company
recorded a charge to earnings of $7.2 million. This charge consisted of
charges of approximately $1.9 million relating to the discontinuance of the
leasing operation, $2.5 million to settle the dispute with the credit
insurer, and the establishment of a $2.8 million reserve for future losses
relating to the four securitized lease pools. As part of the resolution of
its dispute with the credit insurer, the Company has agreed to reimburse the
credit insurer for payments made to investors in the four securitized lease
pools on claims made after December 18, 1997, and the Company is entitled to
all recoveries on defaulted leases held in such pools after such date. The
$2.8 million reserve is an estimate based on historical and projected
performance of the leases. Although management believes that the reserve is
sufficient to cover estimated future losses, there can be no assurances that
actual losses will not be greater than expected. The reserve for credit
losses is included in other liabilities in the consolidated balance sheet.
At December 31, 1997, lease balances aggregating $19.2 million were held in
the four securitized base pools.
In conjunction with the acquisitions of Portsmouth and Community in 1997 and
Safety Fund and Milford in 1996, the Company incurred charges of $11,031,000
and $4,522,000, respectively. These charges were comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996
---------- ---------
(In thousands)
<S> <C> <C>
Personnel $ 3,205 $ 1,440
Data processing 2,464 118
Facilities - 157
Other 5,362 2,807
---------- ---------
$ 11,031 $ 4,522
========== =========
</TABLE>
Personnel charges relate primarily to the costs of employee severance and
employment outplacement assistance. Data processing costs consist of
consultant costs for systems conversion and 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 charged to earnings during the respective year, although not
all cash had been paid out for such expenses. The following table presents a
summary of activity with respect to the merger accruals, included in other
liabilities in the consolidated balance sheets, for each acquisition:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------------------
Portsmouth/ Safety Fund/
Community Milford
------------ --------------
(In thousands)
<S> <C> <C>
Balance at beginning of year $ - $ 1,040
Provision charged to earnings 11,031 -
Cash outlays (7,670) (489)
Noncash write-downs - (157)
--------- ---------
Balance at end of year $ 3,361 $ 394
========= =========
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME TAXES
- --------------------------------------------------------------------------------
In 1997, the Company recognized income tax expense of $7,797,000, an
effective tax rate of 29.2%, compared to $11,876,000 and an effective tax
rate of 33.5% for 1996. The lower tax rate for 1997 is primarily due to
higher tax credits pertaining to low income housing projects, the
establishment of a Real Estate Investment Trust (REIT), which effectively
reduces Massachusetts income taxes, and the non-taxable increase in cash
surrender value of bank-owned life insurance. These benefits were partially
offset in 1997 by non-deductible merger expenses.
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1996 AND 1995
- --------------------------------------------------------------------------------
CFX Corporation reported 1996 earnings of $23,553,000, or $1.01 ($.99
diluted) per share, compared to earnings of $21,465,000, or $.93 ($.89
diluted) 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, earnings and
earnings per share were $27,275,000 and $1.17 per share, respectively, in
1996 representing an increase of $5,810,000, or 27% over prior year
earnings. Return on assets and return on equity in 1996 were 1.20% and
11.62%, respectively, excluding merger charges. During 1996, the Company
incurred charges associated with the mergers of Safety Fund and Milford
totaling $3,722,000 (after tax).
- --------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
Taxable-equivalent net interest and dividend income was $89,764,000 in
1996, up 9.5% from $82,013,000 in 1995. The interest rate spread and net
interest margin were 3.68% and 4.25%, respectively, for 1996 compared to
3.76% and 4.33%, respectively, for 1995. The decrease of 8 basis points in
the interest rate spread was principally due to the rise in the cost of the
funding sources outpacing the increase in yield on earning assets. The
decrease of 8 basis points in the net interest margin was primarily the
result of the increase in the cost of funds, despite the increase in average
interest earning assets in 1996 over 1995 of $219,706,000.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
The provision for loan and lease losses in 1996 was $4,285,000, compared
to $3,814,000 in 1995. The increase of $471,000 was due to the increase in
net charge-offs in 1996 as well as the continued growth in the loan and
lease portfolio. 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 1995 amounted
to 188.56% and 161.31%, respectively.
- --------------------------------------------------------------------------------
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 21%. 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.
16
<PAGE> 18
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 N -
"Employee Benefit Plans" of the Notes to Consolidated Financial Statements
for more detail on this transaction. Also, included in other non-interest
income is $975,000 of income resulting from the Company's investment in
BOLI.
- --------------------------------------------------------------------------------
OTHER EXPENSE
- --------------------------------------------------------------------------------
Other 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 4% 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.
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.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Total shareholders' equity at December 31, 1997 was $245,717,000,
compared to $239,837,000 a year earlier. The increase is primarily due to
the issuance of additional common shares through exercise of stock options
and an increase in the net unrealized gains on securities available for
sale. The Consolidated Statements of Shareholders' Equity provide details of
changes in equity since December 31, 1994.
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.
17
<PAGE> 19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 1997, the Company's combined Tier 1 leverage capital
ratio was 8.3%. In addition, the Company's combined Tier 1 risk-based
capital ratio and total risk-based capital ratio were 13.0% and 14.3%,
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 ratio of 8.3% is substantially above the minimum level of
6% to be considered well capitalized by the regulatory agencies.
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The goal of asset/liability management is the prudent control of market
risk, liquidity, and capital. Asset/liability management is governed by
policies reviewed and approved annually by the Company's Board of Directors
(the "Board"). The Board delegates responsibility for asset/liability
management to the Company's Asset/Liability Management Committee ("ALCO").
ALCO sets strategic directives that guide the day-to-day asset/liability
management activities of the Company. ALCO also reviews and approves all
major market risk, liquidity, and capital management programs.
- --------------------------------------------------------------------------------
MARKET RISK
- --------------------------------------------------------------------------------
Market risk is the sensitivity of income to variations in interest rates
and other market-driven rates or prices. The Company is exposed to market
risk in both its trading and non-trading portfolios. Trading portfolios are
used minimally at the Company and were zero at year-end 1997. Non-trading
market risk is discussed below.
Non-trading Market Risk
The Company's earnings from non-trading operations are not directly or
materially impacted by movements in foreign currency rates or commodity
prices. Movements in equity prices may have an indirect but modest impact on
earnings by affecting the volume of activity or the amount of fees from
investment-related businesses.
Interest-rate risk, including mortgage prepayment risk, is by far the
most significant non-trading market risk to which the Company is exposed.
Interest-rate risk is the sensitivity of income to variations in interest
rates. This risk arises directly from the Company's core banking activities
- lending, deposit gathering, and loan servicing.
The primary goal of interest-rate risk management is to control the
Company's exposure to interest-rate risk within limits approved by the
Board. These limits and guidelines reflect the Company's tolerance for
interest-rate risk over both short-term and long-term time horizons.
The Company controls interest-rate risk by identifying, quantifying and
hedging its exposures. The Company identifies and quantifies its
interest-rate exposures using simulation and valuation models, as well as
gap analyses, reflecting the known or assumed maturity, repricing and other
cash flow characteristics of the Company's assets and liabilities.
The Company manages the interest-rate risk inherent in its core banking
operations using both on-balance sheet instruments, mainly fixed-rate
portfolio securities, borrowed fund maturities, and a variety of off-balance
sheet instruments. The most frequently used off-balance sheet instruments
are interest-rate swaps and options. When appropriate, forward-rate
agreements, options on swaps, and exchange-traded futures and options are
also used.
18
<PAGE> 20
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The major source of the Company's non-trading interest-rate risk is the
difference in the repricing characteristics of the Company's core banking
assets and liabilities - loans and deposits. This difference or mismatch is
a risk to net interest income.
Most significantly, the Company's core banking assets and liabilities are
mismatched with respect to repricing frequency and/or maturity. Most of the
Company's commercial loans, for example, reprice rapidly in response to
changes in short-term interest rates (e.g., London Interbank Offered Rate
(LIBOR) and Prime). In contrast, many of its consumer deposits reprice
slowly, if at all, in response to changes in market interest rates.
Additionally, the Company's core banking assets and liabilities are
mismatched with respect to the repricing index. For example, many of the
Company's commercial and consumer loans reprice in response to changes in
the Prime rate, while few, if any, deposits reprice as Prime changes. As a
result, the core bank is exposed to spread or "basis" risk.
In managing net interest income, the Company uses fixed-rate portfolio
securities, mortgage loans and interest-rate swaps to offset the general
asset-sensitivity of the core bank. At December 31, 1997, interest-rate
swaps totaling $20.0 million (notional amount) were being used to manage
risk to net interest income.
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
A second major source of the Company's non-trading interest-rate risk is
the sensitivity of its mortgage loans and mortgage servicing rights (MSRs)
to prepayments. The mortgage borrower has the option to prepay the mortgage
loan at any time without penalty. When mortgage interest rates decline,
borrowers have a greater incentive to prepay mortgage loans through a
refinancing; when mortgage interest rates rise, this incentive is reduced or
eliminated. Since MSRs represent the right to service mortgage loans, a
decline in interest rates and an actual (or probable) increase in mortgage
prepayments shorten the expected life of the MSR asset and reduce its
economic value. Correspondingly, an increase in interest rates and an actual
(or probable) decline in mortgage prepayments lengthen the expected life of
the MSR asset and enhance its economic value. The expected income from and,
therefore, economic value of MSRs is sensitive to movements in interest
rates due to this sensitivity to mortgage prepayments.
To mitigate the risk of declining long-term interest rates,
higher-than-expected mortgage prepayments, and the potential impairment of
the MSRs, the Company uses a conservative valuation methodology (which
reduces the risk of impairment) and a variety of risk management
instruments. There can be no assurances, however, that such measures will
be effective.
Complicating management's efforts to control non-trading exposure to
interest-rate risk is the fundamental uncertainty of the maturity,
repricing, and/or runoff characteristics of some of the Company's core
banking assets and liabilities. This uncertainty often reflects optional
features contained in these financial instruments. The most important
optional features are contained in consumer deposits and loans.
For example, many of the Company's interest-bearing retail deposit
products (e.g., interest checking, savings and money market deposits) have
no contractual maturity. Customers have the right to withdraw funds from
these deposit accounts freely. Deposit balances may therefore run off
unexpectedly due to changes in competitive or market conditions. To
forestall such runoff, rates on interest-bearing deposits may have to be
increased more (or reduced less) than expected. Such repricing may not be
highly correlated with the repricing of variable rate loans. Finally,
balances that are lost may have to be replaced with other more expensive
retail or wholesale funding. Given the uncertainties surrounding deposit
runoff and repricing, the interest-rate sensitivity of core bank liabilities
cannot be determined precisely.
Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, without penalty. As a result, the Company's
mortgage-based assets (including mortgage loans and securities as well as
mortgage servicing rights) are subject to prepayment risk. This risk tends
to increase when interest rates fall due to the benefits of refinancing.
Since the future prepayment behavior of the Bank's customers is uncertain,
the interest-rate sensitivity of mortgage assets cannot be determined
exactly.
19
<PAGE> 21
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
To cope with such uncertainties, management gives careful attention to
its assumptions. Depending on the product or behavior in question, each
assumption will reflect some combination of market data, research analysis,
and business judgment. For example, assumptions for mortgage prepayments are
derived from published dealer median prepayment estimates for comparable
mortgage loans, adjusted for factors specific to the Company's portfolio,
such as geography and credit quality. Assumptions for noncontractual
deposits are based on a historical analysis of repricing and runoff trends
heavily weighted to the recent past, modified by business judgment
concerning prospective competitive market influences.
To measure the sensitivity of its income to changes in interest rates,
the Company use a variety of methods, including simulation, gap, and
valuation analyses.
Simulation analysis involves dynamically modeling interest income and
expense from the Company's balance sheet and off-balance-sheet positions
over a specified time period under various interest-rate scenarios and
balance sheet structures. The Company uses simulation analysis to measure
the sensitivity of net interest income and net income over relatively short
(i.e., 1-2 year) time horizons.
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Key assumptions in these simulation analyses (and in the gap and
valuation analyses discussed below) relate to the behavior of interest rates
and spread, the growth or shrinkage of product balances and the behavior of
the Bank's deposit and loan customers. As indicated above, the most
material assumptions relate to the prepayment of mortgage assets as well as
the repricing and/or runoff of noncontractual deposits.
As the future path of interest rates cannot be known in advance,
management uses simulation analysis to project earnings under various
interest-rate scenarios. Some scenarios are deliberately extreme, including
immediate interest-rate "shocks", and yield curve "twists".
Usually, each analysis incorporates what management believes to be the
most appropriate assumptions about customer and competitor behavior in the
specified interest-rate scenario. But in some analyses, assumptions are
deliberately manipulated to test the Company's exposure to "assumption
risk."
The Company's Board limits on interest-rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, estimated net
income for the subsequent 12 months should decline by less than 12%. The
Company was in compliance with this limit at December 31, 1997. The
following table reflects the estimated exposure of the Company's net income
for the next 12 months, assuming an immediate shift in interest rates.
<TABLE>
<CAPTION>
Estimated
Exposure to
Rate Change Net Income
(Basis Points) (Dollars in Millions)
<S> <C>
+200 $ 0.8
-200 (3.1)
</TABLE>
The results are dependent on material assumptions such as those discussed
above. There can be no assurances that any particular result will occur.
Management believes that the exposure of the Company's net interest
income to gradual and/or modest changes in interest rates is relatively
small. As indicated by the results of the simulation analyses, however, a
sharp decline in interest rates will tend to reduce net income, but by
amounts that are within corporate limits. This exposure is primarily related
to two major risk factors discussed earlier - the anticipated slow repricing
of noncontractual deposits and the assumed rapid prepayment of mortgage
loans and securities.
Gap analysis provides a static view of the maturity and repricing
characteristics of the on- and off-balance sheet positions. The
interest-rate gap is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled or anticipated repricing
or maturity. Interest-rate gap analysis can be viewed as a complement to
simulation analysis.
20
<PAGE> 22
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table summarizes the timing of the Company's anticipated
maturities or repricing of interest earning assets and interest bearing
liabilities as of December 31, 1997. This table has been generated using
certain assumptions which the Company believes fairly represent repricing
volumes in a dynamic interest rate environment. Specifically, contractual
maturities are used on all time deposits and investments other than
asset-backed securities. For asset-backed securities and loans, contractual
maturities, repricing and prepayment assumptions are used. The prepayment
assumptions are based on current experience and industry statistics. The
stratification of savings deposits (including NOW, savings, and money market
accounts) is based on management's philosophy of repricing core deposits in
reaction to changes in the interest rate environment. Repricing frequencies
will vary at different points in the interest cycle and as supply and demand
for credit change. Derivative financial instruments are reflected in the
gap table. For further discussion on strategies for derivatives, see Note R
- "Derivative Financial Instruments" in the Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
0-3 4-12 1-5 5-10 Over 10
Months Months Years Years Years Total
---------- ----------- ---------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing assets:
Interest bearing deposits
with other banks $ 35 $ - $ - $ - $ - $ 35
Investment securities 188,770 44,695 178,029 84,143 67,097 562,734
Loans and leases 399,894 584,639 858,645 181,986 47,429 2,072,593
---------- ----------- ----------- ---------- ----------- -----------
Total interest earning
assets 588,699 629,334 1,036,674 266,129 114,526 2,635,362
---------- ----------- ----------- ---------- ----------- -----------
Interest bearing liabilities:
Savings and time deposits 268,129 583,464 599,596 198,096 65,203 1,714,488
Advances from Federal
Home Loan Bank of Boston 93,030 153,892 204,443 1,127 1,263 453,755
Other borrowed funds 139,140 59,470 - - - 198,610
---------- ----------- ----------- ---------- ----------- -----------
Total interest bearing liabilities 500,299 796,826 804,039 199,223 66,466 2,366,853
---------- ----------- ----------- ---------- ----------- -----------
Periodic gap $ 88,400 $(167,492) $ 232,635 $ 66,906 $ 48,060 $ 268,509
========== =========== =========== ========== =========== ===========
Cumulative gap $ 88,400 $ (79,092) $ 153,543 $ 220,449 $ 268,509 $ 268,509
========== =========== =========== ========== =========== ===========
</TABLE>
The ability to assess interest rate risk using gap analysis is limited.
Gap analysis does not capture the impact of cash flow or balance sheet mix
changes over a forecasted future period and it does not measure the amount
of price change expected to occur in the various asset and liability
categories. Thus, management does not use gap analysis exclusively in its
assessment of interest rate risk. The Company's interest rate risk exposure
is also measured by the forecasted net income and discounted cash flow
market value sensitivities referred to above.
Valuation analysis involves projecting future cash flows from the
Company's assets, liabilities and off-balance sheet positions over a very
long-term horizon, discounting those cash flows at appropriate interest
rates, and then summing the discounted cash flows. The Company's "economic
value of equity" (EVE) is the estimated net present value of the discounted
cash flows. The interest sensitivity of EVE is a measure of the sensitivity
of long-term earnings to changes in interest rates. The Company uses
valuation analysis (specifically, the sensitivity of EVE) to measure the
exposure of earnings and equity to changes in interest rates over a
relatively long (i.e, greater than 2-year) time horizon. Valuation
analysis provides a more comprehensive measure of the Company's exposure to
the interest-rate risk than simulation analysis.
21
<PAGE> 23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's Board limits on interest-rate risk specify that if interest
rates were to shift immediately up or down 200 basis points, the estimated
economic value of equity should decline by less than 25%. The Company was in
compliance with this limit at December 31, 1997. The following table
reflects the Company's estimated exposure to economic value assuming an
immediate shift in interest rates. Exposures are reported for shifts of +/-
100 basis points as well as +/- 200 basis points because the sensitivity of
EVE to changes in interest rates can be nonlinear:
<TABLE>
<CAPTION>
Estimated
Change in
Rate Change Economic Value
(Basis Points) (Dollars in Millions)
<S> <C>
+200 $ (14)
-100 (5)
-100 (2)
-200 (8)
</TABLE>
It should be emphasized that valuation analysis focuses on the long-term
economic value of the Company's future cash flows, but it does not reflect
accounting rules. For some financial instruments, the adverse impact of
current movements in interest rates on expected future cash flows must be
recognized immediately. For example, if interest rates decline, thereby
reducing estimated future fee income from MSRs such that the estimated
economic value of the MSRs fall below book value, an immediate impairment
charge is required. In contrast, for other financial instruments, such as
fixed-rate investment securities, the beneficial impact of a decline in
interest rates on future income is unrecognized unless the instruments are
sold.
- --------------------------------------------------------------------------------
LIQUIDITY RISK
- --------------------------------------------------------------------------------
Liquidity risk-management's objective is to assure the ability of the
Company and its subsidiaries to meet their financial obligations. These
obligations are the withdrawal of deposits on demand or at their contractual
maturity. the repayment of borrowings as they mature, the ability to take
advantage of new business opportunities. Liquidity is achieved by the
maintenance of a strong base of core customer funds, maturing short-term
assets, the ability to sell marketable securities or other assets, committed
lines of credit and access to capital markets.
At CFX Corporation, liquidity is measured in two ways. First, borrowing
capacities are estimated. Policy guidelines require minimum levels of
available liquidity, whether the source is asset sale or borrowing.
Borrowing capacity estimates are augmented by regular communication between
company management and primary borrowing sources, including the Federal Home
Loan Bank of Boston, national market deposit brokers, and primary
securities' dealers. Second, forecasts of liquidity utilization are reviewed
monthly by ALCO. Trends toward lower liquidity levels can be observed and
connective strategies developed, in advance of the actual occurrence of a
policy violation.
- --------------------------------------------------------------------------------
IMPACT OF INFLATION
- --------------------------------------------------------------------------------
The consolidated financial statements and related consolidated financial
data herein have been presented in accordance with generally accepted
accounting principles which require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to
inflation. Inflation can affect the Company in a number of ways, including
increased operating costs and interest rate volatility. Management attempts
to minimize the effects of inflation by maintaining an approximate match
between interest rate sensitive assets and interest rate sensitive
liabilities and, where practical, by adjusting service fees to reflect
changing costs.
22
<PAGE> 24
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
See Note A - "Significant Accounting Policies - Recent Accounting
Pronouncements," of the Notes to Consolidated Financial Statements for more
detail.
- --------------------------------------------------------------------------------
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. A
comprehensive Year 2000 compliance program has been written and if adhered
to, will ensure that all major system applications will be Year 2000
compliant prior to January 1, 2000. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions beginning in the Year 2000.
Cost estimates have been made and are not deemed to be material in any one
year for the Company. However, if primary processing vendors are not
compliant with the Year 2000 coding requirements, there may be business
interruptions which could have material adverse financial implications for
the Company. As previously noted, the Company announced that it is being
acquired with an expected closing in the second quarter of 1998. Several of
the Year 2000 initiatives undertaken by the Company may not be compatible
with the acquiring organization which has different primary processing
systems.
23
<PAGE> 25
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 87,636 $ 77,123
Federal funds sold and other overnight deposits 7,000 53,983
------------- -------------
Cash and cash equivalents 94,636 131,106
Interest-bearing deposits with other banks 35 287
Securities available for sale 534,550 414,896
Securities held to maturity 28,184 104,682
Mortgage loans held for sale 37,737 16,967
Loans and leases 2,034,856 1,594,399
Less allowance for loan losses 21,898 20,332
------------- -------------
Net loans and leases 2,012,958 1,574,067
------------- -------------
Premises and equipment 38,761 38,195
Mortgage servicing rights 8,894 7,644
Goodwill and deposit base intangibles 8,698 9,235
Foreclosed assets 2,996 3,349
Bank-owned life insurance 63,226 30,975
Other assets 43,092 37,854
------------- -------------
Total assets $ 2,873,767 $ 2,369,257
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing $ 1,714,488 $ 1,557,562
Noninterest bearing 227,508 193,579
------------- -------------
Total deposits 1,941,996 1,751,141
Advances from Federal Home Loan Bank of Boston 453,755 246,593
Other borrowed funds 198,610 104,750
Other liabilities 33,689 26,936
------------- -------------
Total liabilities 2,628,050 2,129,420
------------- -------------
Shareholders' equity:
Preferred stock, par value $1.00 per share - authorized 4,000,000 shares;
no shares outstanding in 1997 or 1996 - -
Common stock, par value $.66 2/3 per share - authorized 50,000,000 shares,
issued 24,116,000 shares in 1997 and 23,504,000 shares in 1996 16,078 15,671
Paid-in capital 149,106 142,898
Retained earnings 79,080 81,198
Net unrealized gains on securities available for sale, after tax effects 2,240 489
Cost of common stock in treasury - 45,109 shares in 1997 and 28,055 shares in 1996 (787) (419)
------------- -------------
Total shareholders' equity 245,717 239,837
------------- -------------
Total liabilities and shareholders' equity $ 2,873,767 $ 2,369,257
============= =============
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
24
<PAGE> 26
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 155,480 $ 128,533 $ 109,601
Interest on investment securities:
Taxable 39,089 33,287 33,185
Tax-exempt 991 1,106 1,233
----------- ----------- -----------
40,080 34,393 34,418
Interest and dividends on trading securities 7 - 6
Dividends on marketable equity securities 1,691 1,449 1,570
Other 2,281 3,930 3,213
----------- ----------- -----------
Total interest and dividend income 199,539 168,305 148,808
----------- ----------- -----------
Interest expense:
Interest on deposits 71,009 63,634 57,674
Interest on borrowings:
Short-term 20,604 11,971 7,251
Long-term 9,639 3,978 2,940
----------- ----------- -----------
Total interest expense 101,252 79,583 67,865
----------- ----------- -----------
Net interest and dividend income 98,287 88,722 80,943
Provision for loan and lease losses 4,548 4,285 3,814
----------- ----------- -----------
Net interest and dividend income, after provision for loan and lease losses 93,739 84,437 77,129
----------- ----------- -----------
Other income:
Service charges on deposit accounts 5,113 4,952 4,474
Loan servicing fees 2,405 2,466 2,248
Net gain on trading securities 87 564 1,092
Net gain on sale of investment securities 2,460 2,216 1,291
Net gain on sale of loan servicing rights 1,339 - -
Net gain on sale of mortgage loans 3,252 2,250 1,149
Leasing activities 1,663 2,487 1,967
Trust fees 3,015 2,351 2,246
Pension settlement gain - 877 -
Bank-owned life insurance 2,251 975 -
Other 3,957 3,124 3,271
----------- ----------- -----------
Total other income 25,542 22,262 17,738
----------- ----------- -----------
Other expense:
Salaries and employee benefits 38,730 34,076 31,941
Occupancy and equipment 12,127 10,306 9,118
Professional fees 2,761 3,030 3,146
Advertising and marketing 2,322 2,366 1,972
Operation of foreclosed assets 648 508 607
FDIC deposit insurance 289 383 2,443
Goodwill and deposit base intangible amortization 623 653 714
Merger expenses 11,031 4,522 -
Charges related to CFX Funding 7,206 - -
SAIF special assessment - 691 -
Other 16,813 14,735 13,310
----------- ----------- -----------
Total other expense 92,550 71,270 63,251
----------- ----------- -----------
</TABLE>
(continued)
See notes to consolidated financial statements and independent auditors'
report.
25
<PAGE> 27
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (concluded) CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Income before income taxes 26,731 35,429 31,616
Income taxes 7,797 11,876 10,062
---------- ---------- ----------
Net income 18,934 23,553 21,554
Preferred stock dividends - - 89
---------- ---------- ----------
Net income available to common stock $ 18,934 $ 23,553 $ 21,465
========== ========== ==========
Weighted averages shares outstanding 23,866 23,383 23,180
========== ========== ==========
Weighted averages shares outstanding - assuming dilution 24,329 23,897 24,069
========== ========== ==========
Earnings per share $ 0.79 $ 1.01 $ 0.93
========== ========== ==========
Earnings per share - assuming dilution $ 0.78 $ 0.99 $ 0.89
========== ========== ==========
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
26
<PAGE> 28
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ------------------------ Paid-In
Shares Dollars Shares Dollars Capital
--------- --------- ---------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 193 $ 193 22,347 $ 14,899 $ 129,377
Net income - - - - -
Common cash dividends declared-$.53 per share - - - - -
Preferred cash dividends declared-$.4625 per share - - - - -
Issuance of common stock under stock
option and purchase plans - - 198 132 1,114
Issuance of common stock under dividend
reinvestment plan - - 22 15 312
Purchase and retirement of treasury stock - - (1,025) (683) (7,996)
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 - - 460 307 6,756
Change in net unrealized gain (loss)
on securities available for sale - - - - -
Activity applicable to change in fiscal year -
Community:
Net income - - - - -
Common cash dividends declared - - - - -
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 - - 22,330 14,888 129,576
Net income - - - - -
Common cash dividends declared-$.58 per share - - - - -
Issuance of common stock under stock option
and purchase plans and related tax effects - - 494 329 2,963
Purchase and retirement of treasury stock - - (42) (28) (555)
Decrease in unearned compensation - ESOP - - - - -
Fractional shares paid out - - (2) (1) (25)
Common stock dividends declared - - 724 483 10,939
Change in net unrealized gain (loss)
on securities available for sale - - - - -
------ ------ -------- ---------- -----------
Balance at December 31, 1996 - - 23,504 15,671 142,898
Net income - - - - -
Common cash dividends declared-$.81 per share - - - - -
Issuance of common stock under stock option
and purchase plans and related tax effects - - 488 325 4,092
Issuance of common stock under dividend
reinvestment plan - - 22 14 422
Purchase of treasury stock - - - - -
Common stock dividends declared - - 102 68 1,694
Change in net unrealized gain (loss)
on securities available for sale - - - - -
------ ------ -------- ---------- -----------
Balance at December 31, 1997 - $ - 24,116 $ 16,078 $ 149,106
====== ====== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Unearned Securities Treasury Stock
Retained Compensation - Available ----------------------
Earnings ESOP for Sale Shares Dollars Total
----------- -------------- --------------- -------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 78,562 $ (429) $ (4,420) (866) $ (7,198) $ 210,984
Net income 21,554 - - - - 21,554
Common cash dividends declared-$.53 per share (11,712) - - - - (11,712)
Preferred cash dividends declared-$.4625 per share (89) - - - - (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 (7,063) - - - - -
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 - - - - 1,774
Common cash dividends declared (543) - - - - (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 82,483 (118) 4,746 - - 231,575
Net income 23,553 - - - - 23,553
Common cash dividends declared-$.58 per share (13,416) - - - - (13,416)
Issuance of common stock under stock option
and purchase plans and related tax effects - - - - - 3,292
Purchase and retirement of treasury stock - - - (28) (419) (1,002)
Decrease in unearned compensation - ESOP - 118 - - - 118
Fractional shares paid out - - - - - (26)
Common stock dividends declared (11,422) - - - - -
Change in net unrealized gain (loss)
on securities available for sale - - (4,257) - - (4,257)
---------- -------- ---------- ------ ---------- -----------
Balance at December 31, 1996 81,198 - 489 (28) (419) 239,837
Net income 18,934 - - - - 18,934
Common cash dividends declared-$.81 per share (19,283) - - - - (19,283)
Issuance of common stock under stock option
and purchase plans and related tax effects - - - - - 4,417
Issuance of common stock under dividend
reinvestment plan - - - - - 436
Purchase of treasury stock - - - (17) (368) (368)
Common stock dividends declared (1,769) - - - - (7)
Change in net unrealized gain (loss)
on securities available for sale - - 1,751 - - 1,751
---------- -------- ---------- ------ ---------- -----------
Balance at December 31, 1997 $ 79,080 $ - $ 2,240 (45) $ (787) $ 245,717
========== ======== ========== ====== ========== ===========
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
27
<PAGE> 29
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,934 $ 23,553 $ 21,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,191 5,123 6,722
Amortization of deferred credit on leasehold residual (774) (1,412) (1,347)
Provision for loan and lease losses 4,548 4,285 3,814
Provision for foreclosed real estate losses 23 21 31
Loans originated and acquired for resale (202,531) (153,836) (120,897)
Principal balance of loans sold 255,620 146,894 124,333
Net gain on sale of portfolio loans (241) (256) (14)
Net (gain) loss on sale of foreclosed real estate 14 (76) (71)
Net gain on sale of investment securities (2,460) (2,216) (1,291)
Net decrease in trading securities - - 236
Deferred income tax provision 3,306 6,136 2,905
Increase in cash surrender value of bank-owned
life insurance (2,251) (975) -
Other (4,996) (270) (6,419)
---------- ---------- ----------
Net cash provided by operating activities 74,383 26,971 29,556
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 236,584 77,663 60,635
Proceeds from maturities of securities available for sale 298,015 178,071 58,019
Purchase of securities available for sale (591,047) (210,357) (80,235)
Proceeds from sales of securities held to maturity - 1,005 6,006
Proceeds from maturities of securities held to maturity 53,328 88,750 68,488
Purchase of securities held to maturity (34,193) (87,253) (85,810)
Proceeds from the sale of, or payments on, foreclosed real estate 11,054 2,489 2,193
Proceeds from the sale of portfolio loans 36,358 16,356 10,027
Net decrease (increase) in interest-bearing deposits with other banks 252 25,155 (3,606)
Net increase in loans and leases (563,660) (312,391) (162,951)
Purchase of bank-owned life insurance (30,000) (30,000) -
Purchase of premises and equipment (6,310) (7,748) (2,859)
---------- ---------- ----------
Net cash used in investing activities (589,619) (258,260) (130,093)
---------- ---------- ----------
</TABLE>
(continued)
See notes to consolidated financial statements and independent auditors'
report.
28
<PAGE> 30
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded) CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
--------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest bearing
deposits and savings accounts 54,304 10,997 (51,887)
Net increase in time certificates of deposit 136,551 102,313 142,290
Proceeds from borrowings with maturities in
excess of three months 651,281 235,500 163,883
Payment of borrowings with maturities in excess of
three months (286,000) (178,640) (57,803)
Net increase (decrease) in borrowings with maturities of
three months or less (64,259) 76,721 (32,716)
Repayment of liability in connection with ESOP - (118) (232)
Common cash dividends paid (16,754) (13,312) (10,041)
Preferred cash dividends paid - - (89)
Proceeds from issuance of common stock 4,018 2,919 1,509
Payments for fractional shares (7) (26) (18)
Acquisition of treasury shares (368) (1,002) (1,481)
--------- ----------- -----------
Net cash provided by financing activities 478,766 235,352 153,415
--------- ----------- -----------
Increase (decrease) in cash and cash equivalents (36,470) 4,063 52,878
Change in fiscal year - Community - - 1,858
Cash and cash equivalents at beginning of year 131,106 127,043 72,307
--------- ----------- -----------
Cash and cash equivalents at end of year $ 94,636 $ 131,106 $ 127,043
========= =========== ===========
Supplementary information:
Interest paid on deposit accounts $ 67,104 $ 61,559 $ 56,730
Interest paid on borrowed funds 27,297 16,147 9,715
Income taxes paid 5,407 5,930 7,662
Transfers from loans to loans held for sale 73,859 - -
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
29
<PAGE> 31
- --------------------------------------------------------------------------------
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 (the Company), 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 Company has entered into a definitive agreement to be acquired by
Peoples Heritage Financial Group, Inc. See Note W - "Acquisition of the
Company."
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>
Six Months Ended June 30,
-------------------------------------------
1997
-------------------------------------------
CFX Portsmouth Community
---------- ------------ -------------
(In thousands)
<S> <C> <C> <C>
Net interest and
dividend income $ 30,784 $ 5,185 $ 11,718
Provision for loan and
lease losses (1,404) - (558)
Other income 8,578 509 2,586
Other expense (24,771) (1,703) (9,211)
Income taxes (3,638) (955) (1,688)
---------- --------- ----------
Net income 9,549 3,036 2,847
Preferred dividends - - -
---------- --------- ----------
Net income available
to common stock $ 9,549 $ 3,036 $ 2,847
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------------
CFX Portsmouth Community CFX Portsmouth Community
------------ ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest and
dividend income $ 56,859 $ 10,043 $ 21,820 $ 52,026 $ 10,862 $ 18,055
Provision for loan and
lease losses (2,935) - (1,350) (3,037) - (777)
Other income 16,827 1,888 3,547 14,311 1,226 2,201
Other expense (51,370) (3,527) (16,373) (46,202) (3,608) (13,441)
Income taxes (6,740) (2,447) (2,689) (5,760) (2,439) (1,863)
---------- ---------- ---------- ---------- ---------- ----------
Net income 12,641 5,957 4,955 11,338 6,041 4,175
Preferred dividends - - - (89) - -
---------- ---------- ---------- ---------- ---------- ----------
Net income available
to common stock $ 12,641 $ 5,957 $ 4,955 $ 11,249 $ 6,041 $ 4,175
========== ========== ========== ========== ========== ==========
</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 year ended December 31, 1995 includes financial information
for Community for the year ended June 30, 1995.
30
<PAGE> 32
- --------------------------------------------------------------------------------
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>
On July 1, 1996, the Company acquired The Safety Fund Corporation and
Milford Co/operative Bank. The acquisitions were accounted for as
poolings-of-interest. Expenses directly attributable to the mergers
amounted to $4,522,000 and were charged to earnings at the date of
combination.
- --------------------------------------------------------------------------------
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, to prepayment speeds used to value mortgage servicing rights, and
to credit losses applicable to lease securitizations. See Note M -
"Charges Related to CFX Funding."
- --------------------------------------------------------------------------------
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 1996 and 1995 consolidated
financial statements to conform to the 1997 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.
31
<PAGE> 33
- --------------------------------------------------------------------------------
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 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.
32
<PAGE> 34
- --------------------------------------------------------------------------------
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 an impaired loan) 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 less than 90 days
past due and 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.
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. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify consumer and residential mortgage loans for impairment. 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 the 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, 1997, the
Company had $6,364,000 in impaired loans, all of which were measured by the
fair value of collateral.
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.
-----------------------------------------------------------------------------
BANK-OWNED LIFE INSURANCE
-----------------------------------------------------------------------------
During 1996 and 1997, the Company invested an aggregate of $60 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.
33
<PAGE> 35
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
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
-----------------------------------------------------------------------------
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 the three years ended December 31, 1997.
-----------------------------------------------------------------------------
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 expected to be realized. At
December 31, 1997 and 1996, the leasehold residual positions of $510,000 and
$1,906,000, respectively, are included in other assets and deferred credits
of $1,105,000 and $3,184,000, 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 $1,633,000 and $4,683,000, respectively, as of December 31, 1997.
-----------------------------------------------------------------------------
FORECLOSED ASSETS
-----------------------------------------------------------------------------
Foreclosed assets consist 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.
Operating expenses of foreclosed real estate and gains and losses upon
disposition are reported in earnings.
34
<PAGE> 36
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
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 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 plans allow 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. The Company does not intend to make
future contributions to the ESOP. 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 Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. The Company
has elected to continue with the accounting methodology in Opinion No. 25
and, as a result, 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 pro forma disclosures include the effects of all awards granted on or
after January 1, 1995. See Note N - "Stock Compensation Plans."
-----------------------------------------------------------------------------
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.
35
<PAGE> 37
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
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
-----------------------------------------------------------------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
which requires that earnings per share be calculated on a basic and a
dilutive basis. Basic earnings per share represents income available to
common stock divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the issuance. Potential common shares related to
outstanding stock options have been determined using the treasury stock
method. The Statement is effective for interim and annual periods ending
after December 15, 1997, and requires the restatement of all prior-period
earnings per share data presented. Accordingly, the Company has restated
all earnings per share data presented herein.
A reconciliation of the components of basic and diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income available to common stock - basic earnings per share $ 18,934 $ 23,553 $ 21,465
Add: Preferred stock dividends - - 89
---------- ---------- ----------
Net income - diluted earnings per share $ 18,934 $ 23,553 $ 21,554
========== ========== ==========
Weighted average shares outstanding - basic earnings per share 23,866 23,383 23,180
Effect of dilutive securities:
Options 463 514 783
Convertible preferred stock - - 106
---------- ---------- ----------
Weighted average shares outstanding - diluted earnings per share 24,329 23,897 24,069
========== ========== ==========
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, options applicable
to 65,000 shares, 170,000 shares and 141,000 shares, respectively, were
anti-dilutive and excluded from the diluted earnings per share computations.
-----------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997.
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Certain FASB statements,
however, require entities to report specific changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, as a separate component of the equity section of the balance
sheet. Such items, along with net income, are components of comprehensive
income. SFAS No. 130 requires that all items of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Additionally, SFAS No. 130 requires that the
accumulated balance of other comprehensive income be displayed separately
from retained earnings and additional paid-in capital in the equity section
of the balance sheet. The Company will adopt these disclosure requirements
beginning in the first quarter of 1998.
36
<PAGE> 38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual and interim financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The
Statement also requires descriptive information about the way that the
operating segments were determined, the products and services provided by
the operating segments, differences between the measurements used in
reporting segment information and those used by the enterprise in its
general-purpose financial statements, and changes in the measurement of
segment amounts from period to period. Management has not yet determined
how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
- --------------------------------------------------------------------------------
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, 1997 and 1996 were approximately $36,527,000 and $30,389,000,
respectively.
- --------------------------------------------------------------------------------
NOTE C--INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at
December 31, 1997, with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ------------------------------------------------- ----------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Debt securities:
U.S. Treasury and agency obligations $ 115,436 $ 487 $ 450 $ 115,473
State and municipal 439 8 - 447
Federal agency mortgage
pass-through securities 164,494 1,155 312 165,337
Other collateralized mortgage
obligations (CMO's) 188,735 1,169 54 189,850
Other asset-backed securities 12,766 - - 12,766
----------- ---------- --------- -----------
Total debt securities 481,870 2,819 816 483,873
Marketable equity securities 22,426 1,551 4 23,973
Federal Home Loan Bank of Boston
and Federal Reserve Bank of Boston stock 26,704 - - 26,704
----------- ---------- --------- -----------
Total securities available for sale $ 531,000 $ 4,370 $ 820 $ 534,550
=========== ========== ========= ===========
Securities Held to Maturity
- ---------------------------
Debt securities:
U.S. Treasury and agency obligations $ 7,721 $ 76 $ 6 $ 7,791
State and municipal 13,470 177 1 13,646
Federal agency mortgage
pass-through securities 6,234 75 9 6,300
Other collateralized mortgage
obligations (CMO's) 359 - 1 358
Other 400 - - 400
----------- ---------- --------- -----------
Total securities held to maturity $ 28,184 $ 328 $ 17 $ 28,495
=========== ========== ========= ===========
</TABLE>
37
<PAGE> 39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 1997, the Company pledged debt securities with an
amortized cost of $263,393,000, and a fair value of $281,076,000, as
collateral to secure public funds and repurchase agreements. See Note J -
"Other Borrowed Funds."
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, 1997 Cost Value Cost Value
- ----------------------------------------- ---------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Within one year $ 13,007 $ 13,038 $ 2,415 $ 2,418
After one year through five years 39,579 39,564 16,402 16,578
After five years through ten years 33,479 33,365 2,774 2,841
After ten years through twenty years 29,810 29,953 -
----------- ----------- ---------- ---------
115,875 115,920 21,591 21,837
Pass-through securities, CMO's and other
asset-backed securities 365,995 367,953 6,593 6,658
----------- ----------- ---------- ---------
$ 481,870 $ 483,873 $ 28,184 $ 28,495
=========== =========== ========== =========
</TABLE>
Proceeds from the sale of securities available for sale during the years
ended December 31, 1997, 1996 and 1995 were $236,584,000, $77,663,000 and
$60,635,000, respectively. Gross gains of $5,086,000, $1,748,000 and
$777,000, respectively, and gross losses of $2,626,000, $83,000 and
$122,000, respectively, were realized on such sales.
In the third quarter of 1997, the acquisitions of Community and Portsmouth
necessitated a transfer of securities classified as held to maturity with an
amortized cost of $61,170,000 and a net unrealized loss of $95,000 to
securities available for sale in order to maintain the Company's existing
interest rate risk profile.
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.
38
<PAGE> 40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at
December 31, 1996, 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 106,479 434 1,389 105,524
Other collateralized mortgage
obligations (CMO's) 19,799 15 206 19,608
Other asset-backed securities 3,407 - - 3,407
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
obligations (CMO's) 1,184 1 - 1,185
Other 13,278 - - 13,278
----------- --------- --------- -----------
Total securities held to maturity $ 104,682 $ 397 $ 296 $ 104,783
=========== ========= ========= ===========
</TABLE>
39
<PAGE> 41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE D--LOANS AND LEASES
- --------------------------------------------------------------------------------
Loans and leases consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Real estate:
Residential $ 1,153,612 $ 872,187
Construction 35,350 19,828
Commercial 265,848 247,517
Commercial, financial and agricultural 209,492 169,880
Warehouse lines of credit to leasing companies 1,922 18,393
Consumer lease financing 134,293 76,343
Indirect and other consumer 244,635 197,014
------------- -------------
2,045,152 1,601,162
Unearned income (17,303) (10,733)
Deferred origination costs, net 7,007 3,970
------------- -------------
Loans and leases, net $ 2,034,856 $ 1,594,399
============= =============
</TABLE>
The following is a summary of information pertaining to impaired and
nonaccrual loans:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
----------- ----------
(In thousands)
<S> <C> <C>
Impaired loans with a valuation allowance $ 2,221 $ 2,816
Impaired loans without a valuation allowance 4,143 3,090
----------- ----------
Total impaired loans $ 6,364 $ 5,906
=========== ==========
Valuation allowance allocated to impaired loans $ 1,111 $ 934
=========== ==========
Nonaccrual loans $ 13,987 $ 10,783
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
--------- ----------
(In thousands)
<S> <C> <C>
Average investment in impaired loans $ 5,461 $ 7,931
========= ==========
Interest income recognized on impaired loans $ 199 $ 620
========= ==========
Interest income recognized on cash basis $ 184 $ 500
========= ==========
</TABLE>
The Company is not committed to lend additional funds to borrowers 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.
40
<PAGE> 42
- --------------------------------------------------------------------------------
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,
--------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 20,332 $ 19,843 $ 18,940
Provision for loan and lease losses 4,548 4,285 3,814
Loans and leases charged-off (4,358) (4,757) (4,482)
Recoveries of loans and leases previously charged-off 1,376 961 1,428
Change in fiscal year - Community - - 143
---------- ---------- ----------
Balance at end of year $ 21,898 $ 20,332 $ 19,843
========== ========== ==========
</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,
-------------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Land $ 5,493 $ 5,401
Buildings and leasehold improvements 37,917 35,878
Furniture and equipment 30,890 26,771
--------- ---------
74,300 68,050
Less accumulated depreciation (35,539) (29,855)
--------- ---------
$ 38,761 $ 38,195
========= =========
</TABLE>
Depreciation and amortization expense was $5,744,000, $4,609,000 and
$4,306,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
NOTE G--FORECLOSED ASSETS
- --------------------------------------------------------------------------------
Foreclosed assets are presented net of a valuation allowance as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Foreclosed real estate $ 2,285 $ 3,071
Non-real estate repossessions 711 288
Less allowance for losses - (10)
--------- ---------
$ 2,996 $ 3,349
========= =========
</TABLE>
41
<PAGE> 43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
An analysis of the allowance for losses on foreclosed assets follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 10 $ 50 $ 367
Reclassification to non-performing loans upon
adoption of SFAS No. 114 - - (131)
Provision for losses 23 21 31
Charge-offs, net of recoveries (33) (61) (217)
------ ------ -------
Balance at end of year $ - $ 10 $ 50
====== ====== =======
</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,
---------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating expenses, net of rental income $ 611 $ 563 $ 647
Provision for losses 23 21 31
Net loss (gain) on sales of foreclosed assets 14 (76) (71)
------- ------- -------
$ 648 $ 508 $ 607
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE H--DEPOSITS
- --------------------------------------------------------------------------------
Total deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Noninterest bearing $ 227,508 $ 193,579
Savings:
Regular savings 337,203 299,411
NOW accounts 197,493 193,274
Money market deposits 152,356 173,992
------------- -------------
Total savings 687,052 666,677
Time certificates of deposit 1,027,436 890,885
------------- -------------
Total deposits $ 1,941,996 $ 1,751,141
============= =============
</TABLE>
Time deposits with a minimum balance of $100,000 at December 31, 1997 and
1996 totaled $354,303,000 and $181,597,000, respectively. Brokered
certificates of deposit at December 31, 1997 and 1996 amounted to
$248,975,000 and $69,960,000, respectively.
42
<PAGE> 44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of time certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- -------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $ 752,391 5.61% $ 702,744 5.51%
After one year through three years 262,803 5.87 160,604 5.71
After three years through five years 12,242 5.80 27,537 6.19
------------- -----------
$ 1,027,436 5.68% $ 890,885 5.57%
============= ===========
</TABLE>
- --------------------------------------------------------------------------------
NOTE I--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, 1997 December 31, 1996
------------------------- -------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- -------- ----------- -------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $ 246,800 5.80% $ 219,734 5.83%
After one year through three years 203,772 6.14 25,875 5.57
After three years 3,183 4.89 984 6.01
----------- -----------
$ 453,755 5.95% $ 246,593 5.80%
=========== ===========
</TABLE>
The Banks also have available lines of credit with the FHLBB at an
interest rate that adjusts daily. Borrowings under the lines are limited to
$58,630,000 as of December 31, 1997. 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.
43
<PAGE> 45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE J--OTHER BORROWED FUNDS
- --------------------------------------------------------------------------------
The following summarizes other borrowed funds:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase:
Retail $ 114,239 $ 81,267
Wholesale:
Short-term 74,319 23,160
Long-term 9,905 -
Other 147 323
----------- -----------
Total borrowed funds $ 198,610 $ 104,750
=========== ===========
</TABLE>
Retail securities sold under agreements to repurchase at December 31, 1997
and 1996 mature within three months at a weighted average interest rate of
4.69% and 4.49%, respectively. Short-term wholesale repurchase agreements
mature within nine months at a weighted average interest rate of 6.13% and
5.50% at December 31, 1997 and 1996, respectively. The long-term wholesale
repurchase agreement matures June 26, 2000 and bears interest at 6.39%.
Other borrowed funds are secured by investment securities. See Note C -
"Investment 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,
----------------------------------------
1997 1996 1995
--------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Current tax provision (benefit):
Federal $ 6,082 $ 5,618 $ 6,868
State (565) 561 466
Federal tax credits (1,026) (439) (177)
--------- ---------- ----------
Total current 4,491 5,740 7,157
--------- ---------- ----------
Deferred tax provision (benefit):
Federal 2,319 5,767 2,926
State 987 992 547
Effect of tax law change - - 10
Effect of change in valuation allowance - (623) (578)
--------- ---------- ----------
Total deferred 3,306 6,136 2,905
--------- ---------- ----------
Provision for income taxes $ 7,797 $ 11,876 $ 10,062
========= ========== ==========
</TABLE>
44
<PAGE> 46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Federal $ 12,961 $ 12,595
State 2,925 1,929
---------- ----------
Total deferred tax assets 15,886 14,524
---------- ----------
Deferred tax liabilities:
Federal (13,983) (9,931)
State (2,875) (1,145)
---------- ----------
Total deferred tax liabilities (16,858) (11,076)
---------- ----------
Net deferred tax asset (liability) $ (972) $ 3,448
========== ==========
</TABLE>
A summary of the change in the net deferred tax asset (liability) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,448 $ 6,909 $ 7,810
Deferred tax provision (3,306) (6,136) (2,905)
Purchase accounting effects of leasehold
residual acquisition - - 6,907
Tax effects of net unrealized gains/losses on investment
securities reflected in shareholders' equity (1,114) 2,675 (4,669)
Change in fiscal year - Community - - (234)
--------- --------- ---------
Balance at end of year $ (972) $ 3,448 $ 6,909
========= ========= =========
</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 the
net unrealized gain on investment securities reflected in shareholders'
equity. See Note A - "Significant Accounting Policies - Principles of
Presentation and Consolidation."
45
<PAGE> 47
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The tax effects of each type of income and expense item that give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 7,961 $ 6,889
Investment in leasehold residual 3,266 4,354
Alternative minimum tax credit carryforward 1,079 1,079
State net operating loss carryforward 40 40
Deferred compensation 2,136 368
Book reserves 1,298 1,016
Other, net 106 192
--------- ---------
Total deferred tax assets 15,886 13,938
--------- ---------
Deferred tax liabilities:
Depreciation 480 701
Deferred point income (163) 1,217
Mortgage loan origination fees 844 1,125
Consumer lease financing 12,903 5,986
Net unrealized gains on investment securities
available for sale 1,417 303
Other, net 1,377 1,158
--------- ---------
Total deferred tax liabilities 16,858 10,490
--------- ---------
Net deferred tax asset (liability) $ (972) $ 3,448
========= =========
</TABLE>
The change in the valuation allowance applicable to deferred tax assets is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ - $ 623 $ 1,335
Benefits generated by current year's operations - (623) (578)
Benefits lost - - (79)
Change in fiscal year - Community - - (55)
--------- --------- ---------
Balance at end of year $ - $ - $ 623
========= ========= =========
</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.
46
<PAGE> 48
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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, 1997, retained earnings include tax loan loss reserves of
approximately $19,620,000 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 $19,620,000 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, 1997 is
approximately $7,605,000.
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>
1997 1996 1995
----------------------- -------------------------- ------------------------
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 $ 9,089 34% $ 12,046 34% $ 10,749 34%
Increase (decrease) resulting from:
Tax-exempt interest income (515) (2) (528) (1) (556) (2)
Goodwill and deposit base
intangible amortization 199 1 199 1 212 1
Nondeductible merger expenses 1,409 5 872 2 75 1
State income taxes, net of
federal income tax benefit 287 1 990 3 679 2
Cash surrender value (765) (3) (349) (1) (86) -
Low income housing tax credits (1,026) (4) (439) (1) (177) (1)
Change in valuation allowance - - (623) (2) (578) (2)
Other, net (881) (3) (292) (1) (256) (1)
--------- ---- ---------- ---- ---------- ----
Income tax expense $ 7,797 29% $ 11,876 34% $ 10,062 32%
========= ==== ========== ==== ========== ====
</TABLE>
- --------------------------------------------------------------------------------
NOTE M--CHARGES RELATED TO CFX FUNDING
- --------------------------------------------------------------------------------
In the fourth quarter of 1997, the Company recorded a $7,206,000 charge
to earnings related to the resolution of a dispute between the Company and a
credit insurer regarding the origination and servicing by CFX Funding of
certain equipment leases held in four securitized leased pools, and the
decision to discontinue future operations of CFX Funding with respect to its
lease securitization business.
The charge of $7,206,000 includes $1,207,000 of advances on third-party
letters of credit that were guaranteed by the Company, $2,500,000 to settle
a dispute with a credit insurer, and $2,800,000 applicable to a loss reserve
established by the Company for future credit losses in the insured lease
pools. In conjunction with the settlement with the credit insurer, the
Company has agreed to reimburse the credit insurer for payments made to
investors in four securitized lease pools on claims made after December 18,
1997, and the Company is entitled to all recoveries on defaulted leases held
in such pools after such date. The reserve, included in other liabilities
in the consolidated balance sheet, is an estimate based on historical and
projected performance of the leases. Future changes in the estimate, if
any, will be reflected in earnings as identified. At December 31, 1997,
lease balances aggregating $19,200,000 were held in the four securitized
lease pools.
47
<PAGE> 49
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE N--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) and Safety Fund National Bank.
Pension expense attributable to the plan for the years ended December 31,
1997 and 1996 was $396,000 and $479,000, respectively.
-----------------------------------------------------------------------------
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,
------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,905,000 in 1997 and $2,619,000 in 1996 $ (3,081) $ (2,759)
========== ==========
Projected benefit obligation for service rendered to date $ (4,353) $ (4,668)
Plan assets at fair value 6,678 5,817
---------- ----------
Excess of plan assets over projected benefit obligation 2,325 1,149
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (2,169) (570)
Prior service cost not yet recognized in net periodic pension cost 396 28
Unrecognized net assets at end of year (634) (704)
---------- ----------
Accrued pension cost included in other liabilities $ (82) $ (97)
========== ==========
</TABLE>
Net pension expense attributable to these plans includes the following
components:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 431 $ 387 $ 850
Interest cost on projected benefit obligation 298 307 694
Actual return on plan assets (889) (648) (225)
Net amortization and deferral 318 164 (584)
------- ------- --------
$ 158 $ 210 $ 735
======= ======= ========
</TABLE>
48
<PAGE> 50
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
SINGLE-EMPLOYER PENSION PLANS (CONCLUDED)
-----------------------------------------------------------------------------
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,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average discount rates 7.0%-7.5% 7.5% 7.25%-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% 7.5%-8.0%
</TABLE>
-----------------------------------------------------------------------------
401(K) PLAN
-----------------------------------------------------------------------------
The Company's 401(k) plan expense for the years ended December 31, 1997,
1996 and 1995 amounted to $1,009,000, $838,000 and $739,000, respectively.
-----------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
NOTE O--STOCK COMPENSATION PLANS
- --------------------------------------------------------------------------------
At December 31, 1997, 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,
---------------------------------------------------
1997 1996 1995
-------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income available to common stock:
As reported $ 18,934 $ 23,553 $ 21,465
Pro forma 17,754 23,370 20,835
Earnings per share:
As reported $ 0.79 $ 1.01 $ 0.93
Pro forma 0.74 1.00 0.90
Earnings per share, assuming dilution:
As reported $ 0.78 $ 0.99 $ 0.89
Pro forma 0.73 0.98 0.86
</TABLE>
49
<PAGE> 51
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
FIXED STOCK OPTION PLANS
-----------------------------------------------------------------------------
The Company has stock 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:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------- --------------- ------------
<S> <C> <C> <C>
Dividend yield 4.0% 5.5% 5.2%
Expected life 9.8 years 6.9 years 6.9 years
Expected volatility 32.0% 29.0% 29.0%
Risk-free interest rate 6.2% 5.8% 5.4%
</TABLE>
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- --------------------------------- ---------------------------- ----------------------------- ---------------------------
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> <C>
Outstanding at beginning
of year 1,321 $ 8.57 1,713 $ 7.40 1,549 $ 5.93
Granted 266 20.37 101 13.32 373 12.66
Excercised (471) 7.12 (488) 5.60 (199) 5.56
Cancelled (19) 12.08 (5) 10.26 (6) 5.39
Change in fiscal year - Community - - - - (4) -
------- --------- ------- -------- ------- --------
Outstanding at end of year 1,097 $ 11.96 1,321 $ 8.57 1,713 $ 7.40
======= ========= ======= ======== ======= ========
Exercisable at end of year 1,089 $ 12.00 1,287 $ 8.64 1,645 $ 7.44
======= ========= ======= ======== ======= ========
Weighted average fair value
of options granted during
the year $ 27.12 $ 17.20 $ 16.22
</TABLE>
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."
50
<PAGE> 52
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
FIXED STOCK OPTION PLANS (CONCLUDED)
-----------------------------------------------------------------------------
Information pertaining to options outstanding at December 31, 1997 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 - $7.78 386 1.75 years $ 5.71 378 $ 5.69
7.88 - 14.29 449 6.61 12.27 449 12.27
15.38 - 20.88 262 9.71 20.64 262 20.64
------- -------
1,097 5.64 years $ 11.96 1,089 $ 12.00
======= =======
</TABLE>
-----------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
-----------------------------------------------------------------------------
The Company has an employee stock purchase plan (the Stock Purchase Plan)
that generally permits any employee who has completed at least six months of
service with the Company or any of its subsidiaries to purchase shares of
CFX common stock by means of regular payroll deductions. The Stock Purchase
Plan was originally adopted by the Company's board of directors on March 2,
1992, was approved by the Company's shareholders on June 24, 1992, and
became effective on September 15, 1992. The Company's board of directors
approved an Amended and Restated Stock Purchase Plan on December 10, 1996,
and the Company's shareholders approved the amended plan at the annual
shareholders' meeting held on July 30, 1997.
Under the Stock Purchase Plan, as amended, the Company may make any number
of stock offerings, each of which may not exceed one year in duration.
There is no limit on the number of shares that can be offered in any stock
offering. Each offering affords eligible participating employees the right
to purchase shares of the Company's common stock at a price determined by
the Company's board of directors prior to each offering, provided that the
price must be no less than 85% and no more than 100% of the fair market
value of the Company's common stock on the date an offering is commenced or
the date an offering is terminated, whichever is less. Purchases under the
Stock Purchase Plan are made by means of payroll deductions during the
offering period; the amount deducted must be a whole number percentage of a
participating employee's base pay from 1% to 7%. If an offering is
oversubscribed, the Company makes a pro rata allocation of the shares
offered.
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, 1997, all shares held by the Plans were
fully allocated to participants.
Contribution expense applicable to the Plans amounted to $122,000 and
$168,000 for the years ended December 31, 1996 and 1995, respectively. The
Company does not expect to make future contributions to the Plans.
- --------------------------------------------------------------------------------
NOTE P--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.
51
<PAGE> 53
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
-----------------------------------------------------------------------------
The Company has entered into employment agreements with four 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. The impending
acquisition of the Company by Peoples Heritage Financial Group, Inc.
constitutes a "change in control" for certain senior executives. See Note W
- "Acquisition of the Company".
-----------------------------------------------------------------------------
INVESTMENTS IN LIMITED PARTNERSHIPS
-----------------------------------------------------------------------------
At December 31, 1997, the Company was committed to invest $4,202,000 in
eight real estate development limited partnerships. At December 31, 1997 and
1996, the Company had $8,013,000 and $3,011,000, 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 had guaranteed a portion of the loss reserve accounts
by executing letters of credit arrangements with third party lenders.
During 1997, the letters of credit were advanced and paid by the Company in
the amount of $1,217,000. See Note M - "Charges Related to CFX Funding."
-----------------------------------------------------------------------------
OPERATING LEASE COMMITMENTS
-----------------------------------------------------------------------------
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1997, pertaining to banking premises and equipment, future
minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, (In thousands)
- -------------------------
<S> <C>
1998 $ 1,238
1999 1,113
2000 960
2001 700
2002 340
Thereafter 2,058
---------
$ 6,409
=========
</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, 1997, 1996 and 1995 amounted to
$936,000, $1,017,000 and $817,000, 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.
52
<PAGE> 54
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE Q--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
$6,210,000 and $6,822,000 at December 31, 1997 and 1996, respectively.
During the year ended December 31, 1997, new loans totaling $3,259,000 were
made, and reductions were made to outstanding loan balances totalling
$3,871,000, of which $870,000 was from repayments and $3,001,000 was
attributable to directors no longer being affiliated with the Company.
During the years ended December 31, 1997 and 1996, payments amounting to
$477,000 and $695,000, respectively, were made by the Company to a
construction company in which a director holds a 100% ownership interest,
for renovations to banking facilities of the Company.
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 R--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.
53
<PAGE> 55
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------------
INTEREST RATE AGREEMENTS (CONCLUDED)
-----------------------------------------------------------------------------
At December 31, 1997 and 1996, 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, 1997:
Variable rate Variable - N/A $ 10,000 02/15/00 $ 113
commercial loans LIBOR floor (6.25%)
Variable rate Variable - N/A $ 10,000 06/03/99 $ 22
commercial loans LIBOR floor (5.75%)
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
commercial loans LIBOR floor (5.75%)
</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. There were no options outstanding at
December 31, 1997.
- --------------------------------------------------------------------------------
NOTE S--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK
- --------------------------------------------------------------------------------
In addition to using derivative financial instruments to manage interest
rate risk (see Note R), 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.
54
<PAGE> 56
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, the following financial instruments were
outstanding:
<TABLE>
<CAPTION>
Contract or
Notional Amount
----------------------------
December 31,
----------------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Financial instruments for which contract amounts
represent credit risk:
Commitments to originate and purchase loans $ 79,750 $ 70,267
Unadvanced funds on lines of credit 210,547 177,312
Standby letters of credit 6,840 4,259
Loans sold with credit enhancements 8,713 17,147
Leases serviced with credit enhancements 19,200 -
Financial instruments for which contract amounts
exceed credit risk:
Outstanding forward delivery contracts 56,827 99,371
</TABLE>
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. In connection with CFX Funding, the Company has
agreed to reimburse a credit insurer for payments made to investors in four
securitized lease pools on claims made after December 18, 1997. See Note M
- "Charges Related to CFX Funding."
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 T--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.
55
<PAGE> 57
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
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.
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.
OTHER BORROWED FUNDS: The fair values of other borrowed funds are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
fair value.
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.
56
<PAGE> 58
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The estimated fair values, and related carrying amounts or notional
amounts, of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 94,636 $ 94,636 $ 131,106 $ 131,106
Interest bearing deposits with other banks 35 35 287 287
Securities available for sale 534,550 534,550 414,896 414,896
Securities held to maturity 28,184 28,495 104,682 104,783
Mortgage loans held for sale 37,737 37,966 16,967 17,078
Loans and leases, net 2,012,958 2,006,592 1,574,067 1,570,046
Accrued interest receivable 16,800 16,800 15,384 15,384
Financial liabilities:
Deposits 1,941,996 1,946,654 1,751,141 1,754,594
Advances from Federal Home
Loan Bank of Boston 453,755 453,669 246,593 246,568
Other borrowed funds 198,610 198,610 104,750 104,750
Accrued interest payable 12,148 12,148 5,297 5,297
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1997 1996
------------------------- --------------------------
Notional Fair Notional Fair
Amount Value Amount Value
---------- -------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to originate and purchase loans $ 79,750 $ (266) $ 70,267 $ (212)
Standby letters of credit 6,840 (69) 4,259 (2)
Unadvanced funds on lines of credit 210,547 (1,320) 177,312 (558)
Interest-rate swap agreements - - 5,000 99
Financial option contracts (long position) - - 4,000 37
Financial option contracts (short position) - - 10,000 152
Interest-rate floor agreements 20,000 135 20,000 248
</TABLE>
57
<PAGE> 59
- --------------------------------------------------------------------------------
NOTE U--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' consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and/or 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, 1997
and 1996, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Deposit Insurance Corporation categorized 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 tables. There are no conditions or events since the notifications
that management believes have changed these categories. The entities' actual
capital amounts and ratios are also presented in the tables.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- ---------------------
DECEMBER 31, 1997 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 $ 256,677 14.3% $ 143,939 8.0% N/A N/A
CFX Bank 181,695 11.6 125,083 8.0 $ 156,354 10.0%
Safety Fund National Bank 25,582 12.8 16,081 8.0 20,102 10.0
Orange Savings Bank 10,336 21.3 3,842 8.0 4,803 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated CFX Corporation 234,779 13.0 71,970 4.0 N/A N/A
CFX Bank 167,033 10.7 62,541 4.0 93,812 6.0
Safety Fund National Bank 23,032 11.5 8,041 4.0 12,061 6.0
Orange Savings Bank 9,730 20.1 1,921 4.0 2,882 6.0
Tier 1 Capital to Average Assets:
Consolidated CFX Corporation 234,779 8.3 113,892 - 4.0- N/A N/A
142,365 5.0
CFX Bank 167,033 6.8 97,882 - 4.0- 122,352 5.0
122,352 5.0
Safety Fund National Bank 23,032 6.8 13,567 - 4.0- 16,959 5.0
16,959 5.0
Orange Savings Bank 9,730 11.1 3,512 - 4.0- 4,391 5.0
4,391 5.0
</TABLE>
58
<PAGE> 60
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<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>
59
<PAGE> 61
- --------------------------------------------------------------------------------
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, approximately $146,000,000 of the Company's equity in the net
assets of the Banks was restricted at December 31, 1997.
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, 1997, the maximum amount available
for transfer from the Banks to the Company in the form of loans approximated
$22,169,000.
- --------------------------------------------------------------------------------
NOTE V-- MORTGAGE LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $1,355,000,000 and $1,116,000,000 at December 31,
1997 and 1996, respectively. Substantially all loans serviced for others
were sold without recourse provisions.
The following is an analysis of the changes in the carrying values of
mortgage servicing rights:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
--------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 7,644 $ 6,886 $ 4,207
Additions 5,033 2,321 3,255
Sales (1,993) - -
Amortization (1,790) (1,563) (525)
Change in fiscal year - Community - - (51)
--------- ---------- ----------
Balance at end of year $ 8,894 $ 7,644 $ 6,886
========= ========== ==========
</TABLE>
For the six months ended December 31, 1995, Community recorded additions
to mortgage servicing rights of $150,000 and amortization of $201,000. See
Note A - "Significant Accounting Policies - Principles of Presentation and
Consolidation."
At December 31, 1997 and 1996, the fair value of capitalized mortgage
servicing rights was $16,384,000 and $10,179,000, respectively. There were
no valuation allowances for mortgage servicing rights for the years ended
December 31, 1997, 1996 and 1995.
- --------------------------------------------------------------------------------
NOTE W-- 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 was subject to approval by
shareholders of both companies, which was obtained on February 9, 1998, and
to approval by regulatory authorities. The transaction is anticipated to be
a tax-free reorganization to the shareholders of the Company (other than
cash received in lieu of any fractional shares) 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.
60
<PAGE> 62
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE X--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ -----------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 325 $ 1,800
Interest-bearing deposits with bank subsidiaries 31,227 21,409
Securities held to maturity - 320
Securities available for sale 29 130
Receivables from subsidiaries 1,907 7,992
Investment in bank subsidiaries 210,661 204,963
Other assets 7,207 5,856
------------ -----------
$ 251,356 $ 242,470
============ ===========
Liabilities $ 5,639 $ 2,633
Shareholders' equity 245,717 239,837
------------ -----------
$ 251,356 $ 242,470
============ ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Interest and dividend income $ 850 $ 951 $ 1,042
Dividends from subsidiaries 20,025 17,163 9,848
Management fee from subsidiaries - 308 131
Gain on sale of investment securities 113 1 28
---------- ---------- ----------
20,988 18,423 11,049
General and administrative expenses 6,735 2,597 1,253
---------- ---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiaries 14,253 15,826 9,796
Income tax expense (benefit) (735) 110 (27)
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiaries 14,988 15,716 9,823
Equity in undistributed net income of subsidiaries 3,946 7,837 11,731
---------- ---------- ----------
Net income $ 18,934 $ 23,553 $ 21,554
========== ========== ==========
</TABLE>
61
<PAGE> 63
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 18,934 $ 23,553 $ 21,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Net deferred income tax provision (benefit) (24) 1 9
Gain on sale of investment securities (113) (1) (28)
Equity in undistributed net income of subsidiaries (3,946) (7,837) (11,731)
Net change in other assets and other liabilities 513 (1,984) (2,122)
---------- ---------- ----------
Net cash provided by operating activities 15,364 13,732 7,682
---------- ---------- ----------
Cash flows from investing activities:
Capital contribution to subsidiary - (200) (200)
Net decrease (increase) in interest bearing deposits with bank subsidiaries (9,818) 223 8,740
Decrease (increase) in receivables from subsidiaries 6,085 241 (7,940)
Purchases of securities available for sale - - (55)
Proceeds from sales of securities available for sale 185 2 1,075
Purchases of securities held to maturity (4,017) (16,601) (6,002)
Proceeds from maturities of securities held to maturity 4,337 16,857 6,483
Purchase of bank-owned life insurance (500) (3,250) -
---------- ---------- ----------
Net cash provided (used) by investing activities (3,728) (2,728) 2,101
---------- ---------- ----------
Cash flows from financing activities:
Common cash dividends paid (16,754) (13,312) (10,041)
Preferred cash dividends paid - - (89)
Proceeds from issuance of common stock 4,018 2,693 1,509
Payments on fractional shares (7) (26) (18)
Acquisition of treasury shares (368) (1,002) (1,481)
---------- ---------- ----------
Net cash used by financing activities (13,111) (11,647) (10,120)
---------- ---------- ----------
Decrease in cash and cash equivalents (1,475) (643) (337)
Change in fiscal year - Community - - (338)
Cash and cash equivalents at beginning of year 1,800 2,443 3,118
---------- ---------- ----------
Cash and cash equivalents at end of year $ 325 $ 1,800 $ 2,443
========== ========== ==========
</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."
62
<PAGE> 64
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE Y--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of the consolidated quarterly results of
operations for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
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 $ 45,033 $ 48,429 $ 53,034 $ 53,043
Interest expense 21,645 23,925 27,662 28,020
---------- ---------- ---------- ----------
Net interest and dividend income 23,388 24,504 25,372 25,023
Provision for loan and lease losses 942 1,020 1,423 1,163
Other income 5,731 5,559 6,253 7,999
Other expenses (1 & 2) 17,438 18,069 29,912 27,131
---------- ---------- ---------- ----------
Income before income taxes 10,739 10,974 290 4,728
Income taxes 3,240 3,310 463 784
---------- ---------- ---------- ----------
Net income (loss) $ 7,499 $ 7,664 $ (173) $ 3,944
========== ========== ========== ==========
Earnings (loss) per share $ 0.32 $ 0.32 $ (0.01) $ 0.16
========== ========== ========== ==========
Earnings (loss) per share-
assuming dilution $ 0.31 $ 0.32 $ (0.01) $ 0.16
========== ========== ========== ==========
</TABLE>
<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 (4&5) 5,284 5,198 5,619 6,161
Other expenses (3) 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 share $ 0.27 $ 0.29 $ 0.13 $ 0.32
========== ========== ========== ==========
Earnings per share-
assuming dilution $ 0.27 $ 0.28 $ 0.13 $ 0.31
========== ========== ========== ==========
</TABLE>
(1) For the quarter ended September 30, 1997, the Company recorded costs
related to the mergers of Community and Portsmouth totaling
$11,031,000.
(2) For the quarter ended December 31, 1997, the Company recorded charges
relating to CFX Funding of $7,206,000.
(3) 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.
(4) 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.
(5) 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.
63
<PAGE> 65
- --------------------------------------------------------------------------------
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, 1997 and 1996, 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,
1997. These 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.
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. as of December 31, 1996
and for the years ended December 31, 1996 and 1995, which statements reflect
total assets of $271,569,000 as of December 31, 1996, and net interest and
dividend income of $10,043,000 and $10,862,000 for the years ended December
31, 1996 and 1995, respectively. We did not audit the consolidated
financial statements of Community Bankshares, Inc. as of December 31, 1996
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 as of December 31,
1996, 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 for the years ended
December 31, 1996 and 1995 is based solely on the reports of other auditors.
The consolidated financial statements for the year ended December 31, 1995
reflect the pooling of interests with The Safety Fund Corporation. We did
not audit the 1995 consolidated financial statements of The Safety Fund
Corporation, which statements reflect net interest and dividend income of
$13,816,000 for the year ended December 31, 1995. 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 for the year ended December 31, 1995 is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CFX Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
January 30, 1998, except for Note W
as to which the date is February 9, 1998
64
<PAGE> 66
- --------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
- --------------------------------------------------------------------------------
At December 31, 1997, there were approximately 5,719 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>
1997 First Second Third Fourth
CALENDAR QUARTERS Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Dividends declared per share $ 0.22 $ 0.22 $ 0.22 $ 0.22
Stock price:
High 18 5/8 21 21 3/4 31 1/8
Low 15 1/8 15 1/2 18 5/8 20 5/8
Last sale 16 7/8 21 21 7/16 30 5/8
1996
CALENDAR QUARTERS
Dividends declared per share (1) $ 0.1714 $ - $ 0.1905 $ 0.2095
Stock price:
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 14 12 3/8 14 1/8 15 1/2
</TABLE>
(1) The dividend for the second quarter of 1996 was omitted in order for
CFX's acquisitions of The Safety Fund Corporation and Milford
Cooperative Bank to be accounted for as poolings-of-interests under
generally accepted accounting principles.
65
