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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 1995
Commission file number 0-15079
CFX CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF NEW HAMPSHIRE 02-0402421
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 352-2502
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [XX] NO [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, $0.66 2/3 par value per share, as of June 30, 1995 was 7,070,859.
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CFX CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Consolidated Balance Sheets -- June 30, 1995
and December 31, 1994 1
Consolidated Statements of Income -- Three
months ended June 30, 1995 and 1994;
Six months ended June 30, 1995 and 1994 2
Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 1995 3
Consolidated Statements of Cash Flows -- Six
months ended June 30, 1995 and 1994 4
Notes to Consolidated Financial Statements -
June 30, 1995 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
(In thousands, except per share data) 1995 1994
Assets
Cash and due from banks $ 25,728 $ 22,750
Interest bearing deposits with other banks 3,757 3,250
Federal Home Loan Bank of Boston stock 7,388 7,388
Trading securities 20,615 236
Securities available for sale 6,741 8,234
Securities held to maturity 102,546 111,285
Mortgage loans held for sale 12,047 8,295
Loans and leases 652,136 641,121
Less allowance for loan and lease losses 7,641 7,558
Net Loans and Leases 644,495 633,563
Premises and equipment 13,874 14,087
Mortgage servicing rights 4,206 4,207
Goodwill and deposit base intangibles 10,108 10,476
Foreclosed real estate 1,414 1,271
Other assets 22,599 14,162
$875,518 $839,204
Liabilities and Shareholders' Equity
Deposits:
Interest bearing $631,232 $585,587
Noninterest bearing 44,965 39,842
Total Deposits 676,197 625,429
Short-term borrowed funds 32,140 27,316
Advances from Federal Home Loan Bank of Boston 64,695 92,201
Other liabilities 14,207 7,685
Total Liabilities 787,239 752,631
Shareholders' Equity
Preferred stock, 7.5% Series A Cumulative Convertible,
par value $1.00 per share-issued and outstanding
192,769 shares at December 31, 1994 - 193
Common stock, par value $.66 2/3 per share-authorized
22,500,000 shares, issued 7,936,757 shares at June 30,
1995 and 7,582,259 shares at December 31, 1994 5,291 5,055
Paid-in capital 66,027 65,740
Retained earnings 24,561 23,289
Net unrealized losses on securities available for sale,
after tax effects (402) (506)
Cost of 865,898 shares of common stock in treasury (7,198) (7,198)
Total Shareholders' Equity 88,279 86,573
$875,518 $839,204
Number of common shares outstanding (thousands) 7,071 6,716
Common shareholders' equity per share $ 12.48 $ 12.36
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Six Months
Ended Ended
June 30, June 30,
------------------ ------------------
(In thousands, except per share data) 1995 1994 1995 1994
---- ---- ---- ----
Interest and dividend income:
Interest on loans and leases $14,163 $10,843 $27,465 $21,625
Interest on investment securities:
Taxable 1,369 1,455 2,793 2,908
Tax-exempt 270 170 525 297
1,639 1,625 3,318 3,205
Interest and dividends on trading securities 2 541 5 1,247
Dividends on marketable equity securities 62 54 128 101
Other 199 197 415 382
Total Interest and Dividend Income 16,065 13,260 31,331 26,560
Interest expense:
Interest on deposits 6,428 4,636 12,415 9,341
Interest on borrowings:
Short-term 1,517 1,098 2,902 1,939
Long-term 2 2 5 5
Total Interest Expense 7,947 5,736 15,322 11,285
Net Interest and Dividend Income 8,118 7,524 16,009 15,275
Provision for loan and lease losses 480 - 630 12
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 7,638 7,524 15,379 15,263
Other income:
Service charges on deposit accounts 540 389 1,092 783
Loan servicing fees 389 448 816 805
Net gains (losses) on trading securities 294 49 518 (392)
Net gains on investment securities 114 86 114 86
Net gains on sales of loans 202 106 214 432
Leasing activities 527 63 1,037 106
Other 510 458 849 798
2,576 1,599 4,640 2,618
Other expense:
Salaries and employee benefits 3,393 3,227 6,939 6,419
Occupancy expense 454 423 926 914
Equipment expense 510 484 1,012 940
Operation of foreclosed real estate 59 143 92 218
FDIC deposit insurance 363 346 725 691
Goodwill and deposit base intangible amortization 179 189 368 379
Other 2,262 1,732 4,465 3,676
7,220 6,544 14,527 13,237
Income Before Income Taxes 2,994 2,579 5,492 4,644
Income taxes 984 990 1,926 1,800
Net Income 2,010 1,589 3,566 2,844
Preferred stock dividends 22 68 89 135
Net Income Available to Common Stock $ 1,988 $ 1,521 $ 3,477 $ 2,709
Weighted average common shares outstanding (thousands) 6,949 6,664 6,835 6,657
Earnings per common share:
Primary $ .28 $ .23 $ .50 $ .41
Fully diluted $ .28 $ .23 $ .49 $ .41
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Net
Unrealized
Losses on
Securities
Preferred Common Paid-in Retained Available Treasury
(In thousands) Stock Stock Capital Earnings For Sale Stock Total
Balance at December 31, 1994 $ 193 $ 5,055 $ 65,740 $ 23,289 $ (506) $ (7,198) $ 86,573
Net income - - - 3,566 - - 3,566
Common cash dividend
declared-$. 31 per share - - - (2,205) - - (2,205)
Preferred cash dividend
declared-$.4625 per share - - - (89) - - (89)
Issuance of common stock under
stock option plan - 16 195 - - - 211
Issuance of common stock
under employee stock
purchase plan - 3 32 - - - 35
Issuance of common stock under
dividend reinvestment plan - 5 79 - - - 84
Decrease in net unrealized
losses on securities
available for sale - - - - 104 - 104
Preferred stock converted to
common stock (193) 212 (19) - - - -
Balance at June 30, 1995 $ - $ 5,291 $ 66,027 $ 24,561 $ (402) $ (7,198) $ 88,279
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
----------------------
(In thousands) 1995 1994
Operating Activities
Net income $ 3,566 $ 2,844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,524 1,686
Provision for loan and lease losses 630 12
Provision for foreclosed real estate losses - 123
Loans originated and acquired for sale (46,018) (59,163)
Principal balance of loans sold 42,266 68,640
Net gain on sale of foreclosed real estate (51) (149)
Net gain on investment securities (114) (86)
Net deferred income tax 1,234 386
Net increase in trading securities (20,379) (33,524)
Other (5,680) (1,463)
Net Cash Used by Operating Activities (23,022) (20,694)
Investing Activities
Proceeds from sales and maturities of securities available for sale 1,949 22,466
Purchases of securities available for sale (240) (23,065)
Proceeds from maturities of securities held to maturity 12,264 13,247
Purchases of securities held to maturity (3,578) (8,226)
Proceeds from sales of, or payments on, foreclosed real estate 404 540
Purchase of Federal Home Loan Bank of Boston stock - (2,332)
Net decrease (increase) in interest bearing deposits with other banks (506) 10,176
Net increase in loans and leases (11,843) (32,930)
Purchases of premises and equipment (688) (2,879)
Net Cash Used by Investing Activities (2,238) (23,003)
Financing Activities
Net increase (decrease) in noninterest bearing deposits and savings accounts (11,968) 4,648
Net increase (decrease)in time certificates of deposit 63,243 (11,140)
Net increase (decrease) in short-term borrowings 6,374 (13,097)
Net increase (decrease) in short-term advances from the
Federal Home Loan Bank of Boston (27,707) 67,616
Common cash dividends paid (1,945) (1,572)
Preferred cash dividends paid (89) (135)
Proceeds from issuance of common stock under dividend reinvestment plan 84 -
Proceeds from issuance of common stock under employee stock purchase plan 35 71
Proceeds from issuance of common stock under stock option plan 211 141
Net Cash Provided by Financing Activities 28,238 46,532
Decrease in Cash and Due From Banks 2,978 2,835
Cash and cash equivalents at beginning of period 22,750 20,852
Cash and Cash Equivalents at End of Period $ 25,728 $ 23,687
Supplementary Information:
Interest paid on deposit accounts $ 4,699 $ 9,469
Interest paid on borrowed funds 1,269 1,899
Income taxes paid 436 1,123
Net decrease in due to broker - 28,313
Net increase in due from broker - 16,436
Transfers from loans to foreclosed real estate 1,515 401
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1995
Note A-Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six month
period ended June 30, 1995 are not necessarily indicative of the results that
may be expected for the current fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
CFX CORPORATION (the Company) annual report on Form 10-K for the year ended
December 31, 1994.
Note B-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 balance sheet at fair value, with unrealized
gains and losses included in earnings (see Note C). Investments not classified
as either of the above are classified as "available for sale" and reflected on
the balance sheet at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity.
For all periods presented, purchase premiums and discounts are amortized to
earnings by a method which approximates the interest method over the terms of
the investments. Declines in the value of investments that are deemed to be
other than temporary are reflected in earnings when identified. Gains and
losses on disposition of investments are computed by the specific
identification method.
Note C-Trading Securities
Trading securities consist of marketable equity securities and debt securities
which the Company intends to trade in the near future. Trading positions are
taken to benefit from short-term movements in market prices. Trading
securities are stated at fair value. Changes in fair value are reflected in
trading gains and losses within the consolidated statement of income. Gains
and losses on trading securities sold are computed by the specific
identification method.
Note D-Financial Instruments
The Company uses certain financial instruments in managing the interest rate
risk included in the consolidated balance sheet. Futures and options contracts
are used explicitly for hedge purposes and are not undertaken for speculation.
The Company's intent and general practice is to liquidate (offset) futures and
options contract obligations before stated exercise or delivery dates through
established market transactions. The Company does not generally intend to
deliver or receive the securities underlying its futures and options
contracts, but may execute delivery or receipt if it is financially prudent to
do so. The specific financial instruments used are described below:
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
June 30, 1995
Note D-Financial Instruments (Cont'd.)
* Interest Rate Exchange Agreements:
Interest rate exchange agreements (swaps) designated as hedges against
future fluctuations in the interest rates of specifically identified
assets or liabilities are accounted for on the same basis as the underlying
asset or liability. Accordingly, interest rate swaps designated as hedges
against floating rate loan portfolios (carried at historical cost) are
reflected at cost. Interest rate swaps which hedge the Company's trading
securities portfolio (carried at fair value) are marked to fair value
through the consolidated statement of income.
* Financial Futures Contracts:
Interest rate futures contracts are entered into by the Company as hedges
against interest rate risk in its trading securities portfolio. These
instruments are marked to fair value with changes in value recorded through
the consolidated statement of income.
* Financial Options Contracts:
Options 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. Options contracts which hedge the Company's trading securities
portfolio (carried at fair value) are marked to fair value through the
consolidated statement of income.
The detail on the specific financial instruments used is as follows:
Interest Rate Exchange Agreements
Commencing in 1993, the Company entered into agreements to exchange interest
rate cash flows with approved counterparties. Swap agreements outstanding at
June 30, 1995 are as follows:
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Loss
(In thousands)
Mortgage loans Fixed - 5.50% Variable - $25,000 11/23/96 $(158)
held in portfolio 6 mo. LIBOR
(Rate: 6.1875%)
The effect of this swap agreement is to lengthen the repricing period of
certain variable-rate mortgage loans.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
June 30, 1995
Note D-Financial Instruments (Cont'd.)
Financial Options Contracts
The Company uses financial options to hedge interest rate exposure generally
on secondary mortgage market operations mortgage loans held for sale. At June
30, 1995, the Company held put options (the option to sell securities at a
stated price within a specified term) on 30-year Treasuries totaling $6
million (unrealized loss of $50,000) and call options (the option to buy
securities at a stated price within a specified term) on 30-year Treasuries
totaling $2 million (unrealized loss of $3,125) extending through September
1995 for mortgage loans held for sale.
Net gains (losses) on trading securities, included separately in the
consolidated statements of income, are summarized as follows:
Three Months Six Months
Ended Ended
-------------- ----------------
June 30 (In thousands) 1995 1994 1995 1994
Mortgage-backed securities $ - $ (1,118) $ - $ (3,053)
Other debt securities - 1 - 2
Equity securities 294 62 518 44
Futures, options and swaps - 1,104 - 2,615
$ 294 $ 49 $ 518 $ (392)
The following table provides a rollforward of the notional amounts on each
type of financial instrument used by the Company to manage interest rate risk
for the periods indicated:
Interest Financial
Rate Options
Exchange Contracts
(In thousands) Agreements (Long Position)
Balance at December 31, 1994 $ 25,000 $ 6,000
Contracts:
New - 28,000
Terminated - (12,000)
Expired - (14,000)
Balance at June 30, 1995 $ 25,000 $ 8,000
Derivative instruments are monitored continually to assess market price
changes. On an at least 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 expectable changes in earnings
and market values. Volatility in these analyses is maintained within policy
guidelines.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
June 30, 1995
Note E-Accounting Change and Reclassification
Accounting by Creditors for Impairment of a Loan
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan". The Statement defines an impaired loan as a loan for which it is
probable that the lender will not be able to collect all amounts due according
to the contractual terms of the loan agreement. An impaired loan is required
to be measured 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 loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. Substantially all of the Company's loans which have
been identified as impaired loans are maintained on nonaccrual status whereby
interest income is recognized only when received.
The Statement is applicable to all creditors and to all loans, except large
groups of smaller balance homogeneous loans that are collectively evaluated
for impairment and loans that are measured at fair value. Accordingly, the
Company has not applied SFAS No. 114 to its consumer loans which are
collectively evaluated for impairment.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. Accordingly, on January 1, 1995, the
Company transferred $798,000 in loans previously classified as in-substance
foreclosures and $131,000 of the valuation allowance for foreclosed real
estate losses to nonperforming loans. These amounts were also retroactively
reclassified in the December 31, 1994 balance sheet to conform with the
current presentation.
The adoption of SFAS No. 114 had no significant effect on the Company's
assessment of the overall adequacy of the allowance for loan and lease losses.
At June 30, 1995, the recorded investment in impaired loans and leases totaled
$12,549,000, of which $6,004,000 related to loans with no valuation allowance
and $6,545,000 related to loans and leases with a corresponding valuation
allowance of $3,585,000.
Accounting for Mortgage Servicing Rights
On May 12, 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, Accounting for Mortgage Servicing Rights. SFAS No. 122 is an
amendment of SFAS No. 65, Accounting for Certain Mortgage Banking Activities.
SFAS No. 122 applies prospectively in fiscal years beginning after December
15, 1995, to transactions in which a mortgage banking enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of SFAS No. 122. Earlier application is
encouraged. (Retroactive capitalization of mortgage servicing rights retained
in transactions in which a mortgage banking enterprise originates mortgage
loans and sells or securitizes those loans before the adoption of SFAS No. 122
is prohibited.)
The Company adopted SFAS No. 122 as of January 1, 1995, which resulted in a
$152,000 increase in gains on the sales of loans. Of the total recognized in
the second quarter of 1995 from the adoption of SFAS No. 122, $43,000 was
related to mortgage servicing rights generated in the first quarter of 1995.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
June 30, 1995
Note F-Acquisitions
On April 28, 1995, the Company acquired Orange Savings Bank, a Massachusetts-
chartered savings bank, headquartered in Orange, Massachusetts. Each of
Orange's 724,412 outstanding shares of common stock was converted into .8075
shares of the Company's common stock, resulting in the issuance of 584,963
shares of the Company's common stock to Orange shareholders. In addition, the
holders of the outstanding Orange stock options (representing the right to
purchase 81,049 shares of Orange common stock) received options to purchase
65,447 shares of CFX common stock in exchange.
The acquisition was accounted for as a pooling-of-interest and, accordingly,
the consolidated financial statements have been restated to include the
consolidated accounts of Orange Savings Bank for all periods presented.
Previously reported information is as follows:
Three Months Ended June 30, 1994 CFX Orange
(In thousands, except per share data) Corporation Savings Bank
Net interest and dividend income $ 6,727 $ 797
Provision for loan and lease losses - -
Other income 1,503 96
Other expense 5,979 565
Income taxes 859 131
Net income 1,392 197
Preferred dividends 68 -
Net income available to common stock 1,324 197
Earnings per common share .23 .27
Cash dividends declared .13 .04
Six Months Ended June 30, 1994 CFX Orange
(In thousands, except per share data) Corporation Savings Bank
Net interest and dividend income $ 13,712 $ 1,563
Provision for loan and lease losses - 12
Other income 2,465 153
Other expense 12,098 1,139
Income taxes 1,574 226
Net income 2,505 339
Preferred dividends 135 -
Net income available to common stock 2,370 339
Earnings per common share .41 .46
Cash dividends declared .27 .08
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
June 30, 1995
Note G-Reclassifications and Restatements
Certain amounts have been reclassified in the 1994 unaudited consolidated
financial statements to conform to the 1995 presentation.
Prior period common per share data has been restated to reflect the Company's
3 for 2 stock split declared on June 13, 1995 to shareholders of record on
June 23, 1995. The effective date of the stock split was July 24, 1995.
Note H-Earnings Per Common Share
Primary and fully diluted earnings per common share are computed by dividing
net income by the weighted average number of common shares outstanding and
common share equivalents with a dilutive effect. Common share equivalents are
shares which may be issuable to employees and non-employee directors upon
exercise of outstanding stock options.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 1995
General
All information within this section should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this Form
10-Q. All references in the discussion to financial condition and results of
operations are to the consolidated position of the Company and its
subsidiaries taken as a whole.
CFX CORPORATION (previously named Cheshire Financial Corporation) is a bank
holding company incorporated under the laws of the State of New Hampshire. The
Company's wholly-owned subsidiaries are CFX BANK, headquartered in Keene, New
Hampshire and Orange Savings Bank, headquartered in Orange, Massachusetts.
CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX
CAPITAL SYSTEMS, INC. (CFX CAPITAL) and CFX FINANCIAL SERVICES, INC. (CFX
FINANCIAL). CFX CAPITAL's wholly-owned subsidiary is CFX MORTGAGE, INC. which
engages in mortgage banking. CFX FINANCIAL owns 51% of CFX FUNDING L.L.C.
(CFX FUNDING), which engages in the facilitation of lease financing and
securitization.
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 and benefits.
Financial Condition
Loans and Leases
The table below sets forth the composition of the Company's loan and lease
portfolio at the dates indicated:
June 30, December 31,
(Dollars in thousands) 1995 1994
---------------------- ----------------------
% of % of
Balances Portfolio Balances Portfolio
-------- --------- -------- ---------
Real estate:
Residential $ 444,501 68.16% $ 447,940 69.87%
Construction 1,811 0.28 7,636 1.19
Commercial 86,643 13.29 82,825 12.92
Commercial, financial, and agricultural 58,335 8.94 48,020 7.49
Warehouse lines of credit to leasing companies 11,099 1.70 15,339 2.39
Consumer and other 49,747 7.63 39,361 6.14
652,136 100.00% 641,121 100.00%
Less allowance for loan and lease losses 7,641 7,558
Net loans $ 644,495 $ 633,563
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Financial Condition - (Cont'd.)
Loans and Leases - Cont'd.
Total loans and leases were $652,136,000, or 74% of total assets, at June 30,
1995, compared with $641,121,000, or 76% of total assets, at December 31,
1994.
Total loans and leases have increased by $11,015,000 since December 31, 1994,
primarily due to increased capacity in commercial lending and increased focus
on consumer finance activities.
The increase in commercial and consumer lending was offset by a decline in
residential and construction real estate loans, along with a decline of
warehouse lines of credit to leasing companies. In January 1995, CFX FUNDING
completed the facilitation of its first lease portfolio securitization. Leases
securitized in January 1995 totaled approximately $14,900,000 with outstanding
loan balances of approximately $13,654,000. In addition to the lease
securitization, in June 1995, the Company sold a lease portfolio that totaled
approximately $10,474,000 with outstanding loan balances of approximately
$9,834,000.
Risk Elements
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets
is reasonable and in accordance with generally accepted accounting principles,
regulatory requirements, and the Company's policies. Loans are placed on
nonaccrual status when management determines that significant doubt exists as
to the collectibility of principal or interest on a loan. Moreover, loans past
due 90 days or more as to principal or interest are placed on nonaccrual
status.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
June 30, December 31,
(Dollars in thousands) 1995 1994 (1)
Nonaccrual (nonperforming) loans $ 7,600 $ 7,848
Foreclosed real estate 1,543 1,465
Valuation allowance on foreclosed real estate (129) (194)
Total nonperforming assets $ 9,014 $ 9,119
Nonperforming loans as a percent of total
loans and leases 1.17% 1.22%
Nonperforming assets as a percent
of total assets 1.03% 1.09%
(1) As reclassified to conform with the adoption of SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", on January 1, 1995. See Note E to
the unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Risk Elements - Cont'd.
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
June 30, December 31,
(Dollars in thousands) 1995 1994
--------------------- ---------------------
% of % of
Balances Portfolio Balances Portfolio
-------- --------- -------- ---------
Nonperforming loans:
Real estate:
Residential $ 3,818 50.2% $ 5,024 64.0%
Commercial 1,424 18.8 1,799 22.9
Commercial, financial, and
agricultural 2,283 30.0 1,007 12.9
Consumer and other 75 1.0 18 .2
7,600 100.0% 7,848 100.0%
Foreclosed real estate:
Residential 648 45.8% 783 61.6%
Construction 191 13.5 330 26.0
Commercial 704 49.8 352 27.7
Valuation allowance (129) (9.1) (194) (15.3)
1,414 100.0% 1,271 100.0%
Total nonperforming assets $ 9,014 $ 9,119
The following table provides a rollforward of the Company's foreclosed real
estate for the periods indicated:
Six Months Ended June 30, (In thousands) 1995 1994
Balance at beginning of period $ 1,985 $ 3,810
Reclassification, net, to nonperforming loans
to reflect adoption of SFAS No. 114 (714) (2,068)
Balance at beginning of period, as reclassified 1,271 1,742
Additions 1,515 401
Provision for losses - (123)
Sales and other (1,372) (986)
Balance at end of period $ 1,414 $ 1,034
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses recognized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loan and lease losses based on
current economic conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
Six Months Ended June 30, (In thousands) 1995 1994
Balance at beginning of period $ 7,558 $ 7,960
Provision for loan and lease losses 630 12
Loans charged-off (697) (641)
Recoveries of loans previously charged-off 150 216
Balance at end of period $ 7,641 $ 7,547
Allowance for loan and lease losses
as a percent of total loans and leases 1.17% 1.33%
Allowance for loan and lease losses as a
percent of total nonperforming loans 100.54% 77.66%
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.
Trading and Investment Securities
Included in the trading portfolio for 1994 was the Company's wholesale
leverage program. The Company began this program in October 1993 and
authorized $100 million to be invested in the program. The objective of this
program was to enhance the Company's earnings and return on equity through
leveraging the balance sheet. However, as a result of significant loan growth
experienced in 1994, and anticipated loan growth in the future, the wholesale
leverage program was completely liquidated as of October 31, 1994. In
addition, management does not anticipate using this program in the foreseeable
future.
The program involved the purchasing of federal agency mortgage pass-through
securities, investment grade asset-backed securities, and investment grade
short-term commercial paper. The funding of these purchases was from short-
term repurchase agreements and Federal Home Loan Bank of Boston advances.
The intent of this program was to take advantage of market mispricing,
primarily based on option adjusted spread differentials. Fundamental to the
conduct of the activities was the minimization of credit risk and interest
rate risk. Credit risk was controlled by purchasing federal agency mortgage
pass-through securities, investment grade asset-backed securities, and
investment grade short-term commercial paper. Interest rate risk was
controlled through the use of hedging instruments.
The leverage program activities, along with the related hedging instruments,
were considered trading, and therefore, all securities were carried at fair
value. As a result, both gains or losses on sales and adjustments to fair
value were recorded in the consolidated statements of income as a net gain
(loss) on trading activities.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Trading and Investment Securities - (Cont'd.)
To determine the success of these activities, the Company calculated a total
return consisting of interest income and fair value changes of the investments
and hedge instruments net of interest expense incurred in funding the
activities. Hedge instruments, primarily including futures and options
contracts and interest rate swap agreements, were used to produce a net asset
duration of six months or less. Settled positions were funded with borrowings
of similar duration to the net asset duration.
The following table illustrates the results of this program for the periods
indicated:
Three Months Six Months
June 30, 1994 (Dollars in thousands) Ended Ended
Interest income $ 541 $ 1,247
Interest expense 341 771
Net interest income 200 476
Fair value change (13) (436)
Total return $ 187 40
Average investment $66,898 $ 77,458
Percentage return on average investment (annualized) 1.12% .10%
Deposits and Borrowed Funds
The following table shows the various components of average deposits and the
respective rates paid on such deposits for the periods indicated:
Six Months Ended June 30, 1995 1994
(Dollars in thousands) Amount Rates Amount Rates
Noninterest bearing demand deposits $ 47,250 - $ 28,792 -
Regular savings deposits 121,776 3.04% 134,926 2.54%
NOW & money market deposits 182,913 2.26 209,022 2.30
Time deposits 282,008 5.25 237,052 4.45
Total retail deposits 633,947 3.57 609,792 3.08
Brokered time deposits 38,591 6.25 963 4.61
Total deposits $672,538 3.72% $610,755 3.08%
As interest rates declined during the 1992 and 1993 periods, CFX customers
became very sensitive to the low interest rate environment and were unwilling
to commit their funds long-term. Therefore, the Company experienced a shift
in deposits from longer-term fixed rate deposits to shorter-term variable rate
deposits (savings, NOW, and money market accounts). In addition, and as a
result of the low interest rate environment in 1993, CFX experienced the
migration of individual depositors to alternative instruments (stock & bond
market, annuities, and mutual funds). However, the rising interest rate
environment in 1994 caused some instability with stocks, bonds, and mutual
funds, and therefore allowed deposits to stabilize. Moreover, with certificate
of deposit rates beginning to rise in the fourth quarter of 1994, depositors
have begun to commit funds for longer-terms continuing through the first six
months of 1995.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
June 30, 1995
Shareholders' Equity
The following table summarizes shareholders' equity at the dates indicated:
June 30, December 31,
(In thousands, except per share data) 1995 1994
Amount Shares Amount Shares(1)
Common shareholders' equity $88,279 7,071 $83,007 6,716
Preferred shareholders' equity - - 3,566 213
Total shareholders' equity $88,279 7,071 $86,573 6,929
Common shareholders' equity per share $ 12.48 $ 12.36
Preferred shareholders' equity per share $ - $ 16.74
Shareholders' equity per share, assuming
conversion of all preferred shares to common $ 12.48 $ 12.49
Shareholders' equity increased by $1,706,000 as of June 30, 1995 from
$86,573,000 at December 31, 1994 to $88,279,000 at June 30, 1995. The increase
was due to $3,566,000 in net income, issuance of $35,000 in common stock under
the employee stock purchase plan, issuance of $211,000 in common stock under
the stock option plan, issuance of $84,000 in common stock under the dividend
reinvestment program, a $104,000 decrease in net unrealized losses on
securities available for sale and $2,205,000 and $89,000 in common and
preferred cash dividends, respectively.
<FN>
<F1> Reflects 192,769 preferred shares outstanding, as adjusted for the
conversion factor of 1.1025.
</FN>
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
June 30, 1995
Results of Operations - General
The following tables set forth comparisons of average interest earning assets
and interest bearing liabilities, and interest income and interest expense
expressed as a percentage of the related asset or liability. In order to
reflect the economic impact of the Company's investments in state and
municipal securities and to present data on a comparative basis, the income
from and yields on these securities have been restated to a taxable-equivalent
basis (using a 38.62% tax rate). The taxable-equivalent income adjustments are
$168,000 and $107,000 for the three months ended June 30, 1995 and 1994,
respectively and $330,000 and $187,000 for the six months ended June 30, 1995
and 1994, respectively. These adjustments, however, are for comparison
purposes only and have no impact on reported net income.
Three Months Ended June 30, 1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest and dividend earning assets:
Loans and leases $662,646 $14,163 8.57% $574,201 $10,843 7.57%
Taxable securities 109,266 1,433 5.26 155,151 2,050 5.30
Tax-exempt securities 24,734 438 7.10 17,383 277 6.39
Other 10,644 199 7.50 15,043 197 5.25
Total interest earning assets 807,290 16,233 8.07 761,778 13,367 7.04
Noninterest earning assets 67,799 102,298
Total $875,089 $864,076
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $299,930 1,931 2.58 $346,847 2,060 2.38
Time deposits 326,591 4,497 5.52 234,633 2,576 4.50
Advances from Federal Home Loan
Bank of Boston 67,384 1,080 6.43 94,616 974 4.13
Other borrowed funds 30,411 439 5.79 17,747 126 2.85
Total interest bearing liabilities 724,316 7,947 4.40 693,843 5,736 3.32
Noninterest bearing liabilities:
Demand deposits 48,819 28,459
Other 13,256 56,336
Shareholders' equity 88,698 85,438
Total $875,089 $864,076
Net interest and dividend income $ 8,286 $ 7,631
Interest rate spread 3.67% 3.72%
Net interest margin 4.12% 4.02%
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
June 30, 1995
Results of Operations - General - (Cont'd.)
Six Months Ended June 30, 1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest and dividend earning assets:
Loans and leases $655,569 $27,465 8.45% $567,207 $21,625 7.69%
Taxable securities 109,668 2,926 5.38 158,495 4,256 5.42
Tax-exempt securities 24,215 855 7.12 15,182 484 6.43
Other 12,645 415 6.62 14,577 382 5.28
Total interest earning assets 802,097 31,661 7.96 755,461 26,747 7.14
Noninterest earning assets 67,130 98,612
Total $869,227 $854,073
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $304,689 3,881 2.57 $343,948 4,087 2.40
Time deposits 320,599 8,534 5.37 238,015 5,254 4.45
Advances from Federal Home Loan
Bank of Boston 65,441 2,057 6.34 88,622 1,702 3.87
Other borrowed funds 30,194 850 5.68 12,453 242 3.92
Total interest bearing liabilities 720,923 15,322 4.29 683,038 11,285 3.33
Noninterest bearing liabilities:
Demand deposits 47,250 28,792
Other 12,761 56,979
Shareholders' equity 88,293 85,264
Total $869,227 $854,073
Net interest and dividend income $16,339 $15,462
Interest rate spread 3.67% 3.81%
Net interest margin 4.11% 4.13%
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Results of Operations - General - (Cont'd.)
The following table presents changes in interest and dividend income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon. The net changes attributable
to both volume and rate have been allocated proportionately.
For the Three Months Ended For the Six Months Ended
June 30 June 30
1995 vs. 1994 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due to
(In thousands) Volume Rate Net Volume Rate Net
Interest and dividends earned on:
Loans and leases $ 1,786 $1,534 $ 3,320 $ 3,573 $ 2,267 $ 5,840
Investments (475) 19 (456) (985) 26 (959)
Other (68) 70 2 (55) 88 33
Total interest and
dividend income 1,243 1,623 2,866 2,533 2,381 4,914
Interest paid on:
Savings and time
deposits 872 920 1,792 1,570 1,504 3,074
Borrowed funds (205) 624 419 (66) 1,029 963
Total interest expense 667 1,544 2,211 1,504 2,533 4,037
Change in net interest
and dividend income $ 576 $ 79 $ 655 $ 1,029 $ (152) $ 877
Net Income & Net Income Available to Common Stock
Net income for the three and six months ended June 30, 1995 was $2,010,000 and
$3,566,000, respectively, compared to $1,589,000 and $2,844,000, respectively
for the same periods a year ago. Net income available to common stock for the
three and six months ended June 30, 1995 was $1,988,000, or $.28 per share and
$3,477,000, or $.50 per share, respectively, compared with $1,521,000, or $.23
per share and $2,709,000, or $.41 per share, respectively, for the
corresponding periods a year ago.
The increase in earnings was primarily due to increased core earnings (net
interest and noninterest income). The stronger core earnings are the result of
an $83 million, or 15%, increase in loans and leases over the past twelve
months, and an increased focus on the generation of noninterest income.
However, a portion of the increase in core earnings was offset by a higher
provision for loan and lease losses and higher operating expenses in 1995
compared to 1994.
Total core earnings were $10,694,000 and $20,649,000, respectively, for the
three and six months ended June 30, 1995, compared to $9,123,000 and
$17,893,000, respectively, for the same periods a year ago. The Company's net
interest margin of 4.12% for the three months ended June 30, 1995 increased
from 4.02% for the corresponding period a year ago.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Results of Operations - General - (Cont'd.)
Net Income & Net Income Available to Common Stock - (Cont'd.)
Contributing to the increase in noninterest income was the adoption of SFAS
No. 122, Accounting for Mortgage Servicing Rights. The Company adopted this
SFAS as of January 1, 1995, which resulted in a $152,000 increase in gains on
the sales of loans. Of the total recognized in the second quarter of 1995 from
the adoption of SFAS No. 122, $43,000 was related to mortgage servicing rights
generated in the first quarter of 1995.
Net Interest Income
Taxable-equivalent net interest income was $8,286,000 and $16,339,000,
respectively, for the three and six months ended June 30, 1995, compared to
$7,631,000 and $15,462,000 for the same periods a year ago. The increase in
net interest income in the 1995 periods was principally due to higher average
interest earning assets and higher demand deposits .
The increase in average interest earning assets resulted principally from
growth in loans and leases (see "Financial Condition - Loans and Lease"
section of this Management's Discussion and Analysis), as loan and lease
demand increased in the current environment.
The interest rate spread in the 1995 periods declined from the 1994 periods
principally as a result of increases in the cost of deposits and borrowed
funds and the relatively low interest rates (teaser rates) offered on newly
originated adjustable rate mortgage loans originated over the last six months
of 1994. In addition to interest rates paid for certificates of deposit
increasing over the last nine months, the Company's deposit customers have
shifted funds from variable rate deposits (savings, NOW, and money market
accounts) to the higher rate certificate accounts. Although the interest rate
spread declined in 1995, the net interest margin remained constant in the 1995
periods compared to the 1994 periods as a result of the increase in demand
deposits in 1995 compared to 1994.
Stable short-term interest rates are having, and are anticipated over the near
term to continue to have, a favorable impact on the Company's interest rate
spread and net interest margin due to interest earning assets repricing more
rapidly than interest bearing liabilities. This expectation is based on the
fact that one year adjustable rate residential mortgage loans originated over
the last six months of 1994 at relatively low interest rates (teaser rates)
will be repricing to market rates in the last six months of 1995. In addition,
continued yield increases on prime rate-based loans are also expected during
the remainder of 1995. However, there can be no assurance that the above
favorable impacts will continue. Moreover, if short-term interest rates move
significantly higher over the next twelve months, the 200 basis point annual
adjustment caps contained in the Company's adjustable rate mortgages, coupled
with the absence of similar limitations on the repricing of liabilities, could
cause the Company's interest rate spread and net interest margin to contract.
Provision for Loan and Lease Losses
The amount of provision for loan and lease losses is determined by management
through its periodic review of the Company's loan portfolio. This review
includes an assessment of problem loans and potential unknown losses based on
current economic conditions, the regulatory environment and historical
experience.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Results of Operations - General - (Cont'd.)
Provision for Loan and Lease Losses - Cont'd.
The provision for loan and lease losses for the three and six months ended
June 30, 1995, was $480,000 and $630,000, respectively, compared to $- and
$12,000, respectively for the same periods a year ago. The higher provision
for loan and lease losses in 1995 is principally the result of continued
growth in the loan portfolio, the change in loan mix from residential to
commercial and consumer, and the higher net charge-offs in 1995 compared to
1994. Total net charge-offs amounted to $547,000 for the six months ended June
30, 1995, compared to $425,000 for the same period a year ago.
At June 30, 1995, nonperforming loans stood at $7,600,000, or 1.17% of total
loans and leases, compared to $7,848,000, or 1.22% of total loans and leases,
as of December 31, 1994. The allowance for loan and lease losses as a
percentage of nonperforming loans as of June 30, 1995 and December 31, 1994
amounted to 100.54% and 96.30%, respectively.
Other Income
Other income for the three and six months ended June 30, 1995 totaled
$2,576,000 and $4,640,000, respectively, compared to $1,599,000 and
$2,618,000, respectively, for the same periods a year ago.
The net gains (losses) on trading securities between the 1995 and 1994 periods
are summarized as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
(In thousands) 1995 1994 1995 1994
Wholesale leverage program $ - $(13) $ - $(436)
Other trading activities 294 62 518 44
$294 $ 49 $518 $(392)
For a discussion on the Company's wholesale leverage program, see the
"Financial Condition" section of this Management's Discussion and Analysis.
The increase in service charges on deposit accounts is due to an increase in
fees and enhanced collection practices. Lower gains on the sale of loans for
the first six months of 1995 is due to lower volumes generated by the
Company's mortgage banking subsidiary, CFX MORTGAGE. The lower volumes are
directly related to the increased interest rate environment and the
corresponding lower consumer demand for loan products. The lower gains on the
sale of loans was offset in the second quarter through the implementation of
SFAS No. 122, "Accounting for Mortgage Servicing Rights." (See "Note E" to the
"Unaudited Notes" to consolidated financial statements.) The Company adopted
SFAS No. 122 as of January 1, 1995, which resulted in a $152,000 increase in
gains on the sales of loans. Of the total recognized in the second quarter of
1995 from the adoption of SFAS No. 122, $43,000 was related to mortgage
servicing rights generated in the first quarter of 1995. The increase in other
income from leasing activities is due principally to fees generated by CFX
FUNDING and the amortization of deferred credits relating to an investment in
lease residuals.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1995
Results of Operations - General - (Cont'd.)
Other Expense
Other expense for the three and six months ended June 30, 1995 totaled
$7,220,000 and $14,527,000, respectively, compared to $6,544,000 and
$13,237,000 for the same periods a year ago. The increase in other expense was
primarily attributable to the increase in salaries and employees benefits,
losses on the sale of real estate investment properties in the first and
second quarters of 1995, and costs incurred in connection with the acquisition
of Orange Savings Bank. The higher salaries and employee benefits are the
result of normal salary adjustments, higher medical costs and lower deferred
salary costs in CFX MORTGAGE pertaining to loan origination. In addition,
contributing to the higher salary and employee benefits was an increase in
capacity in both commercial and consumer lending, along with new employees
hired for the de novo branches opened in Gilford, New Hampshire (December 1994)
and Manchester, New Hampshire (June 1995).
Income Tax
Income taxes for the three and six months ended June 30, 1995 were 32.87% and
35.07% of pretax income, respectively, compared to 38.39% and 38.76%,
respectively, of pretax income for the same periods a year ago. The effective
tax rates were lower in the 1995 periods because of higher tax-exempt income,
tax credits pertaining to low-income housing and the reversal of a $78,000
valuation allowance relating to Orange Savings Bank's capital loss
carryforward.
Asset/Liability Management
The Company's primary objective regarding asset/liability management is to
position the Company so that changes in interest rates do not have a material
adverse impact upon forecasted net income and the net fair value of the
Company. The Company's primary strategy for accomplishing its asset/liability
management objective is achieved by matching the weighted average maturities
of assets, liabilities, and off-balance sheet items (duration matching).
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of the
Company assuming both instantaneous and permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the
net market value of the Company as a result of these interest rate changes
represent greater interest rate risk than do smaller increases or decreases in
net fair value. In connection with these recalculations, the Company makes
assumptions regarding the probable changes in cash flows of its assets,
liabilities, and off-balance sheet positions that would be expected in those
various interest rate environments. Accordingly, the Company adjusts the pro
forma net income and net market values as it believes appropriate on the basis
of historical experience and prudent business judgment. The Company endeavors
to maintain a position where it experiences no material change in net fair
value and no material fluctuation in forecasted net income as a result of
assumed 100 and 200 basis point increases and decreases in interest rates.
However, there can be no assurances that Company projections in this regard
will be achieved.
Management believes that the above method of measuring and managing interest
rate risk is consistent with the Federal Deposit Insurance Corporation (FDIC)
regulation regarding the interest rate risk component of regulatory capital.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
Liquidity
The Company maintains numerous sources of liquidity in the form of marketable
assets and borrowing capacity. Interest bearing deposits with other banks,
trading and available for sale securities, regular cash flows from loan and
securities portfolios and Federal Home Loan Bank of Boston borrowings are the
primary sources of asset liquidity. At June 30, 1995 interest bearing deposits
with other banks totaled $3,757,000 and trading and available for sale
securities totaled $27,356,000.
Because the Company's bank subsidiaries maintain large residential mortgage
loan portfolios, a substantial capability exists to borrow funds from the
Federal Home Loan Bank of Boston. Additionally, investment portfolios are
predominantly made up of securities which can be readily borrowed against
through the repurchase agreement market. Relationships with deposit brokers
and correspondent banks are also maintained to facilitate possible borrowing
needs.
Capital Resources
Federal regulation requires the Company to maintain minimum capital standards.
Tier 1 capital is composed primarily of common stock, retained earnings and
perpetual preferred stock in limited amounts less certain intangibles. The
minimum requirements include a 3% Tier 1 leverage capital ratio for the most
highly-rated institutions; all other institutions are required to meet a
minimum leverage ratio that is at least 1% to 2% above the 3% minimum. In
addition, the Company and its bank subsidiaries are required to satisfy
certain capital adequacy guidelines relating to the risk nature of an
institution's assets. These guidelines established by the Federal Reserve
Board and the FDIC are applicable to bank holding companies and state
chartered non-member banks, respectively. Under the "risk-based" capital
rules, banks and bank holding companies are required to have a level of Tier 1
capital equal to 4% of total risk-weighted assets, as defined. Banks and bank
holding companies are also required to have total capital (composed of Tier 1
plus "supplemental" or Tier 2 capital, the latter being composed primarily of
allowances for loan and lease losses, perpetual preferred stock in excess of
the amount included in Tier 1 capital, and certain "hybrid capital
instruments" including mandatory convertible debt) equal to 8% of total risk-
weighted assets.
As of June 30, 1995, the Company's Tier 1 capital to asset ratio was 9.03%. In
addition, the Company's Tier 1 to risk-weighted asset ratio and total capital
to risk-weighted asset ratios were 15.07% and 16.35%, respectively.
CFX CORPORATION AND SUBSIDIARIES
Part II - Other Information
June 30, 1995
Item 1 - Legal Proceedings
There are no material pending legal proceedings to which the Company,
its subsidiaries, or any directors, officers, affiliates or any owner of
record or beneficiary of more than five percent (5%) of the common stock
of the Company, or any associate of any such director, officer,
affiliate of the Company or any security holder is a party adverse to
the Company or its subsidiaries or has a material interest adverse to
the Company or its subsidiaries.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders of the Company, at which
the holders of common shares entitled to 3,895,152 votes and
holders of Series A preferred shares entitled to 188,139 votes
were represented in person or by proxy, was held on April 19,
1995.
(b) The following individuals, each having received at least 3,196,005
votes in favor of their election, were elected as directors of the
Company for terms of three years each: Richard B. Baybutt,
Christopher V. Bean, Elizabeth S. Hager, and L. William Slanetz.
Peter J. Baxter, Calvin L. Frink, Eugene E. Gaffey, Douglas S.
Hatfield, Jr., Philip A. Mason, Emerson H. O'Brien, and Walter
R. Peterson directors of the Company whose terms did not expire
in 1995, will continue in office for the remainder of their
terms.
(c) Other Matters
(i) The adoption of the CFX CORPORATION 1995 Stock Option Plan
was approved.
Voted: For: 2,558,183 Against: 177,884 Withheld: 59,099
(ii) The appointment, by the Board of Directors, of Wolf & Company,
P.C., as independent auditors for the Registrant was
ratified.
Voted: For: 3,269,631 Against: 7,094 Withheld: 17,215
Item 5 - Other Information
Not applicable
CFX CORPORATION AND SUBSIDIARIES
Part II - Other Information-Cont'd.
June 30, 1995
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10.1 Change of Control Agreement dated February 1, 1995 between CFX
BANK and Benoit J. Asselin
10.2 Change of Control Agreement dated May 15, 1995 between CFX
CORPORATION and Donald E. Leroux
27 Financial Data Schedule
99.1 Computation of Equivalent Shares and Per Share Earnings
(b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K, dated June 19,
1995. reporting the declaration of a three-for-two split of CFX's shares of
Common Stock, and also the declaration of a dividend of $.16 per share to the
holders of record of such shares at $.66 2/3 par value.
CFX CORPORATION AND SUBSIDIARIES
June 30, 1995
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFX CORPORATION
August 15, 1995 /s/ MARK A. GAVIN
Mark A. Gavin
Authorized Officer
Chief Financial Officer