FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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
Securities registered pursuant to
Section 12(b) of the Act: Common Stock, $1.00 par value
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 [XX] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 14, 1995, was $71,087,000. The
foregoing figure does not reflect the registrant's Series A Preferred Stock
which has no established trading market. 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 14, 1995, 3,895,152 shares of the registrant's common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of this Annual Report on Form 10-K:
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Document Part
<S> <S>
Annual Report to Shareholders for the Fiscal Year Ended December 31, 1994 II & IV
Proxy Statement for the 1995 Annual Meeting of Shareholders III
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PART I
Item 1. Business
(a) General Development of Business
CFX CORPORATION (the "Company" formerly Cheshire Financial Corporation)
is a New Hampshire corporation chartered in August 1986 for the purpose of
becoming the bank holding company parent of Cheshire County Savings Bank
("Cheshire"), a New Hampshire state-chartered savings bank with its principal
place of business in Keene, New Hampshire. Cheshire was organized under the
laws of New Hampshire in 1897.
The Company acquired 100% of the stock of Cheshire upon completion of
its conversion from a New Hampshire-chartered mutual savings bank in February
1987 (the "Conversion"). Upon completion of the Conversion, the Company's
assets initially consisted of 100% of the stock of Cheshire and approximately
70% of the net proceeds of the sale of the Company's common stock in a
subscription offering made in connection with the Conversion.
The Company issued a total of 4,000,000 shares of its common stock in
connection with the Conversion. The net proceeds to the Company from the
subscription offering were $56,646,000. From the net proceeds, $16,994,000
was transferred to Cheshire to purchase all of the capital stock issued by
Cheshire in the Conversion. The funds were added to Cheshire's working
capital and continued to be used for general business purposes.
Subsequent to the Conversion, the Company acquired the Monadnock Bank
("Monadnock"), a New Hampshire trust company headquartered in Jaffrey, New
Hampshire, on May 31, 1988. On April 30, 1990, the Company acquired all of
the outstanding capital stock of The Valley Bank ("Valley"), a state-chartered
commercial bank headquartered in Hillsborough, New Hampshire. On June 22,
1990, the Company acquired all of the outstanding capital stock of Village
Savings Bank ("Village"), a state-chartered guaranty savings bank
headquartered in Greenville, New Hampshire. On October 18, 1990, Village was
merged into Monadnock in order to eliminate an overlap of market areas between
these two banking affiliates. On September 6, 1991, Valley acquired certain
assets and assumed all deposits of Family Bank and Trust ("Family"), a state
chartered trust company headquartered in Allenstown, New Hampshire which had
been declared insolvent by the New Hampshire Bank Commissioner and placed into
receivership with the Federal Deposit Insurance Corporation.
On July 12, 1993, the Company merged Monadnock into Cheshire to
eliminate an overlap of market areas between these two banking affiliates. On
November 15, 1993, the Company merged Valley into Cheshire to create a single
united bank with a greater array of products and services to better serve
central and southwestern New Hampshire. The resulting entity was renamed CFX
BANK. These mergers resulted in greater controls and operating efficiencies
through the consolidation of administrative and operational functions.
On September 1, 1993, Cheshire acquired the remaining 52.4% of the
outstanding shares of Colonial Mortgage, Inc., a mortgage banking company
headquartered in Amherst, New Hampshire, for $5,187,000, including $80,000 in
acquisition costs. Cheshire had previously owned 47.6% of this corporation,
which is now known as CFX MORTGAGE, INC. ("CFX Mortgage").
On December 9, 1993, the Company began operating a new subsidiary, CFX
FUNDING L.L.C. ("Funding") specializing in small-ticket lease financing and
securitization. Funding is owned 51% by CFX Financial Services, Inc. (a
wholly-owned subsidiary of CFX BANK), and owned 49% by Novel Leasing Limited
(which is not affiliated with the Company). The objective of Funding is to
provide a lease financing and securitization program specializing in small-
ticket lease portfolios generated by a select group of independent lessors
located throughout the country. In order to accumulate lease receivables for
securitization, CFX BANK provides short-term warehousing lines of credit to
the leasing companies. The strategy is designed to increase the availability
of credit to a select group of lessors while controlling the risks inherent in
lease portfolios through credit enhancements. The warehouse lines of credit
are planned to be paid down every 90 to 180 days through securitization or
sales of various lease portfolios. The operating results of Funding are not
anticipated to materially affect, positively or negatively, the operating
results of the Company in 1995.
On July 26, 1994, the Company signed a definitive agreement to acquire
all of the outstanding capital stock of Orange Savings Bank ("Orange"), a
Massachusetts-chartered savings bank, headquartered in Orange, Massachusetts.
The acquisition is anticipated to be accounted for as a pooling-of-interests.
Pursuant to the definitive agreement, each of Orange's 724,412 outstanding
shares of common stock (except for any dissenting shares and shares
beneficially held by the Company or Orange) will be converted into and
exchangeable for the number of shares of the Company's common stock determined
by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the
denominator of which is the average closing sale price per share of the
Company's common stock on the American Stock Exchange for the ten trading days
ending on the business day before the date on which the required approval of
the Massachusetts Commissioner of Banks is obtained. This exchange ratio is
subject to adjustment in the event that (i) such average closing price is
above $20.00 or below $15.2381, (ii) the Company is a party to certain
business combinations or (iii) the Company issues shares of stock in certain
transactions, including, without limitation, stock splits and stock dividends.
The proposed transaction received approval from Orange's shareholders
and remains subject to regulatory approval. The transaction has already been
approved by the Board of Directors of the Company and Orange. At December 31,
1994, Orange had assets of $83,268,000, deposits of $73,383,000, and
stockholders' equity of $8,444,000.
(b) Financial Information About Industry Segments
See Note Z--Segment Information in Item 8(a).
(c) Narrative Description of Business
General
The Company's primary retail banking markets are Cheshire County,
western Hillsborough County and southern Merrimack County. The mortgage
banking company has loan production offices in four locations throughout
central and southern New Hampshire attracting loan applications from
throughout New Hampshire, Maine, Vermont and northern Massachusetts.
The Company's principal business is to serve as a financial
intermediary, attracting deposits from, and making loans to, consumers and
small-to-mid sized businesses. CFX BANK (the "Bank") uses customer deposits
and loan payments to fund first mortgage loans on residential real estate. In
addition to originating mortgage loans, the Bank also makes commercial,
consumer and other term and installment loans. Other traditional services
available at the Bank include: a wide range of deposit programs designed to
attract both short-term and long-term deposits from the general public,
businesses and local government; safe deposit boxes; travelers checks and
money orders, and many other similar services.
To further the Bank's goals of providing a broad range of retail
services and to generate additional fee income, the Bank has remote service
units located at various business locations in its service area. In addition,
the Bank is a subscriber to INVEST[TM] Financial Corporation which enables
customers to buy and sell securities and obtain investment advice at the Bank.
A full line of trust and investment management services are also available to
the customer, on premise, through an affiliation with a local trust company.
CFX MORTGAGE originates and purchases residential and construction
mortgage loans and sells these loans to the Bank and the secondary market,
while retaining the servicing of these loans. CFX MORTGAGE is an approved
seller and servicer of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA"), Department of Housing and
Urban Development ("HUD"), Veteran's Administration ("VA"), and New Hampshire
Housing Financing Authority loans. CFX MORTGAGE also services loans owned by
private investors.
The Company operates a small-ticket lease financing and securitization
business through Funding. Funding's strategy is to increase the availability
of credit to a select group of lessors while controlling the risk inherent in
lease portfolios through credit enhancements. The business will be built on
stable relationships with a limited number of well-qualified lease originators
(lessors) who will adhere to specified underwriting guidelines. The warehouse
lines of credit are planned to be paid down every 90 to 180 days through
securitization or sales of the various lease portfolios.
The operating results of the Company depend primarily on its net
interest and dividend income, which is the difference between (i) interest and
dividend income on earning assets, primarily loans, leases, trading and
investment securities, and (ii) interest expense on interest bearing
liabilities, which consist of deposits and borrowings. The Company's results
of operations are also affected by the provision for loan and lease losses,
resulting from the Company's assessment of the adequacy of the allowance for
loan and lease losses; the level of its other operating income, including
gains and losses on the sale of loans and securities, and loan and other
fees; operating expenses; and income tax expenses and benefits.
Market Area and Competition
The Bank operates primarily in Cheshire, Hillsborough and Merrimack
Counties, which are located in southwestern and south-central New Hampshire.
Based on total deposits as of December 31, 1994, the Bank had the largest
market share in the southwestern New Hampshire banking market.
The banking business in the Bank's market areas has become increasingly
competitive over the past several years. The Bank's major competitors in
attracting deposits and lending funds are other New Hampshire-based banks,
and, to a certain extent, regional, money center and non-bank financial
institutions. A number of New Hampshire-based banks maintain branches in
cities and towns where the Bank maintains offices.
The principal factors in successfully competing for deposits are
convenient office locations, flexible hours, remote service units, interest
rates and services, while those relating to loans are interest rates, the
range of lending services offered and lending fees. Additionally, the Bank
believes that the local character of its businesses and its "supercommunity
bank" management philosophy enables it to compete successfully in its market
area.
Risk Elements
Nonperforming assets are evaluated quarterly by management to ensure
proper classification and to confirm that the recorded carrying values of the
assets are 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. In
addition, commencing in the third quarter of 1993, all loans past due 90 days
or more as to principal or interest were placed on nonaccrual status.
Previously, such loans which, in management's judgment, were fully secured and
in the process of collection (through legal action or, in appropriate
circumstances, through collection efforts reasonably expected to result in
repayment of the debt or in its restoration to a current status in the near
future) continued to accrue interest.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
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December 31 (Dollars in thousands) 1994 1993
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Nonaccrual (nonperforming) loans $6,536 $6,472
Foreclosed real estate 1,898 3,737
Valuation allowance on foreclosed real estate (325) (384)
Total nonperforming assets $8,109 $9,825
Nonperforming loans as a percent of total loans 1.15% 1.37%
Nonperforming assets as a percent of total assets 1.07% 1.34%
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The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
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1994 1993
% of % of
December 31 (Dollars in thousands) Portfolio Balances Portfolio Balances
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Nonperforming loans:
Real estate:
Residential $4,069 62.2% $2,088 32.3%
Commercial 1,442 22.1 3,737 57.7
Commercial, financial, and agricultural 1,007 15.4 460 7.1
Consumer and other 18 .3 187 2.9
6,536 100.0% 6,472 100.0%
Foreclosed real estate:
Residential 859 54.6% 2,471 73.7%
Construction 330 21.0 352 10.5
Commercial 709 45.1 914 27.3
Valuation allowance (325) (20.7) (384) (11.5)
1,573 100.0% 3,353 100.0%
Total nonperforming assets $8,109 $9,825
</TABLE>
The following table provides a rollforward of the Company's foreclosed
real estate at the dates indicated:
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December 31 (In thousands) 1994 1993
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Balance at beginning of year $3,353 $11,929
Additions 696 3,887
Provisions for losses (207) (673)
Pay-offs/sales/other (2,269) (11,790)
Balance at end of year $1,573 $ 3,353
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During the fourth quarter of 1993, the Company sold $6,600,000 in
nonperforming assets to a private investor. This bulk sale of nonperforming
assets, along with other efforts to reduce nonperforming assets, yielded a
$13,186,000 (57%) reduction in nonperforming assets during 1993. During 1994,
total nonperforming assets decreased by $1,716,000, or 17.5%.
Asset/Liability Management
The Company's primary objective regarding asset/liability management is
to position the Company so that changes in interest rates do not have a
materially adverse impact upon forecasted net income and the net fair value of
the Company. The Company's primary strategy for accomplishing its
asset/liability management objective is achieved by matching the weighted
average maturities of assets, liabilities, and off-balance-sheet items
(duration matching).
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of the
Company assuming both instantaneous, permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the
net market value of the Company as a result of these interest rate changes
represents greater interest rate risk than do smaller increases or decreases
in net fair value. In connection with these recalculations, the Company makes
assumptions regarding 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 fair values as it believes appropriate on the basis
of historical experience and prudent business judgment. The Company endeavors
to maintain a position where it experiences no material change in net fair
value and no material fluctuation in forecasted net income as a result of
assumed 100 and 200 basis point increases and decreases in interest rates.
However, there can be no assurance that the Company's projections in this
regard will be achieved.
Management believes that the above method of measuring and managing
interest rate risk is consistent with the FDIC regulation regarding an
interest rate risk component of regulatory capital.
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, 1994. This table has been generated using
certain assumptions which the Company believes fairly and accurately represent
repricing volumes in a dynamic interest rate environment. Specifically,
contractual maturities are used on all time deposits and investments other
than asset-backed securities. For asset-backed securities and loans,
contractual maturities, repricing and prepayment assumptions are used. The
prepayment assumptions are based on current experience and industry
statistics. The gap maturity categories for savings deposits (including NOW,
savings, and money market accounts) are based on management's philosophy of
repricing core deposits in reaction to changes in the interest rate
environment. Repricing frequencies will vary at different points in the
interest cycle and as supply and demand for credit changes.
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0-3 4-12 1-5 5-10 Over
December 31, 1994 (Dollars in thousands) Months Months Years Years Years Total
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Interest earning assets:
Interest bearing deposits with other banks $ 2,568 $ - $ 95 $ - $ - $ 2,663
Federal Home Loan Bank of Boston stock 6,471 - - - - 6,471
Trading securities 236 - - - - 236
Investment securities 7,223 16,441 62,889 27,336 - 113,889
Loans and leases 161,545 258,105 80,191 35,527 42,240 577,608
Total interest earning assets 178,043 274,546 143,175 62,863 42,240 700,867
Interest bearing liabilities:
Savings and time deposits 72,003 172,567 208,660 30,412 30,222 513,864
Advances from Federal Home Loan Bank of Boston 92,201 - - - - 92,201
Short-term borrowed funds 27,316 - - - - 27,316
Total interest bearing liabilities 191,520 172,567 208,660 30,412 30,222 633,381
Off-balance sheet instruments - (25,000) 25,000 - - -
Periodic gap $(13,477) $76,979 $(40,485) $32,451 $12,018 $ 67,486
Cumulative gap $(13,477) $63,502 $ 23,017 $55,468 $67,486 $ -
</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 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.
Subsidiary
CFX BANK owns two subsidiary companies--CFX CAPITAL SYSTEMS, INC., ("CFX
CAPITAL") and CFX FINANCIAL SERVICES, INC. ("CFX FINANCIAL"). CFX CAPITAL is a
service corporation which owns CFX MORTGAGE, INC. ("CFX MORTGAGE") and certain
investment securities. CFX CAPITAL previously owned 47.6% of CFX MORTGAGE with
the remaining 52.4% purchased in 1993. CFX FINANCIAL owns 51% of CFX FUNDING
L.L.C., a company which facilitates lease financing and securitization.
Owning 100% of CFX MORTGAGE allows CFX BANK to fully integrate mortgage
banking into the retail banking franchise, providing the retail lending units
(mortgage and consumer) with a strong sales-oriented culture and a larger
variety of products. In addition, the distribution network that CFX MORTGAGE
has developed allows access to a larger volume of loans for CFX BANK's in-
house residential loan portfolio. Moreover, CFX MORTGAGE'S operation should
enhance the Company's non-interest income sources. As of December 31, 1994,
CFX MORTGAGE had a servicing portfolio for others of approximately
$645,000,000.
CFX BANK provides CFX MORTGAGE with warehouse and working capital
funding. The warehouse line of credit, which is secured by mortgage loans
originated, bought and packaged for sale by CFX MORTGAGE, allowed CFX MORTGAGE
to borrow up to $30,000,000 during 1994, with advances on December 31, 1994 of
$15,095,000. In addition, CFX BANK has provided CFX MORTGAGE with secured
lines of credit for working capital purposes, allowing CFX MORTGAGE to borrow
up to $6,500,000 with no advances taken in 1994. CFX BANK also provided CFX
MORTGAGE with secured term loans which totaled $600,000 at December 31, 1994.
All such loans are made on substantially the same terms as those prevailing at
the time for comparable transactions with non-affiliated borrowers. CFX
MORTGAGE maintains a deposit relationship with CFX BANK in connection with
these funding arrangements.
Employees
As of December 31, 1994, the Company and its subsidiaries had 336 full-
time and 102 part-time employees. The employees of the Company and its
subsidiaries are not represented by any collective bargaining unit. Relations
between management and employees are considered good.
Regulation
General
As a bank holding company, the Company is subject to regulation by the
Federal Reserve Board. The Company's bank subsidiary, CFX BANK, is a state-
chartered bank; as such, it is subject to regulation by bank regulators in New
Hampshire. The deposits of the Bank are insured by the FDIC, and therefore,
CFX BANK is subject to FDIC supervision and regulation. The Company is also
subject to limitations on the scope of their activities and to continuing
regulation, supervision and examination by the Federal Reserve Board under the
Bank Holding Company Act of 1956 and related federal statutes. As a New
Hampshire corporation, the Company must comply with the general corporation
law of New Hampshire.
Although the Northeast is gradually recovering from the severe recession
of the late 1980's and early 1990's, the banking environment continues to be
affected by a slow recovery of commercial real estate values and substantial
increases in regulatory requirements as a result of the failure of numerous
banking and thrift institutions. In addition to the Company's own monitoring
activities, the credit quality of the assets held by CFX BANK is subject to
periodic review by the state and federal bank regulatory agencies noted above.
While the Company believes its present allowance for loan and lease losses is
adequate in light of prevailing economic conditions or regulatory environment,
there can be no assurance that CFX BANK will not be required to make certain
adjustments to its allowance for loan and lease losses and charge-off policies
in response to changing economic conditions or regulatory examinations.
Neither the Company nor any of its subsidiaries has entered into formal
written agreements with state or federal regulators. The Company and its
subsidiaries continue to evaluate and refine oversight and reporting systems
and procedures to enhance the ability of such companies to respond to current
economic conditions. The following references to applicable statutes and
regulations are brief summaries thereof and do not purpose to be complete.
In addition to extensive existing government regulation, federal and
state statutes and regulations are subject to changes that may have
significant impact on the way in which banks may conduct business. The
likelihood and potential effects of any such changes cannot be predicted.
Legislation enacted in recent years has substantially increased the level of
competition among commercial banks, thrift institutions and nonbanking
institutions, including insurance companies, brokerage firms, mutual funds,
investment banks, and major retailers. In addition, the enactment of banking
legislation such as the Financial Institutions Reform Recovery and Enforcement
Act ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") have affected the banking industry by, among other things,
broadening the regulatory powers of the federal banking agencies in a number
of areas and restricting the powers of state-chartered banks. The following
summary is qualified in its entirety by the text of the relevant statutes and
regulations.
As a result of the enactment of FIRREA, any or all of the Company's
subsidiary banks can be held liable for any loss incurred by, or reasonably
expected to be incurred by the FDIC in connection with (a) the default of any
other of the Company's subsidiary banks or (b) any assistance provided by the
FDIC to any other of CFX's subsidiary banks in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur without regulatory assistance.
Federal Deposit Insurance Corporation
CFX BANK's deposits are insured by the FDIC up to a maximum of $100,000
per depositor. The FDIC issues regulations, conducts periodic examinations,
imposes minimum capital requirements, requires the filing of reports and
generally supervises the operations of its insured banks. The approval of the
FDIC is required prior to any merger or consolidation, or the establishment or
relocation of an office. Such supervision and regulation is intended primarily
for the protection of depositors.
Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for non-
compliance. For example, proceedings may be instituted against any insured
bank or any director, officer or employee of such bank who engages in unsafe
and unsound practices, including the violation of applicable laws and
regulations.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provides for, among other things, increased funding for the Bank
Insurance Fund (the "BIF") of the FDIC and expanded regulation of depository
institutions and their affiliates, including parent holding companies. A
summary of certain provisions of FDICIA and its implementing regulations is
described below.
Risk Based Deposit Insurance Assessments
A significant portion of the additional funding to BIF is in the form of
borrowings to be repaid by insurance premiums assessed on BIF members. In
addition, FDICIA provides for an increase in the ratio of the reserves to
insured deposits of the BIF to 1.25% by the end of the 15 year period that
began with the semi-annual assessment period ending December 31, 1991, also to
be financed by insurance premiums. The result of these provisions could be a
significant increase in the assessment rate on deposits of BIF members during
the balance of this 15 year period. FDICIA also provides authority for
special assessments against insured deposits and for the development of a
general risk-based assessment system. FDIC has set assessment rates for BIF-
insured institutions ranging from 0.23% to 0.31%, based on a risk assessment
of the institution. Each financial institution is assigned to one of three
capital groups; "well capitalized"; "adequately capitalized"; or
"undercapitalized"; and further assigned to one of three subgroups within each
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors and other information
relevant to the institution's financial condition and the risk posed to the
insurance fund. For purposes of the risk-based assessment system, a well-
capitalized institution is one that has a total risk-based capital ratio of
10% or more, a Tier 1 risk-based capital of 6% or more, and a leverage ratio
of 5% or more. An adequately capitalized institution has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more,
and a leverage ratio of 4% or more. An undercapitalized institution is one
that does not meet either of the foregoing definitions. The actual
assessment rate applicable to a particular institution, therefore, depends in
part upon the risk assessment classification so assigned to the institution by
the FDIC.
Prompt Corrective Action
FDICIA also provides the federal banking agencies with broad powers to
take prompt corrective action to resolve problems of insured depository
institutions, depending upon a particular institution's level of capital.
FDICIA established five tiers of capital measurement for regulatory purposes
ranging from "well-capitalized" to "critically undercapitalized". Under
prompt corrective action regulation adopted by the federal banking agencies, a
depository institution is (a) "well-capitalized" if it has a total risk-based
capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more,
a leverage ratio of 5% or more and is not subject to any written agreement,
order or capital measure; (b) "adequately capitalized" if it has a total risk-
based capital ratio of 8% or more, a Tier 1 risk-based capital ratio 4% or
more and a leverage ratio of 4% or more (3% if the bank is rated composite I
under the CAMEL rating system in its most recent examination and is not
experiencing or anticipating significant growth) and does not qualify as
"well-capitalized"; (c) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4% or a leverage ratio that is less than 4% (3% if the bank is rated
composite I under the CAMEL rating system in its most recent examination and
is not experiencing or anticipating significant growth); (d) "significantly
undercapitalized" if the bank has a total risk-based capital ratio that is
less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a
leverage ratio that is less than 3%; and (e) "critically undercapitalized" if
the depository institution has a tangible equity to total assets ratio that is
equal to or less than 2% of total assets, or otherwise fails to meet certain
established critical capital levels. A depository institution may be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances. At December 31, 1994, CFX BANK was
classified as "well-capitalized" under the prompt corrective action
regulations described above.
Any depository institution that is undercapitalized and which fails to
meet regulatory capital requirements specified in FDICIA must submit a capital
restoration plan guaranteed by the bank holding company controlling such
institution. The regulatory agencies may place limits on the asset growth and
restrict activities of the institution (including transactions with
affiliates), and require the institution to raise additional capital, dispose
of subsidiaries or assets or be acquired and, ultimately, require the
appointment of a receiver. The guarantee of a controlling bank holding
company under FDICIA of performance of a capital restoration plan is limited
to the lower of 5% of an undercapitalized banking subsidiary's assets or the
amount required for the bank to be classified as adequately capitalized.
Federal banking agencies may not accept a capital restoration plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. If a depository institution fails to submit an acceptable plan
within the time required (generally 45 days after receiving notice that the
institution is undercapitalized, significantly undercapitalized or critically
undercapitalized), it is treated as if it were significantly undercapitalized.
If the controlling bank holding company fails to fulfill its guaranty
obligations under FDICIA and files (or has filed against it) a petition under
Federal Bankruptcy Code, the applicable regulatory agency would have a claim
as a general creditor of the bank holding company and, if the capital
restoration plan were deemed to be a commitment to maintain capital under the
Federal Bankruptcy Code, the claim would be entitled to a priority in such
bankruptcy proceedings over unsecured third party creditors of the bank
holding company.
In addition to the requirement of mandatory submission of a capital
restoration plan, under FDICIA, an undercapitalized institution may not pay
management fees to any person having control of the institution nor may an
institution, except under certain circumstances and with prior regulatory
approval, make any capital distribution if, after making such payment or
distribution, the institution would be undercapitalized. Further,
undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System.
Undercapitalized and significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. In addition, significantly
undercapitalized depository institutions also are prohibited from awarding
bonuses or increasing compensation of senior executive officers until approval
of a capital restoration plan. Critically undercapitalized depository
institutions are subject to appointment of a receiver or conservator.
Brokered Deposit and Pass Through Deposit Insurance Limitation
Under FDICIA, a depository institution that is not well-capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits "significantly higher" than the prevailing rate in its
market. A depository institution that is adequately capitalized may accept
brokered deposits if it obtains the prior approval of the FDIC. Effective in
November 1993, the FDIC modified the definitions of "well-capitalized" and
"adequately capitalized" to conform to the definitions described above for
prompt corrective action. In addition, "pass-through" insurance coverage may
not be available for certain employee benefit accounts. In the Company's
opinion, these limitations do not have a material effect on the Company.
Safety and Soundness Standards
The Federal Deposit Insurance Act, as amended by FDICIA and as further
amended by the Reigle Community Development and Regulatory Improvement Act of
1994, directs each federal banking agency to prescribe standards for insured
depository institutions relating to asset quality, earnings and stock
valuation. The ultimate cumulative effect of these standards cannot currently
be forecast.
FDICIA also contains a variety of other provisions that may affect the
Company's operations, including new reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch. Many of the
provisions in FDICIA have recently been or will be implemented through the
adoption of regulations by the various federal banking agencies and,
therefore, the precise impact on the Company cannot be assessed at this time.
Capital Guidelines
The Federal Reserve Board and the FDIC have issued risk-based capital
guidelines for bank holding companies, state-chartered member banks and state-
chartered non-member banks. Under these guidelines, the minimum ratio of
total capital to risk-adjusted assets (including certain off-balance-sheet
items, such as standby letters of credit) is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill ("Tier 1 capital"). The
remainder may consist of perpetual debt, mandatory convertible debt
securities, a limited amount of subordinate debt, other preferred stock and a
limited amount of loan loss reserves (supplementary capital). In addition,
the Federal Reserve Board and the FDIC have adopted a leverage ratio (Tier 1
capital to total assets, net of goodwill) of 3% for bank holding companies and
banks that meet certain specified criteria, including that they have the
highest regulatory rating. The rule indicates that the minimum leverage ratio
should be 1% to 2% higher for holding companies and banks undertaking major
expansion programs or that do not have the highest regulatory rating.
As of December 31, 1994, the Company and CFX BANK had capital ratios on
a historical basis which exceeded all minimum regulatory capital requirements.
Under FIRREA and FDICIA, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the
termination of deposit insurance by the FDIC and seizure of the institution.
New Hampshire Banking Department
As a state-chartered institution, CFX BANK is subject to the applicable
provisions of New Hampshire banking law. CFX BANK derives its lending and
investment powers from these laws and is subject to periodic examination and
reporting requirements by the New Hampshire Bank Commissioner (the
"Commissioner"), who also has specific statutory jurisdiction over certain
banking activities such as mergers and the creation of new powers. Conversion
from mutual to stock form and the establishment of branches are subject to
approval of the New Hampshire Board of Trust Company Incorporation (the
"BTCI").
Federal Reserve Board
The Federal Reserve Board requires banks to maintain reserves against
its transaction accounts, and non-personal time deposits based on the amount
of the banks' deposits.
The Company is a "bank holding company" within the meaning of the Bank
Holding Company Act. Under the Bank Holding Company Act, a bank holding
company is required to file annually with the Federal Reserve Board a report
of its operations and, with its subsidiaries, is subject to examination by the
Federal Reserve Board. The Bank Holding Company Act prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting share of any bank, or increasing such ownership or control of
any bank, without prior approval of the Federal Reserve Board. No approval
under the Act is required, however, for a bank holding company already owning
or controlling over 50% of the voting shares of a bank to acquire additional
shares of such bank.
The Bank Holding Company Act further precludes a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any non-banking entity engaged
in any activities other than those which the Federal Reserve Board has
determined to be closely related to banking or managing and controlling banks
so as to be a proper incident thereto. The Federal Reserve Board has
determined that certain activities, including, but not limited to, mortgage
banking, operating small loan companies, discount brokerage activities,
factoring, certain data processing operations, providing investment and
financial advice and leasing personal property on a full payout basis are
closely related, and a proper incident to banking. A bank holding company and
its subsidiaries are also prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services.
Interstate Banking
The Bank Holding Company Act currently prohibits a bank holding company
from acquiring any bank located outside of the state in which the existing
banking subsidiaries of the bank holding company are located unless
specifically authorized by applicable law.
Interstate banking legislation has been enacted in New Hampshire which
permits out-of-state banks and bank holding companies to establish new banks
or to affiliate with existing banks and bank holding companies in New
Hampshire. The legislation establishes the procedures for the creation of new
banks in New Hampshire and the acquisition of five percent more of a New
Hampshire bank or bank holding company . Application for an affiliation
certificate must be made to the Board of Trust Incorporation ("BTCI") and the
Commissioner is charged with promulgating the rules relating to the
application procedures and the standards to be applied to the application by
the BTCI. The Commissioner has the further responsibility of monitoring
certificate holders, new banks and bank holding companies affiliated under the
law and of adopting rules to carry out this responsibility. Violation of the
legislation may result in the imposition of a fine of up to $5,000 per day for
each day the violation continues and the divestiture of any prohibited
affiliation.
Under the legislation, no bank holding company may acquire ownership or
control of the voting stock of any bank if upon such acquisition (1) the bank
holding company would have more than 12 affiliates in New Hampshire; or (2)
the dollar amount of the total deposits of the bank holding company and all
its affililates in New Hampshire would exceed 20 percent of the dollar volume
of total deposits in New Hampshire of all state and federal banks. This 20
percent deposit concentration limitation is subject to waiver by the
Commissioner in cases involving troubled institutions.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal"), effective September 29, 1995 existing restrictions under
the Bank Holding Company Act which prevent the acquisition by a bank holding
company of banks located outside the bank holding company's home state unless
authorized by the state law of the target bank will be eliminated. State law
restrictions regarding deposit concentrations will continue to apply, provided
that such restrictions do not discriminate against out-of-state bank holding
companies. The New Hampshire 20 percent deposit concentration limitation
applies to acquisitions by both in-state and out-of-state bank holding
companies. Such acquisitions will be subject to approval by the Federal
Reserve Board.
Under Riegle-Neal, effective June 1, 1997, (unless the New Hampshire
Legislature enacts a statute "opting out" of interstate branching) out-of-
state banks will be authoriized to merge with New Hampshire banks and to
establish branches in New Hampshire. Such mergers and the establishment of
branches will continue to be subject to state deposit concentration
restrictions and conditions that may be imposed by New Hampshire regulatory
authorities, provided that such restrictions and conditions do not
discriminate against out-of-state banks. The resulting New Hampshire banks
and branches will continue to be subject to regulation by New Hampshire
regulatory authorities provided that such regulations do not discriminate
against out-of-state banks.
Federal Home Loan Bank System
CFX BANK 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. It makes advances to
members in accordance with policies and procedures established by the Board of
Directors of the FHLB. As a member of the FHLB, CFX BANK is required to
purchase and hold stock in the FHLB. As of December 31, 1994, CFX BANK held
stock in the FHLB in the amount of $6,471,000.
Securities and Exchange Commission
The Company has registered its common stock with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended. As a result of such registration, the proxy and tender offer rules,
periodic reporting requirements, and insider trading restrictions and
reporting requirements, as well as certain other requirements, of such Act are
applicable to the Company.
Restrictions on the Payment of Dividends
Under the New Hampshire Business Corporation Act, a distribution
including dividends and the purchase or redemption of a corporation's own
shares, must be authorized by the Board of Directors and may not be paid if
the corporation, after the payment is made, would not be able to pay its
debts as they become due in the usual course of business, or the corporation's
total assets would be less than the sum of its total liabilities plus the
amount that would be needed, if the corporation were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution
of shareholders whose preferential rights are superior to those receiving the
distribution.
CFX BANK is not subject to the Business Corporation Act, but is subject
to state banking and federal regulations restricting the payment of dividends.
Under New Hampshire state law, the Company's banking subsidiary may declare
dividends only from its earnings remaining after deducting all losses, all
sums due for expenses and all overdue debts upon which no interest has been
paid for a period of six months, unless such debts are well secured and in
process of collection. In addition, New Hampshire-chartered guaranty savings
banks such as CFX BANK are required by New Hampshire law to maintain a
"guaranty fund" for the security of their depositors. Funds accumulated in the
guaranty fund can be used only for absorbing losses incurred and thus cannot
be used for the payment of dividends on deposits or capital stock. In order to
pay dividends, a transfer to the guaranty fund from net earnings is required
so as to maintain an unimpaired guaranty fund of 3% of total deposits. As of
December 31, 1994, CFX BANK's guaranty fund amounted to $18,750,000 or 3.27%
of total deposits. Furthermore, the Federal Deposit Insurance Act prohibits
CFX BANK from paying dividends on its capital stock if it is in default in the
payment of any assessment to the FDIC.
Applicable rules prohibit the payment of a cash dividend if the effect
thereof would cause the net worth of CFX BANK to be reduced below either the
amount required for the liquidation account established in connection with the
conversion or the net worth requirements imposed by New Hampshire law or
federal laws or regulations.
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.
The Company generally could not, for a period of three years from the
effective date of the Conversion, repurchase any of its stock from any person,
except in the event of an offer to repurchase by the Company on a pro rata
basis to all shareholders that would be approved by the Commissioner. The
Company received the required regulatory approval in March 1988 to institute a
five percent (5%) open-market common stock repurchase program. Pursuant to
such approval and subsequent approvals to acquire additional shares, the
Company acquired 577,265 shares of its outstanding common stock in open-market
purchases since March 1988, the last such purchase being December 22, 1990.
Restrictions on the Acquisition of the Company
The acquisition of more than 10% of the Company's outstanding shares
may, in certain circumstances, be subject to the provisions of the Change in
Bank Control Act of 1978, and the acquisition of control of the Company by any
company would be subject to regulatory approval under the Bank Holding Company
Act of 1986.
Other Regulations
The policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to do so in the future. An
important function of the Federal Reserve Board is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes
in reserve requirements against bank deposits. Policies of these agencies may
be influenced by many factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and fiscal policies
of the United States government. Supervision, regulation or examination of the
Company by these regulatory agencies is not intended for the protection of the
Company's shareholders.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further deregulation of
both banks and other financial institutions. Such legislation could relax or
eliminate geographic restrictions on banks and bank holding companies and
could place the Company in more direct competition with other financial
institutions, including mutual funds and securities brokerage firms. No
assurance can be given as to whether any additional legislation will be
enacted or as to the effect of such legislation on the business of the
Company.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was enacted on August 9, 1989. FIRREA was a major piece of
legislation which was intended to restore the public's confidence in the
savings and loan industry, ensure a safe and stable system of affordable
housing finance through major regulatory reforms, strengthen capital standards
and provide safeguards for the disposal of recoverable assets. Although CFX
BANK was not directly affected by FIRREA, the legislation has generally had a
significant impact on the nation's insured financial institutions.
FIRREA abolished the Federal Home Loan Bank Board and the position of
Chairman of the Bank Board as chief regulator of the thrift industry. The
Office of Thrift Supervision was created as an office in the Department of the
Treasury. The Director of the Office of Thrift Supervision is responsible for
the examination and supervision of all savings institutions. FIRREA abolished
the Federal Savings and Loan Insurance Corporation and gave the Federal
Deposit Insurance Corporation the duty of insuring the deposits of savings
associations as well as banks. The insurance funds are maintained separately
and were renamed. The Bank Insurance Fund generally serves banks, while the
Savings Association Insurance Fund serves thrift institutions.
The additional statistical disclosure describing the business of the
Company and CFX BANK required by Industry Guide 3 under the Securities
Exchange Act of 1934, as amended, is provided in Appendix A to this Annual
Report.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties
The Company neither owns nor leases any real property. It utilizes the
premises and equipment of CFX BANK (the "Bank") with no payment of any rental
fee to the Bank. However, the management fees charged to the Bank by the
Company are reduced by, among other things, an occupancy factor.
The Bank owns its main office and two branch offices in Keene, New
Hampshire. The Bank also owns branches in Jaffrey, Troy, Greenville, New
Ipswich, Peterborough, Hillsborough, Henniker and Allenstown, New Hampshire
while leasing other branches in Rindge, Hinsdale and Loudon, New Hampshire.
The Bank also owns 50 automated teller and remote service units located in New
Hampshire and operates five "mini-branches" at various retail establishments
in its market area. CFX MORTGAGE owns its main office in Amherst, New
Hampshire while it leases additional office space in Bedford and Portsmouth,
New Hampshire.
The following table sets forth the location of the Company's offices
(including administrative offices) as well as the net book value of such
offices at December 31, 1994.
<TABLE>
<CAPTION>
Location Net Book Value
<S> <C>
CFX BANK:
194 West Street
Keene, New Hampshire $1,292,370
100-104 Main Street
Keene, New Hampshire $1,173,942
828 Court Street
Keene, New Hampshire $ 301,806
117 West Street (administrative)
Keene, New Hampshire $ 481,778
Route 101
Marlborough, New Hampshire $ 22,113(1)
Route 12
North Swanzey, New Hampshire $ 28,234(1)
Route 12
Walpole, New Hampshire $ 0(1)
Route 9
West Chesterfield, New Hampshire $ 0(1)
Warwick Road
Winchester, New Hampshire $ 34,999(1)
87 Main Street
Jaffrey, New Hampshire $ 813,371
18 Goodnow Street
Jaffrey, New Hampshire $ 375,309
42 Goodnow Street
Jaffrey, New Hampshire $ 99,192
Central Square
Troy, New Hampshire $ 124,612
Main Street
Greenville, New Hampshire $ 209,417
Turnpike Road
New Ipswich, New Hampshire $ 202,889
Grove Street
Peterborough, New Hampshire $ 391,872
Route 202
Rindge, New Hampshire. $ 214,488(1)
Main Street
Hillsborough, New Hampshire $ 779,348
Main Street
Henniker, New Hampshire $ 230,853
Church Street
Hillsborough, New Hampshire $ 30,897
Route 28
Allenstown, New Hampshire $ 404,693
Route 106
Loudon, New Hampshire $ 6,339(1)
Route 119, Brattleboro Road
Hinsdale, New Hampshire $ 106,678
5 Commerce Park-North
Bedford, New Hampshire $1,323,585
1383 Lake Shore Road
Gilford, New Hampshire $ 183,153
CFX MORTGAGE:
Colonial Park Route 101A
Amherst, New Hampshire $1,350,988
Building I, Bedford Farms
Bedford, New Hampshire $ 0(1)
<F1> Represents net book values of leasehold improvements.
</TABLE>
At December 31, 1994, the total net book value of the Company's premises
and equipment was $13,643,000.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party
or any of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Bank is a party or of which the Bank's 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 Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for the Company's common equity and
related stockholder matters on page 68 of the Annual Report to Shareholders
for the fiscal year ended December 31, 1994 is incorporated herein by
reference.
Item 6. Selected Financial Data
Information relating to selected financial data on page 1 of the Annual
Report to Shareholders for the fiscal year ended December 31, 1994 is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 14 to 29 inclusive of the Annual Report to Shareholders
for the fiscal year ended December 31, 1994 is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements on pages 30 to 63
inclusive of the Annual Report to Shareholders for the fiscal year
ended December 31, 1994 is incorporated herein by reference.
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 63 of
the Annual Report to Shareholders for the fiscal year ended December
31, 1994 is incorporated herein by reference.
(2) Information About Oil and Gas Producing Activities
Not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
(a)(i) On March 8, 1993, the Board of Directors of CFX CORPORATION
("the Company") voted to engage Wolf & Company, P.C. as its auditors for
fiscal year 1993. The Company's former auditor, Ernst & Young LLP, was
dismissed as of such date.
(ii) The auditor's report on the financial statements for the 1992
fiscal year did not contain an adverse opinion or disclaimer of opinion and
was not qualified as to uncertainty, audit scope or accounting principles.
(iii) The decision to change the Company's auditors was recommended by
the Audit Committee of the Board of Directors and was approved by the
Company's Board of Directors.
(iv) In connection with the audit for the 1992 fiscal year, there were
no disagreements of the type described in Item 304 (a) (1) (iv) of Regulation
S-K with the Company's former auditor on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
(v) During the Company's 1992 fiscal year and the subsequent interim
period preceding the change in accountants, no reportable event, as set forth
in Item 304 (a) (1) (iv) of Regulation S-K, occurred.
(vi) The letter from the Company's former auditor required by Item 304
(a) (1) (iv) of Regulation S-K was filed by amendment to the Form 8-K on
Form 8 on March 17, 1993.
(b) As set forth in (a) (i) above, the Company engaged Wolf & Company,
P.C. on March 8, 1993. During the Company's 1992 fiscal year and the
subsequent interim period preceding the change in accountants, the Company did
not consult Wolf & Company, P.C. on any accounting matters.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the registrant
on pages 2 to 6 inclusive and on pages 16 and 17 inclusive of the Proxy
Statement for the 1995 Annual Meeting of Shareholders is incorporated herein
by reference.
Item 11. Executive Compensation
Information regarding executive compensation on pages 7 to 12 inclusive
of the Proxy Statement for the 1995 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management on pages 2 to 4 of the Proxy Statement for the 1995 Annual
Meeting of Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions on
pages 15 to 16 of the Proxy Statement for the 1995 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated herein by
reference from the Annual Report to Shareholders for the year
ended December 31, 1994 at Item 8. Page references are to such Annual
Report.
<TABLE>
<CAPTION>
Financial Statements Page References
<S> <C>
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34--63
Reports of Independent Auditors 65
</TABLE>
(2) Financial Statement Schedules
See Item 14 (d)
(3) Exhibits Required by Item 601
See Item 14 (c)
(b) Reports on Form 8-K
On December 19, 1994, a Form 8-K was filed announcing the Company's
declaration of its regular quarterly dividend on its common stock, the
declaration of its regular quarterly dividend on its Series A Preferred Stock
and the declaration of a 5% common stock dividend.
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated
herein by reference to other filings.
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
*3 Articles of Incorporation and By-Laws of CFX CORPORATION, as
amended.
**10.1 CFX CORPORATION Retirement Plan.
**10.2 1992 CFX CORPORATION Profit Sharing/Bonus Plan.
**10.3 CFX CORPORATION 401(k) Plan.
***10.4 1986 CFX CORPORATION Stock Option Plan.
****10.5 CFX CORPORATION 1992 Employee Stock Purchase Plan.
*****10.6 Employment Agreement dated as of January 1, 1991 between CFX
CORPORATION and Peter J. Baxter, as amended.
*****10.7 Change of Control Agreement dated June 5, 1991 between CFX
CORPORATION and Laurence E. Babcock.
**10.8 Change of Control Agreement dated December 31, 1992 between CFX
CORPORATION and John F. Foley.
**10.9 Change of Control Agreement dated December 31, 1992 between CFX
CORPORATION and Mark A. Gavin.
******10.10 Change of Control Agreement dated August 4, 1993 between CFX
CORPORATION and Daniel J. LaPlante.
******10.11 Employment Agreement dated September 1, 1993 between CFX
CORPORATION and Paul D. Spiess.
10.12 Change of Control Agreement dated March 30, 1994 between CFX
CORPORATION and William J. McIver.
*****10.13 Change of Control Agreement dated June 5, 1991 between CFX BANK
and William H. Dennison.
*****10.14 Change of Control Agreement dated June 5, 1991 between CFX BANK
and Peter T. Whittemore.
*****10.15 Change of Control Agreement dated June 5, 1991 between CFX BANK
and Wayne R. Gordon.
******10.16 Employment Agreement dated September 1, 1993 between CFX
MORTGAGE, INC. and Paul T. Pouliot.
***10.17 Lease dated May 1, 1983 by and between Santibotto, Inc.
and CFX BANK.
**10.18 Lease dated October 16, 1991 by and between Market Basket, Inc.
and CFX BANK.
******10.19 Lease dated May 11, 1993 by and between Cheshire Oil Company,
Inc. and CFX BANK.
******10.20 Lease dated April 14, 1993 by and between Arnold S. Katz and
Blair J. Finnegan, Trustees of Commerce Center Trust, and CFX
MORTGAGE, INC.
******10.21 Lease dated September 15, 1993 by and between Bedford Farms
Limited Partnership and CFX MORTGAGE, INC.
10.22 Assignment dated September 30, 1994 by and between Fleet Bank, NH
and CFX BANK of the lease dated as of November 9, 1987 by and
between Fleet Bank, NH and Philip C. Haughey and
Andrew J. McCarthy, as Successor Trustee of The St. John Realty
Trust
13 CFX CORPORATION Annual Report to Shareholders for fiscal year
ended December 31, 1994.
21 Subsidiaries--Reference is made to Item 1.
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Ernst & Young LLP.
<FN>
<F1>* Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-4 of CFX CORPORATION No. 33-56875 effective in
1994.
<F2>** Incorporated herein by reference to the Exhibits to the Annual Report
on Form 10-K of CFX CORPORATION for the year ended December 31, 1992.
<F3>*** Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX CORPORATION No. 33-17071 effective in
1987.
<F4>**** Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX CORPORATION No. 33-52598 effective in
1992.
<F5>***** Incorporated herein by reference to the Exhibits to the Annual Report
on Form 10-K of CFX CORPORATION for the year ended December 31, 1991.
<F6>****** Incorporated herein by reference to the Exhibits to the Annual Report
on Form 10-K of CFX CORPORATION for the year ended December 31, 1993.
</TABLE>
(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.
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 28, 1995 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> <S> <C>
/s/ RICHARD B. BAYBUTT Director March 28, 1995
Richard B. Baybutt
/s/ PETER J. BAXTER President and Director March 28, 1995
Peter J. Baxter (Principal Executive Officer)
/s/ CHRISTOPHER V. BEAN Director March 28, 1995
Christopher V. Bean
/s/ CALVIN L. FRINK Director March 28, 1995
Calvin L. Frink
/s/ EUGENE E. GAFFEY Director March 28, 1995
Eugene E. Gaffey
/s/ MARK A. GAVIN Chief Financial Officer March 28, 1995
Mark A. Gavin (Principal Financial Officer)
/s/ ELIZABETH SEARS HAGER Director March 28, 1995
Elizabeth Sears Hager
/s/ DOUGLAS S. HATFIELD, JR. Director March 28, 1995
Douglas S. Hatfield, Jr.
/s/ PHILIP A. MASON Director March 28, 1995
Philip A. Mason
/s/ EMERSON H. O'BRIEN Director March 28, 1995
Emerson H. O'Brien
/s/ WALTER R. PETERSON Director March 28, 1995
Walter R. Peterson
/s/ L. WILLIAM SLANETZ Director March 28, 1995
L. William Slanetz
/s/ GREGG R. TEWKSBURY Corporate Controller March 28, 1995
Gregg R. Tewksbury (Principal Accounting Officer)
</TABLE>
APPENDIX A
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
Information regarding interest rates and interest differentials on pages
21 and 22 inclusive of the Annual Report to Shareholders for the fiscal year
ended December 31, 1994 is incorporated herein by reference.
INVESTMENT PORTFOLIO
The following table sets forth the book value of securities available
for sale and securities held to maturity at the dates indicated. The book
value of securities available for sale in 1994 and 1993 is fair value. The
book value of securities held for sale in 1992 is the lower of aggregate cost
or fair value. The book value of debt securities held to maturity or held for
investment is amortized cost, while the book value of marketable equity
securities held for investment is the lower of aggregate cost or fair value.
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993 1992
Available Available Held
for Sale for Sale for Sale
<S> <C> <C> <C>
U. S. Treasury securities $ - $ - $30,430
Collateralized mortgage securities (CMOs) - 17,772 -
U. S. Treasury money market fund 1,056 675 13,083
Marketable equity securities 3,302 3,248 - $
$ 4,358 $21,695 $43,513
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Held to
Maturity Held for Investment
<S> <C> <C> <C>
U.S. Treasury securities and other
U.S. Government agencies $ - $ - $24,104
State and municipal 23,498 10,591 1,274
Corporate securities 5,932 7,992 12,679
Mortgage-backed securities 79,928 76,841 15,225
Asset-backed securities 173 620 -
Marketable equity securities - - 844
$109,531 $96,044 $54,126
</TABLE>
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, 1994:
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------------
After One After Five
Within But Within But Within After Ten
One Year Five Years Ten Years Years
-------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State and municipal (1) $8,326 6.23% $ 6,666 7.07% $ 8,506 7.35% $ - -%
Corporate securities (2) 500 9.18 5,302 6.74 130 7.04 - -
Mortgage-backed securities and CMO's (3) - - - - 6,018 4.84 73,910 6.55
Asset-backed securities (3) 173 4.66 - - - - - -
Total debt securities $8,999 6.37% $11,968 6.93% $14,654 6.29% $73,910 6.55%
<FN>
<F1> Yields on tax-exempt investment securities are stated on a taxable-
equivalent basis (using a 38.62% tax rate).
<F2> Includes corporate and public utility obligations. The majority of these
obligations contain put and call provisions.
<F3> Included in table based on contractual maturities.
</TABLE>
LOAN PORTFOLIO
The following table shows the Company's loan distribution at the dates
indicated:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $379,181 $312,828 $328,984 $320,615 $323,430
Construction 7,761 9,292 10,920 16,010 21,455
Commercial 82,468 76,955 56,027 56,451 55,981
Commercial, financial, and agricultural 48,020 42,835 54,788 59,318 56,323
Warehouse lines of credit to leasing companies 15,339 5,428 1,497 - -
Consumer and other 36,544 24,934 25,268 26,506 29,555
Total loans and leases $569,313 $472,272 $477,484 $478,900 $486,744
</TABLE>
The following table shows the maturity of loans (excluding residential
mortgages of 1 - 4 family residences and consumer/other loans) outstanding at
December 31, 1994. Also provided are the amounts due after one year,
classified according to sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------
After One
Within But Within After Five
One Year Five Years Years Total
(In thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 35,791 $10,667 $1,562 $ 48,020
Real estate--construction 5,357 1,403 1,001 7,761
Real estate--commercial 65,896 12,446 4,126 82,468
Total $107,044 $24,516 $6,689 $138,249
Loans maturing after one year with:
Fixed interest rates $ 9,377 $6,689
Variable interest rates 15,139 -
Total $24,516 $6,689
</TABLE>
NONACCRUAL, PAST DUE, RESTRUCTURED, AND POTENTIAL PROBLEM LOANS
The following table summarizes the Company's nonaccrual, past due, and
potential problem loans:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:(1)
Real estate (2) $5,511 $5,825 $ 3,893 $ 1,494 $1,682
Commercial, financial, and agricultural 1,007 460 2,002 1,768 1,019
Consumer and other 18 187 209 261 123
Total 6,536 6,472 6,104 3,523 2,824
Accruing loans past due 90 days or more:
Real estate (2) - - 2,916 7,892 4,410
Commercial, financial, and agricultural - - 409 777 818
Consumer and other - - 118 29 723
Total - - 3,443 8,698 5,951
Potential problem loans (3) - - 1,535 963 337
Total nonperforming loans $6,536 $6,472 $11,082 $13,184 $9,112
Percentage of total loans 1.2% 1.4% 2.3% 2.8% 1.9%
Percentage of total assets 0.9% 0.9% 1.7% 2.0% 1.5%
Total restructured loans $1,824 $ 837 $ 963 $ 963 $ 187
<FN>
<F1> When management determines that significant doubt exists as to the
collectibility of principal or interest on a loan, the loan is placed on
nonaccrual status. In addition, loans past due 90 days or more as to
principal or interest are placed on nonaccrual status except those loans
which, in management's judgment, are fully secured and in the process of
collection (through legal action, or in appropriate circumstances
through collection efforts reasonably expected to result in repayment of
the debt or in its restoration to a current status in the near future).
In the third quarter of 1993, management changed its policy regarding
nonaccrual loans, such that all loans past due 90 days or more as to
principal and interest are placed on nonaccrual status. Interest accrued
but not received on loans placed on nonaccrual status is reversed and
charged against current operations. Interest on nonaccrual loans is
recognized only 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.
<F2> Includes residential, construction and commercial real estate loans.
<F3> In addition to loans 90 days or more past due, and nonaccrual loans,
management classifies as nonperforming "potential problem loans" which
are current as to principal and interest payments under original or
restructured agreements, but are expected to have insufficient future
cash flows to service the loan in accordance with the original or
restructured provisions.
</TABLE>
Interest income that would have been recorded under original terms of
nonaccrual and restructured loans andthe interest income actually recognized
for the year ended December 31, 1994 was $549,000 and $255,000, respectively.
At December 31, 1994, the Company has $10,930,000 in commercial and
commercial real estate loans for which payments presently are current and
future cash flows appear to be sufficient to service the loan, but the
borrowers currently are experiencing financial difficulties. These loans,
while not severe enough to be classified as potential problem loans, are
subject to constant management attention and their classification is reviewed
quarterly.
While the Company considers the allowance for loan and lease losses to
be adequate at December 31, 1994, it is uncertain to what extent an economic
recovery will materialize in the region. Therefore, given this uncertainty,
the Company can give no assurance that it will not experience an increase in
nonperforming assets in the future.
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
This table summarizes the Company's loan and lease loss experience for
the years ended December 31, 1994, 1993, 1992, 1991 and 1990.
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning
of year $7,357 $7,909 $6,957 $5,122 $2,787
Allowance of acquired subsidiaries - 13 - - 393
Allowance acquired through regulatory-assisted
transactions - - 350 167 -
Loans charged-off:
Real estate (1) 598 1,810 1,499 1,174 1,227
Commercial, financial and agricultural 379 1,758 678 660 171
Consumer and other 195 336 346 413 715
Total loans charged-off 1,172 3,904 2,523 2,247 2,113
Recoveries on amounts previously charged-off:
Real estate (1) 169 209 84 35 -
Commercial, financial and agricultural 144 78 47 4 -
Consumer and other 102 82 83 46 50
Total recoveries 415 369 214 85 50
Net loans charged-off 757 3,535 2,309 2,162 2,063
Provision for loan and lease losses (2) 425 2,970 2,911 3,830 4,005
Allowance for loan and lease losses, end of year $7,025 $7,357 $7,909 $6,957 $5,122
Net loans charged-off to average loans outstanding 0.1% 0.7% 0.5% 0.4% 0.4%
<FN>
<F1> Includes residential, construction and commercial real estate loans.
<F2> The amount charged to operations and the related balance in the
allowance for loan 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.
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION
This table shows an allocation of the allowance for loan and lease
losses as of December 31, 1994, 1993, 1992, 1991 and 1990.
<TABLE>
<CAPTION>
December 31 1994 1993 1992 1991 1990
------------------ ------------------ ------------------ ------------------ -------------------
(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 $3,530 82.45% $2,963 84.50% $1,706 82.92% $1,602 82.08% $ 625 82.36%
Commercial, financial,
and agricultural 1,322 11.13 2,035 10.22 2,679 11.47 1,612 12.39 1,725 11.57
Consumer and other 300 6.42 274 5.28 306 5.61 435 5.53 511 6.07
Unallocated 1,873 2,085 3,218 3,308 2,261
$7,025 100.00% $7,357 100.00% $7,909 100.00% $6,957 100.00% $5,122 100.00%
</TABLE>
DEPOSITS
The average daily amount of deposits and of rates paid on such deposits
is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 36,656 -% $ 27,920 -% $ 24,491 -%
Regular savings deposits 113,397 2.65 116,475 2.81 110,078 3.98
NOW & money market deposits 185,115 2.23 188,733 2.61 172,984 3.72
Time deposits 210,178 4.54 225,126 4.79 263,810 5.75
Total $545,346 3.06% $558,254 3.40% $571,363 4.75%
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1994, are summarized as follows:
<TABLE>
<CAPTION>
Time Other
Certificates Time
of Deposits(1) Deposits Total
(In thousands)
<C> <C> <C> <C>
3 months or less $1,170 $ 4,459 $ 5,629
Over 3 through 6 months 737 6,396 7,133
Over 6 through 12 months 292 7,884 8,176
Over 12 months 2,482 4,724 7,206
Total $4,681 $23,463 $28,144
<FN>
<F1> Time deposits with a minimum required balance of $100,000.
</TABLE>
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 1994 1993 1992
<S> <C> <C> <C>
Return on:
Average total assets 0.68% 0.71% 0.52%
Average total shareholders' equity 6.77 6.34 4.92
Average common shareholders' equity 7.10 6.66 5.18
Average total shareholders' equity to
average total assets ratio 9.98 11.25 10.68
Common dividend payout ratio (1) 62.22 52.42 58.70
<FN>
<F1> The common dividend payout ratios for 1993 and 1992 have been restated
to reflect the Company's 5% common stock dividend declared on December
12, 1994.
</TABLE>
SHORT-TERM BORROWINGS
The following t able shows various information on short-term borrowings
front he Federal Home Loan Bank of Boston (FHLBB):
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
3.48% (fixed rate) due January, 1994 $ - $10,000
3.54% (variable rate) due January, 1994 - 10,000
3.38% (fixed rate) due March, 1994 - 26,600
5.90% (fixed rate) due January, 1995 50,000 -
6.39% (fixed rate) Due March, 1995 10,000 -
6.65% (variable rate) due daily 32,000 -
$92,000 $46,600
</TABLE>
CFX BANK has an available line of credit with the FHLBB at an interest
rate that adjusts daily. Borrowings under the line are limited to 2% of CFX
BANK's total assets. All borrowings from the FHLBB are secured by a blanket
lien on certain qualified collateral, defined principally as 90% of the fair
value of U.S. Government and federal agency obligations and 75% of the
carrying value of first mortgage loans on owner-occupied residential property.
The maximum amount of short-term advances from the FHLBB at any month-end
during the twelve months ended December 31, 1994 and 1993 were $114,216,000
and $104,614,000, respectively. The approximate average short-term advances
from FHLBB for the twelve months ending December 31, 1994 and 1993 were
$94,759,000 and $72,620,000, respectively with weighted average interest costs
of 4.57% and 3.10%, respectively. There were no advances from the FHLBB by
CFX BANK during 1992.
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 30th day of March, 1994 between CHESHIRE
FINANCIAL CORPORATION, a New Hampshire corporation (hereinafter Company") and
William J. McIver, residing at Henniker, NH.(hereinafter "Executive").
WHEREAS the Company wishes to assure the continued availability of the
executive's services and to create an environment which will promote the
Executive's giving impartial and objective advice in any circumstances
resulting from the possibility of Change of Control of the Company (as herein
defined), and
WHEREAS the Company and the Executive wish to provide the Executive with
financial protection in the event significant changes in the Executive's
employment status occur following a Change of Control of the Company (as
herein defined);
NOW THEREFORE, the Company and the Executive, in consideration of the
terms and conditions set forth herein and other valuable consideration,
receipt of which is hereby acknowledged, mutually covenant and agree as
follows:
1. Term.
The term of this Agreement shall commence on the date hereof and
terminate on the date three years from the date hereof unless the Executive's
employment is sooner terminated as provided in Section 13 hereof (the "Term").
On each December 31st thereafter, the Term shall automatically be extended for
an additional calendar year unless either party gives written notice to the
other, by no later than the preceding November 30th, that he or it does not
concur in such extension.
2. Payments Upon Change of Control and Termination Event.
The Company shall make payments to the Executive as provided for in
paragraph 4 hereof upon the occurrence of both a Change of Control of the
Company and a Termination Event, as such terms are defined in paragraph 3
hereof.
3. Definitions.
(a) "Base Amount" shall mean an amount equal to the average annual
compensation payable by the Company, or any subsidiary in which the Company
owns more than fifty (50) percent of the outstanding shares, to the Executive
and includable by the Executive in gross income for the most recent five (5)
taxable years, or such shorter period as the Executive shall have been
employed by the Company, ending before the date on which the Change of Control
occurred.
(b) A "Change of Control" shall be deemed to have occurred if any of
the following have occurred:
(i) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity
or any group of persons acting in concert becomes the beneficial owner,
as that concept is defined in Rule 13d-3 promulgated by the Securities
Exchange Commission under the Securities Exchange Act of 1934, as the
result of any one or more securities transactions (including gifts and
stock repurchases but excluding transactions described in subdivision
(ii) following) of securities of the Company possessing fifty-one
percent (51%) or more of the voting power for the election of directors
of the Company;
(ii) there shall be consummated any consolidation, merger or
stock-for-stock exchange involving securities of the Company in which
the holders of voting securities of the Company immediately prior to
such consummation own, as a group, immediately after such consummation,
voting securities of the Company (or if the Company does not survive
such transaction, voting securities of the corporation surviving such
transaction) having less than fifty percent (50%) of the total voting
power in an election of directors of the Company (or such other
surviving corporation), excluding securities received by any members of
such group which represent disproportionate percentage increases in
their shareholdings vis-a-vis the other members of such group;
(iii) "approved directors" shall constitute less than a
majority of the entire Board of Directors of the Company, with
"approved directors" defined to mean the members of the Board of
Directors of the Company as of the date of this Agreement and any
subsequently elected members of the Board of Directors of the Company
who shall be nominated or approved by a majority of the approved
directors on the Board of Directors of the Company prior to such
election; or
(iv) there shall be consummated any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions,
excluding any transaction described in subdivision (ii) above), of all,
or substantially all, of the assets of the Company or its subsidiaries
to a party which is not controlled by or under common control with the
Company.
(c) A "Termination Event" shall be deemed to have occurred if, within
the thirty-six month period following a Change of Control, the Executive
experiences the loss of his position by reason of discharge or demotion, for
other than termination for good cause, or the Executive's voluntary
termination following the substantial withholding, substantial adverse
alteration or substantial reduction of responsibility, authority, or
compensation (including any compensation or benefit plan in which the
Executive participates or substitute plans adopted prior to the Change of
Control) to which the Executive was charged or empowered with or entitled to
immediately prior to a Change of Control of the Company or to which he would
normally be charged or empowered with or entitled to from time to time by
reason of his office, for other than good cause.
(d) Termination for Good Cause.
"Termination for good cause" means termination:
(i) based on the willful and continued failure by the Executive
to perform his duties for the Company or a subsidiary (other than such
failure resulting from the Executive's incapacity due to physical or
mental illness), after a written demand for performance is delivered to
the Executive by the Board of Directors of the Company which
specifically identifies the manner in which the Board believes the
Executive has not performed his duties; an act or acts of dishonesty
taken by the Executive; or an act or acts intended to result in his
personal enrichment at the expense of the Company or a subsidiary; or an
act or acts of willful misconduct which are materially injurious to the
Company. Termination shall be by written notice to the Executive
identifying the cause; or
(ii) If the Executive shall have been absent from the full-
time performance of his duties with the Company for six consecutive
months as the result of the Executive's incapacity due to physical or
mental illness, and the Executive shall not have returned to full-time
performance of his duties within thirty days after written notice of
proposed termination, the Executive's employment may be terminated by
the Company on or after the expiration of such thirty day period for
disability. Termination shall be by written notice to the Executive.
Termination of the Executive's employment based on retirement shall mean
termination in accordance with the Company's generally applicable
retirement policy or with any retirement arrangement established with
the Executive's consent.
4. Cash Payments.
Upon the occurrence of both a Change of Control of the Company and a
Termination Event, the Company shall, during the period commencing on the date
of the Termination Event and over a period of _12 months (the "Pay-Out
Period"), make equal monthly payments to the Executive in an amount such that
the present value of all such payments, determined as of the date of the
Termination Event, equals 1.00 times the Base Amount.
5. Advance Payments for Financial Hardship.
If at any time during the Pay-Out Period the Company's Board of
Directors in its sole discretion shall concur, upon application of the
Executive, the Company shall make available to the Executive, in one (l) lump
sum, an amount up to but not greater than the present value of all monthly
payments remaining to be paid to him in the Pay-Out Period, calculated with
the Federal Funds rate in effect as of the date of such Board concurrence. If
(a) the lump sum amount thus made available is less than (b) the present value
of all such remaining monthly payments, the Company shall continue to pay to
the Executive monthly payments for the duration of the Pay-Out Period, but
from such date forward such monthly payments will be in a reduced amount such
that the present value of such payments will equal the difference between (b)
and (a), above. The Executive may elect to waive any or all payments due him
under this subparagraph.
6. Death of Executive.
If the Executive dies before receiving all payments payable to him under
this Agreement, the Company shall pay to the Executive's spouse, or if the
Executive leaves no spouse, to the estate of the Executive, one (l) lump sum
payment in an amount equal to the present value of all such remaining unpaid
payments, determined as of the date of death of the Executive.
7. Reimbursement of Expenses.
In the event a Change of Control of the Company and a Termination Event
occur and any action, suit or proceeding is brought by the Company or the
Executive for the enforcement, performance or construction of this Agreement,
the Company agrees to reimburse the Executive for all costs and expenses
reasonably incurred by him in such action, suit or proceeding, including
reasonable attorneys' and accountants' fees and expenses, unless the Executive
shall have been substantially unsuccessful, on the merits or otherwise, in
such action, suit or proceeding.
8. No Duty to Seek Other Employment.
Amounts payable to the Executive under this Agreement shall not be
reduced by the amount of any compensation received by the Executive from any
other employer or source during the Pay-Out Period, and the Executive shall
not be under any obligation to seek other employment or gainful pursuit during
such Pay-Out Period as a result of this Agreement.
9. Non-Competition, Future Services and Compensation.
(a) During such period as the Executive is receiving cash payments
under this Agreement, the Executive agrees:
(i) that he shall not, without the prior approval of the Board
of Directors of the Company, certified to him by the Secretary or Acting
Secretary of the Company, become an officer, employee, agent, partner,
or director of any other business in substantial competition with the
Company, its subsidiaries or any other company or bank affiliated with
the Company, including any branch or office of any of the foregoing.
Such restriction shall apply to any such other business doing business
in any county in the State of New Hampshire in which the Company, its
subsidiaries or any such other company or bank is then conducting any
material business or into which, to the knowledge of the Executive at
the time of such termination, any such entity has immediate plans to
expand its activities in material respects; and
(ii) to provide such consulting services as may be requested by
the Company.
(b) As compensation to the Executive for his promises in (a) of this
paragraph, the Company agrees to maintain, during such period, the Executive's
eligibility for and participation in any health and life insurance plans, in
which the Executive was eligible to participate prior to the Termination
Event.
10. Reduction of Payments.
In the event any of the payments made under this Agreement would be
considered an "excess parachute payment" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended, then there shall be a reduction in
the amount otherwise payable under this Agreement such that all payments are
deductible by the Company.
11. Withholding.
Distribution of any payments under this Agreement shall be reduced for
the amount required to be withheld pursuant to any law or regulation with
respect to taxes or similar provisions.
12. Payment of Compensation to Termination Date.
In addition to any other payments payable to the Executive hereunder,
the Company shall pay the Executive full compensation and all other amounts
and benefits to which the Executive is entitled through the termination of his
employment.
13. No Right to Continued Employment.
This Agreement shall not confer upon the Executive any right with
respect to continuance of employment by the Company or any subsidiary, nor
shall it interfere in any way with the right of his employer to terminate his
employment at any time. No payments hereunder shall be required except upon
the occurrence of both a Change of Control of the Company and a Termination
Event as set forth in Section 3 herein. Thus, except as specifically provided
in Section 2 herein, no payments hereunder shall be made on account of
termination of the Executive's employment (i) upon the Executive's death,
disability or retirement, (ii) by the Company with or without cause or (iii)
upon the Executive's voluntary termination.
14. Waiver of Breach.
Waiver by any party of a breach of any provision of this Agreement shall
not operate as or be construed as a waiver by such party of any subsequent
breach hereof.
15. Invalidity.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision, which
shall remain in full force and effect.
16. Entire Agreement; Written Modification; Termination.
This Agreement contains the entire agreement between the parties
concerning the matters covered hereby. No modification, amendment or waiver
of any provision hereof shall be effective unless in writing specifically
referring hereto and signed by the party against whom such provision as
modified or amended or such waiver is sought to be enforced. This Agreement
shall terminate as of the time the Company makes the final payment which it
may be obligated to pay hereunder or provides the final benefit which it may
be obligated to provide hereunder.
17. Counterparts.
This Agreement may be made and executed in counterparts, each of which
may be considered an original for all purposes.
18. Governing Law.
This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of New Hampshire.
19. Authorization.
The Company represents and warrants that the execution of this Agreement
has been duly authorized by resolution of the Board of Directors of the
Company.
IN WITNESS WHEREOF, the undersigned parties have executed or caused to
be executed this Agreement as of the day and year first above written.
CHESHIRE FINANCIAL CORPORATION
By:
Peter J. Baxter its duly
authorized President and CEO .
"EXECUTIVE"
William J. McIver
CONSENT TO ASSIGNMENT
THE UNDERSIGNED, being the current landlord (the "Landlord") under a
certain Lease dated as of November 9, 1987, between Indian Head National Bank
of Manchester, as tenant, and Landlord's predecessor-in-interest, Philip C.
Haughey and Andrew J. McCarthy, as successor Trustees of The St. John Realty
Trust under a Declaration of Trust dated September 28, 1964, leasing a certain
parcel of real estate, with the building thereon, situated in the Town of
Gildford, County of Belknap, State of New Hampshire, a copy of said lease
being attached hereto as Exhibit A (the "Lease"), does hereby consent to the
current tenant under the Lease, Fleet Bank - NH (the "Assignor"), assigning
all of its right, title, and interest in and to the Lease as tenant thereunder
to CFX Bank with an address of P.O. Box 748, Keene, New Hampshire 03431 (the
"Assignee"), and accepts Assignee as the tenant under the Lease; provided that
Assignor shall remain jointly and severally liable with Assignee for the
covenants and agreements of the tenant under the Lease. The Landlord
acknowledges and represents to the Assignee that the Lease is in full force
and effect and that no circumstance, condition or event exists which
constitutes or would constitute with the passage of time and/or the giving of
any required notice, a default under the terms of the Lease. The Landlord
further agrees that any and all notices required to be given to the tenant
under the Lease shall, from and after the effective date of the assignment
hereinbelow, be given to the Assignee at the Assignee's address of:
CFX Bank
102-104 Main Street
P.O. Box 746
Keene, NH 03431
GERALD REALTY LIMITED PARTNERSHIP
/s/ SALLY J. DUNN By: /s/ PHILIP C. HAUGHEY
Witness Philip C. Haughey,
General Partner
Dated: October 7, 1994
ASSIGNMENT OF LEASE
THE UNDERSIGNED, being the tenant under the Lease, does hereby assign
all of its right, title and interest as tenant under the Lease to the Assignee
and all of its right, title, and interest, if any, to the tenant's building
under the Lease. Notwithstanding said assignment by the Assignor, the
Assignor shall continue to remain liable for the covenants and agreements of
the tenant under the Lease, said liability to be joint and several with the
Assignee. The Assignee represents and warrants to the Assignor that the Lease
is in full force and effect, that the Assignor has made all payments and
performed all other obligations of the tenant thereunder up to and including
the effective date of this assignment, and that no circumstance, condition or
event exists which constitutes a default or which, with the passage of time
and/or giving of any required notice would constitute a default under the
terms of the Lease. Notwithstanding the joint and several nature of the
liability provided for above, the Assignor hereby agrees to indemnify and hold
harmless the Assignee from and against all liabilities and obligations which
the Assignee may incur, directly or indirectly, under or in connection with
the Lease and the obligations of the tenant hereunder, to the extent the
circumstances and/or events giving rise to such liabilities and obligations
occurred on or before the effective date of this assignment. Assignor agrees
that rent and other charges paid or payable under the Lease, including real
estate taxes, shall be prorated between Assignee and Assignor as of the
effective date hereof. This assignment shall be effective as of the latest
date of execution of the consent hereinabove, this assignment, and the
acceptance herein below.
FLEET BANK - NH
/s/ DAVID N. TRAGER By: /s/ MICHAEL WHITNEY
Witness [Signature]
Michael Whitney, President
[Print Name and Title]
Dated: September 30, 1994
ACCEPTANCE OF ASSIGNMENT
THE UNDERSIGNED, does hereby accept the foregoing assignment by the
Assignor of all of its right, title and interest as tenant under the Lease and
hereby assumes all liabilities and obligations of the Assignor under the
Lease. The Assignee acknowledges and agrees that notwithstanding said
assumption by Assignee, under the provisions of the Lease and the above
consent and assignment, the Assignor remains liable to Landlord, jointly and
severally with Assignee, for the covenants and agreements of the tenant under
the Lease. Notwithstanding said joint and several liability of Assignor and
Assignee to Landlord, Assignee shall, and hereby agrees to, indemnify and hold
harmless the Assignor from and against all liabilities and obligations which
Assignor may incur, directly or indirectly, under or in connection with the
Lease and the obligations of the tenant thereunder to the extent the
circumstances and/or events giving rise to such liabilities and obligations
occurred from and after the effective date of the assignment hereinabove.
Assignee agrees that rent and other charges paid and payable under the Lease,
including real estate taxes, shall be prorated between Assignee and Assignor
as of the effective date of the assignment herein above.
CFX BANK
__________________________ By: /s/ Paul D. Speiss
Witness [Signature]
Paul D. Speiss, Executive Vice President
[Print Name and Title]
Dated:_____________, ___, 1994
COMMONWEALTH OF MASSACHUSETTS
Suffolk, SS.
On this, the 7th, day of October, 1994, before me, the undersigned
officer, personally appeared Philip C. Haughey, who acknowledged himself to be
the General Partner of the Gerald Realty Limited Partnership, and that he, as
such General Partner, being authorized so to do, executed the foregoing
instrument for the purposes therein contained on behalf of the limited
partnership.
Before me,
/s/ SALLY J. DUNN
Justice of the Peace/Notary Public
STATE OF NEW HAMPSHIRE
Hillsborough, SS.
On this, the 30th, day of September, 1994, before me, the undersigned
officer, personally appeared Michael C. Whitney, who acknowledged himself to
be a Vice President of Fleet Bank - NH, a bank, and that he, as such officer,
being authorized so to do, executed the foregoing instrument for the purposes
therein contained on behalf of the bank.
Before me,
/s/ JUDITH K. MACKAY
Justice of the Peace/Notary Public
STATE OF NEW HAMPSHIRE
Cheshire, SS.
On this, the 27th, day of September, 1994, before me, the undersigned
officer, personally appeared Paul D. Speiss, who acknowledged himself to be a
Vice President of CFX Bank, a bank, and that he, as such officer, being
authorized so to do, executed the foregoing instrument for the purposes
therein contained on behalf of the bank.
Before me,
/s/ JESSICA B. JORDAN
Justice of the Peace/Notary Public
STATE OF NEW HAMPSHIRE
Cheshire County , SS.
On this, the 27th day of September , 1994, before me, the undersigned
officer, personally appeared Paul D. Spiess , who acknowledged himself to be
a Vice President of CFX Bank a bank, and that he, as such officer, being
authorized so to do, executed the foregoing instrument for the purposes
therein contained on behalf of the bank.
Before me,
/s/ JESSICA B. JORDAN
Justice of the Peace/Notary Public
EXHIBIT A
LEASE
LANDLORD: Philip C. Haughey and Andrew J. McCarthy, as successor Trustees
of The St. John Realty Trust under a Declaration of Trust dated
September 28, 1964, and recorded with the Belknap County Registry
of Deeds in Book 452 at Page 117.
TENANT: Indian Head National Bank, a national banking association.
DATE: November 9, 1987
1. Premises
Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term hereinafter set forth, upon and subject to the
agreements and conditions of this lease, the premises described in Exhibit A
attached hereto.
2. Term
A. The term of this lease shall be the period of twenty (20) years and
a fraction of a month, commencing upon the commencement date set forth in
Article 7 hereof, and terminating upon the twentieth (20th) anniversary of the
last day of the month during which the term of this lease commences; provided,
however, that if the term of this lease shall commence upon the first day of a
calendar month, then the term of this lease shall be the period of exactly
twenty (20) years.
B. Tenant shall have the right, at its election, to extend the
original term of this lease for an additional period of five (5) years
commencing upon the expiration of the original term, provided that Tenant
shall give Landlord notice of the exercise of its election at least six (6)
months prior to the expiration of the original term and provided further that
Tenant shall not be in default at the time of giving of such notice in the
performance or observance of any of the terms and agreements in this lease
contained on the part of Tenant to be performed or observed. The expression
"the original term" means the period of twenty (20) years referred to in
Section A. of this Article 2. Prior to the exercise by Tenant of said
election to extend the original term, the expression "the term of this lease"
or any equivalent expression shall mean the original term; after the exercise
by Tenant of the aforesaid election, the expression "the term of this lease"
or any equivalent expression shall mean the original term as extended. Except
as expressly otherwise provided in this lease, all the agreements and
conditions in this lease contained shall apply to the additional period to
which the original term shall be extended as aforesaid. If Tenant shall give
notice of the exercise of the election in the manner and within the time
provided aforesaid, the term shall be extended upon the giving of the notice
without the requirement of any action on the part of Landlord.
3. Minimum Rent
Tenant agrees to pay Landlord minimum rent at the rates set forth below,
in each case in equal monthly installments of one-twelfth thereof, which
minimum rent shall be paid monthly in advance on the first day of each and
every calendar month during the term hereof. Rent for any fraction of a month
at the commencement or expiration of the term of this lease shall be prorated.
All payments of rent (minimum and additional) shall be made payable to
Landlord and shall be sent to Landlord at Landlord's address specified in
Article 27 or such other person or address as Landlord shall from time to time
designate by notice to Tenant. The minimum rent payable hereunder during each
lease year (as defined in Article 4 hereof) shall be paid at the following
annual rates:
During the first five lease years of the original term -- $25,000.00 per
year; and
During each five-year portion of the term of this lease after the first
five lease years -- an amount equal to the greater of (a) one hundred
ten percent (110%) of the minimum rent payable during the immediately
preceding five-year period, or (b) "the Cost of Living Rent" (as defined
in Article 4 hereof).
For purposes of this lease, the first lease year shall be the period of twelve
(12) and a fraction months commencing upon the commencement date of the term
of this lease and terminating on the last day of a month twelve (12) and a
fraction months thereafter, except, however, if the term of this lease shall
commence on the first day of a month, then the first lease year shall be
exactly twelve months. The second and succeeding lease years shall be periods
of exactly twelve months following successively thereafter.
4. Cost of Living Rent
For purposes of this lease "the Cost of Living Rent" for any five-year
period shall be equal to the annual minimum rent payable during the
immediately preceding five-year period increased by fifty percent (50%) of the
percentage by which the "Consumer Price Index For All Urban Consumers, U.S.
City Average, All Items", as published by the United States Bureau of Labor
Statistics) hereinafter referred to as "the Index") has increased between the
first month of said preceding five-year period and the first month of the
five-year period in question. (In the event that the Index is not then in
existence, the parties shall use such equivalent Price Index as is then
published by any governmental agency or such non-governmental agency as may
then be publishing an equivalent Price Index, in either case, such Price Index
to be adjusted to the Index. If the basis upon which the Index is computed
shall change, then a proper adjustment shall be made so that the results
obtained shall be (as nearly as is possible) equivalent to those which would
have been obtained had said basis not been changed). Until the dollar amount
of the minimum rent for an additional period shall be determined, Tenant shall
pay minimum rent at one hundred ten percent (110%) of the rate provided for
immediately prior to such five-year period, and when the minimum rent is so
determined, Tenant shall pay to Landlord immediately any excess rent due for
the portion of such five-year period which may theretofore have expired.
5. Real Estate Taxes
A. Tenant shall pay to Landlord, as additional rent, in each tax year
during the term of this lease the amount of the real estate taxes upon the
demised premises for such tax year. The real estate taxes upon the demised
premises shall for purposes of this lease be deemed to be an amount equal to
the sum of:
(i) with respect to land and the common areas of the Shopping
Center, that proportion of the real estate taxes on all land and
common areas within the Shopping Center which the ground area of
the demised premises bears to the ground area under all the
buildings of the Shopping Center; and
(ii) with respect to buildings, that proportion of the real
estate taxes on all buildings within the Shopping Center with
which the building upon the demised premises shall be jointly
assessed which twice the ground floor area in the building upon
the demised premises bears to the ground floor area in all the
buildings so jointly assessed; or if the building upon the
demised premises is separately assessed according to the real
estate tax bill, the assessors' records or a written assessor's
certificate, the amount of real estate taxes determined on
the basis of such separate assessment. Landlord agrees to use
reasonable efforts to obtain such separate assessment.
If upon the assessment day for real estate taxes for any tax year any
construction shall be incomplete, an appropriate adjustment shall be made to
carry out the intent of this Article. Real estate taxes for the years during
which the term commences and terminates shall be prorated and adjusted.
Notwithstanding anything to the contrary contained herein, if land shall
hereafter be added to the Shopping Center by landlord, Tenant shall not pay
any portion of the real estate taxes upon said land (or upon any common areas
constructed thereon), unless and until such time as one or more buildings
intended for occupancy shall be erected upon said land.
B. The real estate taxes for any tax year shall mean such amounts as
shall be finally determined to be the real estate taxes payable for said tax
year; that is, the real estate taxes assessed for said tax year less the net
amount of any abatements, refunds or rebates made thereof. For the purpose of
determining payments due from Tenant to Landlord in accordance with the
provisions of this Article 5:
(i) The real estate taxes for any tax year shall be deemed to be
the real estate taxes assessed for said year until such time as
an abatement, refund or rebate shall be made thereof; and
(ii) if any abatement, refund or rebate shall be made for any
tax year, an appropriate adjustment shall be made in the amount
paid by Tenant to Landlord on account of real estate taxes,
after first deducting all costs of securing the same.
Throughout the term of this lease, the expression "real estate taxes" shall
include real estate taxes of the sort now levied upon the Shopping Center and
betterments assessments which may be charged, assessed or imposed upon the
Shopping Center; and during so much of the term of this lease as shall be
after the tenth (10th) anniversary of the date on which the term shall
commence, the expression "real estate taxes" shall also include taxes upon
gross rents and other taxes and charges which may be charged, assessed or
imposed upon the Shopping Center; provided, however, that in no event shall
business profits taxes or any other currently existent non-real-estate taxes
be included within the expression "real estate taxes". Tenant shall pay to
Landlord on the first day of every month in advance a sum equal to the amount
reasonably estimated by Landlord for such purpose at or about the commencement
of the term hereof, such payments to represent payments on account of Tenant's
obligations under this Article. After the tax year in which the building upon
the demised premises shall first be assessed as a completed improvement, said
monthly payment shall be adjusted for each tax years so that it shall be equal
to one-twelfth of the real estate taxes upon the demised premises for the
prior tax year. If for the tax year in question the real estate taxes upon
the demised premises shall exceed or be less than the aggregate of said
payments, an appropriate adjustment shall be made between the parties. If
real estate taxes shall be payable in installments to the taxing authority or
to the holder of the first mortgage upon the Shopping Center, or if more than
one taxing authority shall exist, appropriate modifications shall be made in
the foregoing language to carry out the intent of Landlord and Tenant.
Appropriate adjustments shall be made in said monthly payment if the real
estate taxes upon the demised premises for the current tax year shall be known
prior to the end of said tax year, all to the end that as each payment of real
estate taxes shall become payable Landlord shall have received from Tenant
payments sufficient in amount to pay Tenant's share of the real estate tax
payment then payable by Landlord. Furthermore, an equitable adjustment shall
be made in the event of any change in method or system of taxation from that
which is now applicable, including without limitation any change in the dates
and periods for which such taxes are levied.
6. Old Lease
Reference is made to that certain Indenture dated May 31, 1967, between
Landlord, as landlord, and The Lakeport National Bank, as tenant, with respect
to the demised premises. Tenant has succeeded to the tenant's interest in
said Indenture. Landlord and Tenant agree that upon the commencement of the
term of this lease, said Indenture dated May 31, 1967, shall terminate and
expire with the same force and effect as though said date had been set forth
therein for the expiration of the term thereof.
7. Construction
A. Tenant agrees to construct certain improvements upon the demised
premises in accordance with the provisions of this Article.
B. Landlord and Tenant acknowledge that it will be necessary for
Tenant to obtain certain governmental approvals in order that the improvements
herein contemplated may be constructed upon the demised premises. Tenant
agrees to use its best efforts to obtain such approvals at Tenant's sole cost
and expense. Tenant agrees to give prompt notice to Landlord of Tenant's
obtaining such approvals. In the event that Tenant shall be unable to obtain
the same on or before the expiration of six (6) months after the date of this
lease, unless Landlord and Tenant shall agree in writing to extend such date,
this lease shall become null and void and of no further force and effect. In
such event, neither Landlord nor Tenant shall have any claim against the other
on account hereof or on account of the termination hereof.
C. Tenant acknowledges that it has inspected the demised premises, and
it is understood and agreed that Tenant accepts the demised premises in their
existing physical condition, and Landlord shall be under no obligation to make
any repairs, alterations or improvements to the demised premises prior to or
at the commencement of the term hereof or at any time thereafter, except as
herein specifically provided otherwise.
D. Tenant presently occupies the building upon the demised premises
pursuant to the Indenture described in Article 6 hereof. Said building, as
the same may be modified pursuant hereto is herein sometimes referred to as
"Tenant's building". The improvements contemplated herein shall be an
expansion of Tenant's building (which may include the demolition, in whole or
in part, of the existing building), including the addition thereto of a drive-
up window and canopies, all of which shall be located entirely upon the
demised premises and shall be performed pursuant to plans and specifications
prepared by Tenant and approved in writing by Landlord. Said plans shall also
indicate any and all changes to be made by Tenant in the parking and/or
traffic flow pattern upon the demised premises, as well as any and all
relocations of parking lot lights. It is expressly understood and agreed that
no part of Tenant's building or any other improvement erected upon the demised
premises shall extend higher than twenty (20) feet above the ground, Tenant's
building shall not contain more than two thousand five hundred sixty (2,560)
square feet of floor area, and Tenant's building and the new drive-through and
canopy thereof shall be located as shown on Exhibit B attached hereto and made
a part hereof. Furthermore, no free-standing sign or pylon sign may be
erected in the Shopping Center by Tenant without the prior written consent of
Landlord.
Furthermore, in conjunction with the construction of Tenant's building
Tenant shall also, at its sole cost and expense, re-stripe and landscape (as
shown on Exhibit B) that portion of the parking areas of the Shopping Center
shown on said plan. Notwithstanding that Tenant shall re-stripe said portion
of the parking areas of the Shopping Center, it is expressly understood and
agreed that Tenant shall not have the exclusive use of said parking areas,
said parking areas being part of the common areas of the Shopping Center.
Thereafter, said portion of the parking area of the Shopping Center shall not
be changed by Landlord or Tenant unless required by law.
Tenant agrees that such construction will be done in a good and
workmanlike manner and in conformity with all laws, ordinances and regulations
of all public authorities and insurance inspection or rating bureaus having
jurisdiction, and that materials of first-class quality shall be employed
therein. Tenant agrees that it will procure all necessary permits before
commencing such construction. Landlord agrees it will cooperate with Tenant
in obtaining such permits. Tenant agrees to pay promptly when due the entire
cost of such construction so that the demised premises shall at all times be
free of liens for labor or materials. Tenant agrees to save and indemnify
Landlord from any and all injury, loss, claims or damage to any person or
property occasioned by or arising out of such construction. Such construction
will be done or carried on in such manner as to avoid or prevent any labor
disputes with those engaged in any construction elsewhere upon the Shopping
Center. Said construction shall be performed so as not to interfere with the
conduct of business operations upon the balance of the Shopping Center.
Tenant will store its construction materials in a protected location approved
by Landlord and will keep the same neat and orderly. Tenant will deliver
certificates of public liability insurance and builder's risk insurance to
Landlord not less than fifteen (15) days prior to the commencement of
construction. It is expressly understood that all such construction shall
belong to Landlord and may not be removed by Tenant.
Subject to applicable law Landlord agrees that Tenant may erect a
temporary trailer in the vicinity of the demised premises for a period of time
not to extend beyond June 1, 1988, which trailer shall be used solely for the
provision of banking services to Tenant's customers during the course of
construction.
E. If this lease shall not have terminated pursuant to Section B.
above, the term of this lease shall commence upon the day upon which Tenant
shall receive the last of the governmental approvals described in said Section
B.
8. Common Areas
A. "The common areas of the Shopping Center" shall be the parking
areas, driveways, walks, entrances, exits and service roads from time to time
existing in the Shopping Center. Tenant agrees that it will keep the
sidewalks and drive-up lanes within the area outlined in orange on Exhibit B
reasonably free of snow, ice, refuse and obstructions, and Tenant shall
maintain in a neat and attractive condition all landscaping shown on Exhibit
B. During the term of this lease, Tenant shall reimburse Landlord, as
additional rent, for Tenant's prorata share (determined as hereinafter
provided) or all reasonable costs and expenses paid or incurred by or on
behalf of Landlord in removing snow, ice and refuse from, operating, managing,
equipping, lighting, repairing, replacing and maintaining the common areas,
the drainage, lighting and utilities systems and the landscaping and gardening
(if any) of the Shopping Center. Such costs shall likewise include (but shall
not be limited to): premiums for liability, workmen's compensation and other
insurance; wages, unemployment taxes and assessments for non-supervisory
personnel; fees for required licenses and permits; supplies; reasonable
depreciation of equipment used in the operation of the common areas (but there
shall be excluded costs of equipment properly chargeable to capital accounts
and depreciation of the original cost of constructing said common areas); and
a supervisory fee equal to fifteen percent (15%) of the costs and expenses set
forth in this sentence and in the preceding sentence. Tenant's prorata share
of said costs and expenses shall be determined by multiplying said costs and
expenses by a fraction the numerator of which is the ground floor area in the
building upon the demised premises and the denominator of which is the ground
floor area in all the buildings of the Shopping Center from time to time.
Notwithstanding anything to the contrary contained in this paragraph, Tenant
shall not be required to reimburse Landlord for any portion of any costs or
expenses with respect to common areas located upon land which shall hereafter
be added by Landlord to the Shopping Center unless and until such time as one
or more buildings shall be erected upon said land.
Tenant shall pay to Landlord on the first day of every month in advance
a sum equal to the amount reasonably estimated by Landlord for such purpose at
or about the commencement of the term hereof, such payments to represent
payments on account of Tenant's obligations under this Article. If for the
calendar year in question Tenant's prorata share of said costs and expenses
shall exceed or be less than the aggregate of said payments, an appropriate
adjustment shall be made upon the determination of the amount of said costs
and expenses for said calendar year and the submission to Tenant of a
statement setting forth Tenant's prorata share thereof. The initial monthly
payment referred to above shall be replaced after the end of the first full
calendar year of the term, and after each succeeding calendar year, by a
monthly payment equal to one-twelfth of Tenant's actual prorata share of said
costs and expenses for the immediately preceding calendar year. If there
shall be any partial calendar year at the commencement or termination of the
term hereof, the provisions of this Section shall apply pro tanto. At
Landlord's election, however, Landlord may submit quarterly statements with
respect to said costs and expenses (rather than annual statements), and in
such case any deficiency in the payments made by Tenant for any quarter shall
be paid to Landlord forthwith upon Tenant's receipt of the quarterly statement
in question, but all other adjustments shall be made on an annual basis as set
forth above.
B. Tenant, subtenants and concessionaires of Tenant, and employees,
agents, contractors and customers of Tenant or its subtenants or
concessionaires shall have the right to use, in common with and with due
regard for the rights of others entitled to use the same, the common areas of
the Shopping Center for all such purposes as said various common areas shall
be designated by Landlord, but only in connection with business upon the
Shopping Center. Tenant will park its vehicles and will cause its subtenants
and concessionaires and the employees, agents and contractors of Tenant or its
subtenants or concessionaires to park their vehicles only in such areas as
shall from time to time be designated by Landlord as "employee parking areas".
Tenant will, on request, furnish Landlord with automobile license numbers
assigned to automobiles belonging to or used by Tenant or such other persons.
Tenant will cause to be affixed to such automobiles, employee identification
stickers which Landlord may furnish. Landlord reserves the right at any time
and from time to time to change the location or size of any of the common
areas.
9. Use of Premises
A. Tenant agrees that during the term of this lease the demised
premises will be used and occupied for the following purposes and for no other
purpose without the written consent of Landlord: a banking office. It is
expressly understood and agreed, however, that neither the demised premises
nor any part thereof shall be used for any of the following purposes: (a) for
the operation of a drug store; (b) for the operation of a so-called vitamin
and patent medicine and beauty aid store; (c) for any sort of laundry and/or
dry cleaning operation; (d) for the operation of a theater; (e) for the sale
of gasoline, oil and/or other allied products of a gasoline service station;
(f) for the sale of wearing apparel (including without limitation shoes and
other footwear); (g) for any industrial and/or warehouse purposes; (h) for the
sale of any food or beverages (including without limitation alcoholic
beverages) intended for consumption on or off the premises; (i) for the
operation of a funeral parlor, bowling alley, billiard parlor, automobile
showroom, auto service center, car wash, amusement gallery and/or office space
(except for office space within a bank); or (j) for any combination of the
foregoing.
B. Tenant agrees that during the term of this lease: one hundred
percent of the demised premises will be used for the operation of such
business; the demised premises will be kept open for business at least during
such hours as are customarily kept by branch banking offices in the
Gilford/Laconia area; only such goods shall be warehoused and/or stored in the
demised premises as are intended to be consumed in the operation of the
business of the demised premises; no auction, fire, bankruptcy or going out of
business sale or similar sales may be conducted or be advertised as being
conducted within the demised premises; the common areas of the Shopping Center
(including any sidewalks adjacent to the demised premises) shall not be used
for business purposes; the windows of the demised premises shall be kept
electrically lighted at least during such periods of time as the demised
premises are open for business; Tenant and Tenant's employees and agents shall
not solicit business in the common areas, nor shall they distribute any
handbills or other advertising matter on automobiles parked, or to
pedestrians, in the common areas; the plumbing facilities shall not be used
for any other purpose than for the discharge of ordinary sanitary waste, and
no chemicals or foreign substance of any kind which could harm said facilities
shall be introduced therein, and the expense of any breakage, stoppage or
damage resulting from a violation of this provision shall be borne by Tenant;
no item will be displayed outside the building upon the demised premises; no
nuisance will be permitted on or about the demised premises; nothing shall be
done upon or about the demised premises which shall be unlawful, improper,
noisy or offensive, or contrary to any law, ordinance, regulation or
requirement of any public authority or insurance inspection or rating bureau
or similar organization having jurisdiction, or which may be injurious to or
adversely affect the quality or tone of the demised premises or the Shopping
Center; the demised premises will not be overloaded, damaged or defaced;
Tenant will not permit the emission of any objectionable noise or odor from
the demised premises; Tenant will procure all licenses and permits which may
be required for any use made of the demised premises; Tenant will keep the
demised premises free of pests, rodents, and other vermin; all property will
be delivered to and/or removed from the building upon the demised premises,
and all waste and refuse will be removed from the building upon the demised
premises in accordance with rules and regulations therefor as shall be
prescribed by Landlord; the demised premises will be kept attractive in
appearance and appealing to customers. Tenant will not do, or suffer to be
done, or keep, or suffer to be kept, or omit to do anything in, upon or about
the demised premises which may prevent the obtaining of any insurance on the
demised premises or any other premises of the Shopping Center or on any
property therein including, but without limitation, fire, extended coverage
and public liability insurance, or which may make void or voidable any such
insurance, or which may create any extra premiums for, or increase the rate
of, any such insurance. If anything shall be done or kept or omitted to be
done in, upon or about the demised premises which shall create any extra
premiums for, or increase the rate of, any such insurance, Tenant will pay the
increased cost of the same to Landlord upon demand.
10. Utilities, Repairs and Alterations
A. Tenant agrees to pay all charges for heat, air conditioning, water,
gas, electricity and other utilities used by the demised premises. If a
charge shall be made from time to time by the public authority having
jurisdiction for the use of the sanitary and/or storm sewer system, if any,
Tenant shall pay the share thereof properly apportionable to the demised
premises. Tenant agrees it will at all times keep sufficient heat in the
demised premises to prevent the pipes therein from freezing. Tenant shall
also pay any sprinkler stand-by service charges or similar charges allocable
to the building upon the demised premises.
B. Landlord shall not be obligated to make any repairs or alterations
of any kind whatsoever to the demised premises or any part thereof.
C. Tenant agrees that it will during the term of this lease make all
repairs and alterations to the property which Tenant is required to maintain,
as hereinafter set forth, which may be necessary to maintain the same in good
repair and condition or which may be required by any laws, ordinances,
regulations or requirements of any public authorities having jurisdiction,
subject only to the provisions of Article 13 and 14; and that it will upon the
expiration or other termination of the term of this lease remove its personal
property and that of all persons claiming under it and will yield up peaceably
to Landlord the demised premises and all property therein other than personal
property of Tenant or persons claiming under Tenant, broom clean and in good
repair and condition. The property which Tenant is required to maintain is
the demised premises and every part thereof, including, Tenant's building and
all other improvements upon the demised premises. Tenant also agrees to
paint, varnish and otherwise redecorate the demised premises when reasonably
required to keep the demised premises attractive in appearance.
D. No sign may be installed or maintained by Tenant upon the exterior
of the Tenant's building without the prior written approval of Landlord. It
is expressly understood and agreed that no sign visible from outside the
demised premises shall be an exposed neon, flashing or animated sign; that no
roof signs shall be permitted; and that all signs must be affixed parallel to,
and not project more than twelve (12) inches from, the front of Tenant's
building. Furthermore, no sign, other than so-called "belt signs" may be
erected upon the exterior of Tenant's building without the consent of the
tenants of the premises in the Shopping Center now operated under the names
"Star" and "Osco". However, Landlord approves the continued existence of the
signs upon the demised premises on the date of this lease. Tenant agrees that
neither it nor anyone claiming under it will make any installations,
alterations, additions or improvements to or upon the demised premises, except
only the installation of fixtures necessary for the conduct of its business,
without the prior written approval of landlord. All installations,
alterations, additions and improvements made to or upon the demised premises,
whether made by Landlord or Tenant or any other person (except only signs and
movable trade fixtures installed in the demised premises prior to or during
the term of this lease at the cost of Tenant or any person claiming under
Tenant), shall be deemed part of the demised premises and upon the expiration
or other termination of the term of this lease shall be surrendered with the
demised premises as a part thereof without disturbance, molestation or injury.
Said signs and movable trade fixtures shall not be deemed part of the demised
premises and may be removed by Tenant at any time or times during the term of
this lease or upon the termination of the term of this lease. Movable trade
fixtures shall include Tenant's vaults, automated teller machines and drive-
through window equipment as well as all trade fixtures and other installations
not affixed to the realty and trade fixtures and other installations affixed
only by nails, screws or similar means. Movable trade fixtures shall not
include linoleum or other floor covering cemented or otherwise adhesively
affixed to the floor. By way of affirmation and not by way of limitation,
Tenant will not without the prior written approval of Landlord, increase or
diminish the size of the building upon the demised premises after the original
enlargement thereof contemplated in Article 7 hereof.
E. Tenant agrees that it will procure all necessary permits before
making any repairs, installations, alterations, additions, improvements or
removals. Landlord agrees it will cooperate with Tenant in obtaining such
permits. Tenant agrees that all repairs, installations, alterations,
improvements and removals done by it or anyone claiming under it shall be done
in a good and workmanlike manner, that the same shall be done in conformity
with all laws, ordinances and regulations of all public authorities and all
insurance inspection or rating bureaus having jurisdiction, that the structure
of the demised premises will not be endangered or impaired and that Tenant
will repair any and all damage caused by or resulting from any such repairs,
installations, alterations, additions, improvements or removals, including,
but without limitation, the filling of holes. Tenant agrees to pay promptly
when due all charges for labor and materials in connection with any work done
by Tenant or anyone claiming under Tenant upon the demised premises so that
the demised premises shall at all times be free of liens. Tenant agrees to
save Landlord harmless from, and indemnify Landlord against, any and all
claims for injury, loss or damage to person or property caused by or resulting
from the doing of any such work.
11. Indemnity and Insurance
A. Tenant agrees to save Landlord harmless from, and indemnify
Landlord against, to the extent permitted by law, any and all injury, loss or
damage to third parties and any and all claims for injury, loss or damage to
third parties, of whatever nature (i) caused by or resulting from, or claimed
to have been caused by or to have resulted from, any act, omission or
negligence of Tenant or anyone claiming under Tenant (including, but without
limitation subtenants and concessionaires of Tenant and, employees and
contractors of Tenant or its subtenants or concessionaires), no matter where
occurring, or (ii) occurring upon or about the demised premises, no matter how
caused. This indemnity and hold harmless agreement shall include indemnity
against all costs, expenses and liabilities incurred in connection with any
such injury, loss or damage or any such claim, or any proceeding brought
thereon or the defense thereof. If Tenant or anyone claiming under Tenant or
the whole or any part of the property of Tenant or anyone claiming under
Tenant shall be injured, lost or damaged by theft, fire, water or steam or in
any other way or manner, whether similar or dissimilar to the foregoing, no
part of said injury, loss or damage is to be borne by Landlord or its agents
unless the same shall be caused by or result from the fault or negligence of
Landlord or its agents. Tenant agrees that Landlord shall be not liable to
Tenant or anyone claiming under Tenant for any injury, loss or damage that may
be caused by or result from the fault or negligence of any persons occupying
adjoining premises or any other part of the Shopping Center.
B. Tenant will maintain general comprehensive public liability
insurance, with respect to the demised premises and its appurtenances naming
Landlord and Tenant as insureds, in amounts not less than $1,000,000.00 with
respect to injuries to any one person and not less than $3,000,000.00 with
respect to injuries suffered in any one accident, and not less than
$250,000.00 with respect to damage to property. Tenant shall deliver to
Landlord the policies of such insurance, or certificates thereof, at least
fifteen days prior to the commencement of the term of this lease, and each
renewal policy or certificate thereof, at least fifteen days prior to the
expiration of the policy it renews. Each such policy shall provide that it
may not be modified or canceled without at least twenty days' written notice
to Landlord. All policies of insurance to be maintained by Tenant under this
lease shall be written by responsible insurance companies authorized to do
business in the State of New Hampshire. Upon Landlord's request from time to
time during the term of this lease, the minimum limits of said insurance shall
be increased to such higher limits, if any, as are customarily carried in the
area in which the demised premises are located upon properties similar in type
and use to the demised premises.
12. Access to Premises
Landlord shall have the right to enter upon the demised premises or any
part thereof without charge at all reasonable times and in case of emergency,
at any time, to inspect the same, to show the demised premises to prospective
purchasers or tenants, to make or facilitate any repairs, alterations,
additions or improvements to the demised premises or any other part of the
Shopping Center, including, but without limitation, to install and maintain
in, and remove from, the demised premises, pipes, wires and other conduits
(but nothing in this Article 12 contained shall obligate Landlord to make any
repairs, alterations, additions or improvements); and Tenant shall not be
entitled to any abatement or reduction of rent or damages by reason of any of
the foregoing. No forcible entry shall be made by Landlord unless such entry
shall be reasonably necessary to prevent serious injury, loss or damage to
person or property. Landlord shall repair any damage to property of Tenant or
anyone claiming under Tenant caused by or resulting from Landlord's making any
such repairs, alterations, additions or improvements, except only such damage
as shall result from the making of such repairs, alterations, additions or
improvements which Landlord shall make as a result of the default, fault or
negligence of Tenant or anyone claiming under Tenant. For the period
commencing six (6) months prior to the expiration of the term of this lease,
Landlord may maintain reasonable "For Rent" signs on the front or any part of
the exterior of the demised premises.
13. Fire and Other Casualty
A. If the demised premises or any part thereof, shall be damaged or
destroyed by fire, the elements or other casualty, then Tenant shall give
notice thereof to Landlord, and except as hereinafter otherwise provided,
Tenant shall promptly thereafter repair or restore the demised premises to
substantially the same condition they were in immediately prior to the
casualty. The repair or restoration shall not be performed unless the plans
and specifications prepared by Tenant therefor shall be approved in writing by
Landlord, which approval Landlord agrees not to delay or withhold
unreasonably. Tenant shall not be entitled to any abatement or reduction in
rent. All insurance proceeds recovered on account of any damage or
destruction by fire, the elements or other casualty shall be made available
for the payment of the cost of the aforesaid repairs or restoration. Said
insurance proceeds shall be deposited in escrow with instructions to the
escrow holder that the escrow holder shall disburse the same to Tenant as the
work of repair or restoration progresses upon certificates of the architect or
engineer supervising the repair or restoration that the disbursements then
requested, plus all previous disbursements made from said insurance proceeds
do not exceed the cost of the repair and restoration already completed and
paid for and that the balance in the escrow fund is sufficient to pay for the
estimated cost of completing the repair and restoration. The escrow holder
shall be the institutional lender holding a first mortgage upon the demised
premises or the property of which the demised premises are a part if there
shall be an institutional lender holding such first mortgage and if such
institutional lender shall be willing to accept said escrow; otherwise the
escrow holder shall be any bank mutually agreeable to Landlord and Tenant. If
the insurance proceeds shall be less than the cost of repair or restoration,
Tenant shall pay the excess cost. If the insurance proceeds shall be greater
than the cost of repair or restoration, the excess shall belong to Tenant.
B. It is agreed and understood that (i) if during the fourth semi-
annual period preceding the expiration of the term of this lease the demised
premises shall be so damaged or destroyed to the extent of twenty percent or
more of their insurable value, or (ii) if during the third semi-annual period
preceding the expiration of the term of this lease, the demised premises shall
be so damaged or destroyed to the extent of fifteen percent or more of their
insurable value, or (iii) if during the second semi-annual period preceding
the expiration of the term of this lease, the demised premises shall be so
damaged or destroyed to the extent of ten percent or more of their insurable
value, or (iv) if during the semi-annual period immediately preceding the
expiration of the term of this lease, the demised premises shall be so damaged
or destroyed to the extent of five percent or more of their insurable value,
either Landlord or Tenant may, if either shall so elect, terminate the term of
this lease by notice to the other within twenty (20) days after such damage or
destruction. In the event of any termination of the term of this lease as
aforesaid the termination shall become effective on the twentieth day after
the giving of the notice of termination, neither Landlord nor Tenant shall be
obligated to repair or restore any damage or destruction caused by the fire or
other casualty, and said insurance proceeds shall belong to Landlord, and
Tenant shall pay to Landlord the amount of any "deductible" applicable to said
loss. Notwithstanding the foregoing, if Landlord shall give Tenant notice of
the termination of this lease as provided in this Section B. at a time when
Tenant shall be entitled to extend the term of this lease pursuant to the
provisions of Article 2 hereof, and if within fifteen (15) days after Tenant's
receipt of said notice, Tenant shall give Landlord notice that it so elects to
extend the term of this lease, then Landlord's notice of termination shall be
null and void and of no force or effect.
C. Tenant agrees that it will maintain at all times during the term of
this lease with respect to the demised premises insurance against loss or
damage by fire, the casualties covered under a so-called all risk endorsement
and so-called extended coverage casualties, vandalism and malicious mischief
and sprinkler leakage (if there shall be a sprinkler system) and such other
casualties as may be requested by an institutional lender holding a first
mortgage upon the demised premises or any property of which the demised
premises are a part. Said insurance shall be in an amount not less than the
replacement cost of the improvements upon the demised premises. Each year
during the term of this lease, at the written request of Landlord, Tenant's
insurance carrier or agent (or an appraiser, engineer, architect or contractor
designated by Tenant and approved by Landlord) shall certify to Landlord that
the amount of fire and other casualty insurance being maintained by Tenant
upon the building and improvements upon the demised premises satisfy the
foregoing provisions of this Article 13. The policies of such insurance shall
name Landlord and Tenant as insureds as their interests may appear and shall
be payable in case of loss to the holders of any mortgages upon the demised
premises or property of which the demised premises are a part, as their
interests may appear. The policies shall provide that losses payable shall be
payable notwithstanding any act or negligence of any named insured. Said
insurance shall be written by responsible insurance companies authorized to do
business in the state wherein the Shopping Center is located and acceptable to
an institutional lender holding a first mortgage upon the demised premises or
the property of which the demised premises are a part. Tenant agrees that not
less than fifteen days prior to the commencement of any construction work upon
the demised premises and not less than thirty days prior to the expiration of
each policy of such insurance, Tenant will deliver to Landlord policies or
certificates of such insurance, or the renewals thereof, as the case may be.
Each such policy shall provide that it may not be modified or canceled without
at least twenty days' written notice to Landlord.
Until completion of construction of the improvements upon the demised
premises, Tenant, in lieu of maintaining the aforesaid Insurance, shall
maintain so-called builder's risk insurance on such improvements in an amount
reasonably satisfactory to Landlord.
D. Damage or destruction by the act of any third party, including a
public authority, shall be deemed damage or destruction by a casualty. All
damages recoverable on account of such act shall be recovered, used and
applied like insurance proceeds and to that end shall be deemed included
within the meaning of the expression "insurance proceeds".
14. Eminent Domain
A. If both after the execution of this lease and prior to the
expiration of the term of this lease the whole of the demised premises shall
be taken under the power of eminent domain, then the term of this lease shall
cease as of the time when Landlord shall be divested of its title in the
demised premises, and annual rent shall be apportioned and adjusted as of the
time of termination.
B. If only a part of the demised premises shall be taken under the
power of eminent domain, and what shall remain of the demised premises cannot
by repairing or rebuilding be made reasonably adequate for the operation of
the business conducted in the demised premises prior to the taking, Landlord
or Tenant may, at its election, terminate the term of this lease by giving the
other notice of its election within twenty days after it shall receive notice
of such taking, and the termination shall be effective as of the time that
possession of the part so taken shall be required for public use, and annual
rent shall be apportioned and adjusted as of the time of termination. If only
a part of the demised premises shall be taken under the power of eminent
domain and if the term of this lease shall not be terminated as aforesaid,
then the term of this lease shall continue in full force and effect and Tenant
shall, within a reasonable time after possession is required for public use,
repair and rebuild what may remain of the demised premises so as to put the
same into condition for use and occupancy by Tenant. The repair or
restoration shall not be performed unless the plans and specifications
prepared by Tenant therefor shall be approved in writing by Landlord, which
approval Landlord agrees not to delay or withhold unreasonably. Tenant shall
not be entitled to any abatement or reduction in rent. Landlord shall pay to
Tenant, within seven days (7) days after receipt, that part of the award
attributable to the taking of Tenant's building (excluding the land), such
award to be deposited into escrow in the manner provided in Section A. of
Article 13 and to be used by Tenant for such repair and restoration, any
balance remaining after such repair and restoration to be paid to Landlord.
C. Landlord reserves to itself, and Tenant assigns to Landlord, all
rights to damages accruing on account of any taking under the power of eminent
domain or by reason of any taking under the power of eminent domain or by
reason of any act of any public or quasi-public authority for which damages
are payable. Tenant agrees to execute such instruments of assignment as may
be reasonably required by Landlord in any proceeding for the recovery of such
damages if requested by Landlord, and to turn over to Landlord any damages
that may be recovered in such proceeding. It is agreed and understood,
however, that Landlord does not reserve to resell, and Tenant does not assign
to Landlord, any damages payable for (i) trade fixtures installed by Tenant or
anybody claiming under Tenant at its own cost and expense, and (ii) the
unamortized cost to Tenant of the initial improvements made by Tenant to the
realty which are so taken. The unamortized cost to Tenant of the initial
improvements made by Tenant to the realty shall be determined in accordance
with a straight-line method of amortization, and the life expectancy of said
improvement used by Tenant for federal income tax purposes. The provisions of
clause (ii) above shall be applicable only if any taking by eminent domain
shall result in the termination of the term of this lease as above provided.
15. Defaults
A. (1) If Tenant shall default in the payment of rent or other payments
required of Tenant and if Tenant shall fail to cure such default within
fourteen (14) days after receipt of notice of said default from Landlord, or
(2) if Tenant shall default in the performance or observance of any other
agreement or condition on its part to be performed or observed and if Tenant
shall fail to cure said default within fifteen days after receipt of notice of
said default from Landlord, or (3) if any person shall levy upon, or take this
leasehold interest or any part thereof upon execution, attachment or other
process of law, or (4) if Tenant shall make an assignment of its property for
the benefit of creditors, or (5) if Tenant shall be declared bankrupt or
insolvent according to law, or (6) if any bankruptcy or insolvency proceeding
shall be commenced by or against Tenant, or (7) if a receiver, trustee or
assignee shall be appointed for the whole or any part of Tenant's property,
then in any of said cases, Landlord lawfully may immediately, or at any time
thereafter, and without any further notice or demand, enter into and upon the
demised premises or any part thereof in the name of the whole, by force or
otherwise, and hold the demised premises as if this lease had not been made,
and expel Tenant and those claiming under it and remove its or their property
(forcibly, if necessary) without being taken or deemed to be guilty of any
manner of trespass (or Landlord may send written notice to Tenant of the
termination of the term of this lease), and upon entry as aforesaid (or in the
event that Landlord shall send to Tenant notice of termination as above
provided, on the fifth day next following the date of the sending of the
notice), the term of this lease shall terminate. Notwithstanding the
provisions of clauses (1) and (2) of the immediately preceding sentence, if
Landlord shall have rightfully given Tenant notice of default pursuant to
either or both of said clauses three (3) times during any twelve-month period,
and if Tenant shall thereafter default in the payment of rent or other
payments and/or the performance or observance of any other agreement or
condition required of Tenant, then Landlord may exercise the right of
termination provided for it in said immediately preceding sentence without
first giving Tenant notice of such default and the opportunity to cure the
same within the time provided in said clause (1) and/or clause (2), as the
case may be. Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event Landlord terminates
this lease as provided in this Article.
B. In case of any such termination, Tenant will indemnify Landlord each
month against all loss of rent and all obligations which Landlord may incur by
reason of any such termination between the time of termination and the
expiration of the term of this lease; or at the election of Landlord,
exercised at the time of the termination or at any time thereafter, Tenant
will indemnify Landlord each month until the exercise of the election against
all loss of rent and other obligations which Landlord may incur by reason of
such termination during the period between the time of the term ination and
the exercise of the election, and upon the exercise of the election Tenant
will pay to Landlord as damages such amount as at the time of the exercise of
the election represents the amount by which the rental value of the demised
premises for the period from the exercise of the election until the expiration
of the term shall be less than the amount of rent and other payments provided
herein to be paid by Tenant to Landlord during said period. It is understood
and agreed that at the time of the termination or at any time thereafter
Landlord may rent the demised premises, and for a term which may expire after
the expiration of the term of this lease, without releasing Tenant from any
liability whatsoever, that Tenant shall be liable for any expenses incurred by
Landlord in connection with obtaining possession of the demised premises, with
removing from the demised premises property of Tenant and persons claiming
under it (including warehouse charges), with putting the demised premises into
good condition for reletting, and with any reletting, including, but without
limitation, reasonable attorneys' fees and brokers' fees, and that any monies
collected from any reletting shall be applied first to the foregoing expenses
and then to the payment of rent and all other payments due from Tenant to
Landlord.
16. Subordination to Mortgages
Tenant agrees that upon the request of Landlord it will subordinate this
lease and the lien hereof to the lien of any present or future mortgage or
mortgages upon the demised premises or any property of which the demised
premises are a part, irrespective of the time of execution or time of
recording of any such mortgage or mortgages. Tenant agrees that it will upon
the request of Landlord execute, acknowledge and deliver any and all
instruments deemed by Landlord necessary or desirable to give effect to or
notice of such subordination. Tenant also agrees that if it shall fail at any
time to execute, acknowledge or deliver any such instrument requested by
Landlord, Landlord may, in addition to any other remedies available to it,
execute, acknowledge and deliver such instrument as the attorney-in-fact of
Tenant and in Tenant's name; and Tenant hereby makes, constitutes and
irrevocably appoints Landlord as its attorney-in-fact for that purpose. The
word "mortgage" as used herein includes mortgages, deeds of trust or other
similar instruments and modifications, consolidations, extensions, renewals,
replacements and substitutes thereof. Whether the lien of any mortgage shall
be superior or subordinate to the lien of this lease, Tenant agrees that it
will,upon request, attorn to the holder of such mortgage or anyone claiming
under such holder and their respective successors and assigns in the event of
foreclosure of or similar action taken under such mortgage. Notwithstanding
anything to the contrary contained in this Article 16, if Tenant shall be
required to subordinate this lese and the lien hereof to the lien of any
mortgage, Landlord shall use its best efforts to cause the holder of such
mortgage to enter into an agreement with Tenant, recordable in form, to the
effect that in the event of foreclosure of, or similar action taken under,
such mortgage, Tenant's possession of the demised premises shall not be
terminated or disturbed by such mortgage holder or anyone claiming under such
mortgage holder so long as Tenant shall not be in default under this lease.
17. Waiver of Subrogation
Each of Landlord and Tenant hereby releases the other, to the extent of
its insurance coverage, from any and all liability for any loss or damage
caused by fire, any of the extended coverage casualties or any other casualty
actually insured against, even if such fire or other casualty shall be brought
about by the fault or negligence of the other party, or any persons claiming
under it; provided, however, this release shall be in force and effect only
with respect to loss or damage occurring during such time as the releasor's
policies of fire and casualty insurance shall contain a clause to the effect
that this release shall not affect said policies or the right of the releasor
to recover thereunder. Each of Landlord and Tenant agrees that its fire and
casualty insurance policies will include such a clause so long as the same is
obtainable and is includable without extra cost, or if extra cost is
chargeable therefor, so long as the other party pays such extra cost. If
extra cost is chargeable therefor, each party will advise the other thereof
and the amount therefor, and the other party, at its election, may pay the
same but shall not be obligated to do so.
18. Assignment
A. Tenant agrees that it will not assign, mortgage, pledge or otherwise
encumber this lease or any interest therein, or sublet the whole or any part
of the demised premises without obtaining on each occasion the prior written
consent of Landlord, which Landlord hereby agrees not unreasonably to
withhold.
B. Tenant shall pay to Landlord upon demand, and as additional rent,
all reasonable legal and other expenses incurred by Landlord in connection
with any request by Tenant for consent to assignment or subletting. Without
intending to limit Landlord's discretion in granting or withholding such
consent, it is agreed that if Tenant requests Landlord's consent to assign
this lease or sublet more than fifteen percent (15%) of the floor space within
the demised premises, Landlord shall have the option exercisable by notice to
Tenant given within sixty (60) days after receipt of such request, to
terminate this lease as of a date specified in such notice, which date shall
be not less than thirty (30) or more than sixty (60) days after the date of
such notice. If Landlord shall consent to any assignment of this lease by
Tenant or a subletting of the whole of the demised premises by Tenant at a
rent which exceeds the rent payable hereunder by Tenant, or if Landlord shall
consent to a subletting of a portion of the demised premises by Tenant at a
rent in excess of the subleased portion's prorata share of the rent payable
hereunder by Tenant, then Tenant shall pay to Landlord, as additional rent
forthwith upon Tenant's receipt of each installment of any such excess rent,
one-half (1/2) of any such excess rent. Each request by Tenant for permission
to assign this lease or to sublet the whole or any part of the demised
premises shall be accompanied by a warranty by Tenant as to the amount of rent
to be paid to Tenant by the proposed assignee or sublessee. For purposes of
this paragraph, the term "rent" shall mean all fixed rent, additional rent or
other payments and/or consideration payable by one party to another for the
use and occupancy of premises. Tenant agrees that if a sublease is entered
into, neither the rent payable thereunder nor the amount thereof passed on to
any person or entity shall have deducted therefrom any expenses or costs
related in any way to the subleasing of such space. If there shall be any
assignment or subletting by Tenant pursuant to the provisions of this
paragraph, Tenant shall remain primarily liable for the performance and
observance of the covenants and agreements herein contained on the part of
Tenant to be performed and observed, such liability to be (in the case of any
assignment) joint and several with that of such assignee. It is expressly
understood and agreed that no assignment of Tenant's interest in this lease
shall be effective until such time as Tenant shall deliver to Landlord an
agreement from the assignee, which agreement shall be reasonably satisfactory
to Landlord in form and substance and shall provide that the assignee agrees
with Landlord to be primarily liable for the performance and observance of the
covenants and agreements herein contained on the part of Tenant to be
performed and observed, such liability to be joint and several with that of
Tenant.
19. Holding Over
If Tenant or anyone claiming under Tenant shall remain in possession of
the demised premises or any part thereof after the expiration of the term of
this lease without any agreement in writing between Landlord and Tenant with
respect thereto, prior to acceptance of rent by Landlord the person remaining
in possession shall be deemed a tenant at sufference and after acceptance of
rent by Landlord the person remaining in possession shall be deemed a tenant
at will, subject to the provisions of this lease insofar as the same may be
made applicable to a tenancy at will; provided, however, that minimum rent
during such period as such person shall continue to hold the demised premises
or any part thereof shall be payable at twice the highest rate payable during
the term hereof.
20. Waivers
Failure of Landlord to complain of any act or omission on the part of
Tenant, no matter how long the same may continue, shall not be deemed to be a
waiver by Landlord of any of its rights hereunder. No waiver by Landlord at
any time, express or implied, of any breach of any provision of this lease
shall be deemed a waiver of a breach of any other provision of this lease or a
consent to any subsequent breach of the same or any other provision. If any
action by Tenant shall require Landlord's consent or approval, Landlord's
consent to or approval of such action on any one occasion shall not be deemed
a consent to or approval of said action on any subsequent occasion or consent
to or approval of any other action on the same or any subsequent occassion.
No payment by tenant or acceptance by Landlord of a lesser amount than shall
be due from Tenant to Landlord shall be deemed to be anything but payment on
account, and the acceptance by Landlord of a check for a lesser amount with
the endorsement or statement thereon or upon a letter accompanying said check
that said lesser amount is payment in full shall not be deemed an accord and
satisfaction, and Landlord may accept said check without prejudice to recover
the balance or pursue any other remedy. Any and all rights and remedies which
Landlord may have under this lease or by operation of law, either at law or in
equity, upon any breach, shall be distinct, separate and cumulative and shall
not be deemed inconsistent with each other; and no one of them, whether
exercised by Landlord or not, shall be deemed to be in exclusion of any other;
and any two or more of all of such rights and remedies may be exercised at the
same time.
21. Rules and Regulations
Tenant will observe and comply with, and will cause its subtenants and
concessionaires, and its and their employees and agents, to observe and comply
with reasonable rules and regulations from time to time promulgated by
Landlord for the benefit and prosperity of the Shopping Center. However,
neither Tenant nor anyone claiming under it shall be bound by any such rules
and regulations until such time as Tenant receives a copy thereof.
22. Quiet Enjoyment
Landlord agrees that upon Tenant's paying the rent and performing and
observing the agreements, conditions and other provisions on its part to be
performed and observed, Tenant shall and may peaceably and quietly have, hold
and enjoy the demised premises during the term of this lease without any
manner of hindrance or molestation from Landlord or anyone claiming under
Landlord, subject, however, to the terms of this lease and any instruments
having a prior lien.
23. Labor Disputes
While any addition to the Shopping Center is being built, Tenant agrees
that all repairs, alterations, additions, improvements, installations and
other work other than its ordinary course of business done upon or about the
demised premises by it or anyone claiming under it will be done or carried on
in such manner as to avoid or prevent any labor disputes.
24. Failure of Performance
If tenant shall default in the performance or observance of any
agreement or condition in this lease contained on its part to be performed or
observed other than an obligation to pay money, and shall not cure such
default within fifteen days after notice from Landlord specifying the default
(or shall not within said period commence to cure such default and thereafter
prosecute the curing of such default to completion with due diligence),
Landlord may, at is option, without waiving any claim for damages for breach
of agreement, at any time thereafter cure such default for the account of
Tenant, and any amount paid or any contractual liability incurred by Landlord
in so doing shall be deemed paid or incurred for the account of Tenant, and
Tenant agrees to reimburse Landlord therefor or save Landlord harmless
therefrom; provided that Landlord may cure any such default as aforesaid prior
to the expiration of said waiting period by after notice to Tenant, if the
curing of such default prior to the expiration of said waiting period is
reasonably necessary to protect the real estate or Landlord's interest
therein, or to prevent injury or damage to persons or property. If Tenant
shall fail to reimburse Landlord upon demand for any amount paid for the
account of Tenant hereunder, said amount, together with interest at the rate
set forth in Article 33 hereof, shall be added to and become due as a part of
the next payment of rent due hereunder.
25. Miscellaneous
A. The words "Landlord" and "Tenant" and the pronouns referring
thereto, as used in this lease, shall mean, where the context requires or
admits, the persons named herein as Landlord and as Tenant, respectively, and
their respective heirs, legal representatives, successors and assigns,
irrespective of whether singular or plural, masculine, feminine or neuter.
Except as hereinafter provided otherwise, the agreements and conditions in
this lease contained on the part of Landlord to be performed and observed
shall be binding upon Landlord and its heirs, legal representatives,
successors and assigns and shall enure to the benefit of Tenant and its heirs,
legal representatives, successors and assigns; and the agreements and
conditions on the part of Tenant to be performed and observed shall be binding
upon Tenant and its heirs, legal representatives, successors and assigns and
shall enure to the benefit of the Landlord and its heirs, legal
representatives, successors and assigns. The word "Landlord", as used herein
means only the owner for the time being of Landlord's interest in this lease;
that is, in the event of any transfer of Landlord's interest in this lease the
transferor shall cease to be liable, and shall be released from all liability
for the performance or observance of any agreements or conditions on the part
of the Landlord to be performed or observed subsequent to the time of said
transfer, it being understood and agreed that from and after said transfer the
transferee shall be liable for the performance and observance of said
agreements and conditions. If Tenant shall consist of more than one person or
if there shall be one or more guarantor of Tenant's obligations, then the
liability of all such persons, including the guarantors, if any, shall be
joint and several, and the work "Tenant", as used in clauses (4), (5), (6) and
(7) of Section A. of Article 15 of this lease, shall be deemed to mean any one
of such persons. No trustee, shareholder or beneficiary of any trust which
holds Landlord's interest in this lease shall be personally liable for any of
the covenants or agreements, express or implied, hereunder. Landlord's
covenants and agreements shall be binding upon the trustees of said trust as
trustees as aforesaid and not individually and shall be binding upon the trust
estate. Without limiting the generality of the foregoing, and whether or not
all or any part of Landlord's interest in this lease shall, from time to time,
be held by a trust, Tenant specifically agrees to look solely to Landlord's
interest in the Shopping Center for recovery of any judgment from Landlord; it
being specifically agreed that Landlord shall never be personally liable for
any such judgment.
B. It is agreed that if any provisions of this lease shall be
determined to be void by any court of competent jurisdiction then such
determination shall not affect any other provisions of this lease, all of
which other provisions shall remain in full force and effect; and it is the
intention of the parties hereto that if any provision of this lease is capable
of two constructions, one of which would render the provision void and the
other of which would render the provision valid, then the provision shall have
the meaning which renders it valid.
C. This instrument contains the entire and only agreement between the
parties, and no oral statements or representations or prior written matter not
contained in this instrument shall have any force or effect. This lease shall
not be modified in any way except by a writing subscribed by both parties.
D. At any time after the commencement of the term hereof and within
five days after receipt by Tenant of a written request from Landlord, Tenant
shall acknowledge in writing to any mortgagee or purchaser or prospective
mortgagee or purchaser designated by Landlord that this lease is unmodified
and in full force and effect, that Landlord is not in default under this
lease, that Tenant has no right of set off against rents for any reason, and
any other information reasonably requested.
E. Wherever in this lease provision is made for the doing of any act by
any person it is understood and agreed that said act shall be done by such
person at its own cost and expense unless a contrary intent is expressed.
F. For purposes of Article 10 C. hereof, the word "repairs" includes
the making of replacements when necessary.
26. Delays
In any case where either party hereto is required to do any act (other
than make a payment of money), delays caused by or resulting from Act of God,
war, civil commotion, fire or other casualty, labor difficulties, shortages of
labor, materials or equipment, government regulations or other causes beyond
such party's reasonable control (other than such party's financial condition)
shall not be counted in determining the time during which such work shall be
completed whether such time be designated by a fixed date, a fixed time or "a
reasonable time". In any case where work is to be paid for out of insurance
proceeds or condemnation awards, due allowance shall be made, both to the
party required to perform such work and to the party required to make such
payment, for delays in the collection of such proceeds and awards. The
provisions of this Article shall not apply to the commencement date of the
term of this lease as set forth in Article 7.
27. Notices
All notices and other communications authorized or required hereunder
shall be in writing and shall be given by mailing the same by certified or
registered mail, return receipt requested, postage prepaid. If given to
Tenant the same shall be mailed to Tenant at 1 Indian Head Plaza, Nashua, New
Hampshire 03060, or to such other person or at such other address as Tenant
may hereafter designate by notice to Landlord; and if given to Landlord the
same shall bee mailed to Landlord c/o The Haughey Company, 1660 Soldiers Field
Road, Boston, Massachusetts 02135, or to such other person or at such other
address as Landlords may hereafter designate by notice to Tenant.
In the event the notice mailed with sufficient postage as above provided
shall not be received upon attempted delivery thereof to the proper address
and shall be received upon attempted delivery thereof to the proper address
and shall be returned by the Postal Service to the sender because of a refusal
of receipt, the absence of a person to receive, or otherwise, the time of the
giving of such notice shall be the time of such attempted delivery.
If the Landlord shall give Tenant notice of the name and address of the
holder of any mortgage on the demised premises or any property of which the
demised premises is a part, then Tenant shall send a copy of any notice given
to Landlord to such mortgagee, by mailing the same (simultaneously with giving
such notice to Landlord) by certified or registered mail, return receipt
requested, postage prepaid.
28. Headings
The headings for the various Articles of this lease are used only as a
matter of convenience for reference, and are not to be considered a part of
this lease or to be used in determining the intent of the parties to this
lease.
29. Effectiveness
The submission of this lease for examination does not constitute a
reservation of, or option for, the demised premises and this lease becomes
effective as a lease only upon execution and unconditional delivery thereof by
both Landlord and Tenant.
30. Brokers
Tenant hereby represents and warrants to Landlord that it has dealt with
no broker in connection with this lease and there are no brokerage commissions
or other finders' fees in connection herewith. Tenant hereby agrees to hold
Landlord harmless from, and indemnified against, all loss or damage (including
without limitation, the cost of defending the same) arising from any claim by
any broker claiming to have dealt with Tenant.
31. Removal
Intentionally Omitted.
32. Recordings
Tenant shall not record this lease and any recording of this lease by
Tenant shall constitute a material breach by Tenant and shall entitle
Landlord, at its election, to immediately terminate this lease pursuant to the
provisions of Article 15 hereof. At the request of either party, Landlord and
Tenant shall execute a short form lease with respect hereto in recordable
form. At the request of either party, after the commencement of the term of
this lease, Landlord and Tenant shall execute an instrument setting forth the
term of this lease, and the commencement and expiration dates.
33. Interest
If any payment of rent (minimum, percentage or additional) or any other
payment payable hereunder by Tenant to Landlord shall not be paid when due,
the same shall bear interest from the date when the same was payable until the
date paid at the lesser of (a) two percent (2%) per annum in excess of the
prime interest rate of The First National Bank of Boston from time to time
(that is, two percent (2%) per annum in excess of the interest rate announced
by said bank as its "prime" or "base" interest rate), or (b) the highest
lawful rate of interest which Landlord may charge to Tenant without violating
any applicable law. Such interest shall constitute additional rent payable
hereunder.
34. Merchant's Association
Intentionally Omitted.
35. Modification
In the event that any holder or prospective holder of any mortgage, as
hereinbefore defined, shall request any modification of any of the provisions
of this lease Landlord shall so advise Tenant. If said requested modification
shall not substantially affect Tenant's rights (a provision directly related
to the rents payable hereunder, the duration of the term hereof, or the size,
use or location of the demised premises being deemed to affect substantially
Tenant's rights), Tenant agrees that Tenant will enter into a written
agreement in recordable form with such holder or prospective holder which
shall effect such modification and provide that such modification shall become
effective and binding upon Tenant and shall have the same force and effect as
an amendment to this lease in the event of foreclosure or other similar action
taken by such holder or prospective holder.
36. Fire Preventive Devices
Tenant agrees to supply and maintain in the demised premises any fire
prevention equipment required pursuant to any law, ordinance, regulation or
requirement of any public authority or insurance inspection or rating bureau
or similar organization having jurisdiction.
37. Sale of Stock
Intentionally Omitted.
38. Interruption of Services
With respect to any services furnished by Landlord to Tenant, landlord
shall in no event be liable for failure to furnish the same when prevented
from doing so by strike, lockout, breakdown, accident, order or regulation of
or by any governmental authority, or failure of supply, or inability by the
exercise of reasonable diligence to obtain supplies, parts or employees
necessary to furnish such services, or because of war or other emergency, or
for any cause beyond Landlord's reasonable control, or for any cause due to
any act or neglect of Tenant or its servants, agents, employees, licensees or
any person claiming by, through or under Tenant, and in no event shall
Landlord ever be liable to Tenant for any indirect or consequential damages.
IN WITNESS WHEREOF, each of Landlord and Tenant has caused this
instrument to be duly executed all as of the day and year first above written.
SIGNED IN THE PRESENCE OF: LANDLORD:
/s/ TRACY A. FALSI /s/ PHILIP C. HAUGHEY
Philip C. Haughey, Trustee As
Aforesaid And Not Individually
/s/ TRACY A. FALSI /s/ ANDREW J. MCCARTHY
Andrew J. McCarthy, Trustee As
Aforesaid And Not Individually
TENANT:
SIGNED IN THE PRESENCE OF: INDIAN HEAD NATIONAL BANK
/s/ MARY T. MILLER By: /s/ BRUCE N. JOHNSTONE
President
ATTEST:
/s/ DIANE HART By: /s/ JAMES C. REAL
Secretary
(Corporate Seal)
COMMONWEALTH OF MASSACHUSETTS
Suffolk, SS.
On this 20th day of November, 1987, before me, the undersigned notary,
personally appeared Philip C. Haughey and Andrew J. McCarthy, known to me or
satisfactorily proven to be the persons whose names are subscribed to the
within instrument and acknowledged that they executed the same in their
capacity as Trustees of The St. John Realty Trust for the purposes therein
contained.
Before me,
/s/ KENNETH H. JAMES
Notary Public
My Commission Expires:
STATE OF NEW HAMPSHIRE
Hillsborough, SS.
On this 10th, day of November, 1987, before me, the undersigned notary,
personally appeared Bruce N. Johnstone, President of Indian Head National
Bank, and acknowledged the foregoing instrument to be his free at and deed in
his said capacity and the free act and deed of said corporation.
Before me,
/s/ JOSEPH B. REILLY
Notary Public
My Commission Expires:
EXHIBIT A (SHEET ONE)
The demised premises consist of a certain parcel of land (herein
referred to as the :"demised Premises") in a shopping center (herein referred
to as "Shopping Center") situated in Gilford, Belknap County, New Hampshire.
The Shopping Center consists of the land (and all improvements that may
from time to time be thereon) represented by the area outlined by a bold line
upon the plan attached to Sheet Two of this Exhibit A and made a part hereof,
as the same may be increased by integration by Landlord of adjacent property
or decreased by disposition by Landlord shall of any part thereof. No such
integration or disposition by Landlord shall be deemed to have occurred until
such time as Landlord shall give notice thereof to Tenant. The demised
premises are located in the area outlined in red upon the plan attached to
Sheet Two of this Exhibit A, and are more particularly described on Sheet
Three of this Exhibit A. As used in the lease, the words "the demised
premises" includes Tenant's building where the context so permits. It is
understood and agreed that said plan is intended respectively only to show the
approximate size of the Shopping Center and the approximate size and location
of the demised premises and for no other purpose. Any other matters shown
thereon are projections of Landlord and may be changed by Landlord at any time
and from time to time. The Shopping Center is more particularly described in
Exhibit A-1 attached hereto and made a part hereof.
EXHIBIT A (SHEET TWO)
Floor Plan - St John Realty Trust
EXHIBIT A (SHEET THREE)
The demised premises consist of that certain parcel of land in Gilford,
Belknap County, New Hampshire bounded and described as follows:
Beginning at an iron pin ninety-three and fifty hundredths feet (93.50')
from the southerly side of Route #11; thence turning north seventy-six
degrees thirty-two minutes thirty seconds west (N 76 32' 30" W) ninety
feet (90'), more or less, to an iron pin set in the ground; thence
turning and running south thirteen degrees twenty-seven minutes thirty
seconds west (S 13 27' 30" W) sixty feet (60'), more or less, to an
iron pin set in the ground; thence turning and running south seventy-six
degrees thirty-two minutes thirty seconds east (S 76 32' 30" E) ninety
feet (90'), more or less, to an iron pin set in the ground; thence
turning and running north thirteen degrees twenty-seven minutes thirty
seconds east (N 13 27' 30" E) sixty feet (60'), more or less, to the
bound begun at.
Together with that portion of the area labeled "New Drive-Through & Canopy"
upon the plan attached hereto and made a part hereof as Exhibit B which is not
already included in the parcel of land described above.
EXHIBIT A-1
The Shopping Center consists of that certain parcel of land in Gilford,
Belknap County, New Hampshire, more particularly described as follows:
------------------------------------------------------------------------------
Beginning at an iron pin set in the ground on the southerly line of U.S.
Federal Highway, Route #11, said iron pin being Station 14+05.68 of layout;
thence South 34 -02'-30" East, 40.05 feet to an iron pin;
thence, South 3 -01'-00" West, 66.00 feet to an iron pin;
thence, continuing on the same bearing 100.00 feet to an iron pin;
thence, South 61 -04'-10" East, 602.13 feet to an iron pin set on the westerly
line of Public Service Company of New Hampshire easement (B.C.R., Book 405,
Page 224);
thence, South 42 -42'-40" West and along the westerly side of said easement, a
distance of 1191.50 feet to an iron pin set in the ground at a fence and wall;
thence, South 59 -48'-30" west and along said fence and wall a distance of
925.30 feet, more or less, to a corner in said wall;
thence, to the right and running on a magnetic bearing of North 32 -12'-00"
East, 463.00 feet, more or less, to a corner;
thence, North 76 -32'-30" West, 402.00 feet to a point;
thence, North 13 -27'-30" East, 257.00 feet to an iron pin set in the ground
on the southerly side of land formerly of the Old Lake Shore Railroad;
thence, turning to the left and crossing said railroad land a distance of
66.00 feet to an iron pin set in the ground on the northerly side of said
railroad land;
thence, turning to the right and running on a curve to the right, said curve
having a radius of 2897.93 feet, a distance of 232.21 feet to an iron pin set
in the ground;
thence, turning to the left and on a magnetic bearing of North 12 -00' East,
266.67 feet to an iron pin set in the ground on the southerly side of U.S.
Federal Highway, Route #11;
thence, turning to the right and running on a curve to the right, said curve
having a radius of 2814.93 feet, a distance of 261.48 feet to a point of
tangency at Station 7+45.16 of layout of U.S. Federal Highway, Route #11;
thence, running on a magnetic bearing of South 76 -32'-30" East, a distance of
660.52 feet to the point of beginning.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At or For
Years Ended December 31
(In thousands, except per share data) 1994 1993(1 & 2) 1992 1991(4 & 5) 1990(6)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net interest and dividend income $ 28,049 $ 26,457 $ 25,322 $ 22,902 $ 21,681
Provision for loan and lease losses 425 2,970 2,911 3,830 4,005
Net income (loss) available to common stock 5,205 4,725 3,528 1,891 (846)
Common earnings (loss) per share(3) 1.35 1.24 .92 .50 (.22)
Common dividends declared per share(3) .84 .65 .54 .64 .90
Preferred dividends declared per share 1.3875 1.3875 1.3875 1.3875 .925
Balance Sheet Data:
Total assets 755,936 735,121 661,149 661,508 613,684
Net loans and leases 562,288 464,915 469,575 471,942 481,622
Investments(7) 123,259 193,808 123,661 131,964 72,343
Deposits 551,539 551,205 575,517 563,938 509,247
Advances from Federal Home Loan Bank of Boston 92,201 46,801 -- 19,000 26,000
Total shareholders' equity 78,128 75,784 73,308 71,482 71,470
Common shareholder's equity 74,562 72,193 69,710 67,884 67,853
Common shareholders' equity per share(3) 19.15 18.79 18.29 17.86 17.90
Average Balance Data:
Total assets 770,117 665,985 672,119 633,359 592,784
Interest earning assets 691,739 615,504 623,120 590,647 546,586
Loans and leases (net of unearned income) 521,711 484,074 478,665 485,730 466,841
Interest bearing liabilities 620,125 557,533 570,369 533,030 487,023
Common shareholders' equity 73,306 71,327 68,162 67,965 72,634
Financial Ratios:
Return on average common shareholders' equity 7.10% 6.66% 5.18% 2.78% (1.16%)
Return on average assets .68% .71% .52% .30% (.14%)
<F1> During 1993, the Company merged together its three banking subsidiaries,
Cheshire County Savings Bank, The Monadnock Bank and The Valley Bank. The
resulting consolidated bank, Cheshire County Savings Bank, changed its name to
CFX BANK on November 15, 1993.
<F2> On September 1, 1993, the Company, through its subsidiary, Cheshire County
Savings Bank, acquired the remaining 52.4% of Colonial Mortgage, Inc. (renamed
CFX MORTGAGE, INC.). Previously, the Company owned 47.6% and as a result of
the purchase Colonial became a wholly-owned subsidiary. The transaction was
accounted for by the purchase method of accounting. (See Note B of the "Notes
to Consolidated Financial Statements".)
<F3> Common per share data has been restated to reflect the Company's 5% stock
dividend declared on December 12, 1994.
<F4> On September 7, 1991, the Company, thorugh its subsidiary, The Valley
Bank, acquired certain assets and assumed all deposits of The Family Bank and
Trust. The Family Bank and Trust had been declared insolvent by the New
Hampshire Bank Commissioner and placed into Federal Deposit Insurance
Corporation receivership on September 6, 1991.
<F5> State of Financial Standards No. 109, "Accounting for Income Taxes", was
adopted by the Company effective January 1, 1991. The cumulative effect of the
change in accounting principle on years prior to 1991 was to increase 1991
Common Stock by $1,603,000, or $.42 per share.
<F6> On April 30, 1990 and on June 22, 1990, the Company acquired all of the
outstanding capital stock of The Valley Bank and Village Savings Bank,
respectively. The transactions were accounted for by the purchase method of
accounting.
<F7> Investments include trading securities, investment securities, Federal
Home Loan Bank of Boston stock, and interest bearing deposits with other
banks.
</TABLE>
FINANCIAL CONTENTS
Management's Discussion and Analysis 14
Consolidated Financial Statements
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements
A. Significant Accounting Policies 34
B. Mergers and Acquisitions 39
C. Restrictions on Cash and Due from Bank Accounts 40
D. Trading Securities 40
E. Investment Securities 40
F. Mortgage Loans Held for Sale 43
G. Loans and Leases 43
H. Allowance for Loan and Lease Losses 43
I. Premises and Equipment 44
J. Foreclosed Real Estate 44
K. Deposits 45
L. Short-Term Borrowed Funds 46
M. Advances from Federal Home Loan Bank of Boston 46
N. Due to Broker 46
O. Preferred Stock 47
P. Income Taxes 47
Q. Pension and 401(k) Plans 51
R. Stock Option Plan 52
S. Employee Stock Purchase Plan 52
T. Restrictions on Subsidiary Dividends, Loans and
Advances 53
U. Loans to Related Parties 53
V. Commitments and Contingencies 53
W. Financial Instruments 54
X. Fair Value of Financial Instruments 56
Y. Financial Instruments with Off-Balance-Sheet Risk 58
Z. Segment Information 60
AA. CFX Corporation (Parent-Company-Only)
Condensed Financial Statements 61
BB. Quarterly Results of Operations (Unaudited) 63
Report of Management-Assessment of Internal Controls Over
Financial Reporting 64
Reports of Wolf & Company, P.C., Independent Auditors 65
Directors and Officers of CFX Corporation 66
Trustees and Banking Partners of CFX BANK 66
Directors and Mortgage Banking Partners of CFX MORTGAGE, INC. 67
Management of CFX FUNDING L.L.C. 67
Information on Common Stock 68
Corporate Information 69
Management's Discussion and Analysis
General
All information within this section should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report and the tables appearing throughout the discussion and analysis.
All references in the discussion to financial condition and to results of
operations are to the consolidated position and results of CFX Corporation
(formerly known as Cheshire Financial Corporation) and its subsidiary (the
Company), taken as a whole.
CFX Corporation is a bank holding company incorporated under the laws of the
State of New Hampshire. The Company's wholly-owned subsidiary is CFX BANK (the
Bank), headquartered in Keene, New Hampshire.
The Bank's direct subsidiaries, both of which are wholly-owned, are CFX
CAPITAL SYSTEMS, INC. (CFX CAPITAL) and CFX FINANCIAL SERVICES, INC. (CFX
FINANCIAL). CFX CAPITAL's wholly-owned subsidiary is CFX MORTGAGE, INC.
(previously named Colonial Mortgage, Inc. [Colonial]), which engages in
mortgage banking. Prior to September 1, 1993, CFX CAPITAL owned 47.6% of
Colonial, and as a result of the acquisition of the remaining 52.4%, Colonial
became a wholly-owned subsidiary. The transaction was accounted for by the
purchase method of accounting. CFX FINANCIAL owns 51% of CFX FUNDING L.L.C.,
which engages in the facilitation of lease financing and securitization.
(Please refer to Note B of the "Notes to Consolidated Financial Statements"
for more detail on CFX's acquisition of Colonial.)
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 portfolio
at the dates indicated:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1994 1993
% of % of
Balances Portfolio Balances Portfolio
<S> <C> <C> <C> <C>
Real estate:
Residential $379,181 66.60% $312,828 66.24%
Construction 7,761 1.36 9,292 1.97
Commercial 82,468 14.49 76,955 16.29
Commercial, financial, and agricultural 48,020 8.44 42,835 9.07
Warehouse lines of credit to leasing companies 15,339 2.69 5,428 1.15
Consumer and other 36,544 6.42 24,934 5.28
569,313 100.00% 472,272 100.00%
Less: Allowance for loan and lease losses 7,025 7,357
Net loans and leases $562,288 $464,915
</TABLE>
Total loans and leases were $569,313,000, or 75% of total assets, at
December 31, 1994, compared with $472,272,000, or 64% of total assets, at
December 31, 1993.
Total loans and leases have increased by $97,041,000 since December 31,
1993, primarily due to residential real estate loans generated by CFX
MORTGAGE. In addition, increased capacity in commercial lending and increased
focus on consumer finance activities has contributed to new growth for the
Company. Moreover, the Company's new lease financing and securitization
company, CFX FUNDING, has also increased the Company's lending volumes.
Through its national securitization program (the Program), CFX FUNDING
establishes relationships with lessors who are selected by CFX FUNDING to
participate in the Program based on a variety of factors, including the
lessor's demonstrated portfolio performance, underwriting criteria, experience
in the leasing industry, and credit history. CFX FUNDING arranges for short-
term warehousing lines of credit with CFX BANK based on the credit of the
participating leasing company. The warehouse line of credit enables the
Program participants to originate leases for portfolio sale or securitization.
Upon securitization, CFX FUNDING functions as the Master Servicer with respect
to the lease receivables.
During 1994, CFX FUNDING facilitated one major lease portfolio sale and
several smaller sales to private investors. Lease receivables sold in 1994
totaled approximately $13,832,000, with outstanding loan balances of
approximately $11,278,000. In January 1995, the Company completed the
facilitation of its first lease portfolio securitization (rated A+ by Duff &
Phelps). Leases securitized in January 1995 totaled approximately $14,900,000
with outstanding loan balances of approximately $13,654,000.
Risk Elements
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying values of the assets
are 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. In
addition, commencing in the third quarter of 1993, all loans past due 90 days
or more as to principal or interest were placed on nonaccrual status.
Previously, such loans which, in management's judgment, were fully secured and
in the process of collection (through legal action or, in appropriate
circumstances, through collection efforts reasonably expected to result in
repayment of the debt or in its restoration to a current status in the near
future) continued to accrue interest.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1994 1993
<S> <C> <C>
Nonaccrual (nonperforming) loans $6,536 $6,472
Foreclosed real estate 1,898 3,737
Valuation allowance on foreclosed real estate (325) (384)
Total nonperforming assets $8,109 $9,825
Nonperforming loans as a percent of total loans 1.15% 1.37%
Nonperforming assets as a percent of total assets 1.07% 1.34%
</TABLE>
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1994 1993
% of % of
Balances Portfolio Balances Portfolio
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $4,069 62.2% $2,088 32.3%
Commercial 1,442 22.1 3,737 57.7
Commercial, financial, and agricultural 1,007 15.4 460 7.1
Consumer and other 18 .3 187 2.9
6,536 100.0% 6,472 100.0%
Foreclosed real estate:
Real estate:
Residential 859 54.6% 2,471 73.7%
Construction 330 21.0 352 10.5
Commercial 709 45.1 914 27.3
Valuation allowance (325) (20.7) (384) (11.5)
1,573 100.0% 3,353 100.0%
Total nonperforming assets $8,109 $9,825
</TABLE>
The following table provides a rollforward of the Company's foreclosed real
estate at the dates indicated:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Balance at beginning of year $ 3,353 $ 11,929
Additions 696 3,887
Provision for losses (207) (673)
Pay-offs/sales/other (2,269) (11,790)
Balance at end of year $ 1,573 $ 3,353
</TABLE>
During the fourth quarter of 1993, the Company sold $6,600,000 in
nonperforming assets to a private investor. This bulk sale of nonperforming
assets, along with other efforts to reduce nonperforming assets, yielded a
$13,186,000 (57%) reduction in nonperforming assets during 1993. During 1994,
total nonperforming assets decreased by $1,716,000, or 17.50%.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses recognized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loan and lease losses based on
current economic conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year $7,357 $7,909 $6,957
Allowance of acquired subsidiaries -- 13 --
Allowance acquired through regulatory-
assisted transactions -- -- 350
Provision for loan and lease losses 425 2,970 2,911
Loans charged-off (1,172) (3,904) (2,523)
Recoveries of loans previously charged-off 415 369 214
Balance at end of year $7,025 $7,357 $7,909
Allowance for loan and lease losses
as a percent of total loans 1.23% 1.56% 1.66%
Allowance for loan and lease losses
as a percent of total nonperforming loans 107.48% 113.67% 71.37%
</TABLE>
Management considers the allowance for loan and lease losses to be adequate
in view of its evaluation of the Company's loan and lease portfolio, the level
of nonperforming loans and leases, current economic conditions and historical
experience with loan and lease losses.
Trading Securities and Investment Securities
Effective December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". (Please refer to Notes A and E of
the "Notes to Consolidated Financial Statements" for more information on the
new accounting standard for investment securities.) The Statement establishes
standards for all debt securities and for equity securities that have readily
determinable fair values. As required under SFAS No. 115, prior year financial
statements were not restated.
SFAS No. 115 requires that investments in debt securities that management
has the positive intent and ability to hold to maturity be classified as "held
to maturity" and reflected at amortized cost. Investments that are purchased
and held principally for the purpose of selling them in the near term are
classified as "trading securities" and reflected on the balance sheet at fair
value, with unrealized gains and losses included in earnings. Investments not
classified as either of the above are classified as "available for sale" and
reflected on the balance sheet at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity, net of related income tax effects. The cumulative effect of the change
in accounting principle at December 31, 1993 was to decrease shareholders'
equity by $187,000. There was no effect on net income for the year ended
December 31, 1993 relating to the adoption of SFAS No. 115.
Prior to December 31, 1993, debt securities that management had the intent
and ability to hold until maturity were reflected at amortized cost.
Marketable equity securities held for trading were stated at the lower of
aggregate cost or fair value. Other marketable equity securities and
securities held for sale were stated at the lower of aggregate cost or fair
value. Net unrealized losses applicable to other marketable equity securities
were reflected as a charge to shareholders' equity while write-downs
applicable to securities held for sale were reflected in the statements of
income:
Trading securities and investment securities consist of the following at the
dates indicated:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Trading securities $ 236 $ 61,999
Investment securities:
Securities available for sale 4,358 21,695
Securities held to maturity 109,531 96,044
Total investment securities 113,889 117,739
Total trading and investment securities $114,125 $179,738
</TABLE>
Included within the trading portfolio, at December 31, 1993, 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.
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 since inception:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993
<S> <C> <C>
Interest income $ 1,719 $ 332
Interest expense 1,149 176
Net interest income 570 156
Fair value change (528) (83)
Total return $ 42 $ 73
Average investment $50,353 $36,253
Percentage return on average investment .08% .60%
</TABLE>
Deposits
The following table shows the various components of average deposits and the
respective rates paid on such deposits:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993
Amount Rates Amount Rates
<S> <C> <C> <C> <S>
Noninterest bearing demand deposits $ 36,656 -- $ 27,920 --
Regular savings deposits 113,397 2.65% 116,475 2.81%
NOW and money market deposits 185,115 2.23 188,733 2.61
Time deposits 210,178 4.54 225,126 4.79
Total $545,346 3.06% $558,254 3.40%
</TABLE>
During 1994, the Company experienced a $12,908,000 decline in average
deposits. This decline was principally in time deposits as the Company
continued to experience the migration of individual depositors to alternative
investment instruments (stock/bond market, annuities, and mutual funds). The
migration of depositors to alternative investment instruments was the result
of the low interest rate environment and the growing spread between market
rates and deposit rates. However, the recent concern over the instability of
alternative investment instruments in a rising interest rate environment has
allowed deposits to stabilize.
The significant increase in loan demand and securities during 1994, along
with the above deposit loss, caused the Company's wholesale funding (average
short-term borrowed funds and average advances from the Federal Home Loan Bank
of Boston) to increase by $84,236,000. The resurgence in loan growth will also
cause the Company to begin raising deposit rates more aggressively in future
quarters.
Shareholders' Equity
The following table summarizes shareholders' equity at the dates indicated:
<TABLE>
<CAPTION>
December 31 (In thousands, except per share date) 1994 1993
Amount Shares Amount Shares
<S> <C> <C> <C> <C>
Common shareholders' equity $74,562 3,893 $72,193 3,843
Preferred shareholders' equity 3,566 213 3,591 214
Total shareholders' equity $78,128 4,106 $75,784 4,057
Common shareholders' equity per share $ 19.15 $ 18.79
Preferred shareholders' equity per share $ 16.74 $ 16.78
Shareholders' equity per share, assuming
conversion of all preferred shares to common $ 19.03 $ 18.68
<F1> Note: Prior year shares and per share data have been restated to
reflect the Company's 5% stock dividend declared on December 12,
1994.
</TABLE>
Shareholders' equity increased by $2,344,000 as of December 31, 1994 from
$75,784,000 at December 31, 1993 to $78,128,000 at December 31, 1994. The
increase was due to $5,473,000 in net income, issuance of $149,000 in common
stock under the employee stock purchase plan, issuance of $461,000 in common
stock under the stock option plan, issuance of $64,000 in common stock under
the dividend reinvestment and stock purchase plan, offset by a $273,000
increase in net unrealized losses on securities available for sale and
$3,262,000 and $268,000 in common and preferred cash dividends, respectively.
Results of Operations-General
The Company's involvement in mergers and acquisitions has impacted the
Company's financial statements for the past two years. All references to
merger and acquisition activity should be read in conjunction with Note B of
the "Notes to Consolidated Financial Statements."
The following table sets forth comparisons of average interest earning
assets and interest bearing liabilities, and interest income and interest
expense expressed as a percentage of the related asset or liability. In order
to reflect the economic impact of CFX's investments in state and municipal
securities and to present data on a comparative basis, the income from yields
on these securities has been restated to a tax-equivalent basis (using a
38.62%, 38.95% and 34% tax rates, respectively, for the years ended December
31, 1994, 1993, and 1992). The tax-equivalent adjustments are $533,000,
$185,000, and $156,000 for the years ended December 31, 1994, 1993, and 1992,
respectively. These adjustments, however, are for comparison purposes only and
have no impact on reported net income.
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993 1992
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loans and leases (1) $521,711 $40,765 7.81% $484,074 $39,496 8.16% $478,665 $43,989 9.19%
Taxable securities (2) 138,341 7,430 5.37 108,898 5,729 5.26 115,984 7,215 6.22
Tax-exempt securities (3) 21,326 1,380 6.47 6,630 475 7.16 6,474 460 7.11
Other 10,361 639 6.17 15,902 627 3.94 21,997 903 4.11
Total interest earning assets 691,739 50,214 7.26 615,504 46,327 7.53 623,120 52,567 8.44
Noninterest earning assets 78,378 50,481 48,999
Total $770,117 $665,985 $672,119
Liabilities and Shareholders'
Equity
Interest bearing liabilities:
Savings deposits $298,512 7,128 2.39 $305,208 8,191 2.68 $283,062 10,820 3.82
Time deposits 210,178 9,542 4.54 225,126 10,774 4.79 263,810 15,156 5.75
Advances from Federal Home
Loan Bank of Boston 94,960 4,338 4.57 7,821 246 3.15 12,113 830 6.85
Other borrowed funds 16,475 624 3.79 19,378 474 2.45 11,384 283 2.49
Total interest bearing liabilities 620,125 21,632 3.49 557,533 19,685 3.53 570,369 27,089 4.75
Noninterest bearing liabilities:
Demand deposits 36,656 27,920 24,491
Other 36,451 5,609 5,499
Shareholders' equity 76,885 74,923 71,760
Total $770,117 $665,985 $672,119
Net interest and
dividend income $28,582 $26,642 $25,478
Interest rate spread 3.77% 4.00% 3.69%
Net interest margin 4.13% 4.33% 4.09%
<F1> For the purpose of these computations, nonaccrual loans are included in loans.
<F2> Taxable securities include trading securities and investment securities.
<F3> Tax-exempt securities are included within investment securities.
</TABLE>
The following table presents changes in interest and dividend income,
interest expense, and net interest income which are attributable to changes in
the average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon. The net changes attributable
to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
(In thousands) 1994 vs 1993 1993 vs 1992
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $3,001 $(1,732) $ 1,269 $ 492 $(4,985) $(4,493)
Investments 2,535 71 2,606 (417) (1,054) (1,471)
Other (266) 278 12 (241) (35) (276)
Total interest and
dividend income 5,270 (1,383) 3,887 (166) (6,074) (6,240)
Interest paid on:
Savings and time deposits (868) (1,427) (2,295) (767) (6,244) (7,011)
Borrowed funds 3,854 388 4,242 155 (548) (393)
Total interest expense 2,986 (1,039) 1,947 (612) (6,792) (7,404)
Change in net interest
and dividend income $2,284 $ (344) $ 1,940 $ 446 $ 718 $ 1,164
</TABLE>
Comparison of Years 1994 and 1993
In 1994 the Company earned $5,205,000, or $1.35 per share, compared to
earnings of $4,752,000, or $1.24 per share, for the prior year.
Income taxes for the prior year period were reduced (and thus earnings
increased) through the recognition of several special tax adjustments in
connection with Statement of Financial Accounting Standards No. 109. Without
these tax adjustments, the previous year's earnings would have been $3,577,000,
or $.93 per share.
Earnings for 1994 were positively affected by stronger core earnings (net
interest and dividend income and other income, excluding securities gains and
losses) and lower credit costs (provision for loan and lease losses and the
operation of foreclosed real estate) as a result of a significantly lower
level of average nonperforming assets carried on the Company's balance sheet
during 1994 compared to 1993. Total core earnings were $34,446,000 for 1994,
compared to $29,784,000 for 1993. Offsetting these positive factors were the
inclusion of CFX MORTGAGE's and CFX FUNDING's operating expenses for the full
1994 year and several non-recurring charges.
Net Interest and Dividend Income
Taxable-equivalent net interest and dividend income was $28,582,000 in 1994,
up 7.28% from $26,642,000 in 1993. The $1,940,000 gain in net interest and
dividend income was due to an increase in average interest earning assets in
1994; offset by a decline in the Company's interest rate spread from 4.00% in
1993 to 3.77% in 1994.
The increase in average interest earning assets resulted from an increase in
taxable securities (see "Financial Condition-Trading and Investment Securities"
section of this "Management's Discussion and Analysis") and in loans and leases
(see "Financial Condition-Loans and Leases" section of this "Management's
Discussion and Analysis").
The 1994 interest rate spread and net interest margin decline from the 1993
level was partially the result of the Company's wholesale leverage program
(liquidated in October 1994) which earned a considerably lower interest rate
spread than the Company's retail banking activities. Excluding leverage program
assets and other trading securities, the Company's interest rate spread and
net interest margin for the twelve months ended December 31, 1994, were 3.85%
and 4.23%, respectively.
The remaining decline in the interest rate spread and net interest margin is
due to increases in the cost of borrowed funds and the relatively low interest
rates (teaser rates) offered on newly originated adjustable rate mortgage
loans.
The Company's portfolio of residential mortgages consists predominantly of
adjustable rate mortgages (most of which bear interest at rates based on one-
year Treasury securities with the balance at rates based on three- and five-
year Treasury securities). A rising short-term interest rate environment
typically has a positive impact on the Company's interest rate spread and net
interest margin as this portfolio reprices more rapidly than interest bearing
liabilities. However, continued material increases in short-term interest
rates (similar to that evidenced in 1994) could cause compression in the
interest rate spread and net interest margin as the 200 basis point annual
adjustment caps on variable-rate mortgage loans would limit a full market
adjustment. Additionally, customers' preference for longer-term, higher-rate
deposit products over shorter-term, more accessible products would increase
deposit costs regardless of any expected increases in short-term market
interest rates. The Company includes these possibilities in its regular
assessment of interest rate risk exposure. Policy guidelines in this area are
designed to maintain relatively stable interest margins in rising and falling
interest rate environments.
Provision for Loan and Lease Losses
The provision for loan and lease losses is determined by management through
its regular review of the Company's loan portfolio. This review includes an
assessment of problem loans and potential unknown losses based on current
economic conditions, the regulatory environment and historical experience.
The provision for loan and lease losses in 1994 was $425,000, compared to
$2,970,000 in 1993. The lower provision for loan and lease losses in 1994 is
the result of lower charge-offs and asset quality improving over the previous
year, partially offset by provisions for new loan growth in 1994. A
combination of an improving economy, increased efforts to resolve problem
assets, and a $6.6 million bulk sale of nonperforming assets in the fourth
quarter of 1993, allowed the Company to significantly reduce nonperforming
assets.
At December 31, 1994, nonperforming loans stood at $6,536,000, or 1.15% of
total loans and leases, compared to $6,472,000, or 1.37% of total loans and
leases, as of December 31, 1993. The allowance for loan and lease losses as a
percentage of nonperforming loans as of December 31, 1994 and 1993 amounted to
107.48% and 113.67%, respectively. Net charge-offs for 1994 amounted to
$757,000, compared to $3,535,000 for 1993.
Other Income
Other income for 1994 totaled $6,225,000 compared to $6,267,000 for 1993.
The net gains (losses) on trading securities in 1994 and 1993 are summarized
as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993
<S> <C> <C>
Wholesale leverage program $(528) $ (83)
Other trading activities 271 399
$(257) $ 316
</TABLE>
For a discussion on the Company's wholesale leverage program, see the
"Financial Condition-Trading Securities and Investment Securities" section of
this "Management's Discussion and Analysis".
Income from investment securities sales was significantly higher during 1993
compared to 1994 as a result of restructuring the securities portfolios
during 1993 in preparation for the adoption of SFAS No. 115 and to better
manage the Company's interest rate risk exposure, particularly in a rising
interest rate environment.
The increase in loan servicing fees, net gains on sale of loans and other
income are from CFX MORTGAGE, INC. (formerly Colonial Mortgage, Inc., acquired
as of September 1, 1993). CFX MORTGAGE's operations are included in the
Company's Consolidated Statements of Income for the full 1994 year compared to
four months for 1993.
As a result of favorable market conditions (higher interest rates and lower
prepayment speeds) the Company sold $58,900,000 in residential mortgage
servicing rights as of December 21, 1994. This sale resulted in a pre-tax gain
of $677,000.
Other Expense
Other expense for 1994 totaled $25,162,000, compared to $23,492,000 for the
same period a year ago. The increase in other expense was primarily
attributable to the inclusion of CFX MORTGAGE's (acquired September 1, 1993)
and CFX FUNDING's (commenced operations December 7, 1993) operations for the
full 1994 year. Also contributing to higher expense in 1994 were increased
salary costs, increased severance costs, higher medical costs, costs
associated with changing the names of the Company and its subsidiaries, and
costs incurred in connection with the pending acquisition of Orange Savings
Bank. (Please refer to Note B of the "Notes to Consolidated Financial
Statements" for more detail on the Company's pending acquisition of Orange
Savings Bank). Offsetting these expenses for 1994 was a reduction of
$2,854,000 in costs associated with the operation of foreclosed real estate.
This decrease is a result of a reduction in holdings of foreclosed real estate
in 1994 compared to 1993 and the inclusion in 1993 results of a $1,395,000
loss on the bulk sale of foreclosed real estate.
Taxes
Income taxes for the year ended December 31, 1994 and 1993 were 37.0% and
20.0%, of pretax income, respectively. The effective tax rate was lower
during 1993 because of the realization of several special tax adjustments
in connection with the Statement of Financial Accounting Standards No. 109.
The special tax adjustments related to the recognition of a deferred tax asset
for New Hampshire Business Profits Taxes and the realization of previously
unrecognized deferred tax benefits applicable to capital loss transactions.
Comparison of Years 1993 and 1992
In 1993 the Company earned $4,752,000, or $1.24 per share, compared to
earnings of $3,528,000, or $.92 per share, for the prior year.
The factors contributing to the higher level of earnings in 1993 were
stronger core earnings (net interest and dividend income and other income,
excluding securities gains), a lower effective tax rate and securities gains.
Offsetting these positive factors were increased costs associated with the
operation and sale of foreclosed real estate, several non-recurring charges,
and higher operating costs due to the acquisition of Colonial Mortgage, Inc.
as of September 1, 1993.
Net Interest Income
Taxable-equivalent net interest income was $26,642,000 in 1993, up 4.6% from
$25,478,000 in 1992. The $1,164,000 increase was due to both the Company's
interest rate spread growing from 3.69% in 1992 to 4.00% in 1993, and the
decrease in average interest bearing liabilities being greater than the
decrease in average interest earning assets during 1993.
Total average interest earning assets decreased by $7,616,000 in 1993 from
$623,120,000 in 1992 to $615,504,000 in 1993. The decline in average interest
earning assets reflected a decline in taxable securities, federal funds sold
and other interest earning assets and was attributable principally to the
decline in deposit liabilities. The yield on interest earning assets decreased
by .91% to 7.53% for the year ended December 31, 1993, down from 8.44% in 1992.
Due primarily to a decline in time deposits during 1993, average interest
bearing liabilities decreased by $12,836,000 from $570,369,000 in 1992 to
$557,533,000 in 1993. The average rate paid on interest bearing liabilities
decreased by 1.22% to 3.53% for the year ended December 31, 1993, from 4.75%
in 1992.
The net interest margin was 4.33% for 1993, compared to 4.09% for 1992. The
increase in the net interest margin in 1993 was reflective of the significant
increase in interest rate spread, a higher volume of interest earning assets
net of interest bearing liabilities, and a significant decline in nonperforming
assets.
The increase in interest rate spread in 1993 was attributable to both a more
conservative deposit pricing strategy employed in 1993 and a steeper U.S.
treasury yield curve.
Provision for Loan and Lease Losses
The provision for loan and lease losses is determined by management through
its regular review of the Company's loan and lease portfolio. This review
includes an assessment of problem loans and leases and potential unknown losses
based on current economic conditions, the regulatory environment and historical
experience. The provision for loan and lease losses was $2,970,000 in 1993,
compared to $2,911,000 in 1992.
The following schedule presents, in summary, the quarterly trends in
nonperforming assets and charge-offs that correlate with the quarterly
provisions for loan and lease losses in 1993 and the last quarter of 1992:
<TABLE>
<CAPTION>
Dec. 31 Sept. 30 June 30 March 31 Dec. 31
(Dollars in thousands) 1993 1993 1993 1993 1992
<S> <C> <C> <C> <C> <C>
Nonperforming loans $6,472 $ 9,168 $13,297 $13,197 $11,082
Foreclosed real estate 3,353 9,388 10,383 11,117 11,929
Nonperforming assets $9,825 $18,556 $23,680 $24,314 $23,011
Net charge-offs $ 845 $ 1,324 $ 534 $ 832 $ 849
Provision for loan and lease losses $ -- $ 750 $ 900 $ 1,320 $ 986
Allowance for loan and lease losses $7,357 $ 8,202 $ 8,630 $ 8,264 $ 7,909
Allowance for loan and lease losses as
a percent of nonperforming loans 113.67% 89.46% 64.90% 62.62% 71.37%
</TABLE>
An increase in nonperforming loans and higher net charge-offs in the first
quarter of 1993 warranted a higher provision for loan and lease losses. As
either nonperforming loans or charge-offs reduced in subsequent 1993 quarters,
the provision for loan and lease losses declined. The significant decline in
nonperforming assets in the fourth quarter of 1993 was due to the $6,600,000
bulk sale of nonperforming assets, and consequently, no additional loan and
lease loss provision was deemed necessary in the fourth quarter.
Other Income
Other income increased by $3,103,000, from $3,164,000 in 1992 to $6,267,000
in 1993. This increase was primarily from additional deposit account service
charge income from both a larger base and increased fees, gains on securities,
loan servicing fees and gains on sale of loans generated by Colonial from
September 1, 1993 (acquisition date). Included in the net gains on sale of
loans was a gain of $879,000 recognized on the $25,115,000 performing loan
sale and a loss of $1,078,000 recognized on the $2,768,000 nonperforming loan
sale.
During 1993, in an effort to restructure the Company's securities portfolios
in preparation for the adoption of SFAS No. 115 as of December 31, 1993 (See
Note A of the "Notes to Consolidated Financial Statements"), the Company made
several transfers into its held for sale portfolio and then sold substantially
all of its held for sale securities; this activity generated net gains of
$2,624,000.
Other Expense
Other expense increased by $3,715,000, from $19,777,000 in 1992 to
$23,492,000 in 1993. The increase was primarily due to four months
(September 1, 1993 through December 31, 1993) of operating expenses, amounting
to $1,357,000, associated with Colonial; a $683,000 increase in the operation
of foreclosed real estate including the $1,395,000 loss on the bulk sale of
foreclosed real estate in the fourth quarter (See Note J of the "Notes to
Consolidated Financial Statements" for the components of the operation of
foreclosed real estate); and $637,000 in non-recurring charges associated with
the write-down of a bank building disposition; the performing and
nonperforming asset disposition; changing the discount rate on the Company's
pension plan (from 8.25% to 7.00%), a severance accrual, and the cost of
changing the names of the Company's subsidiaries. The remaining increase in
other expense was principally due to increased salary costs, higher medical
costs and increased profit sharing in 1993.
Taxes
Income taxes for the year ended December 31, 1993 and 1992 were 20.0% and
34.0% of pretax income, respectively. The effective tax rate was lower during
1993 because of the recognition of a $436,000 net deferred tax asset for New
Hampshire Business Profits Taxes and the reversal of a $387,000 valuation
allowance relating to capital loss carryforwards.
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. Prior to 1993,
the Company believed that some uncertainty existed with respect to future
realization of capital loss carryforwards. Therefore the Company had
established a valuation allowance relating to capital loss carryforwards of
$387,000 as of December 31, 1992. The valuation allowance was reversed in 1993
as a result of the recognition of $1,266,000 in capital gains and the
implementation of tax planning strategies that continue to utilize the capital
loss carryforwards.
A summary of capital loss carryforwards and other temporary differences that
result in capital loss (income) treatment when recognized for tax purposes,
along with the corresponding valuation allowance are summarized as follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1993 1992
Amount @ 39% Amount @ 34%
<S> <C> <C> <C> <C>
Tax capital loss carryforwards $1,522 $593 $ 2,466 $ 838
Other temporary differences that
result in capital loss (income):
Stock write downs 36 14 387 132
Net unrealized losses on
marketable equity securities 24 9 122 41
Book over tax basis from investment
in Colonial Mortgage, Inc. -- -- (697) (237)
1,582 616 2,278 774
Valuation allowance -- -- (1,139) (387)
$1,582 $616 $ 1,139 $ 387
</TABLE>
The capital loss carryforwards expire as of December 31, 1996.
Based upon the fact that the Company's capital gains plan significantly
exceeds the Company's capital loss carryforwards, no valuation allowance was
required as of December 31, 1993.
Prior to 1993, the Company was not obligated to pay New Hampshire Business
Profits Tax (NHBPT) because a significant portion of its income was derived
from state tax free sources and because a credit was allowed for New Hampshire
Franchise Tax paid. Therefore, prior to 1993, no deferred taxes were
recognized for NHBPT purposes.
During 1993, as a result of the Franchise Tax being repealed by the New
Hampshire State Legislature and the Company's significant reduction in income
derived from state tax free sources, the Company began to pay NHBPT. This
obligation to pay allowed the Company to fully recognize deferred taxes
for NHBPT in 1993.
Capital Resources
Federal regulation requires the Company and CFX BANK 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 CFX BANK 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 Federal Deposit Insurance Corporation (FDIC), are applicable to
bank holding companies and state chartered non-member banks, respectively.
Under the "risk-based" capital rules, banks and bank holding companies are
required to have a level of Tier 1 capital equal to 4% of total risk-weighted
assets, as defined. Banks and bank holding companies are also required to have
total capital (composed of Tier 1 plus "supplemental" or Tier 2 capital, the
latter being composed primarily of allowances for loan and lease losses,
perpetual preferred stock in excess of the amount included in Tier 1 capital,
and certain "hybrid capital instruments" including mandatory convertible debt)
equal to 8% of total risk-weighted assets.
As of December 31, 1994, the Company's Tier 1 leverage capital ratio was
9.09%. In addition, the Company's Tier 1 risk-based capital ratio and total
risk-based capital ratio were 15.74% and 17.02%, respectively.
Asset/Liability Management
The Company's primary objective regarding asset/liability management is to
position the Company so that changes in interest rates do not have a materially
adverse impact upon forecasted net income and the net fair value of the
Company. The Company's primary strategy for accomplishing its asset/liability
management objective is achieved by matching the weighted average maturities of
assets, liabilities, and off-balance-sheet items (duration matching).
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of the
Company assuming both instantaneous, permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the
net market value of the Company as a result of these interest rate changes
represent greater interest rate risk than do smaller increases or decreases in
net fair value. In connection with these recalculations, the Company makes
assumptions regarding 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 fair values as it believes appropriate on the basis of
historical experience and prudent business judgment. The Company endeavors to
maintain a position where it experiences no material change in net fair value
and no material fluctuation in forecasted net income as a result of assumed 100
and 200 basis point increases and decreases in interest rates. However, there
can be no assurances that the Company's projections in this regard will be
achieved.
Management believes that the above method of measuring and managing interest
rate risk is consistent with the FDIC regulation regarding an interest rate
risk component of regulatory capital.
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, 1994. This table has been generated using
certain assumptions which the Company believes fairly and accurately represent
repricing volumes in a dynamic interest rate environment. Specifically,
contractual maturities are used on all time deposits and investments other than
asset-backed securities. For asset-backed securities and loans, contractual
maturities, repricing and prepayment assumptions are used. The prepayment
assumptions are based on current experience and industry statistics. The gap
maturity categories for savings deposits (including NOW, savings, and money
market accounts) are based on management's philosophy of repricing core
deposits in reaction to changes in the interest rate environment. Repricing
frequencies will vary at different points in the interest cycle and as supply
and demand for credit change.
<TABLE>
<CAPTION>
(In thousands) 0-3 4-12 1-5 5-10 Over 10
December 31, 1994 Months Months Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits
with other banks $ 2,568 $ -- $ 95 $ -- $ -- $ 2,663
Federal Home Loan Bank
of Boston stock 6,471 -- -- -- -- 6,471
Trading securities 236 -- -- -- -- 236
Investment securities 7,223 16,441 62,889 27,336 -- 113,889
Loans and leases 161,545 258,105 80,191 35,527 42,240 577,608
Total interest earning assets 178,043 274,546 143,175 62,863 42,240 700,867
Interest bearing liabilities:
Savings and time deposits 72,003 172,567 208,660 30,412 30,222 513,864
Advances from Federal Home
Loan Bank of Boston 92,201 -- -- -- -- 92,201
Short-term borrowed funds 27,316 -- -- -- -- 27,316
Total interest bearing liabilities 191,520 172,567 208,660 30,412 30,222 633,381
Off-balance sheet instruments -- (25,000) 25,000 -- -- --
Periodic gap $(13,477) $ 76,979 $ (40,485) $32,451 $12,018 $ 67,486
Cumulative gap $(13,477) $ 63,502 $ 23,017 $55,468 $67,486 $ --
</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
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.
Liquidity
The Company maintains numerous sources of liquidity in the form of marketable
assets and borrowing capacity. Interest bearing deposits with other banks,
trading and available for sale securities, regular cash flows from loan and
securities portfolios and Federal Home Loan Bank of Boston borrowings are the
primary sources of asset liquidity. At December 31, 1994, interest bearing
deposits with other banks totaled $2,663,000 and trading and available for sale
securities totaled $4,594,000.
Because the Company's subsidiary, CFX BANK, maintains a large residential
mortgage portfolio, a substantial capability exists to borrow funds from the
Federal Home Loan Bank of Boston. Additionally, investment portfolios are
predominantly made up of securities which can be readily borrowed against
through the repurchase agreement market. Relationships with deposit brokers
and correspondent banks are also maintained to facilitate possible borrowing
needs.
Impact of Inflation
The consolidated financial statements and related consolidated financial data
herein have been presented in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Inflation can
affect the Company in a number of ways, including increased operating costs and
interest rate volatility. Management attempts to minimize the effects of
inflation by maintaining an approximate match between interest rate sensitive
assets and interest rate sensitive liabilities and, where practical, by
adjusting service fees to reflect changing costs.
Consolidated Balance Sheets CFX Corporation and Subsidiary
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Assets
Cash and due from banks $ 18,832 $ 16,676
Interest bearing deposits with other banks 2,663 10,480
Federal Home Loan Bank of Boston stock 6,471 3,590
Trading securities 236 61,999
Securities available for sale 4,358 21,695
Securities held to maturity 109,531 96,044
Mortgage loans held for sale 8,295 16,927
Loans and leases 569,313 472,272
Less allowance for loan and lease losses 7,025 7,357
Net Loans and Leases 562,288 464,915
Premises and equipment 13,643 11,398
Mortgage servicing rights 4,207 4,557
Goodwill and deposit base intangibles 10,387 11,121
Foreclosed real estate 1,573 3,353
Other assets 13,452 12,366
$755,936 $735,121
Liabilities and Shareholders' Equity
Deposits:
Interest bearing $513,864 $518,991
Noninterest bearing 37,675 32,214
Total Deposits 551,539 551,205
Short-term borrowed funds 27,316 20,882
Advances from Federal Home Loan Bank of Boston 92,201 46,801
Due to broker -- 33,254
Other liabilities 6,752 7,195
Total Liabilities 677,808 659,337
Shareholders' Equity
Preferred stock, 7.5% Series A Cumulative Convertible, par value $1.00 per share-
issued and outstanding 192,769 shares in 1994 and 194,074 shares in 1993 193 194
Common stock, par value $1.00 per share-authorized 15,000,000
shares, issued 4,469,876 shares in 1994 and 4,236,876 shares in 1993 4,470 4,237
Paid-in capital 63,279 59,612
Retained earnings 17,858 19,140
Net unrealized losses on securities available for sale, after tax effects (474) (201)
Cost of 577,265 shares of common stock in treasury (7,198) (7,198)
Total Shareholders' Equity 78,128 75,784
$755,936 $735,121
</TABLE>
Consolidated Statements of Income CFX Corporation and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands, except per share data) 1994 1993 1992
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans $40,765 $39,496 $43,989
Interest on investment securities:
Taxable 5,523 5,179 6,914
Tax-exempt 847 290 304
6,370 5,469 7,218
Interest and dividends on trading securities 1,725 468 133
Dividends on marketable equity securities 182 82 168
Other 639 627 903
Total Interest and Dividend Income 49,681 46,142 52,411
Interest expense:
Interest on deposits 16,670 18,965 25,976
Interest on borrowings:
Short-term 4,952 711 283
Long-term 10 9 830
Total Interest Expense 21,632 19,685 27,089
Net Interest and Dividend Income 28,049 26,457 25,322
Provision for loan and lease losses 425 2,970 2,911
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 27,624 23,487 22,411
Other income:
Service charges on deposit accounts 1,456 1,433 1,388
Loan servicing fees 1,862 323 --
Net gains (losses) on trading securities (257) 316 (8)
Net gains on investment securities 85 2,624 238
Net gain on sale of loan servicing rights 677 -- --
Net gains on sales of loans 525 371 --
Other 1,877 1,200 1,546
6,225 6,267 3,164
Other expense:
Salaries and employee benefits 12,559 10,084 8,662
Occupancy 1,708 1,393 1,216
Equipment 1,788 1,439 1,421
Operation of foreclosed real estate 157 3,011 2,328
FDIC deposit insurance 1,234 1,341 1,296
Goodwill and deposit base intangible amortization 733 684 692
Other 6,983 5,540 4,162
25,162 23,492 19,777
Income Before Income Taxes 8,687 6,262 5,798
Income taxes 3,214 1,240 2,000
Net Income 5,473 5,022 3,798
Preferred stock dividends 268 270 270
Net Income Available to Common Stock $ 5,205 $ 4,752 $ 3,528
Weighted average common shares outstanding 3,860 3,826 3,805
Earnings per common share $ 1.35 $ 1.24 $ .92
</TABLE>
Consolidated Statements of Shareholders' Equity CFX Corporation and Subsidiary
<TABLE>
<CAPTION>
Net Unrealized Net Unrealized
Losses on Losses on
Marketable Securities
Preferred Common Paid-in Retained Equity Available Treasury
(In thousands, except per share data) Stock Stock Capital Earnings Securities for Sale Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $194 $4,026 $56,267 $18,567 $(374) $ -- $(7,198) $71,482
Net income -- -- -- 3,798 -- -- -- 3,798
Common cash dividends
declared-$.54 per share -- -- -- (2,070) -- -- -- (2,070)
Preferred cash dividends
declared-$1.3875 per share -- -- -- (270) -- -- -- (270)
Issuance of common stock under
employee stock purchase plan -- 10 61 -- -- -- -- 71
Decrease in net unrealized
losses on marketable
equity securities -- -- -- -- 297 -- -- 297
Balance at December 31, 1992 194 4,036 56,328 20,025 (77) -- (7,198) 73,308
Net income -- -- -- 5,022 -- -- -- 5,022
Common cash dividends
declared-$.65 per share -- -- -- (2,500) -- -- -- (2,500)
Preferred cash dividends
declared-$1.3875 per share -- -- -- (270) -- -- -- (270)
Issuance of common stock under
stock option plan -- 20 251 -- -- -- -- 271
Issuance of common stock under
employee stock purchase plan -- 7 81 -- -- -- -- 88
5% common stock dividend -- 174 2,952 (3,137) -- -- -- (11)
Decrease in net unrealized
losses on marketable
equity securities -- -- -- -- 63 -- -- 63
Change in method of accounting
for investment securities -- -- -- -- 14 (201) -- (187)
Balance at December 31, 1993 194 4,237 59,612 19,140 -- (201) (7,198) 75,784
Net income -- -- -- 5,473 -- -- -- 5,473
Common cash dividends
declared-$.84 per share -- -- -- (3,242) -- -- -- (3,242)
Preferred cash dividends
declared-$1.3875 per share -- -- -- (268) -- -- -- (268)
Issuance of common stock under
stock option plan -- 34 427 -- -- -- -- 461
Issuance of common stock under
employee stock purchase plan -- 10 139 -- -- -- -- 149
Preferred stock converted
to common stock (1) 1 -- -- -- -- -- --
5% common stock dividend -- 184 3,041 (3,245) -- -- -- (20)
Increase in net unrealized
losses on securities
available for sale -- -- -- -- -- (273) -- (273)
Issuance of common stock under
dividend reinvestment program -- 4 60 -- -- -- -- 64
Balance at December 31, 1994 $193 $4,470 $63,279 $17,858 $ -- $(474) $(7,198) $78,128
</TABLE>
Consolidated Statements of Cash Flows CFX Corporation and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Operating Activities
Net income $ 5,473 $ 5,022 $ 3,798
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,921 2,306 1,872
Provision for loan and lease losses 425 2,970 2,911
Provision for foreclosed real estate losses 207 673 307
Write-down of foreclosed real estate and
in-substance foreclosures -- -- 914
Loans originated and acquired for sale (100,331) (81,635) --
Principal balance of loans sold 108,963 64,708 --
Net loss (gain) on sale of portfolio loans (87) 199 --
Net loss (gain) on sale of foreclosed real estate (225) 1,338 (348)
Net deferred income tax benefit (53) (322) (401)
Net decrease (increase) in trading securities 39,595 (28,861) (12,554)
Net gains on investment securities (85) (2,624) (238)
Gain on sale of bank premises -- -- (371)
Gain deferred on sale/leaseback of bank premises -- -- 79
Other (2,047) 1,079 (2,120)
Net Cash Provided (Used) by Operating Activities 54,756 (35,147) (6,151)
Investing Activities
Purchase of CFX MORTGAGE INC., net of cash and cash equivalents acquired -- (4,831) --
Proceeds from sales of securities available for sale 20,331 -- --
Proceeds from maturities of securities available for sale 2,137
Purchases of securities available for sale (21,376) -- --
Proceeds from maturities of securities held to maturity 28,385 -- --
Purchases of securities held to maturity (37,776) -- --
Purchases of investment securities -- (134,636) (73,874)
Proceeds from sales of investment securities -- 101,592 66,181
Proceeds from maturities of investment securities -- 26,571 26,006
Proceeds from sales of, or payments on, foreclosed real estate 1,553 7,282 1,630
Proceeds from sales of portfolio loans 999 27,228 --
Purchases of Federal Home Loan Bank of Boston stock (2,881) (1,106) --
Proceeds from sales of Federal Home Loan Bank of Boston stock -- 12 --
Net decrease in interest bearing deposits with other banks 7,817 235 1,973
Net increase in loans (97,409) (23,052) (1,377)
Proceeds from the sale of premises and equipment -- -- 593
Purchases of premises and equipment (3,802) (3,171) (1,346)
Net Cash Provided (Used) by Investing Activities (102,022) (3,876) 19,786
Financing Activities
Net increase (decrease) in noninterest bearing deposits and savings accounts (16,540) 1,192 77,018
Net increase (decrease) in time certificates of deposit 16,874 (25,504) (65,439)
Net increase in short-term borrowings 6,434 11,426 5,756
Net increase in short-term advances from the
Federal Home Loan Bank of Boston 45,400 46,600 --
Proceeds from long-term advances from the
Federal Home Loan Bank of Boston -- 201 --
Repayments of long-term advances from the
Federal Home Loan Bank of Boston -- -- (19,000)
Common cash dividends paid (3,152) (2,287) (2,069)
Preferred cash dividends paid (268) (270) (274)
Proceeds from issuance of common stock under stock option plan 461 271 --
Proceeds from issuance of common stock under
employee stock purchase plan 149 88 71
Proceeds from issuance of common stock under
dividend reinvestment program 64 -- --
Net Cash Provided (Used) by Financing Activities 49,422 31,717 (3,937)
Increase (Decrease) in Cash and Cash Equivalents 2,156 (7,306) 9,698
Cash and cash equivalents at beginning of year 16,676 23,982 14,284
Cash and Cash Equivalents at End of Year $ 18,832 $ 16,676 $ 23,982
Supplementary information
Interest paid on deposit accounts $ 16,639 $ 19,092 $ 26,368
Interest paid on borrowed funds 4,669 609 1,223
Income taxes paid 1,626 2,527 1,905
Net increase (decrease) in due to broker (33,254) 32,230 1,024
Transfers from loans to foreclosed real estate 696 3,887 6,066
Transfers from securities available for sale to held to maturity 15,810 -- --
</TABLE>
Notes to Consolidated Financial Statements
Note A-Significant Accounting Policies
The principal accounting policies of CFX Corporation (formerly known as
Cheshire Financial Corporation) and its wholly-owned subsidiary (the Company),
which provide banking services primarily in New Hampshire, are as follows:
Principles of Presentation and Consolidation
The consolidated financial statements include the accounts of CFX
Corporation and its wholly-owned subsidiary, CFX BANK (the Bank) and the
Bank's wholly-owned subsidiaries, CFX CAPITAL SYSTEMS, INC. (CFX CAPITAL) and
CFX FINANCIAL SERVICES, INC. (CFX FINANCIAL). Also included are the accounts
of CFX CAPITAL's wholly-owned subsidiary, CFX MORTGAGE, INC., which engages in
mortgage banking, and CFX FINANCIAL's 51% ownership of CFX FUNDING L.L.C.,
which engages in the facilitation of lease financing and securitization. Upon
consolidation, all significant intercompany accounts and transactions are
eliminated. (See Note B -- "Mergers and Acquisitions".)
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 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.
Reclassifications and Restatements
Certain amounts have been reclassified in the 1993 and 1992 consolidated
financial statements to conform to the 1994 presentation.
Prior period common per share data has been restated to reflect the
Company's 5% stock dividend declared on December 12, 1994 to shareholders of
record on December 23, 1994.
Cash Flow Information
Cash equivalents include amounts due from banks and federal funds sold.
Generally, federal funds are sold for one day periods.
Accounting Policy Changes
Investment Securities: Effective December 31, 1993, the Bank adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". (See Note
E -- "Investment Securities".) The Statement establishes standards for all
debt securities and for equity securities that have readily determinable fair
values. As required under SFAS No. 115, prior year financial statements have
not been restated.
SFAS No. 115 requires that investments in debt securities, that management
has the positive intent and ability to hold to maturity, be classified as
"held to maturity" and reflected at amortized cost. Investments that are
purchased and held principally for the purpose of selling them in the near
term are classified as "trading securities" and reflected on the balance sheet
at fair value, with unrealized gains and losses included in earnings.
Investments not classified as either of the above are classified as "available
for sale" and reflected on the balance sheet at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity. The cumulative effect of the change in accounting
principle at December 31, 1993 was to decrease shareholders' equity by
$187,000 net of related income tax effects. There was no effect on net income
for the year ended December 31, 1993 relating to the adoption of SFAS No. 115.
Prior to December 31, 1993, debt securities that management had the intent
and ability to hold until maturity were reflected at amortized cost.
Marketable equity securities and securities held for sale were stated at the
lower of aggregate cost or fair value. Net unrealized losses applicable to
marketable equity securities were reflected as a charge to shareholders'
equity, net of tax effects, while write-downs applicable to securities held
for sale were reflected in earnings.
For all years presented, purchase premiums and discounts are amortized to
earnings by a method which approximates the interest method over the terms of
the investments. Declines in the value of investments that are deemed to be
other than temporary are reflected in earnings when identified. Gains and
losses on disposition of investments are computed by the specific
identification method.
Federal Home Loan Bank stock is carried at cost.
Trading Securities
Trading securities consist of marketable equity securities and debt
securities which the Company intends to trade in the future. Trading positions
are taken to benefit from short-term movements in market prices. Trading
securities are stated at fair value. Prior to the adoption of SFAS No. 115,
marketable equity securities held for trading were stated at the lower of
aggregate cost or fair value. Changes in fair value are reflected in trading
gains and losses within the consolidated statements of income. Gains and
losses on trading securities sold are computed by the specific identification
method.
Financial Instruments
Interest Rate Swap Agreements: Interest rate swap agreements designated as
hedges against future fluctuations in the interest rates of specifically
identified assets or liabilities are accounted for on the same basis as the
underlying asset or liability. Accordingly, interest rate swaps designated as
hedges against floating rate loan portfolios (carried at historical cost) are
reflected at cost. Interest rate swaps which hedge the Company's trading
securities portfolio (carried at fair value) are marked to fair value through
net gains (losses) on trading securities included in the consolidated
statements of income. The net interest paid or received under swap agreements
is recorded in the interest income or expense account related to the asset or
liability being hedged.
Financial Futures Contracts: Interest rate futures contracts are entered
into by the Company as hedges against interest rate risk in its trading
securities portfolio. These instruments are marked to fair value through net
gains (losses) on trading securities included in the consolidated statements
of income.
Financial Option Contracts: Option premiums paid or received, and designated
as hedges against future fluctuations in the interest rates of specifically
identified assets or liabilities, are accounted for on the same basis as
the underlying asset or liability. Accordingly, option contracts designated as
hedges against mortgage loans held for sale are carried at the lower of cost
or estimated fair value in the aggregate. Option contracts which hedge the
Company's trading securities portfolio (carried at fair value) are marked to
fair value through net gains (losses) on trading securities included in the
consolidated statements of income.
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to the
consolidated statements of income.
Loans and Leases
Interest on loans and leases (loans) is accrued and credited to income based
upon the principal amount outstanding. When management determines that
significant doubt exists as to the collectibility of principal or interest on
a loan, the loan is placed on nonaccrual status. In addition, commencing in
the third quarter of 1993 all loans past due 90 days or more as to principal
or interest were placed on nonaccrual status. Previously, such loans which, in
management's judgment, were fully secured and in the process of collection
(through legal action or, in appropriate circumstances, through collection
efforts reasonably expected to result in repayment of the debt or in its
restoration to a current status in the near future) continued to accrue
interest. Interest accrued but not received on loans placed on nonaccrual
status is reversed and charged against current income. Interest on nonaccrual
loans is recognized only 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.
Loans considered to be uncollectible are charged against the allowance for
loan and lease losses. The allowance is increased by charges to current income
in amounts sufficient to maintain the adequacy of the allowance. The adequacy
is determined by management's evaluation of the extent of existing risk in the
loan portfolio and prevailing economic conditions.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the related
loan's yield using the interest method. The Company is generally amortizing
these amounts over the contractual life of the related loans.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to income as incurred,
and the costs of major additions and improvements are capitalized.
The provision for depreciation and amortization is computed on the straight-
line method based on the estimated useful lives of the assets or the terms of
the leases, if shorter.
Mortgage Servicing Rights
The cost of mortgage servicing rights acquired is amortized in proportion
to, and over the period of, estimated net servicing revenues. When
participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield
to the purchaser, gains or losses are recognized equal to the present value of
such differential over the estimated remaining life of such loans. The
resulting "excess servicing fees receivable" is amortized over the estimated
life using a method approximating the level-yield method.
The cost of loan servicing rights purchased, the excess servicing fees
receivable, and the amortization thereon, is periodically evaluated in
relation to estimated future net servicing revenues. The Company evaluates the
carrying value of the servicing portfolio by estimating the future net
servicing income of the portfolio based on management's best estimate of
remaining loan lives.
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 bank subsidiaries and 15 years for the
mortgage banking subsidiary. (See Note B -- "Mergers and Acquisitions".)
The accumulated amortizations of deposit base intangibles and goodwill were
$1,111,000 and $2,891,000, respectively, as of December 31, 1994.
Foreclosed Real Estate
Foreclosed real estate consists of properties that the Company has formally
received title for partial or total satisfaction of loans, and in-substance
foreclosures which consist of properties that the Company has substantively
repossessed for partial or total satisfaction of loans. The Company classifies
loans as in-substance foreclosures when there is an indication that the
borrower has little or no equity in the collateral, repayment of the loan can
only come from the operation or sale of the collateral, and it is doubtful
that the equity will be rebuilt in the forseeable future. Loan losses arising
from the write-down of properties to fair value at the time the Company
formally receives title or substantively repossesses the collateral are
charged against the allowance for loan and lease losses.
On April 28, 1992, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 92-3, "Accounting for
Foreclosed Assets". This SOP required application in annual financial
statements for periods ending on or after December 15, 1992, with earlier
application permitted. The Company adopted this SOP effective October 1, 1992.
SOP No. 92-3 requires that foreclosed assets held for sale, on an individual
asset basis, be carried at the lower of (a) fair value minus the cost to sell,
or (b) cost.
If the fair value of the asset minus the estimated costs to sell the asset
is less than the cost of the asset, the deficiency is recognized as a
valuation allowance. Increases or decreases in the valuation allowance are
charged or credited to income. Prior to October 1, 1992, any subsequent write-
downs of the carrying value to fair value were charged to earnings.
Operating expenses of foreclosed real estate and gains and losses upon
disposition are reflected in earnings.
Pension and 401-K Plans
The Company and its subsidiaries have a defined benefit pension plan which
covers substantially all full-time employees. The benefits are based on years
of service and the employee's compensa tion during the years immediately
preceding retirement. The Company's funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
The Company maintains a Section 401(k) savings plan for employees of the
Company and its subsidiaries. Under the plan, the Company makes a matching
contribution of one-third of the amount contributed by each participating
employee, up to 6% of the employee's yearly salary. The Company's
contributions may be paid out of current or retained earnings. The plan also
allows for supplementary profit sharing contributions by the Company, at its
discretion, for the benefit of participating employees.
Income Taxes
The Company and its subsidiaries file a consolidated income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
For regulatory capital purposes, the recognition of deferred tax assets,
when realization of such is dependent on an institution's future taxable
income, is limited to the amount that can be realized within one year or 10%
of core capital, whichever is less.
Parent-Company-Only Condensed Financial Statements
In the parent-company-only condensed financial statements, the investment in
bank subsidiary is stated at cost plus equity in the undistributed earnings of
the subsidiary.
Earnings Per Share
Earnings per share are based on the weighted average number of common shares
outstanding during the period. The dilutive effect of common stock equivalents
attributable to outstanding stock options is not material. Prior period common
per share data has been restated to reflect the Company's 5% stock dividend
declared on December 12, 1994 to shareholders of record on December 23, 1994.
Recent Accounting Pronouncements
In May, 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan", which requires a
change in accounting method for most financial institutions, commencing with
fiscal years beginning after December 15, 1994, with early adoption
permissible. In addition, in October 1994, the FASB amended SFAS No. 114 with
SFAS No. 118, to allow a creditor to use existing methods for recognizing
interest income on impaired loans. Under the new Statements, impaired loans
would be measured using any of the following three methods on a loan-by-loan
basis.
* The present value of expected future cash flows (principal and interest
related to the loan) discounted at the loan's effective interest rate.
* The loan's obtainable market price.
* The fair value of the collateral if the loan is collateral dependent.
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.
The Statements are applicable to all creditors and to all loans,
uncollateralized as well as collateralized, except large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment
(i.e., residential mortgage, credit card and consumer installment loans),
loans that are measured at fair value or at the lower of cost or fair value
(i.e., loans in a trading or held for sale portfolio), leases, and
convertible or nonconvertible debentures and bonds and other debt
securities.
Management does not expect that adopting the provisions of these Statements
will have a material impact on the Company's consolidated financial
statements.
Note B-Mergers and Acquisitions
Pending: On July 26, 1994, the Company signed a definitive agreement to
acquire all of the outstanding capital stock of Orange Savings Bank (Orange),
a Massachusetts-chartered savings bank, headquartered in Orange,
Massachusetts. The acquisition is anticipated to be accounted for as a
pooling-of-interests.
Pursuant to the definitive agreement, each of Orange's 724,412 outstanding
shares of common stock (except for any dissenting shares and shares
beneficially held by the Company or Orange) will be converted into and
exchangeable for the number of shares of the Company's common stock determined
by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the
denominator of which is the average closing sale price per share of the
Company's common stock on the American Stock Exchange for the ten trading days
ending on the business day before the date on which the required approval of
the Massachusetts Commissioner of Banks is obtained. This exchange ratio is
subject to adjustment in the event that (i) such average closing price is
above $20.00 or below $15.2381, (ii) the Company is a party to certain
business combinations or (iii) the Company issues shares of stock in certain
transactions, including, without limitation, stock splits and stock dividends.
The proposed transaction is subject to regulatory approval and approval of
Orange's shareholders. The transaction has already been approved by the Boards
of Directors of the Company and Orange. At December 31, 1994, Orange had
assets of $83,257,000, deposits of $73,383,000, and stockholders' equity of
$8,531,000 (unaudited).
Completed: On September 1, 1993, the Company, through its bank subsidiary,
purchased the remaining 52.4% of Colonial Mortgage, Inc. (Colonial), a
mortgage banking company headquartered in Amherst, New Hampshire, for
$5,187,000, including $80,000 in acquisition costs. The Company previously
owned 47.6% and as a result of the purchase Colonial became a wholly-owned
subsidiary. The transaction was accounted for by the purchase method of
accounting, and, accordingly, the results of operations of Colonial from
September 1, 1993 to December 31, 1993 have been included in the Company's
consolidated statements of income. Prior to the acquisition on September 1,
1993, 47.6% of the results of operations of Colonial was included in the
Company's consolidated statements of income through the equity method of
accounting. In connection with the acquisition, the excess ($2,023,000) of the
purchase price over 52.4% of the fair value of the net assets acquired has
been allocated to goodwill and is being amortized over 15 years on a straight-
line basis. The fair value of the assets (including goodwill) and liabilities
acquired amounted to $11,151,000 and $5,964,000, respectively. On November 15,
1993, Colonial was renamed CFX MORTGAGE, INC.
The following summarized pro forma information (unaudited) presents the
results of the Company's operations assuming the purchase of Colonial
Mortgage, Inc. occurred on January 1, 1992.
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands, except per share data) 1993 1992
(unaudited)
<S> <C> <C>
Total income $55,208 $59,640
Net income 4,962 3,725
Preferred dividend 270 270
Net income available to common stock 4,692 3,455
Net income per common share 1.23 .91
</TABLE>
The above pro forma information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
at January 1, 1992, and is not intended to be a projection of future results
or trends.
Note C-Restrictions on Cash and Due From Bank Accounts
The Federal Reserve Bank requires the Bank to maintain average reserve
balances. The average amount of these reserve balances for the years ended
December 31, 1994 and 1993 were approximately $13,835,000 and $10,942,000,
respectively.
Note D-Trading Securities
The following table reflects the fair value of trading securities:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
U.S. Government and federal agency obligations $ -- $ 115
Federal agency mortgage pass-through securities -- 61,097
Hedge instruments -- 669
Money market funds 236 118
$236 $61,999
</TABLE>
During 1994, the decrease in the net unrealized holding gain on trading
securities included in the consolidated statement of income amounted to
$46,000.
Note E-Investment Securities
Investment securities consist of the following at December 31, 1994 and
1993.
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Securities available for sale, at fair value $ 4,358 $ 21,695
Securities held to maturity, at amortized cost 109,531 96,044
$113,889 $117,739
</TABLE>
The amortized cost and estimated fair value of investment securities, with
gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
Money market funds $ 1,056 $ -- $ -- $ 1,056
Other marketable equity securities 3,370 20 88 3,302
Total securities available for sale $ 4,426 $ 20 $ 88 $ 4,358
Securities held to maturity:
Debt securities:
State and municipal $ 23,498 $ 2 $ 815 $ 22,685
Corporate 5,932 8 137 5,803
Asset-backed 173 -- 1 172
Federal agency mortgage pass-through securities 62,966 -- 5,354 57,612
Collateralized mortgage obligations (CMO's) 16,962 -- 353 16,609
Total securities held to maturity $109,531 $ 10 $6,660 $102,881
</TABLE>
<TABLE>
<CAPTION>
December 31 (In thousands) 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for sale:
CMO's $ 18,082 $ 4 $ 314 $ 17,772
Money market funds 675 -- -- 675
Other marketable equity securities 3,272 -- 24 3,248
Total securities available for sale $ 22,029 $ 4 $ 338 $ 21,695
Securities held to maturity:
Debt securities:
State and municipal $ 10,591 $ 77 $ 52 $ 10,616
Corporate 7,992 242 8 8,226
Asset-backed 620 2 -- 622
Federal agency mortgage pass-through securities 76,841 79 249 76,671
Total securities held to maturity $ 96,044 $400 $ 309 $ 96,135
</TABLE>
At December 31, 1994, the Company has pledged debt securities with an
amortized cost of $54,440,000, and a fair value of $49,726,000, as collateral
to secure public funds, repurchase agreements (See Note L -- "Short-Term
Borrowed Funds") and for other purposes.
The amortized cost and estimated fair value of debt securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
------------------- -----------------------------------------
Held to Maturity Available for Sale Held to Maturity
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Within one year $ 8,999 $ 8,990 $ -- $ -- $ 290 $ 290
After one year through five years 11,968 11,654 -- -- 11,906 12,113
After five years through ten years 8,636 8,016 -- -- 6,931 6,985
After ten years through twenty years -- -- -- -- 76 76
29,603 28,660 -- -- 19,203 19,464
Pass-through securities and CMO's 79,928 74,221 18,082 17,772 76,841 76,671
$109,531 $102,881 $18,082 $17,772 $96,044 $96,135
</TABLE>
Proceeds from the sale of securities available for sale during the year
ended December 31, 1994 were $20,331,000. Gross gains of $85,000 and no gross
losses were recognized on such sales. In addition, securities available for
sale with an amortized cost of $16,575,000 were transferred to securities held
to maturity at their fair value of $15,810,000, resulting in a net unrealized
loss of $765,000 at the date of transfer. The net unrealized loss is being
amortized to interest income using the interest method over the terms of the
investments.
Proceeds from the sale of debt securities during the years ended December
31, 1993 and 1992 were $89,184,000 and $32,741,000, respectively. Gross gains
of $3,212,000 and $598,000, respectively, and gross losses of $588,000 and
$57,000, respectively, were realized during the years ended December 31, 1993
and 1992.
Note F-Mortgage Loans Held for Sale
The Company's mortgage banking subsidiary, CFX MORTGAGE, INC. engages in
originating, selling and servicing real estate loans, primarily residential.
Mortgage loans totaling $8,295,000 and $16,927,000 were held for sale by CFX
MORTGAGE, INC. as of December 31, 1994 and December 31, 1993, respectively.
Note G-Loans and Leases
Loans and leases consist of the following:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Real estate:
Residential $379,181 $312,828
Construction 7,761 9,292
Commercial 82,468 76,955
Commercial, financial and agricultural 48,020 42,835
Warehouse lines of credit to leasing companies 15,339 5,428
Consumer and other 36,544 24,934
$569,313 $472,272
</TABLE>
Nonaccrual loans and restructured loans totaled $6,536,000 and $1,824,000,
respectively, at December 31, 1994 and $6,472,000 and $837,000, respectively,
at December 31, 1993.
Interest income that would have been recorded under the original terms of
such nonaccrual and restructured loans and the interest income actually
recognized for the years ended December 31, 1994, 1993, and 1992 are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Interest income that would have been recorded $549 $656 $721
Interest income recognized 255 483 372
Interest income foregone $294 $173 $349
</TABLE>
The Company is not committed to lend additional funds to borrowers whose
loans have been modified in connection with troubled debt restructurings.
The primary geographic concentration of credit risk for loans originated by
the Company is the State of New Hampshire. The remainder of the portfolio is
distributed principally throughout the other New England states.
Note H-Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year $7,357 $7,909 $6,957
Allowance of acquired subsidiaries -- 13 --
Allowance acquired through regulatory-assisted
transactions -- -- 350
Provision for loan and lease losses 425 2,970 2,911
Loans charged-off (1,172) (3,904) (2,523)
Recoveries of loans previously charged-off 415 369 214
Balance at end of year $7,025 $7,357 $7,909
</TABLE>
Note I-Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Land $ 2,033 $ 1,792
Buildings and leasehold improvements 11,369 9,959
Furniture and equipment 7,877 6,485
21,279 18,236
Less accumulated depreciation and amortization (7,636) (6,838)
$13,643 $11,398
</TABLE>
Depreciation and amortization expense was $1,558,000, $1,244,000, and
$1,181,000, for the years ended December 31, 1994, 1993, and 1992,
respectively.
Note J-Foreclosed Real Estate
Foreclosed real estate is presented net of a valuation allowance as follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Foreclosed real estate $1,100 $1,868
In-substance foreclosures 798 1,869
1,898 3,737
Less allowance for losses (325) (384)
$1,573 $3,353
</TABLE>
An analysis of the allowance for losses on foreclosed real estate follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year $384 $307 $ --
Provision for losses 207 673 307
Charge-offs, net of recoveries (266) (596) --
Balance at end of year $325 $384 $307
</TABLE>
The following table presents the components of the operation of foreclosed
real estate for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Operating expenses, net of rental income $175 $1,000 $1,455
Write-downs to net realizable value -- -- 914
Provision for losses 207 673 307
Net loss (gain) on sales of real estate (225) 1,338 (348)
$157 $3,011 $2,328
</TABLE>
Note K-Deposits
Total deposits consist of the following:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Noninterest bearing $ 37,675 $ 32,214
Savings:
Regular savings 102,653 111,155
NOW accounts 79,140 77,274
Money market accounts 98,389 113,754
Total savings 280,182 302,183
Time certificates of deposit 233,682 216,808
Total deposits $551,539 $551,205
</TABLE>
Time deposits with a minimum balance of $100,000 at December 31, 1994 and
1993 totaled approximately $28,144,000 and $32,830,000, respectively.
A summary of term certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31 (Dollars in thousands) 1994 1993
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Within one year $123,231 4.36% $143,048 4.22%
After one year through three years 83,329 5.52 66,341 5.02
After three years through five years 27,122 5.63 7,419 4.90
$233,682 4.92% $216,808 4.49%
</TABLE>
Note L-Short-Term Borrowed Funds
The following summarizes short-term borrowed funds:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Securities sold under agreement to repurchase:
Retail $ 5,603 $ 6,238
Wholesale-3.55% (fixed rate) due January 14, 1994 -- 14,644
Wholesale-6.35% (fixed rate) due January 13, 1995 7,120 --
Wholesale-6.05% (fixed rate) due January 20, 1995 14,593 --
Total short-term borrowed funds $27,316 $20,882
</TABLE>
Retail securities sold under agreement to repurchase at December 31, 1994
were due to mature by January 11, 1995 at a weighted average interest rate of
4.58%. At December 31, 1993, such agreements were due to mature by January 17,
1994 at a weighted average interest rate of 2.02%
Note M-Advances from Federal Home Loan Bank of Boston
Advances from the Federal Home Loan Bank of Boston (FHLBB) consist of the
following:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<C> <C> <C>
Short-Term:
3.48% (fixed rate) due January, 1994 $ -- $10,000
3.54% (variable rate) due January, 1994 -- 10,000
3.38% (fixed rate) due March, 1994 -- 26,600
5.90% (fixed rate) due January, 1995 50,000 --
6.39% (fixed rate) due March, 1995 10,000 --
6.65% (variable rate) due daily 32,000 --
92,000 46,600
Long-Term:
5.00% (fixed rate) due January, 2003 201 201
Total advances $92,201 $46,801
</TABLE>
CFX BANK has an available line of credit with the FHLBB at an interest rate
that adjusts daily. Borrowings under the line are limited to 2% of CFX BANK's
total assets. All borrowings from the FHLBB are secured by a blanket lien on
certain qualified collateral, defined principally as 90% of the fair value of
U.S. Government and federal agency obligations and 75% of the carrying value
of first mortgage loans on owner-occupied residential property.
Note N-Due to Broker
The Company records the purchase and sale of securities as of the trade
date. Trading and investment purchase transactions that had not yet settled at
December 31, 1993 amounted to $20,327,000 and $12,927,000, respectively.
Note O-Preferred Stock
At December 31, 1994, the Company had outstanding 192,769 shares of 7.5%
Series A Cumulative Convertible Preferred Stock (the "Preferred Stock").
The Preferred Stock was issued as of April 30, 1990 in connection with the
acquisition of The Valley Bank.
The Preferred Stock is convertible on a basis of 1.1025 share of common
stock for each share of Preferred Stock, (which reflects common stock
dividends) at the option of the shareholder at any time until the mandatory
conversion date of April 30, 1995.
The holders of the Preferred Stock are entitled to receive cumulative cash
dividends and have the right, voting as a single class with the shareholders
of the Company's common stock, to vote on all matters presented for a
shareholder vote. Each holder of the Preferred Stock is entitled to one vote
for each share held.
Note P-Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Current tax provision:
Federal $2,768 $1,501 $2,401
State 499 61 --
Total current 3,267 1,562 2,401
Deferred tax provision (benefit):
Federal (57) 479 (401)
State (13) 22 --
Total deferred (70) 501 (401)
Effect of tax law change 17 (436) --
Effect of change in valuation reserve -- (387) --
Provision for income taxes $3,214 $1,240 $2,000
</TABLE>
The components of the net deferred tax asset included in other assets are as
follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Deferred tax assets:
Federal $3,648 $3,822
State 496 537
Total deferred tax assets 4,144 4,359
Deferred tax liabilities:
Federal (1,623) (1,993)
State (221) (290)
Total deferred tax liabilities (1,844) (2,283)
Net deferred tax asset $2,300 $2,076
</TABLE>
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year $2,076 $3,007 $2,667
Deferred tax benefit 53 322 401
Purchase accounting effects of Colonial
Mortgage, Inc. acquisition -- (1,371) --
Tax effects of net unrealized losses on investment
securities reflected in shareholders' equity 171 118 (61)
Balance at end of year $2,300 $2,076 $3,007
</TABLE>
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 (In thousands) 1994 1993
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $2,713 $2,866
Capital loss carryforwards 512 593
Stock write-downs 14 14
Net unrealized losses on trading and investment securities 303 132
Foreclosed real estate write-downs -- 92
Deferred point income 81 214
Book reserves 421 385
Other 100 63
Total deferred tax assets 4,144 4,359
Deferred tax liabilities:
Depreciation (547) (576)
Mortgage servicing rights (1,037) (1,215)
Cash to accrual recapture (110) (167)
Deferred gains -- (169)
Other (150) (156)
Total deferred tax liabilities (1,844) (2,283)
Net deferred tax asset $2,300 $2,076
</TABLE>
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Prior to 1993,
the Company believed that some uncertainty existed with respect to future
realization of capital loss carryforwards. Therefore, the Company had
established a valuation allowance relating to capital loss carryforwards of
$387,000 as of December 31, 1992. The valuation allowance was reversed in
1993 as a result of the recognition of $1,266,000 in capital gains in 1993 and
the development of tax planning strategies that will utilize the capital loss
carryforwards.
A summary of capital loss carryforwards and other temporary differences that
will result in capital loss treatment when recognized for tax purposes is as
follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
Amount @ 39% Amount @ 39%
<S> <C> <C> <C> <C>
Tax capital loss carryforwards $1,325 $512 $1,522 $593
Other temporary differences that will result
in capital losses:
Stock write-downs 36 14 36 14
Net unrealized losses on marketable
equity securities -- -- 24 9
$1,361 $526 $1,582 $616
</TABLE>
The capital loss carryforwards expire as of December 31, 1996.
Prior to 1993, the Company was not obligated to pay New Hampshire Business
Profits Tax (NHBPT) as a result of significant income derived from state tax-
free sources and a credit allowed for New Hampshire Franchise Tax. Therefore,
prior to 1993 no deferred taxes had been recognized for NHBPT purposes.
During 1993, as a result of the Franchise Tax being repealed by the New
Hampshire State legislature and the Company's significant reduction in
income derived from tax-free sources, the Company began to pay NHBPT. As a
result of becoming obligated to pay NHBPT in 1993, the Company fully
recognized deferred taxes for NHBPT in 1993.
CFX BANK qualifies under provisions of the Internal Revenue Code to deduct
from taxable income, if any, a provision for loan and lease losses based on a
percentage of taxable income before such deduction (PTI method). Under
the Tax Reform Act of 1986, the loan loss deduction allowable is limited to 8%
of taxable income.
At December 31, 1994, retained earnings include a tax loan loss reserve of
approximately $5,700,000 at the Bank's base year for which no provision for
income taxes has been made. If, in the future, such amounts are used for any
purpose other than to absorb loan losses, or if CFX BANK ceases to qualify to
utilize the PTI method under the Internal Revenue Code, CFX BANK will incur a
tax liability at the current applicable income tax rates. The Company
anticipates that it will continue to meet the qualifying assets test and that
the $5,700,000 of retained earnings will not be used for any purpose that
would result in the payment of income taxes. The unrecognized deferred tax
liability on such amount as of December 31, 1994 is approximately $2,200,000.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting income, with the income tax provisions in the
consolidated statements of income:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1994 1993 1992
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at the statutory rate $2,954 34% $2,129 34% $1,971 34%
Increase (decrease) resulting from:
Dividends received deduction (44) (1) (29) -- (35) (1)
Tax-exempt interest income (252) (3) (91) (2) (93) (2)
Goodwill and deposit base intangible amortization 232 3 215 3 218 4
Reversal of book over tax basis from investment
in Colonial Mortgage, Inc. -- -- (273) (4) -- --
State income taxes, net of federal income tax
benefit 332 4 (381) (6) -- --
Other, net (8) -- 42 1 23 --
Change in valuation allowance -- -- (372) (6) (84) (1)
Income tax expense $3,214 37% $1,240 20% $2,000 34%
</TABLE>
Note Q-Pension and 401(k) Plans
The Company's defined benefit pension plan and 401(k) savings plan are
summarized in the following tables:
Pension Plan
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,467,000 in 1994 and $2,631,000 in 1993 $(2,539) $(2,689)
Projected benefit obligation for service rendered to date $(2,962) $(3,221)
Plan assets at fair value, primarily invested in bank money
market accounts, equities, and group annuity contracts 3,144 3,076
Plan assets in excess of (less than) projected benefit obligation 182 (145)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (1,153) (656)
Prior service cost not yet recognized in net periodic pension cost 128 136
Unrecognized net assets at end of year (8) (10)
Accrued pension cost included in other liabilities $ (851) $ (675)
</TABLE>
Net pension expense includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Service cost-benefits earned during the period $349 $268 $196
Interest cost on projected benefit obligation 253 221 208
Actual return on plan assets (79) (136) (267)
Net amortization and deferral (159) (117) 12
Net pension expense $364 $236 $149
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation was 8.00% and 5.00%, respectively, in 1994
and 7.00% and 5.50%, respectively, in 1993 and 8.25% and 5.50%,
respectively, in 1992. The expected long-term rate of return on plan assets
was 7.50% for the years ended December 31, 1994, 1993, and 1992.
401(k) Plan
The following table sets forth the Company's 401(k) plan expense recognized:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Matching contribution $110 $ 82 $ 76
Supplemental profit sharing contribution 315 328 106
$425 $410 $182
</TABLE>
Note R-Stock Option Plan
The Company has a stock option plan (the Option Plan) whereby options may be
granted to certain key employees and directors of the Company and its
subsidiaries to purchase shares of common stock of the Company at a price not
less than fair value at the date of grant.
Both incentive stock options and nonqualified stock options may be granted
pursuant to the Option Plan. A total of 248,000 shares of authorized but
unissued common stock of the Company has been reserved for issuance pursuant
to incentive stock options granted under the Option Plan and 193,000 shares of
authorized but unissued common stock have been reserved for
issuance pursuant to nonqualified stock options granted. The options are
exercisable over a period not to exceed ten years from the date of grant.
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
(In thousands, except price per share data) Stock Options Stock Options
------------------------ ------------------------
December 31 1994 1993 1992 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 237 193 191 30 47 47
Granted -- 61 9 63 -- --
Exercised @ $ 8.39 -- (3) -- -- -- --
@ $12.87 (10) -- -- -- -- --
@ $13.04 (24) (9) -- (1) (12) --
Cancelled (1) (5) (7) -- (5) --
Outstanding at end of year 202 237 193 92 30 47
Exercisable at end of year 202 237 193 92 30 47
Price range of options $ 8.39 $ 8.39 $ 8.39 $13.04 -- --
outstanding $15.88 $15.88 $13.04 $14.74 $13.04 $13.04
Average price of options outstanding $13.30 $13.30 $12.62 $14.20 $13.04 $13.04
</TABLE>
As provided for in the Option Plan, all option information has been restated
for stock dividends declared.
Note S-Employee Stock Purchase Plan
The Company has an employee stock purchase plan (the Stock Purchase Plan)
whereby employees of the Company and its subsidiaries with more than one-half
year of continuous service, except for certain employees with substantial
stock interests in the Company or with substantial rights to purchase common
stock, may purchase up to an aggregate of 110,000 shares of the Company's
common stock.
Eligible employees have the right to purchase common stock by authorizing
payroll deductions of up to seven percent of their base salary. The Stock
Purchase Plan provides for periodic offerings at a purchase price which would
not be less than the lesser of (1) 90% of the fair value per share on the
offering date or (2) 90% of the fair value per share on the date of exercise.
The Board of Directors of the Company may change the option price for
subsequent offerings by increasing the percentage of fair value to a
percentage not greater than 100% or decreasing the percentage of fair value to
a percentage not less than 85%.
Eligible employees purchased 10,235 and 7,889 shares of common stock at an
exercise price of $14.50 (average) and $11.15 (average) per share during the
years ended December 31, 1994 and 1993, respectively. As provided for in the
Stock Purchase Plan, all information has been restated for stock dividends
declared.
Note T-Restrictions on Subsidiary Dividends, Loans and Advances
Certain restrictions exist regarding the ability of the Bank 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 Bank if the
effect thereof would cause the net worth of the Bank to be reduced below
applicable net worth requirements.
Federal banking regulators require that the Company (on a consolidated
basis) and the Bank meet certain Tier 1 leverage capital and risk-based
capital ratio requirements. Generally, all but the most financially sound
institutions are required to maintain a minimum Tier 1 leverage capital
ratio of not less than 4.00% and a risk-based capital ratio of not less than
8.00%. The Company and the Bank exceeded all minimum regulatory requirements
at December 31, 1994 and 1993.
Under Federal Reserve regulations, the Bank is also limited as to the amount
it may loan to the Company, unless such loans are collateralized by specified
obligations. At December 31, 1994, the maximum amount available for transfer
from the Bank to the Company in the form of loans approximated 8.68% of
consolidated net assets.
Note U-Loans to Related Parties
In the ordinary course of business, the Company makes loans to subsidiary
affiliates, directors and officers and their associates and affiliated
companies (related parties) at substantially the same terms, including
interest rates and collateral, as those prevailing at the time of origination
for comparable transactions with other borrowers.
The total amounts due from directors, officers and their associates were
$7,546,000 and $8,534,000 at December 31, 1994 and 1993, respectively. During
the year ended December 31, 1994, new loans totaling $5,094,000 were made, and
repayments received totaled $6,082,000.
Note V-Commitments and Contingencies
In the ordinary course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial
statements.
Employment and Special Termination Agreements
The Company has entered into three-year employment agreements with its
President and Executive Vice President. Additionally, CFX MORTGAGE, INC. has
entered into a three-year employment agreement with its President. The terms
of the agreements automatically extend for an additional year unless either
party elects to limit the agreement to its then existing term. The agreements
generally provide for a specified minimum annual compensation and the
continuation of benefits currently received, including provisions following a
"Change of Control". However, such employment may be terminated for cause, as
defined, without incurring any continuing obligations. In addition to the
above agreements, the Company has entered into special termination agreements
with certain additional senior executives. The agreements generally provide
for certain lump sum or periodic severance payments following a "Change in
Control" as defined in the agreements.
Investment in Limited Partnerships
At December 31, 1994, the Company was committed to invest $551,000 in two
real estate development limited partnerships.
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.
Note W-Financial Instruments
The Company uses certain financial instruments in managing the interest rate
risk included in the consolidated balance sheet. Futures and options contracts
are used explicitly for hedge purposes and are not undertaken for speculation.
The Company's intent and general practice is to liquidate (offset) futures and
options contract obligations before stated exercise or delivery dates through
established market transactions. The Company does not generally intend to
deliver or receive the securities underlying its futures and options
contracts, but may execute delivery or receipt if it is financially prudent to
do so.
The detail on the specific financial instruments used is as follows:
Interest Rate Swap Agreements
Commencing in 1993, the Company entered into agreements to exchange interest
rate cash flows with approved counterparties. Swap agreements outstanding at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
December 31, 1994 (Dollars in thousands)
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Loss
<S> <S> <S> <C> <C> <C>
Mortgage loans Fixed--4.37%(1) Variable-- $25,000 11/23/96 $(1,194)
held in portfolio 6 mo. LIBOR(1)
(Rate: 6.3125%)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993 (Dollars in thousands)
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Loss
<S> <S> <S> <C> <C> <C>
Mortgage loans Fixed--4.37%(1) Variable-- $25,000 11/23/96 $ (52)
held in portfolio 6 mo. LIBOR(1)
(Rate: 3.5625%)
Trading securities Variable-- Fixed--4.55% 7,500 11/18/96 --
3 mo. LIBOR
Trading securities Variable-- Fixed--5.13% 9,500 11/18/98 --
3 mo. LIBOR
Trading securities Variable-- N/A 10,000 10/18/97 --
3 mo. LIBOR
with cap(2)
------- -------
$52,000 $ (52)
======= =======
<FN>
<F1> The contract can be terminated by counterparty in May 1995. If the
contract is not terminated in May 1995, the interest received from
the counterparty increases to 5.5% for the remaining term.
<F2> To be received only if and by the amount such rate exceeds 4.5%
</TABLE>
The effect of the $25,000,000 swap agreement is to lengthen the repricing
period of certain variable-rate mortgage loans. The $7,500,000 and $9,500,000
agreements effectively shorten the repricing period of certain fixed-rate
mortgage-backed securities held in the trading portfolio. The $10,000,000
agreement, known as an interest rate cap contract, is intended to protect
against declining fair values of trading securities should interest rates move
significantly higher.
Financial Futures Contracts
The Company uses financial futures contracts to hedge interest rate exposure
generally on certain mortgage-backed securities held in the trading portfolio.
At December 31, 1994, the Company held no financial futures contracts. At
December 31, 1993, the Company held short futures positions (futures contract
sold with a commitment to buy back within a specified term) in euro-dollar
contracts totaling $120,000,000 extending through March of 1995. The cost of
U.S. Treasury bills pledged as collateral for initial margin on open futures
contracts was $114,000 at December 31, 1993.
Financial Option Contracts
The Company uses financial options to hedge interest rate exposure generally
on certain mortgage-backed securities held in the trading portfolio as well as
secondary mortgage market operations. At December 31, 1994, the Company held
put options (the option to sell securities at a stated price within a
specified term) on 30-year Treasuries totaling $6,000,000 extending through
March 1995 for mortgage loans held for sale. At December 31, 1993, the Company
held put options in U.S. Treasury bonds totaling $9,000,000 extending through
March of 1994 and on euro-dollar obligations totaling $325,000,000 extending
through December of 1994. The Company also held call options (the option to
buy securities at a stated price within a specified term) on U.S. Treasury
bonds totaling $2,000,000 extending through March of 1994.
At December 31, 1994, there were no derivatives held for trading purposes as
the overall program for which they were used was liquidated in October, 1994.
The average fair values for such instruments for 1994 were not material to the
consolidated financial statements.
Net gains (losses) on trading securities, included separately in the
consolidated statements of income, are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Mortgage-backed securities $(2,985) $(323) $(41)
Other debt securities (4) 18 (17)
Equity securities 271 300 50
Futures, options and swaps 2,461 321 --
$ (257) $ 316 $ (8)
</TABLE>
The following table provides a rollforward of the notional amounts of each
type of financial instrument used by the Company to manage interest rate risk
for the periods indicated:
<TABLE>
<CAPTION>
Interest Financial Financial
Rate Futures Option
Swap Contracts Contracts
Year Ended December 31, 1994 (In thousands) Agreements (Short Position) (Long Position)
<S> <C> <C> <C>
Balance at beginning of year $52,000 $(120,000) $ 336,000
Contracts:
New -- 858,000 975,300
Terminated (27,000) (738,000) (1,280,300)
Expired -- -- (25,000)
Balance at end of year $25,000 $ -- $ 6,000
</TABLE>
As mortgage-backed securities were purchased for the trading portfolio, the
Company assessed the price volatility under varying interest rates. A hedge
using a combination of interest rate exchange agreements, financial futures
contracts and financial option contracts were constructed to closely resemble
the volatility of the underlying security. On an ongoing basis, the Company
monitored the effectiveness of the hedge position to ensure appropriate
matching of price volatility.
Derivative instruments are monitored regularly to assess market price
changes. On at least a monthly basis, rate change analyses are done in order
to assess potential market risk in changing interest rate environments. When
the price volatility of derivative instruments varies from the price
volatility of assets being hedged, positions are adjusted to maintain an
appropriate match.
The Company includes all off-balance sheet and derivative positions in its
analysis of interest rate risk. Increases and decreases of both 100 and 200
basis points are analyzed in order to determine anticipated changes in
earnings and market values.
Note X-Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Interest Bearing Deposits with Other Banks: The carrying values of interest
bearing deposits with other banks approximate fair values.
Federal Home Loan Bank of Boston Stock: The carrying value of Federal Home
Loan Bank of Boston stock approximates fair value.
Trading Securities: Fair values for trading portfolio securities (including
off-balance-sheet instruments), which also are the amounts recognized in the
consolidated balance sheet, are based on quoted market prices.
Investment Securities: Fair values of investment securities are based on
quoted market prices.
Mortgage Loans Held For Sale: Fair values of mortgage loans held for sale
are determined taking into consideration commitments on hand from investors
and prevailing market prices.
Loans and Leases (Loans): Fair values of variable-rate loans that reprice
frequently and have no significant change in credit risk, are based on
carrying values. Fair values for other loans are estimated using discounted
cash flow analyses which use interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Deposits: Fair values disclosed for demand deposits (non-interest bearing
deposits, savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-Term Borrowed Funds: The carrying amounts of borrowings under
repurchase agreements and other short-term borrowings approximate their
fair values.
Advances from the Federal Home Loan Bank of Boston: The carrying amount of
advances from the Federal Home Loan Bank of Boston approximate their fair
values.
Accrued Interest: The carrying amounts of accrued interest approximates
fair value.
Off-Balance-Sheet Instruments: Fair values for futures, options and swaps
are based on quoted market prices. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values, and related carrying amounts or notional amounts,
of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 18,832 $ 18,832 $ 16,676 $ 16,676
Interest bearing deposits with other banks 2,663 2,663 10,480 10,480
Federal Home Loan Bank of Boston stock 6,471 6,471 3,590 3,590
Trading securities 236 236 61,999 61,999
Securities available for sale 4,358 4,358 21,695 21,695
Securities held to maturity 109,531 102,881 96,044 96,135
Mortgage loans held for sale 8,295 8,321 16,927 16,957
Loans and leases, net 562,288 560,311 464,915 470,115
Accrued interest receivable 4,753 4,753 3,946 3,946
Financial liabilities:
Deposits 551,539 550,962 551,205 555,700
Short-term borrowed funds 27,316 27,316 20,882 20,882
Advances from the Federal Home Loan
Bank of Boston 92,201 92,201 46,801 46,801
Accrued interest payable 662 662 339 339
</TABLE>
<TABLE>
<CAPTION>
Notional Fair Notional Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to grant loans 21,836 (120) 29,283 (169)
Standby letters of credit 954 (9) 738 (7)
Unadvanced funds on lines of credit 48,183 -- 36,822 --
Interest-rate swap agreements 25,000 (1,194) 25,000 (52)
Financial options contract 6,000 31 336,000 --
</TABLE>
Note Y-Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest-rate contracts, (caps,
floors, and interest-rate swaps) and futures contracts. These instruments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated balance sheet. The
contract or notional amounts of these instruments reflect the
extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
specific instruments. The Company uses the same credit policies in making
these commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest-rate contracts, futures contracts, and options
contracts, the contract or notional amounts do not represent the Company's
exposure to credit loss. Rather, the credit loss exposure relates to the net
fair value to be received if such contracts were to be offset in the
marketplace. The Company controls the credit risk of such contracts through
credit approvals, limits, and monitoring procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
At December 31, 1994 and 1993, the following financial instruments were
outstanding:
<TABLE>
<CAPTION>
Contract or
Notional Amount
December 31 (In thousands) 1994 1993
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to grant loans $ 21,836 $ 29,283
Unadvanced funds on lines of credit 48,183 36,822
Standby letters of credit 954 738
Financial instruments whose contract or notional amounts
exceed the amount of credit risk:
Trading:
Futures contracts (short position) -- $120,000
Interest-rate swap agreements
(including caps and floors) -- 27,000
Financial options contracts (long position) -- 327,000
Other:
Outstanding forward delivery contracts 116,891 142,697
Interest-rate swap agreements 25,000 25,000
Financial options contracts (long position) 6,000 9,000
</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 secured letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
Forward delivery contracts are contracts for delayed delivery of mortgage
loans or mortgage- backed securities in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Credit risk to the Company arises from the possible inability
of counterparties to meet the terms of their contracts. In the event of
nonacceptance by the counterparty, the Company would be subject to the credit
risk of the loans retained. These loans would have been originated in the
ordinary course of business complying with the Company's standard credit
evaluation and collateral requirements. Failure to fulfill delivery
requirements for these contracts may result in payment of fees to certain
investors.
Futures contracts are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to make delivery at a specified
future date of a specified instrument, at a specified price or yield. Risks
arise from the possible inability of counterparties to meet the terms of their
contracts and from movements in securities values and interest rates.The
Company enters into a variety of interest-rate contracts including interest-
rate caps and floors, interest-rate options, and interest-rate swap
agreements, in its trading portfolio, in its mortgage banking activity, and
in managing the Company's overall interest-rate exposure. Interest-rate
options are contracts that allow the holder of the option to purchase or
sell a financial instrument at a specified price within a specified period of
time. For most futures and 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.
Interest-rate swap transactions generally involve the exchange of fixed and
floating-rate interest-payment obligations without the exchange of the
underlying principal amounts. The Company typically becomes a principal in the
exchange of interest payments between the parties and, therefore, is exposed
to loss should one of the parties default. The Company minimizes this risk by
performing normal credit reviews on its swap counterparties.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts but also the interest-rate risk associated with an unmatched
position. Notional principal amounts often are used to express the volume of
these transactions, but the amounts potentially subject to credit risk are
much smaller.
Note Z-Segment Information
Summarized data for the Company's mortgage banking operations for the year
ended December 31, 1994 and the period from September 1, 1993 (See Note B --
"Mergers and Acquisitions") to December 31, 1993 is as follows:
<TABLE>
<CAPTION>
Period Ended December 31 (In thousands) 1994 1993
<S> <C> <C>
Net interest and dividend income $ 1,063 $ 191
Loan servicing fees 2,627 323
Net gain on sale of loan servicing rights 677 --
Net gains on sale of loans 413 595
Other income 378 160
Total income 5,158 1,269
Depreciation expense 142 53
Other expense 3,790 1,304
Income (loss) before income tax expense (benefit) 1,226 (88)
Income tax expense (benefit) 516 (30)
Net income (loss) $ 710 $ (58)
Total assets $ 25,764 $ 36,000
Total loans serviced for others $645,000 $705,000
Additions to property, plant and equipment $ 287 $ 1,502
</TABLE>
Substantially all loans serviced for others were sold without recourse
provisions.
The following is an analysis of the changes in mortgage servicing rights
(acquired and excess servicing fees receivable):
<TABLE>
<CAPTION>
Period Ended December 31 (In thousands) 1994 1993
<S> <C> <C>
Balance at beginning of period $4,557 $1,473
Purchase accounting adjustment -- 3,463
Adjusted balance 4,557 4,936
Additions 406 112
Sales (126) --
Amortization (630) (491)
Balance at end of period $4,207 $4,557
</TABLE>
Note AA-CFX Corporation (Parent-Company-Only) Condensed Financial Statements
Balance Sheets
<TABLE>
<CAPTION>
December 31 (In thousands) 1994 1993
<S> <C> <C>
Assets
Cash and due from banks $ 100 $ 111
Interest bearing deposits with bank subsidiary 11,386 7,756
Securities available for sale 1,047 13
Securities held to maturity 595 873
Investment in bank subsidiary 66,922 66,338
Other assets 3,106 2,441
$83,156 $77,532
Liabilities $ 5,028 $ 1,748
Shareholders' Equity 78,128 75,784
$83,156 $77,532
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Interest and dividend income $ 277 $ 126 $ 231
Dividends from subsidiaries 5,000 7,750 2,000
Trading securities gains -- 9 1
5,277 7,885 2,232
General and administrative expenses 1,013 919 710
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries 4,264 6,966 1,522
Income tax benefit (345) (597) (264)
Income before equity in undistributed net income
(loss) of subsidiaries 4,609 7,563 1,786
Equity in undistributed net income (loss)
of subsidiaries 864 (2,541) 2,012
Net Income $5,473 $ 5,022 $3,798
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Operating Activities
Net income $ 5,473 $ 5,022 $ 3,798
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred tax benefit (111) (311) (83)
Net decrease in trading securities -- 11 29
Equity in undistributed net loss (income)
of subsidiaries (864) 2,541 (2,012)
Net change in other assets and other liabilities 2,621 (15) 322
Net Cash Provided
by Operating Activities 7,119 7,248 2,054
Investing Activities
Capital contribution to subsidiary -- (750) (750)
Net decrease (increase) in interest
bearing deposits (3,630) (4,040) 390
Purchases of securities available for sale (1,027) -- --
Purchases of securities held to maturity (3,002) -- --
Proceeds from maturities of securities
held to maturity 3,275 -- --
Proceeds from sales and maturities
of investment securities -- 2,695 4,638
Purchases of investment securities -- (2,855) (4,131)
Net Cash Provided (Used)
by Investing Activities (4,384) (4,950) 147
Financing Activities
Common cash dividends paid (3,152) (2,287) (2,069)
Preferred cash dividends paid (268) (270) (274)
Proceeds from issuance of common stock
under stock option plan 461 271 --
Proceeds from issuance of common stock
under employee stock purchase plan 149 88 70
Proceeds from issuance of common stock
under dividend reinvestment program 64 -- --
Net Cash Used
by Financing Activities (2,746) (2,198) (2,273)
Increase (Decrease) in Cash
and Cash Equivalents (11) 100 (72)
Cash and cash equivalents at beginning of year 111 11 83
Cash and Cash Equivalents
at End of Year $ 100 $ 111 $ 11
</TABLE>
Note BB-Quarterly Results of Operations (Unaudited)
The following is a summary of the consolidated quarterly results of
operations for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
Three Months Ended March 31 June 30 Sept. 30 Dec. 31
(In thousands, except per share data)
<S> <C> <C> <C> <C>
1994
Interest and dividend income $11,925 $11,845 $12,425 $13,486
Interest expense 4,940 5,118 5,522 6,052
Net interest and dividend income 6,985 6,727 6,903 7,434
Provision for loan and lease losses -- -- 50 375
Trading securities gains (losses) (441) 49 11 124
Investment securities gains -- 85 -- --
Other income (1) 1,403 1,369 1,386 2,239
Other expense (2) 6,119 5,979 6,156 6,908
Income before income taxes 1,828 2,251 2,094 2,514
Income taxes 715 859 724 916
Net income 1,113 1,392 1,370 1,598
Preferred stock dividend 67 68 66 67
Net income available to
common stock $ 1,046 $ 1,324 $ 1,304 $ 1,531
Earnings per common share (5) $ .28 $ .34 $ .33 $ .40
1993 (4)
Interest and dividend income $11,640 $11,690 $11,216 $11,596
Interest expense 5,150 4,907 4,778 4,850
Net interest and dividend income 6,490 6,783 6,438 6,746
Provision for loan and lease losses 1,320 900 750 --
Trading securities gains (losses) 154 44 144 (26)
Investment securities gains 725 439 569 891
Other income 546 592 901 1,288
Other expense (3) 5,235 5,082 5,528 7,647
Income before income taxes 1,360 1,876 1,774 1,252
Income taxes 469 384 225 162
Net income 891 1,492 1,549 1,090
Preferred stock dividend 67 68 67 68
Net income available to
common stock $ 824 $ 1,424 $ 1,482 $ 1,022
Earnings per common share (5) $ .22 $ .37 $ .38 $ .27
<FN>
<F1> Included in other income for the quarter ended December 31, 1994 was a
$677,000 gain from the sale of a $59,000,000 mortgage loan servicing portfolio
and a $87,000 gain from the sale of a $999,000 credit card portfolio.
<F2> Included in other expense for the quarter ended December 31, 1994 was
$594,000 in charges associated with a profit sharing accrual, a severance
accrual, and costs incurred in connection with the pending acquisition of
Orange Savings Bank.
<F3> Included in other expense for the quarter ended December 31, 1993 was
$2,022,000 in non-recurring charges associated with the performing and
nonperforming asset disposition, changing the discount rate on the Company's
pension plan, a severance accrual, and the cost of changing the names of the
Company's affiliates.
<F4> Reflected are the results of operations of CFX MORTGAGE, INC. commencing
September 1, 1993 versus 47.6% of such results previously recognized on the
equity method.
<F5> Prior period common per share earnings have been restated to reflect the
5% stock dividend declared on December 12, 1994.
</TABLE>
Report of Management-Assessment of Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting, including controls over
the safeguarding of assets, presented in conformity with both generally
accepted accounting principles and the Federal Financial Institutions
Examination Council instructions for Consolidated Reports of Condition and
Income (call report instructions). The structure contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with respect
to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1994. This
assessment was based on criteria for effective internal control over financial
reporting described in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management believes that, as of December 31, 1994, CFX
Corporation and subsidiary maintained an effective internal control structure
over financial reporting presented in conformity with both generally accepted
accounting principles and call report instructions.
/s/ PETER J. BAXTER /s/ MARK A. GAVIN
Peter J. Baxter Mark A. Gavin
President and Chief Chief Financial Officer
Executive Officer
Reports 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 subsidiary as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial
statements of CFX Corporation for the year ended December 31, 1992 were
audited by other auditors whose report dated January 19, 1993 expressed an
unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CFX Corporation and subsidiary at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
January 20, 1995
To the Board of Directors and
Shareholders of CFX Corporation
We have examined management's assertion that CFX Corporation and subsidiary
maintained an affective internal control structure over financial reporting,
including controls over the safeguarding of assets, as of December 31, 1994,
included in the accompanying report on Assessment of Internal Controls Over
Financial Reporting, presented in conformity with both generally accepted
accounting principles and call report instructions.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of
the internal control structure, and such other procedures as was considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to
future periods are subject to the risk that the internal control structure may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion that CFX Corporation and subsidiary
maintained an affective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
call report instructions as of December 31, 1994, is fairly stated, in all
material respects, based on Internal Control--Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
January 20, 1995
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No 33-17071) pertaining to the 1986 Stock Option Plan of CFX
Corporation and in the Registration Statement (Form S-8, No. 33-52598)
pertaining to the 1992 Employee Stock Purchase Plan of CFX Corporation, of our
report dated January 20, 1995, with respect to the consolidated financial
statements of CFX Corporation as of December 31, 1994, and for the year then
ended, incorporated by reference in the Annual Report (Form 10-K) for the year
ended December 31, 1994.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 28, 1995
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-17071) pertaining to the 1986 Stock Option Plan of CFX
Corporation and in the Registration Statement (Form S-8, No. 33-52598)
pertaining to the 1992 Employee Stock Purchase Plan of CFX Corporation, of our
report dated January 19, 1993, with respect to the consolidated financial
statements of CFX Corporation (formerly Cheshire Financial Corporation) for
the year ended December 31, 1992, incorporated by reference in the Annual
Report (Form 10-K) for the year ended December 31, 1994.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
March 28, 1995
