<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE COMMISSION
For the transition period from __________________ to ____________________
Commission File Number 1-10633
CFX CORPORATION
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0402421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 352-2502
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.66 2/3 PAR VALUE, LISTED ON THE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 17, 1997, was $212,331,000.
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 17, 1997, 13,045,157 shares of the registrant's common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1996 are incorporated by reference into Part II and Part IV of
this Form 10-K.
Portions of the definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders for the fiscal year ended December 31, 1996, which is to be filed
within 120 days of the end of the Company's fiscal year, are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference
herein of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a) (8) of
Regulation S-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
CFX Corporation (the "Company") is a bank holding company
incorporated under the laws of the State of New Hampshire. The Company's
wholly-owned subsidiary banks are CFX Bank, headquartered in Keene, New
Hampshire, Orange Savings Bank ("Orange"), headquartered in Orange,
Massachusetts, and Safety Fund National Bank ("Safety Fund"), headquartered in
Fitchburg, Massachusetts.
CFX Bank is a New Hampshire state-chartered savings bank that has
been incorporated since 1897. CFX Bank had total assets of $1.16 billion as of
December 31, 1996 and operates 28 full-service branches, 29 remote service
units ("RSUs") and 23 automated teller machines ("ATMs") in its service area.
CFX Bank's subsidiaries include CFX Capital Systems, Inc. ("CFX Capital") and
CFX Financial Services, Inc. ("CFX Financial"). CFX Capital's wholly-owned
subsidiary is CFX Mortgage, Inc. ("CFX Mortgage"), which engages in mortgage
banking. CFX Financial owns 51% of CFX Funding L.L.C. ("CFX Funding"), which
engages in the facilitation of lease financing and securitization.
Orange is a Massachusetts state-chartered savings bank that had
total assets of $84 million as of December 31, 1996. Orange operates two
full-service branches in Orange and Athol, Massachusetts, and 2 ATMs in its
service area.
On July 1, 1996, Milford Co/operative Bank ("Milford"), a New
Hampshire state-chartered co-operative bank located in Milford, New Hampshire,
with total assets of $160 million, was merged into CFX Bank. In connection with
the Milford merger, the Company issued 1,914,000 shares of its common stock in
exchange for all the issued and outstanding shares of Milford common stock. The
transaction was accounted for as a pooling-of-interests.
On July 1, 1996, the Company acquired The Safety Fund Corporation
("SFC"), a bank holding company, and its subsidiary bank, Safety Fund, a
national banking association. Safety Fund had total assets of $331 million as
of December 31, 1996 and operates 12 full-service branches and 14 ATMs in its
service area. In connection with the SFC and Safety Fund acquisitions, the
Company issued 2,973,000 shares of its common stock in exchange for all the
issued and outstanding shares of SFC common stock. The transaction was
accounted for as a pooling-of-interests. The acquisition of Safety Fund
provided an expanded penetration of the Company into commercial banking
services. In addition, Safety Fund had approximately $370 million in trust
assets as of December 31, 1996.
As previously reported, on February 13, 1997, the Company entered
into a definitive agreement to acquire Portsmouth Bank Shares, Inc.
("Portsmouth"), a bank holding company headquartered in Portsmouth, New
Hampshire. Pursuant to the Portsmouth agreement, each of the issued and
outstanding shares of Portsmouth common stock (5,711,000 at December 31, 1996)
will be converted into .93 shares of CFX common stock, as adjusted for
Portsmouth's 2% stock dividend declared on February 19, 1997 and subject
to adjustment based on the trading price of the Company's common stock.
The Portsmouth transaction is expected to be tax free to the owners of
Portsmouth and is subject to regulatory approval and the approval of both
the Company's and Portsmouth's shareholders. It is anticipated that the
transaction will be accounted for as a pooling-of-interests. At December 31,
1996, Portsmouth reported total assets of $272 million, deposits of
$198 million and stockholders' equity of $66 million. Following the Portsmouth
acquisition, Portsmouth's subsidiary bank, Portsmouth Savings Bank
("Portsmouth Bank"), a New Hampshire state-chartered savings bank headquartered
in Portsmouth, New Hampshire, will be merged into CFX Bank. Portsmouth Bank
operates 3 full-service branches and 3 ATMs in its service area.
On March 24, 1997, the Company entered into a definitive agreement
to acquire Community Bankshares, Inc. ("Community"), a bank holding company
headquartered in Concord, New Hampshire. Pursuant to the Community agreement,
it is anticipated that each of the issued and outstanding shares of Community
common stock (2,465,000 at December 31, 1996) will be converted into 2.2 shares
of CFX common stock, subject to adjustment based on the trading price of the
Company's common stock. The Community transaction is expected to be tax free
to the shareholders of Community and is subject to regulatory approval and the
approval of the respective shareholders of the Company and Community. It is
anticipated that the transaction will be accounted for as a
pooling-of-interests. At December 31, 1996, Community reported total assets of
$550 million, deposits of $396 million and stockholders' equity of $41 million.
Following the Community acquisition, the Company plans to merge Community's
subsidiary banks, Concord Savings Bank, a New Hampshire state-chartered savings
bank, and Centerpoint Bank, a New Hampshire state-chartered commercial bank,
into CFX Bank. Concord Savings Bank operates 7 full-service branches and 27
2
<PAGE> 3
ATMs, and Centerpoint Bank operates 4 full-service branches and 4 ATMs, in
their respective service areas. The Community agreement is attached hereto as
Exhibit 2.2.
In connection with the Community agreement, the Company and
Community entered into a Stock Option Agreement that grants the Company an
option to acquire up to 493,000 shares of the common stock of Community at a
purchase price of $28.50 per share, upon the occurrence of certain events
specified in the Stock Option Agreement. The Stock Option Agreement is attached
hereto as Exhibit 99.3.
For additional information regarding the Community transaction,
reference is made to the joint press release of the Company and Community,
dated March 24, 1997, which is attached hereto as Exhibit 99.2 and incorporated
herein by reference. Additional information about Community is contained in
Community's filings with the Commission under the Securities Exchange Act of
1934 (Commission File No. 0-14620).
The Company serves as a financial intermediary, attracting deposits
from, and making loans to, consumers and small-to-mid sized businesses. It's
principal lines of business are mortgage banking, retail banking, commercial
banking, investment and trust services, and equipment lease funding. The
Company's primary retail banking markets are New Hampshire and central
Massachusetts. The mortgage banking company uses loan production offices and
correspondent banks attracting loan applications from throughout New Hampshire,
Maine, Vermont and northern Massachusetts.
CFX Bank, Orange, and Safety Fund (collectively referred to as the
"Banks") use customer deposits and loan payments to fund first mortgage loans
on residential real estate. In addition to originating mortgage loans, the
Banks also make commercial, consumer and other term and installment loans.
Other traditional services available at the Banks include: a wide range of
deposit programs designed to attract both short-term and long-term deposits
from the general public, businesses and local government; safe deposit boxes;
travelers checks and money orders; and many other banking services.
To further the Banks' goals of providing a broad range of retail
services and to generate additional fee income, the Banks operate remote
service units and automated teller machines located at various business
locations in their respective service areas providing customers with a
convenient vehicle for conducting routine banking transactions. In addition,
CFX Bank is a subscriber to INVEST(TM) Financial Corporation which enables
customers to buy and sell securities and obtain investment advice at CFX Bank
offices. A full line of trust and investment management services are also
available to the Bank's customers. These services to customers were enhanced by
the acquisition of Safety Fund, which has provided trust services to its
customers for many years.
CFX Mortgage originates and purchases residential and construction
mortgage loans and sells these loans to the Banks and the secondary market,
while retaining the servicing for a majority of these loans. CFX Mortgage is an
approved seller and servicer of the Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, Department of Housing and Urban
Development, Veteran's Administration, and New Hampshire Housing Financing
Authority. CFX Mortgage services loans in an aggregate amount of $1.4 billion
as of December 31, 1996, including loans serviced for the Banks.
The Company operates a small-ticket lease financing and
securitization business through CFX Funding. CFX 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 is built on stable relationships with a limited number of
well-qualified lease originators (lessors) who adhere to specified underwriting
guidelines. Warehouse lines of credit provided by CFX Bank to these originators
are typically paid down every 90 to 180 days through securitization or sales of
the various lease portfolios.
The operating results of the Company depend primarily on its net
interest and dividend income, which is the difference between (i) interest and
dividend income on earning assets, primarily loans, leases, trading and
investment securities, and (ii) interest expense on interest bearing
liabilities, which consist of deposits and borrowings. The Company's results of
operations are also affected by the provision for loan and lease losses,
resulting from the Company's assessment of the adequacy of the allowance for
loan and lease losses; the level of its other operating income, including gains
and losses on the sale of loans and securities, and loan and other fees;
operating expenses; and income tax expenses.
The Company has made, and may continue to make, various
forward-looking statements with respect to earnings per share, cost savings
related to acquisitions, credit quality and other financial business matters
for 1997 and, in certain instances, subsequent periods. The Company cautions
that these forward-looking statements are subject to
3
<PAGE> 4
numerous assumptions, risks and uncertainties, and that statements for periods
subsequent to 1997 are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements. In addition to those
factors previously disclosed by the Company and those factors identified
elsewhere herein, the following factors could cause actual results to differ
materially from such forward-looking statements: continued pricing pressures on
loan and deposit products, actions of competitors, changes in economic
conditions, the extent and timing of actions of the Federal Reserve, customers'
acceptance of the Company's products and services and the extent and timing of
legislative and regulatory actions and reforms. The Company's forward-looking
statements speak only as of the date on which such statements are made. By
making any forward-looking statements, the Company assumes no duty to update
them to reflect new, changing or unanticipated events or circumstances.
MARKET AREA
The Banks operate primarily in New Hampshire and central
Massachusetts. Based on total deposits as of June 30, 1996, CFX Bank had the
largest market share in Cheshire County with 55% of the total deposit base. In
the other three counties CFX Bank operates in; Belknap, Hillsborough and
Merrimack, CFX Bank has less than 4% market share in each of these.
Collectively, CFX Bank ranks 5th in New Hampshire with 4.33% of total deposits.
Furthermore, the acquisition of Safety Fund increased the Company's market
share in Worcester County, Massachusetts from 1% to 4%.
INVESTMENT PORTFOLIO
The following table sets forth the book value of securities
available for sale and securities held to maturity at the dates indicated.
Securities available for sale are carried at estimated fair value. Securities
held to maturity are carried at amortized cost.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31 (IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
United States Treasury and agency obligations $ 128,863 $ 102,531 $ 76,357
State and municipal 441 - -
Corporate bonds 3,163 5,072 150
Federal agency mortgage pass-through securities 75,153 55,707 1,494
Other collateralized mortgage obligations (CMOs) 19,608 24,158 6,373
Money market funds - - 1,056
Other marketable equity securities 5,961 5,454 3,856
Federal Home Loan Bank of Boston and
Federal Reserve Bank of Boston Stock 12,135 8,324 8,295
------------ ----------- ------------
$ 245,324 $ 201,246 $ 97,581
============ =========== ============
SECURITIES HELD TO MATURITY:
United States Treasury and agency obligations $ 9,417 $ 48,323 $ 52,518
State and municipal 13,986 19,229 23,498
Corporate bonds - - 5,932
Federal agency mortgage pass-through securities 7,783 21,243 82,885
Other collateralized mortgage obligations (CMOs) 1,184 8,098 27,240
Other 300 200 100
------------ ----------- ------------
$ 32,670 $ 97,093 $ 192,173
============ =========== ============
</TABLE>
In the third quarter of 1996, the acquisitions of Safety Fund and
Milford necessitated a transfer of securities held to maturity with an
amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 to
securities available for sale in order to maintain the Company's existing
interest rate risk profile. In November 1995, the FASB issued guidance allowing
a one-time reassesment of an entity's investment classifications during the
period November 15, 1995 to December 31, 1995. As a result, securities held to
maturity with an amortized cost of $95,819,000 and a net
4
<PAGE> 5
unrealized loss of $815,000 were transferred to securities available for sale
and securities held to maturity with an amortized cost of $6,000,000 were sold
at a net realized gain of $6,000. At December 31, 1996 and 1995, net unrealized
gains (losses) on securities available for sale included in the shareholders'
equity section of the consolidated balance sheets, included net unrealized
gains (losses) of $126,000 and $(138,000), respectively, on securities
transferred from available for sale to held to maturity during 1994 and 1995.
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, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
MATURING
----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE BUT
WITHIN BUT WITHIN WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
---------------------- ---------------------- -------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ --------- ------------ --------- ---------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and other $ 10,047 6.11% $ 82,151 6.61% $44,116 6.71% $ 1,966 7.40%
State and municipal (1) 2,151 6.94 8,166 7.38 3,669 7.64 441 8.73
Corporate securities 3,035 6.84 - - 128 6.00 - -
Mortgage-backed securities
and CMO's (2) - - 10,802 7.16 8,606 6.83 84,320 6.74
Other - - - - 300 7.28 - -
---------- ------------ ------- ---------
Total debt securities $ 15,233 6.37% $ 101,119 6.73% $56,819 6.79% $ 86,727 6.77%
========== ============ ======= =========
</TABLE>
- ----------
(1) Yields on tax-exempt investment securities are stated on a
taxable-equivalent basis (using a 38.62% tax rate).
(2) Included in table based on contractual maturities.
LOAN PORTFOLIO
The following table shows the Company's loan distribution, net of
unearned income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 712,980 $ 586,489 $ 547,356 $ 473,673 $ 490,470
Construction 8,101 9,190 10,021 11,296 13,625
Commercial 142,989 141,618 119,775 117,267 101,400
Commercial, financial, and agricultural 120,380 104,412 104,126 105,147 121,078
Warehouse lines of credit to leasing companies 18,393 12,906 15,339 5,428 1,497
Consumer lease financing 67,146 24,399 306 - -
Consumer and other 48,175 48,416 45,833 35,095 34,016
------------- ------------ ----------- ---------- -----------
Total loans and leases $ 1,118,164 $ 927,430 $ 842,756 $ 747,906 $ 762,086
============= ============ =========== ========== ===========
</TABLE>
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<PAGE> 6
The following table shows the maturity of loans (excluding residential
mortgages on 1 - 4 family residences and all consumer loans) outstanding at
December 31, 1996. Also provided are the amounts due after one year, classified
according to sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
------------------------------------------------------
MATURING
------------------------------------------------------
AFTER ONE
WITHIN ONE BUT WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
------------- ------------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate--construction $ 6,558 $ 1,170 $ 373 $ 8,101
Real estate--commercial 61,760 43,961 37,268 142,989
Commercial, financial, and agricultural 64,513 26,543 29,324 120,380
Warehouse lines of credit to leasing companies 18,393 - - 18,393
------------ ---------- ---------- ----------
Total $ 151,224 $ 71,674 $ 66,965 $ 289,863
============ ========== ========== ===========
Loans maturing after one year with:
Fixed interest rates $ 37,018 $ 46,303
Variable interest rates 34,656 20,662
---------- ---------
Total $ 71,674 $ 66,965
========== ==========
</TABLE>
The following table summarizes the Company's nonaccrual, past due, and
restructured loans and leases:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (DOLLARS IN THOUSANDS) 1996(3) 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases: (1)
Real estate (2) $ 7,132 $ 7,693 $ 8,573 $ 11,412 $ 7,885
Commercial, financial, and agricultural 1,021 2,039 1,970 5,293 3,858
Consumer and other 146 108 34 195 209
--------- --------- --------- --------- --------
Total 8,299 9,840 10,577 16,900 11,952
--------- --------- --------- --------- --------
Accruing loans and leases past due 90 days or more:
Real estate (2) - 203 557 2,971 5,978
Commercial, financial, and agricultural - - - 246 483
Consumer and other - 32 12 15 131
--------- --------- --------- --------- --------
Total - 235 569 3,232 6,592
--------- --------- --------- --------- --------
Total nonperforming loans and leases $ 8,299 $ 10,075 $ 11,146 $ 20,132 $ 18,544
========= ========= ========= ========= ========
Percentage of total loans and leases .74% 1.09% 1.32% 2.69% 2.43%
Percentage of total assets .54% .75% .88% 1.65% 1.61%
Total restructured loans and leases $ 1,895 $ 1,360 $ 2,804 $ 4,105 $ 7,429
========= ========= ========= ========= ========
</TABLE>
- ---------
(1) All loans past due 90 days or more as to principal or interest are
generally placed on nonaccrual status. Prior to the third quarter of
1993, loans past due 90 days or more remained on nonaccrual status if,
in management's judgement, they were fully secured and in process of
collection. In addition, a loan, including an impaired loan, is
generally classified as nonaccrual when management determines that
significant doubt exists as to the collectibility of principal or
interest. An impaired loan may remain on accrual status if it is
guaranteed or well secured. Interest accrued but not received on loans
placed on nonaccrual status is reversed and charged against current
income. Interest on nonaccrual loans is recognized when received. Cash
received on impaired loans is generally allocated to principal and
interest based on the contractual terms of the note, unless management
believes such receipt should be applied directly to principal based on
collection concerns. Loans are restored to accrual status when the
borrower has demonstrated the ability to make future payments of
principal and interest, as scheduled.
(2) Includes residential, construction and commercial real estate loans.
(3) In addition to nonaccrual loans, management identifies "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. At December 31 1996, potential
problem loans totaled $2,205,000.
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<PAGE> 7
Interest income that would have been recorded under the original
terms of nonaccrual and restructured loans and the interest income actually
recognized for the year ended December 31, 1996 amounted to $1,069,000 and
$462,000, respectively.
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
This table summarizes the Company's loan and lease loss experience
for the years indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning of year $ 15,449 $ 14,401 $ 16,168 $ 12,639 $ 11,038
Allowance of acquired subsidiaries - - - 13 -
Allowance acquired through regulatory-assisted
transactions - - - - 350
Loans charged-off:
Real estate (1) 1,946 1,496 3,272 5,234 3,168
Commercial, financial and agricultural 906 1,269 1,986 3,071 2,268
Consumer and other 449 169 209 341 356
--------- ---------- ---------- --------- ---------
Total loans charged-off 3,301 2,934 5,467 8,646 5,792
--------- ---------- ---------- --------- ---------
Recoveries of amounts previously charged-off:
Real estate (1) 335 380 535 278 110
Commercial, financial and agricultural 225 417 362 193 119
Consumer and other 97 148 106 83 86
--------- ---------- ---------- --------- ---------
Total recoveries 657 945 1,003 554 315
--------- ---------- ---------- --------- ---------
Net loans charged-off 2,644 1,989 4,464 8,092 5,477
Provision for loan and lease losses (2) 2,935 3,037 2,697 11,608 6,728
--------- ---------- ---------- --------- ---------
Allowance for loan and lease losses, end of year $ 15,740 $ 15,449 $ 14,401 $ 16,168 $ 12,639
========= ========== ========== ========= =========
Net loans charged-off to average loans outstanding .26% .23% .56% 1.06% .71%
========= ========== ========== ========= =========
</TABLE>
- ----------------------
(1) Includes residential, construction and commercial real estate loans.
(2) The amount charged to operations and the related balance in the allowance
for loan and lease losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan
portfolio composition, prior loan and lease loss experience, and
management's estimation of future potential losses. The large provision
in 1993 resulted in part from losses incurred as a result of the earlier
real estate decline as well as for the losses incurred in conjunction
with a bulk sale of nonperforming assets totaling $6,600,000 to a private
investor. The amount of loss recognized on this 1993 sale was $2,473,000.
The combination of this bulk sale and a general economic strengthening
evidenced during 1994 allowed the Company to provide substantially less
to the allowance for loan and lease losses in 1994. From 1994 through
1996 the provision for loan and lease losses has remained fairly
consistent. These provisions have increased the allowance for loan and
lease losses, partially reduced by net charge-offs, each year since 1994.
The increase in the allowance was necessary, despite a lower level of
nonperforming loans and leases, due to the growth in the loan and lease
portfolio which has increased 50% since 1993.
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<PAGE> 8
ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION
The following table shows an allocation of the allowance for loan and
lease losses as of the dates indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate $ 6,727 77.27% $ 5,927 79.50% $ 5,121 80.35%
Commercial, financial,
and agricultural 3,241 12.41 2,791 12.65 1,528 14.18
Consumer and other 559 10.32 705 7.85 365 5.47
Unallocated 5,213 - 6,026 - 7,387 -
------- ------- ------- ------- ------- ------
$15,740 100.00% $15,449 100.00% $14,401 100.00%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
DECEMBER 31 1993 1992
- -----------------------------------------------------------------------
(DOLLARS IN THOUSANDS) PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate $ 4,993 80.52% $ 3,122 79.45%
Commercial, financial,
and agricultural 4,638 14.79 3,819 16.09
Consumer and other 322 4.69 347 4.46
Unallocated 6,215 - 5,351 -
------- ------ -------- ---------
$16,168 100.00% $12,639 100.00%
======= =======
</TABLE>
DEPOSITS
The average daily balances of deposits and of rates paid on such
deposits is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 131,008 -% $ 119,021 -% $ 102,152 -%
Regular savings deposits 169,648 2.69 164,944 2.81 175,888 2.55
NOW and money market deposits 279,353 2.14 300,905 2.37 336,221 2.36
Time deposits 541,945 5.57 466,025 5.48 359,619 4.37
------------ ------------- ----------
Total $ 1,121,954 3.63% $ 1,050,895 3.55% $ 973,880 2.89%
============ ============= ==========
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
OF DEPOSITS(1) DEPOSITS TOTAL
-------------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
3 months or less $ 5,782 $ 20,323 $ 26,105
Over 3 through 6 months 901 39,621 40,522
Over 6 through 12 months 2,494 54,415 56,909
Over 12 months 203 13,509 13,712
-------- -------- --------
Total $ 9,380 $127,868 $137,248
======== ======== ========
</TABLE>
- -------------
(1) Time deposits with a minimum required balance of $100,000.
8
<PAGE> 9
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 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on:
Average total assets .86% .86% .56%
Average total shareholders' equity 9.58 9.08 5.94
Average common shareholders' equity 9.58 9.17 6.12
Average total shareholders' equity to
average total assets ratio 8.94 9.45 9.35
Common dividend payout ratio 55.56 56.18 53.45
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds with an original maturity of one year
or less. Securities sold under repurchase agreements generally mature within 90
days. The details of these borrowings for the years 1996 and 1995 are presented
below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31 (Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under repurchase agreements:
Balance at year end $ 67,325 $ 42,855
Average amount outstanding 68,456 43,675
Maximum amount outstanding at any month end 94,762 48,372
Average interest rate for the year 4.78% 5.03%
Average interest rate on year-end balance 4.66% 4.81%
Advances from Federal Home Loan Bank of Boston:
Balance at year end $ 174,657 $ 102,613
Average amount outstanding 131,539 75,307
Maximum amount outstanding at any month end 191,970 103,613
Average interest rate for the year 5.66% 6.28%
Average interest rate on year-end balance 5.88% 6.16%
</TABLE>
SUBSIDIARIES
CFX Bank owns two subsidiary companies--CFX Capital and CFX Financial.
CFX Capital is a service corporation which owns CFX Mortgage and certain
investment securities. CFX Financial owns 51% of CFX Funding, a company which
facilitates lease financing and securitization.
CFX Mortgage has fully integrated its 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. CFX
Mortgage makes available to borrowers in its primary consumer market area a
full range of residential loans, including FHA-insured and VA-guaranteed loans,
conventional fixed-rate loans for terms of 15 or 30 years, and adjustable-rate
mortgage loans (ARMs). ARMs are advantageous to the Company because adjustable
rates retained in the Company's loan portfolio better match its natural
liability base. However, CFX Mortgage's ability to originate ARMs in lieu of
fixed-rate loans has varied in response to changes in market interest rates.
Under the Company's current ARMs program, the borrower may choose among loans
that have the initial interest rate fixed for one, three, five, or seven years
before the adjustment begins. Currently, ARMs are indexed to the 1-year
Treasury Securities Index and have annual caps of two percent.
All of CFX Mortgage's residential mortgage lending is subject to
non-discriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market.
Residential loans are originated using standard Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
applications and appraisal forms. All loans are subject to underwriting review
and approval by various levels of CFX Mortgage personnel, depending on the size
of the loan. Residential loan applications come in through various channels,
including the Company's bank branches and loan production offices.
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<PAGE> 10
In addition, CFX Mortgage originates 50% of its lending volumes through
a correspondent network located in New Hampshire, Maine, Vermont, and
Massachusetts. The majority of CFX Mortgage's correspondent network consists of
unaffiliated community banks with the remaining consisting of mortgage bankers
and mortgage brokers. CFX Bank provides CFX Mortgage with warehouse and working
capital funding.
CFX Funding engages in the facilitation of lease financing and
securitization. Through its national securitization 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 warehouse lines of credit with CFX Bank based on the credit of the
participating leasing company. The warehouse lines of credit enable program
participants in the securitization program to originate leases for portfolio
sale or securitization. Upon securitization, CFX Funding functions as the
master servicer with respect to the lease receivables.
Orange and Safety Fund own OSB Securities Corp. and Safety Fund
Securities Corp., respectively, each of which principally holds investment
securities.
Safety Fund also owns two additional subsidiaries, The
Lenders/Massachusetts, Inc. ("Lenders") and Prichard Plaza Realty Corp.,
("Prichard Plaza"). Lenders was established as a mortgage company operation
which focused on originating and servicing second mortgages. Currently, this
company does not, and it is not anticipated that it will in the future,
originate new production. It is currently dormant and only services a small
portfolio of approximately $2 million in loans, $575,000 of which is its own
portfolio. Prichard Plaza principally holds real estate related assets.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 580
full-time and 243 part-time employees. The employees of the Company and its
subsidiaries are not represented by any collective bargaining unit. Relations
between management and employees are considered good.
RISK MANAGEMENT
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and interest rate.
Although it cannot eliminate these risks, the Company has risk management
processes designed to provide for risk identification, measurement, monitoring
and control.
Credit Risk. Credit risk represents the possibility that a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
results from extending credit to customers, purchasing securities and entering
into certain off-balance-sheet financial derivative transactions. Risk
associated with the extension of credit includes general risk, which is
inherent in the lending business, and risk specific to individual borrowers.
The Company seeks to manage credit risk through portfolio diversification,
underwriting policies and procedures, and loan monitoring practices.
Liquidity Risk. Liquidity represents an institution's ability to
generate cash or otherwise obtain funds at reasonable rates to satisfy
commitments to borrowers and demands of depositors and debtholders, and invest
in strategic initiatives. Liquidity risk represents the likelihood the Company
would be unable to generate cash or otherwise obtain funds at reasonable rates
for such purposes. Liquidity is managed through the coordination of the
relative maturities of assets, liabilities and off-balance-sheet positions and
is enhanced by the ability to raise funds in capital markets through direct
borrowing or securitization of assets, such as mortgage loans and lease
receivables.
Interest Rate Risk. Interest rate risk arises primarily through the
Company's normal business activities of extending loans and taking deposits.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the timing, magnitude and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets, liabilities, and
off-balance-sheet positions. Interest rate risk also results from, among other
factors, changes in the relationship or spread between interest rates. Many
factors, including economic and financial conditions, general movements in
market interest rates and consumer preferences, affect the spread between
interest earned on assets and interest paid on liabilities. Financial
derivatives, primarily interest rate swaps, caps and floors, are used to alter
the interest rate characteristics of assets and liabilities. The Company uses a
number of measures to monitor and manage interest rate risk, including income
simulation and interest sensitivity ("gap") analyses.
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<PAGE> 11
For additional information relating to the Company's risk management
processes, see Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report to Shareholders
for the year ended December 31, 1996 and incorporated herein by reference.
REGULATION AND SUPERVISION
General
Bank holding companies and banks are extensively regulated under both
federal and state law. The following information describes certain aspects of
that regulation applicable to the Company and the Banks, and does not purport
to be complete. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular provisions. In addition to existing government
regulation, federal and state statutes and regulations are subject to changes
that may have significant impact on the way in which banks and bank holding
companies may conduct business. The likelihood and potential effects of such
changes cannot be predicted. Legislation enacted in recent years has
substantially increased the level of competition among commercial banks,
savings banks, thrift institutions and nonbanking companies, including
insurance companies, securities brokerage firms, mutual funds, investment banks
and major retailers. Recent legislation also has broadened the regulatory
powers of the federal banking agencies in a number of areas and has restricted
the powers of state-chartered banks.
The Company
Bank Holding Company Regulation. As a bank holding company, the Company
is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"),
and related federal statutes, and is subject to supervision, regulation and
inspection by the Board of Governors of the Federal Reserve System and the
Federal Reserve Bank of Boston (collectively, the "Federal Reserve"). The
Company is required to file with the Federal Reserve an annual report and any
additional information as the Federal Reserve may require pursuant to the BHC
Act. The Federal Reserve possesses cease and desist powers over bank holding
companies and their non-bank subsidiaries if their actions represent unsafe or
unsound practices.
Bank Acquisitions. The BHC Act requires, among other things, the prior
approval of the Federal Reserve in any case where the Company proposes to (i)
acquire all or substantially all the assets of any bank, (ii) acquire direct or
indirect ownership or control of more than 5 percent of the voting shares of
any bank, or (iii) merge or consolidate with any other bank holding company.
The BHC Act currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state-imposed concentration
limits. Effective June 1, 1997, the Company will have the ability, subject to
certain restrictions, including state opt-out provisions, to acquire by
acquisition or merger branches outside its home state. States may affirmatively
opt-in to permit these transactions earlier, which Massachusetts, among other
states, has done (although New Hampshire has opted-in to interstate branching,
it is not effective until June 1, 1997). The establishment of new interstate
branches also will be possible in those states with laws that expressly permit
it. Interstate branches will be subject to certain laws of the states in which
they are located. Competition may increase further as banks branch across state
lines and enter new markets.
Non-Bank Acquisitions. The BHC Act also prohibits a bank holding
company, with certain exceptions, from acquiring or retaining direct or
indirect ownership or control or more than 5 percent of the voting shares of
any company that is not a bank or bank holding company, and from engaging in
any activities other than those of banking, managing or controlling banks, or
activities which the Federal Reserve has determined to be so closely related to
the business of banking or managing or controlling banks as to be a proper
incident thereto.
Restrictions on the Acquisition of the Company. The acquisition of 10
percent or more of the Company's outstanding shares by any person or group of
persons may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act of 1978, as amended, and the acquisition of control
of the Company by another company would be subject to regulatory approval under
the BHC Act.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings retention appears to be
consistent with the corporation's capital needs, asset quality and overall
financial condition.
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<PAGE> 12
Cross-Guarantee. As a result of the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, any or all of the
Company's subsidiary banks can be held liable under so-called "cross-guarantee"
provisions for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the default of any other of the Company's
subsidiary banks, or (ii) any assistance provided by the FDIC to any other of
CFX's subsidiary banks in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur without regulatory assistance.
Securities Regulation. The Company has registered its common stock with
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). As a result of such registration, the
proxy and tender offer rules, periodic reporting requirements and insider
trading restrictions and reporting requirements, as well as certain other
requirements of the Exchange Act, are applicable to the Company. Because the
Company's stock is traded on the American Stock Exchange (the "AMEX"), the
Company is also subject to the rules and regulations of the AMEX. The Company
also may, from time to time, be subject to regulation by various state
securities commissions with respect to the offer and sale of its securities.
New Hampshire Corporation Law. As a New Hampshire corporation, the
Company also must comply with the general corporation laws of the state of New
Hampshire.
The Banks
Bank Regulation. As a New Hampshire state-chartered savings bank the
deposits of which are insured by the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF") of the Federal Deposit
Insurance Corporation (the "FDIC"), CFX Bank is subject to supervision,
regulation and examination by the New Hampshire State Banking Department and
the FDIC. As a Massachusetts state-chartered savings bank the deposits of which
are insured by the BIF, Orange is subject to supervision, regulation and
examination by the Massachusetts Commissioner of Banks and the FDIC. As a
national banking association, Safety Fund is subject to supervision, regulation
and examination primarily by the Office of the Comptroller of the Currency (the
"OCC"). Each of the Banks is subject to various requirements and restrictions
under federal and, in the case of CFX Bank and Orange, state law, including (i)
requirements to maintain reserves against deposits, (ii) restrictions on the
types, amount and terms and conditions of loans that may be granted, (iii)
limitations on the types of investments that may be made, the activities that
may be engaged in, and the types of services that may be offered, and (iv)
standards relating to asset quality, earnings, and employee compensation. The
approval of a Bank's primary regulator is required prior to any merger or
consolidation or the establishment or relocation of any office. Various
consumer laws and regulations also affect the operations of the Banks.
Affiliate Transactions. The Banks are subject to federal laws that
limit the transactions by subsidiary banks to or on behalf of their parent
company and to or on behalf of any nonbank subsidiaries. Such transactions by a
subsidiary bank to its parent company or to any nonbank subsidiary are limited
to 10 percent of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20
percent of such bank subsidiary's capital and surplus. Further, loans and
extensions of credit generally are required to be secured by eligible
collateral in specified amounts. Federal law also prohibits banks from
purchasing "low-quality" assets from affiliates.
FDIC Assessments. The deposits of the Banks are insured by the BIF and
the SAIF up to a maximum of $100,000 per depositor and are subject to FDIC
insurance assessments. The amount of FDIC and the SAIF assessments paid by
individual insured depository institutions is based on their relative risk as
measured by regulatory capital ratios and certain other factors. During 1995,
the FDIC's Board of Directors significantly reduced premium rates assessed on
deposits insured by the BIF.
Milford, a state-chartered co/operative bank with deposits insured by
the SAIF, was acquired and merged into CFX Bank as of July 1, 1996. The
deposits of Milford remain subject to SAIF assessment as the purchase of
Milford was completed through an "Oakar transaction" where deposits
of one insurance fund are moved to another without paying exit fees (to old
fund) or entrance fees (to new fund). Following an Oakar transaction, a portion
(Adjusted Attrributable Deposits Amounts - "AADA") of the transferred
deposits remains subject to the old fund assessment. Oakar deposits comprise
approximately 11% of the Company's total deposits. In 1996, the Deposit
Insurance Funds Act of 1996 was enacted and called for a special assessment on
SAIF-assessable deposits to capitalize the SAIF. CFX Bank was assessed, and
paid, this special assessment totaling $691,000 (pre-tax) in 1996. Also in
1996, legislation was enacted that provides that the FICO-bond repayment
obligations would be shared by SAIF- and BIF-insured institutions. For the
years 1997 through 1999, BIF-assessable deposits will be assessed at a FICO
premium rate of 1/5 of the rate
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<PAGE> 13
imposed on SAIF-assessable deposits. The FICO premiums for BIF and SAIF are 1.3
and 6.4 basis points, respectively, beginning January 1, 1997. Other than the
Oakar fees and FICO fees, there are no other deposit insurance premiums
currently assessed to any of the Company's banking subsidiaries.
Prompt Corrective Action. Federal banking agencies possess broad powers
to take corrective action as deemed appropriate for an insured depository
institution and its holding company. The extent of these powers depends on
whether the institution in question is considered "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". At December 31, 1996, each of the Banks
exceeded the required ratios for classification as "well capitalized." The
classification of depository institutions is primarily for the purpose of
applying the federal banking agencies' prompt corrective action powers and is
not intended to be, and should not be interpreted as, a representation of the
overall financial condition or prospects of any financial institution. The
agencies' prompt corrective action powers can include, among other things,
requiring an insured depository institution to adopt a capital restoration plan
which cannot be approved unless guaranteed by the institution's parent company;
placing limits on asset growth and restrictions on activities, including
restrictions on transactions with affiliates; restricting the interest rate the
institution may pay on deposits; prohibiting the payment of principal or
interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Federal Home Loan Bank. Each of the Banks is a member of the Federal
Home Loan Bank of Boston (the "FHLB"), which is one of twelve regional Federal
Home Loan Banks. The FHLB serves as a reserve or central bank for its members
and makes advances to its members in accordance with the FHLB's policies and
procedures. As members of the FHLB, the Banks are required to purchase and hold
stock in the FHLB. As of December 31, 1996, CFX Bank, Orange and Safety Fund
held stock in the FHLB in the amount of $9,962,000, $1,025,000 and $867,000
respectively.
Risk-Based Capital Requirements
Under the risk-based capital guidelines applicable to the Company and
the Banks, the minimum guideline for the ratio of total capital to
risk-weighted assets (including certain off-balance-sheet activities) is 8
percent. At least half of the total capital must be "Tier 1" capital, which
primarily includes common shareholders' equity and qualifying preferred stock,
less goodwill and other disallowed tangibles. "Tier 2" capital includes, among
other items, certain cumulative and limited-life preferred stock, qualifying
subordinated debt and the allowance for credit losses, subject to certain
limitations, less required deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio
(Tier 1 capital to total adjusted average assets) guidelines providing for a
minimum leverage ratio of 3 percent for bank holding companies and banks
meeting certain specified criteria, including that such institutions have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. Institutions not meeting these criteria are expected to
maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200
basis points. The federal bank regulatory agencies may, however, set higher
capital requirements when particular circumstances warrant. Under the federal
banking laws, failure to meet the minimum regulatory capital requirements could
subject a bank to a variety of enforcement remedies available to federal bank
regulatory agencies, including the termination of deposit insurance by the FDIC
and seizure of the institution.
At December 31, 1996, the total and Tier 1 risk-based capital ratios
and leverage ratios of the Company and each of the Banks exceeded the minimum
regulatory capital requirements. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Community Reinvestment
Bank holding companies and their subsidiary banks are also subject to
the provisions of the Community Reinvestment Act of 1977, as amended ("CRA").
Under the terms of the CRA, a bank's record in meeting the credit needs of the
community served by the bank, including low- and moderate-income neighborhoods,
is generally annually assessed by the bank's primary federal regulator. When a
bank holding company applies for approval to acquire a bank or other bank
holding company, the Federal Reserve will review the assessment of each
subsidiary bank of the applicant bank holding company, and such records may be
the basis for denying the application. At December 31, 1996, the Company and
each of the Banks was rated "Satisfactory" or "Outstanding" with respect to
CRA.
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Dividend Restrictions
Under the New Hampshire Business Corporation Act, a distribution,
including dividends and the purchase or redemption of a corporation's own
shares, must be authorized by the Board of Directors and may not be paid if the
corporation, after the payment is made, would not be able to pay its debts as
they become due in the usual course of business, or the corporation's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
The principal source of the Company's revenue and cash flow is
dividends from the Banks and its other subsidiaries. The Banks are subject to
various statutory and regulatory restrictions on their ability to pay dividends
or otherwise make distributions or supply funds to the Company. In addition,
bank regulators may have authority to prohibit a bank subsidiary from paying
dividends, depending on the subsidiary's financial condition, if such payment
is deemed to constitute an unsafe or unsound practice.
The Company is a legal entity separate and distinct from the Banks and
its other subsidiaries. Accordingly, the right of the Company, and consequently
the right of creditors and shareholders of the Company, to participate in any
distribution of the assets or earnings of the Banks and its other Subsidiaries
is necessarily subject to the prior claims of creditors of the Banks and its
other subsidiaries, except to the extent that claims of the Company in its
capacity as creditor may be recognized.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
Other Regulations
The policies of regulatory authorities, including the Federal Reserve
and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to do so in the future. An
important function of the Federal Reserve is to regulate aggregate national
credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes
in reserve requirements against bank deposits. Policies of these agencies may
be influenced by many factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and fiscal policies of
the United States government. Supervision, regulation or examination of the
Company by these regulatory agencies is not intended for the protection of the
Company's shareholders.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further deregulation of
both banks and other financial institutions. Such legislation could 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.
Competition
Bank holding companies and their subsidiaries are subject to
vigorous and intense competition from various financial institutions and other
"nonbank" or non-regulated companies or firms that engage in similar
activities. The Bank competes for deposits with other commercial banks, savings
banks, savings and loan associations, insurance companies and credit unions, as
well as issuers of commercial paper and other securities, including shares in
mutual funds. In making loans, the Bank competes with other commercial banks,
savings banks, savings and loan associations, consumer finance companies,
credit unions, leasing companies and other nonbank lenders. In addition,
various nonbank subsidiaries engaged in investment banking and venture capital
activities compete with commercial banks, investment banking firms, insurance
companies and venture capital firms.
The Company and the Bank compete not only with financial institutions
based in New Hampshire and Massachusetts, but also with a number of large
out-of-state and foreign banks, bank holding companies and other financial and
nonbank institutions. Some of the financial and other institutions operating
in the same markets are engaged in national and international operations and
have more assets and personnel than the Company. Some of the Company's
competitors are not subject to the extensive bank regulatory structure and
restrictive policies which apply to the Company and the Bank.
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<PAGE> 15
The principal factors in successfully competing for deposits are
convenient office locations and remote service units, flexible hours,
competitive interest rates and services, while those relating to loans are
competitive interest rates, the range of lending services offered and lending
fees. The Company believes that the local character of the Banks' businesses
and their community bank management philosophy enabled them to compete
successfully in their respective market areas. However, it is anticipated that
competition will continue to increase in the years ahead.
ITEM 2. PROPERTIES
The Company neither owns nor leases any real property but utilizes the
premises and equipment of CFX Bank. CFX Bank owns its main office and two
branch offices in Keene, New Hampshire. CFX Bank also owns branches in
Allenstown, Amherst, Greenville, Henniker, Hillsborough, Jaffrey, Milford, New
Boston, New Ipswich, Peterborough, Troy and Wilton/Lyndeborough, New Hampshire
while leasing other branches in Brookline, Gilford, Hinsdale, Laconia, Loudon,
Manchester, Marlborough, Mont Vernon, North Swanzey, Rindge, Walpole, West
Chesterfield and Winchester, New Hampshire. Included above are five
"mini-branches" that are located at various retail establishments in its market
area. In addition, CFX Bank and subsidiaries also own or lease several other
properties used for administrative purposes. Orange Savings Bank owns its main
office, located in Orange Massachusetts, and leases a branch facility in Athol,
Massachusetts. Safety Fund owns its main office and leases a branch office in
Fitchburg, Massachusetts. Additionally, Safety Fund owns branches in Gardner,
Leominster and Worcester, while leasing other branches in Gardner, Leominster,
Westborough and Worcester, Massachusetts. In addition, Prichard Plaza owns a
real estate investment property in Fitchburg, Massachusetts.
The Banks also own 68 automated teller and remote service units located
in New Hampshire and central Massachusetts.
At December 31, 1996, the total net book value of the Company's
premises and equipment was $27,386,000.
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 Banks are a party or of which the Banks' property is
subject. There are no material pending legal proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of
more than five percent (5%) of the common stock of the Company, or any
associate of any such director, officer, affiliate of the Company or any
security holder is a party adverse to the Company or has a material interest
adverse to the Company or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 63 of the Annual Report to Shareholders for
the fiscal year ended December 31, 1996 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 year ended December 31, 1996 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 10-24 inclusive of the Annual Report to Shareholders for
the year ended December 31, 1996 is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements Required by Regulation S-X
Information relating to financial statements on pages 25-57 inclusive
of the Annual Report to Shareholders for the year ended December 31, 1996 is
incorporated herein by reference.
The opinion of KPMG Peat Marwick, LLP for the years ended 1995 and 1994
pertaining to The Safety Fund Corporation, and the opinion of Deloitte &
Touche, LLP for the year ended 1994 pertaining to Orange Savings Bank follow:
Independent Auditors' Report
To the Board of Directors and Stockholders of
The Safety Fund Corporation:
We have audited the accompanying consolidated balance sheet of The
Safety Fund Corporation and subsidiaries as of December 31, 1995, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the two-year period
ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principals used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Safety
Fund Corporation and subsidiaries at December 31, 1995, and the results
of their operations and their cash flows for the two-year period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
/S/ KPMG Peat Marwick LLP
January 22, 1996
Boston, Massachusetts
Independent Auditors' Report
To the Board of Directors and Stockholders of
Orange Savings Bank:
We have audited the consolidated statements of operations,
stockholders' equity, and cash flows of Orange Savings Bank and
subsidiary for the year ended December 31, 1994 (not included herein).
These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the Company's results of operations and their
cash flows for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
/S/ Deloitte & Touche LLP
January 27, 1995
Boston, Massachusetts
16
<PAGE> 17
(b) Supplementary Financial Information
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 57 of
the draft of the Annual Report to Shareholders for the fiscal year
ended December 31, 1996 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the
registrant under the caption "Proposal I - Election of Directors" of the Proxy
Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation under the caption
"Proposal I - Election of Directors" of the Proxy Statement for the 1997 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 under the caption "Proposal I - Election of Directors" of the
Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
under the caption "Proposal I - Election of Directors" of the Proxy Statement
for the 1997 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, 1996:.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE REFERENCES
-------------------- ---------------
<S> <C>
Consolidated Balance Sheets ...................................... 25
Consolidated Statements of Income................................. 26
Consolidated Statements of Shareholders' Equity................... 27
Consolidated Statements of Cash Flows............................. 28
Notes to Consolidated Financial Statements........................ 29-57
Report of Independent Auditors.................................... 59
</TABLE>
(2) Financial Statement Schedules
See Item 14 (d)
17
<PAGE> 18
(3) Exhibits Required by Item 601
See Item 14 (c)
(b) Reports on Form 8-K
On February 21, 1997, a Form 8-K was filed announcing the Company
entered into a definitive agreement for the acquisition of Portsmouth
Bank Shares, Inc., headquartered in Portsmouth, New Hampshire.
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated herein
by reference to other filings.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization dated February
13, 1997 between CFX Corporation and Portsmouth Bank Shares, Inc.
2.2 Agreement and Plan of Reorganization, dated March 24, 1997
between CFX Corporation and Community Bankshares, Inc.
3 (4) Articles of Incorporation and by-laws of CFX Corporation, as amended.
10.1(6) 1992 CFX Corporation Profit Sharing/Bonus Plan.
10.2(7) 1986 CFX Corporation Stock Option Plan.
10.3(5,8) Employment Agreement dated as of January 1, 1991 between CFX Corporation and
Peter J. Baxter, as amended.
10.4(3,8) Change of Control Agreement dated December 31, 1992
between CFX Corporation and Mark A. Gavin.
10.5 Change of Control Agreement dated January 27, 1997 between CFX Corporation
and Gregg R. Tewksbury
10.6(2) 1995 CFX Corporation Stock Option Plan.
10.7(9) Employment Agreement between The Safety Fund Corporation and Christopher W.
Bramley dated as of February 1, 1994, assumed by the Company as of July 1, 1996.
10.8(9) Employment and Change of Control Agreement between The Safety Fund
Corporation and Stephen R. Shirley, dated June 1, 1994, assumed by the Company
as of July 1, 1996.
10.19(10) CFX Corporation 1992 Employee Stock Purchase Plan
13 CFX Corporation Annual Report to Shareholders for fiscal year ended
December 31, 1996.
21 Subsidiaries--Reference is made to Item 1.
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Deloitte & Touche, LLP
23.3 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
99.1(1) Stock Option Agreement dated February 13, 1997 between CFX Corporation
and Portsmouth Bank Shares, Inc.
99.2 Joint Press Release, dated March 24, 1997
99.3 Stock Option Agreement dated March 24, 1997 between CFX Corporation and
Community Bankshares, Inc.
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Exhibits to the Form 8-K of CFX
Corporation filed on February 21, 1997.
(2) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-61787 effective in 1995.
(3) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of CFX Corporation for the year ended December 31, 1994.
(4) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-4 of CFX Corporation No. 33-56875 effective in 1994.
(5) 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.
(6) 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.
(7) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-17071 effective in 1987.
(8) Exhibits refer to compensatory agreements with executives of CFX
Corporation and its subsidiaries.
(9) Incorporated herein by reference to The Safety Fund Corporation's Annual
Report on Form 10-KSB for the year ended December 31, 1994.
(10) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-52598 effective in 1992.
(d) Financial Statement Schedules.
Schedules to the Consolidated Financial Statements required by Article
9 of Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CFX CORPORATION
Date: March 24, 1997 By: /s/ PETER J. BAXTER
-------------------
Peter J. Baxter, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ RICHARD F. ASTRELLA Director March 24, 1997
- ------------------------------------
Richard F. Astrella
/s/ WILLIAM E. AUBUCHON, III Director March 24, 1997
- ------------------------------------
William E. Aubuchon, III
Director March 24, 1997
- ------------------------------------
Richard B. Baybutt
/s/ PETER J. BAXTER President and Director March 24, 1997
- ------------------------------------ (Principal Executive Officer)
Peter J. Baxter
/s/ CHRISTOPHER V. BEAN Director March 24, 1997
- ------------------------------------
Christopher V. Bean
/s/ CHRISTOPHER W. BRAMLEY Director March 24, 1997
- ------------------------------------
Christopher W. Bramley
/s/ P. KEVIN CONDRON Director March 24, 1997
- ------------------------------------
P. Kevin Condron
/s/ CALVIN L. FRINK Director March 24, 1997
- ------------------------------------
Calvin L. Frink
/s/ EUGENE E. GAFFEY Director March 24, 1997
- ------------------------------------
Eugene E. Gaffey
/s/ DAVID R. GRENON Director March 24, 1997
- ------------------------------------
David R. Grenon
/s/ ELIZABETH SEARS HAGER Director March 24, 1997
- ------------------------------------
Elizabeth Sears Hager
/s/ DOUGLAS S. HATFIELD, JR. Director March 24, 1997
- ------------------------------------
Douglas S. Hatfield, Jr.
/s/ PHILIP A. MASON Director March 24, 1997
- ------------------------------------
Philip A. Mason
/s/ WALTER R. PETERSON Director March 24, 1997
- ------------------------------------
Walter R. Peterson
/s/ L. WILLIAM SLANETZ Director March 24, 1997
- ------------------------------------
L. William Slanetz
/s/ MARK A. GAVIN Chief Operating Officer March 24, 1997
- ------------------------------------ (Principal Operating Officer)
Mark A. Gavin
/s/ GREGG R. TEWKSBURY Chief Financial Officer March 24, 1997
- ------------------------------------ (Principal Financial and
Gregg R. Tewksbury Accounting Officer)
</TABLE>
20
<PAGE> 1
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Reorganization
Agreement"), dated as of March 24, 1997, is by and among COMMUNITY
BANKSHARES, INC. ("Community"), a New Hampshire corporation, CONCORD
SAVINGS BANK ("Concord Bank"), a New Hampshire state-chartered savings
bank, CENTERPOINT BANK, a New Hampshire state-chartered commercial bank
(Concord Bank and Centerpoint Bank being referred to together herein as the
"Community Banks"), CFX CORPORATION ("CFX"), a New Hampshire corporation,
and CFX BANK, a New Hampshire state-chartered savings bank.
WITNESSETH
WHEREAS, the parties hereto desire to combine their respective
businesses on the terms and subject to the conditions of this
Reorganization Agreement;
WHEREAS, the parties hereto desire that CFX acquire all the
outstanding shares of capital stock of Community, including each attached
right issued pursuant to the Community Rights Agreement (as defined below),
through an exchange (the "Share Exchange") of shares of CFX Common Stock
(as defined below) for the issued and outstanding shares of Community
Common Stock (as defined below) pursuant to a Plan of Share Exchange (the
"Plan of Exchange") in the form attached hereto as Annex A;
WHEREAS, the parties desire that, following the Share Exchange,
Community shall be merged (the "Holding Company Merger") with and into CFX,
pursuant to a merger agreement or plan of merger (the "Merger Agreement")
in a form to be specified by CFX and reasonably satisfactory to Community
and consistent with the terms of this Reorganization Agreement;
WHEREAS, the parties desire that, following the consummation of the
Holding Company Merger, the Community Banks, wholly owned subsidiaries of
Community, shall be merged (the "Bank Merger") with and into CFX Bank, a
wholly-owned subsidiary of CFX, pursuant to an Agreement and Plan of Merger
(the "Plan of Merger") in the form attached hereto as Annex B;
WHEREAS, in connection with the execution of this Reorganization
Agreement, Community and CFX have entered into a Stock Option Agreement
(the "Stock Option Agreement") dated as of even date herewith pursuant to
which Community will grant CFX the right to purchase certain shares of
Community Common Stock; and
WHEREAS, the parties hereto desire to provide for certain
undertakings, conditions, representations, warranties and covenants in
connection with Share Exchange, the Holding Company Merger, the Bank Merger
and the other transactions (collectively, the "Transactions") contemplated
<PAGE> 2
by this Reorganization Agreement, the Plan of Exchange, the Merger
Agreement, the Plan of Merger and the Stock Option Agreement (collectively,
the "Transaction Documents");
WHEREAS, it is intended that all of the parties hereto except
Centerpoint Bank shall execute this Reorganization Agreement on the date
first above written, with Centerpoint Bank to execute this Reorganization
Agreement, as promptly thereafter as practicable, as provided in Section
4.7(d) hereof;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained and intending to
be legally bound hereby, the parties hereto do hereby agree as follows:
ARTICLE 1.
CERTAIN DEFINITIONS
1.1. "AMEX" shall mean the American Stock Exchange, Inc.
1.2. "BHC Act" shall mean the Bank Holding Company Act of 1956, as
amended.
1.3. "CFX Entities" shall mean CFX and the CFX Subsidiaries.
1.4. "CFX Financial Statements" shall mean (i) the consolidated
balance sheets of CFX as of September 30, 1996 and as of December 31, 1995
and 1994 and the related consolidated statements of income, cash flows and
changes in shareholders' equity (including related notes, if any) for the
nine months ended September 30, 1996 and each of the three years ended
December 31, 1995, 1994 and 1993 as filed by CFX in SEC Documents, together
with the consolidated balance sheet of CFX and the related consolidated
statements of income, cash flows and changes in shareholders' equity
(including related notes, if any) as of and for the period ended December
31, 1996, as delivered to Community prior to the date hereof
and (ii) the consolidated balance sheets of CFX and related consolidated
statements of income, cash flows and changes in shareholders' equity
(including related notes, if any) as filed by CFX in SEC Documents with
respect to periods ended subsequent to September 30, 1996.
1.5. "Closing Date" shall mean the date specified pursuant to
Section 4.8 hereof as the date on which the Parties shall close the
Transactions.
1.6. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.7. "Commissioner" shall mean the New Hampshire State Bank
Commissioner.
1.8. "Community Entities" shall mean Community and the Community
Subsidiaries.
- 2 -
<PAGE> 3
1.9. "Community Financial Statements" shall mean (i) the
consolidated balance sheets of Community as of September 30, 1996 and as of
December 31, 1995 and 1994 and the related consolidated statements of
income, cash flows and changes in shareholders' equity (including related
notes, if any) for the nine months ended September 30, 1996 and each of the
three years ended December 31, 1995, 1994 and 1993 as filed by Community in
SEC Documents, together with the consolidated balance sheet of Community
and the related consolidated statements of income, cash flows and changes
in shareholders' equity (including related notes, if any) as of and for the
period ended December 31, 1996, as delivered to CFX prior to the date
hereof and (ii) the consolidated balance sheets of Community and related
consolidated statements of income, cash flows and changes in shareholders'
equity (including related notes, if any) as filed by Community in SEC
Documents with respect to periods ended subsequent to September 30, 1996.
1.10. "Effective Date" shall mean the date specified pursuant to
Section 4.8 hereof as the effective date of the Share Exchange.
1.11. "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
1.12. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
1.13. "FDIA" shall mean the Federal Deposit Insurance Act.
1.14. "FDIC" shall mean the Federal Deposit Insurance Corporation.
1.15. "Federal Reserve" shall mean the Board of Governors of the
Federal Reserve System or any appropriate Federal Reserve Bank.
1.16. "Intellectual Property" means domestic and foreign letters
patent, patents, patent applications, patent licenses, software licensed or
owned, know-how, know-how licenses, trade names, common law and other
trademarks, service marks, licenses of trademarks, trade names and/or
service marks, trademark registrations and applications, service mark
registrations and applications and copyright registrations and
applications.
1.17. "Investment Company Act" means the Investment Company Act of
1940, as amended.
1.18. "Material Adverse Effect" shall mean, with respect to Community
or CFX, as the case may be, a material adverse effect on (A) the business,
results of operations or financial condition of such party and its
subsidiaries taken as a whole (provided, however, that the following shall
not constitute or contribute to a Material Adverse Effect: (i) changes in
the financial condition, business, or results of operations of a person
resulting directly or indirectly from (1) changes in interest rates
(provided that Community is in compliance with its asset/liability
- 3 -
<PAGE> 4
management policy as Previously Disclosed to CFX, as the same may be
revised thereafter with CFX's concurrence), or (2) changes in state and
federal regulations or legislation affecting New Hampshire banks; or (ii)
matters related to changes in federal, state or local tax laws or changes
in federal, state or local tax status, characteristics, or attributes or
the ability to use such attributes); or (B) the ability of any Party to
perform its obligations under, and to consummate the transactions
contemplated by, the Transaction Documents.
1.19. "Parties" shall mean CFX, CFX Bank, Community and the Community
Banks.
1.20. "Previously Disclosed" shall mean disclosed prior to the
execution hereof in (i) an SEC Document filed with the SEC subsequent to
December 31, 1995 and prior to the date hereof, or (ii) a letter dated of
even date herewith from the Party making such disclosure and delivered to
the other Parties prior to the execution hereof.
1.21. "Proxy Statement" shall mean the proxy statement/prospectus (or
similar documents) together with any supplements thereto sent to the
shareholders of CFX or Community to solicit their votes in connection with
this Reorganization Agreement and the Plan of Exchange.
1.22. "Registration Statement" shall mean the registration statement
with respect to the CFX Common Stock to be issued in connection with the
Share Exchange as declared effective by the SEC under the Securities Act,
if required.
1.23. "Rights" shall mean subscriptions, warrants, options, rights,
calls, agreements, understandings or commitments of any character calling
for the transfer, purchase, issuance or disposition of, or representing the
right to purchase, acquire, subscribe to or otherwise receive any shares of
capital stock, or any securities convertible into or representing the right
to purchase, acquire, subscribe to or otherwise receive any shares of
capital stock, or any stock appreciation rights, performance units and
other similar stock-based rights whether they obligate the issuer thereof
to issue stock or other securities or to pay cash.
1.24. "SEC" shall mean the Securities and Exchange Commission.
1.25. "SEC Documents" shall mean all reports and registration
statements filed, or required to be filed, by a Party pursuant to the
Securities Laws.
1.26. "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.27. "Securities Laws" shall mean the Securities Act; the Exchange
Act; the Investment Company Act; the Investment Advisers Act of 1940, as
amended; the Trust Indenture Act of 1939, as amended; and the rules and
regulations of the SEC promulgated thereunder.
- 4 -
<PAGE> 5
Other terms used herein are defined in the preamble and the recitals
to this Reorganization Agreement and in Articles II, III and IV hereof.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF COMMUNITY AND THE COMMUNITY BANKS
Community and the Community Banks hereby represent and warrant to CFX
and CFX Bank that, except as Previously Disclosed:
2.1. Capital Structure of Community
(a) The authorized capital stock of Community consists solely of
3,000,000 shares of common stock, par value $1.00 per share ("Community
Common Stock"), and 1,000,000 shares of preferred stock, par value $1.00
per share ("Community Preferred Stock"). There are 2,465,237 shares of
Community Common Stock issued and outstanding, no shares of Community Common
Stock held in its treasury, no shares of Community Preferred Stock issued
and outstanding, and no shares of Community Preferred Stock held in its
treasury. No shares of Community Common Stock or Community Preferred Stock
are reserved for issuance, except that (i) 36,924 shares of Community Common
Stock are reserved for issuance under Community's employee stock purchase
plans (the "Community Stock Purchase Plans"), (ii) 143,781 shares of Community
Common Stock are reserved for issuance upon the exercise of stock options
heretofore granted pursuant to Community's stock option plans (the "Community
Stock Option Plans") and (iii) 24,653 shares of Community Preferred Stock are
reserved for issuance upon the exercise of rights pursuant to the Rights
Agreement dated as of October 31, 1989 between Community and the First
National Bank of Boston (the "Community Rights Agreement").
(b) Except for shares of Community Common Stock subject to purchase
under the Community Stock Purchase Plans or subject to options under the
Community Stock Option Plans as Previously Disclosed and to the Stock
Option Agreement and shares of Community Preferred Stock subject to the
Community Rights Agreement, Community is not bound by any outstanding
Rights. Except for the Community Rights Agreement and the Stock Option
Agreement, there are no agreements, understandings or commitments to which
Community is a party with respect to the voting of any shares of Community
Common Stock or which restrict the transfer of such shares.
(c) All outstanding shares of Community's capital stock have been
duly issued and are validly outstanding, fully paid and nonassessable.
None of the shares of Community's capital stock has been issued in
violation of the preemptive rights of any person. All options granted
under the Community Stock Option Plans have become fully exercisable in
accordance therewith or in accordance with certain change in control
agreements that have been Previously Disclosed.
2.2. Organization, Standing and Authority of Community
Community is a duly organized corporation, validly existing and in
good standing under the laws of New Hampshire, with full corporate power
and authority to carry on its business as now conducted and is duly
licensed or qualified to do business in the states of the United States and
- 5 -
<PAGE> 6
foreign jurisdictions where its ownership or leasing of property or the
conduct of its business requires such qualification, except where the
failure to be so licensed or qualified would not have a Material Adverse
Effect on Community. Community is registered as a bank holding company
under the BHC Act.
2.3. Ownership and Capital Structure of the Community Subsidiaries
(a) Community does not own, directly or indirectly, 5 percent or
more of the outstanding capital stock or other voting securities of any
corporation, bank or other organization, except as Previously Disclosed
(collectively, the "Community Subsidiaries" and individually a "Community
Subsidiary").
(b) The authorized and issued capital stock of each of the
Community Subsidiaries has been Previously Disclosed.
(c) The outstanding shares of capital stock of each Community
Subsidiary are validly issued and outstanding, fully paid and nonassessable
and all such shares are directly or indirectly owned by Community free and
clear of all liens, claims and encumbrances, subject, in the case of
Concord Bank, to the Distribution and Liquidation Account (the "Liquidation
Account") established by Concord in connection with its conversion from
mutual to stock form and maintained pursuant to Article 7 of Concord Bank's
Amended and Restated Charter. No Community Subsidiary is bound by any
Rights with respect to its capital securities and there are no agreements,
understandings or commitments relating to the right of Community to vote or
dispose of said shares. None of the shares of capital stock of any
Community Subsidiary has been issued in violation of the preemptive rights
of any person whose cause of action is not time barred by any applicable
statute of limitations. Concord Bank has established and maintained the
Liquidation Account in accordance with all applicable laws and regulations.
2.4. Organization, Standing and Authority of the Community Subsidiaries
Each of the Community Subsidiaries is a corporation, savings bank or
commercial bank duly organized, validly existing and in good standing under
the laws of New Hampshire with full power and authority to carry on its
business as now conducted and is duly licensed or qualified to do business
in the states of the United States and foreign jurisdictions where its
ownership or leasing of property or the conduct of its business requires
such qualification, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on Community. Neither of the
Community Banks engages in any activities other than those expressly
authorized to it by applicable New Hampshire and federal banking laws,
including without limitation the regulations of the FDIC under Section 24
of the FDIA. Each of the Community Banks is a member in good standing of
the Federal Home Loan Bank of Boston and owns the requisite amount of stock
therein. The deposits of each of the Community Banks are insured by the
Bank Insurance Fund of the FDIC in accordance with the FDIA, and each of
- 6 -
<PAGE> 7
the Community Banks has paid all assessments that have come due and has
filed all reports required by the FDIA.
2.5. Authorized and Effective Agreement
(a) Community has all requisite corporate power and authority to
enter into and perform all its obligations under the Transaction Documents
to which Community is a party. The adoption, execution and delivery of the
Transaction Documents to which Community is a party and the consummation of
the Transactions contemplated thereby have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of
Community, including without limitation the approval of a majority of the
"Disinterested Directors" as contemplated by Article Ninth, Section A of
Community's Articles of Incorporation, except that (1) pursuant to
applicable New Hampshire law and Community's Articles of Incorporation and
By-laws, the Plan of Exchange must be approved by the affirmative vote of
the holders of not less than two-thirds of all the shares of Community
Common Stock entitled to vote thereon, and (2) pursuant to applicable New
Hampshire law, certain required or appropriate actions may or must be taken
with respect to the rights of any dissenting shareholders. The Board of
Directors of Community has directed that the Transaction Documents and the
Transactions be, to the extent necessary, submitted to Community's
stockholders for approval at an annual or special meeting to be held as
soon as practicable.
(b) Each of the Community Banks has all requisite corporate power
and authority to enter into and perform all its obligations under the
Transaction Documents to which it is a party. The execution and delivery
of this Reorganization Agreement and the Plan of Merger and the
consummation of the Transactions contemplated thereby have been duly and
validly authorized by all necessary corporate action in respect thereof on
the part of the Community Banks.
(c) Assuming the accuracy of the representations contained in
Section 3.5(c) hereof, the Transaction Documents constitute legal, valid
and binding obligations of the Community Entities, enforceable against them
in accordance with their respective terms subject, as to enforceability, to
bankruptcy, insolvency and other laws of general applicability relating to
or affecting creditors' rights and to general principles of equity.
(d) Except as Previously Disclosed, and except for such violations,
rights, conflicts, breaches, creations or defaults which, either
individually or in the aggregate, will not have a Material Adverse Effect
on Community, neither the adoption, execution and delivery of the
Transaction Documents nor the consummation of the Transactions nor
compliance by the Community Entities with any of the provisions hereof or
thereof shall (i) conflict with or result in a breach of any provision of
the articles or certificates of incorporation or association, charters or
by-laws of any of the Community Entities, (ii) assuming that the regulatory
approvals referred to in Section 5.1(b) hereof are duly obtained,
constitute or result in a breach of any term, condition or provision of, or
- 7 -
<PAGE> 8
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of
any lien, charge or encumbrance upon any property or asset of any Community
Entity pursuant to, any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation, or (iii) assuming that the regulatory
approvals referred to in Section 5.1(b) hereof are duly obtained, violate
any order, writ, injunction, decree, statute, rule or regulation applicable
to any Community Entity.
(e) Except for the approvals specified in Sections 4.2 and 4.4
hereof, except as Previously Disclosed and except as expressly referred to
in this Reorganization Agreement, no consent, approval or authorization of,
or declaration, notice, filing or registration with, any governmental or
regulatory authority, or any other person, is required to be made or
obtained by the Community Entities on or prior to the Closing Date in
connection with the execution, delivery and performance of the Transaction
Documents or the consummation of the Transactions other than the filing of
certificates or articles of merger or share exchange or similar documents
with the appropriate New Hampshire state authorities.
2.6. SEC Documents; Regulatory Filings
Community has, since January 1, 1992, filed all SEC Documents
required by the Securities Laws and such SEC Documents complied, as of
their respective dates, in all material respects with the Securities Laws.
As of their respective dates, no such SEC Documents filed with the SEC
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances in which they were
made, not misleading, except that information filed as of a later date
shall be deemed to modify information as of an earlier date. Each of the
Community Entities has, since January 1992, filed all reports required by
statute or regulation to be filed with any federal or state bank regulatory
agency, and such reports were prepared in accordance with the applicable
statutes, regulations and instructions in existence as of the date of
filing of such reports in all material respects.
2.7. Financial Statements; Books and Records; Minute Books
The Community Financial Statements fairly present, or when filed will
fairly present, in all material respects, the consolidated financial
position of the Community Entities as of the dates indicated and the
results of operations, changes in shareholders' equity and cash flows of
the Community Entities for the periods then ended in conformity with
generally accepted accounting principles applicable to banking
organizations or financial institutions applied on a consistent basis
(except as disclosed therein and except for the omission of notes for
unaudited financial statements and year-end adjustments to interim
results). The books and records of each of the Community Entities fairly
reflect in all material respects the transactions to which it is a party or
to or by which its properties are subject or bound. Such books and records
- 8 -
<PAGE> 9
have been properly kept and maintained and are in compliance in all
material respects with all applicable legal and accounting requirements.
The minute books of the Community Entities contain records which are
accurate in all material respects of all corporate actions of their
respective shareholders and Boards of Directors (including committees of
their respective Boards of Directors).
2.8. Material Adverse Change
Community has not, on a consolidated basis, suffered any Material
Adverse Effect in its financial condition, results of operations or
business since December 31, 1996.
2.9. Absence of Undisclosed Liabilities
None of the Community Entities has any liability (contingent or
otherwise) that is material to Community, on a consolidated basis or that,
when combined with all similar liabilities, would be material to the
Community Entities, except as Previously Disclosed, as disclosed in the
Community Financial Statements described in clause (i) of Section 1.9
hereof and except for liabilities incurred in the ordinary course of
business subsequent to December 31, 1996.
2.10. Properties
The Community Entities have good title free and clear of all liens,
encumbrances, charges, defaults or equitable interests to all of their
respective properties and assets, real and personal that are reflected on
the Community Financial Statements as of September 30, 1996 or acquired
after such date, except (i) as may be reflected in the Community Financial
Statements, (ii) for liens for taxes not yet delinquent, (iii) for liens on
real estate acquired by foreclosure or substantively repossessed, (iv) for
pledges to secure deposits and other liens incurred in the ordinary course
of banking business, (v) for such imperfections of title, easements,
encumbrances, liens, charges, defaults and equitable interests, if any,
that do not have a Material Adverse Effect on the value of personal or real
property reflected in the Community Financial Statements or acquired since
the date of such statements and which do not materially interfere with or
impair the present and continued use of such property, and (vi) for
dispositions and encumbrances in the ordinary course of business. All
leases pursuant to which any of the Community Entities, as lessee, leases
real and personal property which, individually or in the aggregate, are
material to the business of the Community Entities are valid and
enforceable by one or both of the Community Entities in accordance with
their respective terms.
2.11. Loans; Allowance for Possible Loan Losses
(a) Each loan reflected as an asset in the Community Financial
Statements (i) is evidenced by notes, agreements or other evidences of
indebtedness which are true, genuine and what they purport to be, (ii) to
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the extent secured, has been secured by valid liens and security interests
which have been perfected, and (iii) is not subject to any known defenses,
set-off or counterclaims except as may be provided under bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general principles of
equity.
(b) The Community Entities have Previously Disclosed all loans in
the original principal amount in excess of $200,000 of each Community
Entity that, as of the date of this Reorganization Agreement, are
classified by Community or any state or federal bank regulatory or
supervisory authority as "Special Mention," "Substandard," "Doubtful,"
"Loss" or "Classified," together with the aggregate principal amount of and
accrued and unpaid interest on such loans, by category, it being understood
that no representation is being made that any state or federal bank
regulatory or supervisory authority would agree with such loan
classifications.
(c) Except as Previously Disclosed or as identified in the notes to
the Community Financial Statements, as of September 30, 1996, neither of
the Community Banks was, as of the date hereof, a party to any loan,
including any loan guaranty, in the amount of $50,000 or more, with any
director, executive officer or 5% shareholder of Community or any person,
corporation or enterprise controlling, controlled by or under common
control with any of the foregoing. All loans and extensions of credit that
have been made by the Community Banks and that are subject to Section 22(h)
of the Federal Reserve Act, comply therewith.
2.12. Tax Matters
Except as Previously Disclosed:
(a) Each of the Community Entities has timely filed federal income
tax returns for each year through December 31, 1995 and has timely filed
all other material federal, state, local and foreign tax returns
(including, without limitation, estimated tax returns, returns required
under Sections 1441-1446 and 6031-6060 of the Code and the regulations
thereunder and any comparable state, foreign and local laws, any other
information returns, withholding tax returns, FICA and FUTA returns and
back-up withholding returns required under Section 3406 of the Code and any
comparable state, foreign and local laws) required to be filed with respect
to the Community Entities. All taxes due in respect of the periods covered
by such tax returns and for any subsequent periods have been paid or
adequate reserves have been established for the payment of such taxes. As
of the Closing Date, all material taxes due in respect of any subsequent
periods ending on or prior to the Closing Date (or that portion of any
period that is prior to the Closing Date) will have been paid or adequate
reserves will have been established for the payment thereof. No (i) audit
examination, (ii) deficiency or (iii) refund litigation with respect to any
tax is pending. The Community Entities will not have any material
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liability for any taxes in excess of amounts paid or reserves or accruals
established.
(b) All federal, state and local (and, if applicable, foreign) tax
returns filed by the Community Entities are complete and accurate in all
material respects. None of the Community Entities is delinquent in the
payment of any material tax, assessment or governmental charge, and no
Community Entity has requested any extension of time within which to file
any tax returns in respect of any fiscal year or portion thereof which have
not since been filed. No deficiency for any tax, assessment or
governmental charge has been proposed, asserted or assessed (tentatively or
otherwise) against any Community Entity which has not been settled and
paid. There are currently no agreements in effect with respect to any
Community Entity to extend the period of limitations for the assessment or
collection of any tax.
2.13. Employee Benefits; ERISA
(a) The Community Entities have Previously Disclosed a true and
complete list of each bonus, deferred compensation, incentive compensation,
stock purchase, stock option, severance pay, medical, life or other
insurance, profit-sharing, or pension plan, program, agreement or
arrangement, and each other employee benefit plan, program, agreement or
arrangement, sponsored, maintained or contributed to or required to be
contributed to by any Community Entity or by any trade or business, whether
or not incorporated, that together with any Community Entity would be
deemed a "single employer" under Section 414 of the Code (an "ERISA
Affiliate") for the benefit of any employee or director (including advisory
directors) or former employee or former director (including advisory
directors) of any Community Entity, whether formal or informal and whether
legally binding or not (the "Plans"). None of the Community Entities has
any formal plan or commitment, whether legally binding or not, to create
any additional plan or modify or change any existing Plan that would affect
any employee or director or former employee or former director of any
Community Entity.
(b) With respect to each of the Plans, the Community Entities have
made available to CFX true and complete copies of each of the following
documents: (a) the Plan and related documents (including all amendments
thereto); (b) the two most recent annual reports and financial statements,
if any; (c) the most recent Summary Plan Description, together with each
Summary of Material Modifications, required under ERISA with respect to
such Plan, and all material employee communications relating to such Plan;
and (d) the most recent determination letter received from the IRS with
respect to each Plan that is intended to be qualified under the Code and
all material communications to or from the IRS or any other governmental or
regulatory authority relating to each Plan.
(c) No liability under Title IV of ERISA has been incurred by any
Community Entity or any ERISA Affiliate since the effective date of ERISA
that has not been satisfied in full, and no condition exists that presents
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a material risk to Community or any ERISA Affiliate of incurring a
liability under such Title. No reportable event under Section 4043 of
ERISA (other than the reportable event described in Pension Benefit
Guaranty Corporation Regulation Section 2615.23 occurring by reason of the
Transactions) has occurred or will occur with respect to any Plan on or
before the Closing Date or the Effective Date.
(d) No Community Entity, no ERISA Affiliate, no Plan, no trust
created thereunder, and no trustee or administrator thereof has engaged in
a transaction in connection with which any Community Entity, any Plan, any
trust, or any trustee or administrator thereof, could be subject to either
a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA, or a
tax imposed pursuant to Section 4975 or 4976 of the Code.
(e) Full payment has been made, or will be made in accordance with
Section 404(a)(6) of the Code, of all amounts that any Community Entity or
any ERISA Affiliate is required to pay under Section 412 of the Code or
under the terms of the Plans, and all such amounts properly accrued through
the Closing Date or the Effective Date will be paid on or prior to the
Closing Date or the Effective Date (as applicable) or will be properly
recorded on the books and records of Community. None of the Plans or any
trust established thereunder has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived.
(f) Except as Previously Disclosed, with respect to each Plan that
is subject to Title IV of ERISA, the present value of accrued benefits
under such Plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by such Plan's
actuary with respect to such Plan, did not, as of the valuation date used
in such report, exceed the current value of the assets of such Plan
allocable to such accrued benefits as of such valuation date and no
material adverse change in the funded status of any such Plan has occurred
since such valuation date.
(g) No Plan is a "multiemployer pension plan," as such term is
defined in Section 3(37) of ERISA, a "multiple employer welfare
arrangement," as such term is defined in Section 3(40) of ERISA, or a
single employer plan that has two or more contributing sponsors, at least
two of whom are not under common control, within the meaning of Section
4063(a) of ERISA.
(h) Each Plan that is intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified. Each Plan that is intended
to satisfy the requirements of Section 125 or 501(c)(9) of the Code
satisfies such requirements. Each Plan has been operated and administered
in all material respects in accordance with its terms and applicable laws,
including without limitation ERISA and the Code.
(i) Except as Previously Disclosed, each Plan may be amended or
terminated without liability to Community or any ERISA Affiliate. No
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<PAGE> 13
amounts payable under the Plans will fail to be deductible for federal
income tax purposes under Section 280G of the Code.
(j) There are no actions, suits or claims pending, or, to the
knowledge of the Community Entities, threatened or anticipated (other than
routine claims for benefits) against any Plan, the assets of any Plan or
against any Community Entity or any ERISA Affiliate with respect to any
Plan. There is no judgment, decree, injunction, rule or order of any
court, governmental body, commission, agency or arbitrator outstanding
against or in favor of any Plan or any fiduciary thereof (other than rules
of general applicability). There are no pending or threatened audits,
examinations or investigations by any governmental body, commission or
agency involving any Plan.
(k) Except as Previously Disclosed, neither consummation of the
Transactions nor termination of the employment or service of any employee
or director of any of the Community Entities prior to or following
consummation of the Transactions will (i) entitle any current or former
employee or director of any Community Entity to severance pay, or any
similar payment, (ii) accelerate the time of payment or vesting, or
increase the amount, of any compensation due to any such current or former
employee or director, (iii) renew or extend the term of any agreement
regarding compensation for a current or former employee or director, or
(iv) result in the Community Entities making or being required to make any
"excess parachute payment" as that term is defined in Section 280G of the
Code.
2.14. Certain Contracts
(a) Except as Previously Disclosed or as specifically identified in
the notes to the Community Financial Statements, none of the Community
Entities is a party to, or bound by, (i) any material contract, arrangement
or commitment whether or not made in the ordinary course of business
requiring the payment of more than $100,000 in any year or any agreement
restricting the nature or geographic scope of its business activities in
any material respect, (ii) any agreement, indenture or other instrument
relating to the borrowing of money by any Community Entity or the guarantee
by any Community Entity of any such obligation, other than instruments
relating to transactions entered into in the customary course of the
Community Banks' business, (iii) any written or oral agreement, arrangement
or commitment not terminable at will without liability or requiring the
payment of more than $25,000 relating to the employment of a consultant or
the employment, election, retention in office or severance of any present
or former director or officer, or (iv) any contract, agreement or
understanding with a labor union.
(b) No Community Entity is in default in any material respect under
any material agreement, commitment, arrangement, lease, insurance policy or
other instrument whether entered into in the ordinary course of business or
otherwise, and there has not occurred any event that, with the lapse of
time or giving of notice or both, would constitute such a material default.
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2.15. Legal Proceedings
Except for matters which, individually or in the aggregate, would not
have a Material Adverse Effect on Community, neither Community nor any of
the Community Subsidiaries is a party to any, and there are no pending or,
to the best of Community's knowledge, threatened, legal, administrative,
arbitral or other proceedings, claims, actions or governmental
investigations of any nature by or against Community or any of the
Community Subsidiaries; and neither Community nor any of the Community
Subsidiaries is a party to or subject to any order, judgment or decree. To
the knowledge of the Community Entities, there are no actual or threatened
actions, suits or proceedings which present a claim to restrain or prohibit
the Transactions or to impose any material liability in connection
therewith. There are no actions, suits or proceedings instituted, pending
or, to the knowledge of the Community Entities, threatened against any
present or former director or officer of any Community Entity, that would
be likely to give rise to a claim for indemnification and that, in the
event of an unfavorable outcome, would, individually or in the aggregate,
have a Material Adverse Effect on Community and, to the knowledge of the
Community Entities, there is no reasonable basis for any such action, suit
or proceeding.
2.16. Compliance with Laws; Regulatory Examinations; Regulatory Approvals
(a) Each Community Entity holds, and at all times since January 1,
1994 has held, all licenses, franchises, permits, approvals, consents,
qualifications and authorizations material for the lawful conduct of its
business under and pursuant to, and has complied with, and is not in
default under, and no Community Entity has any knowledge of any violation
of, any applicable law, statute, order, rule, regulation, policy,
ordinance, reporting or filing requirement and/or guideline of any federal,
state or local governmental authority relating to the Community Entities,
except as Previously Disclosed and except for failures to hold, failures to
comply, defaults or violations which, either individually or in the
aggregate, do not or would not have a Material Adverse Effect on Community.
(b) Except for normal examinations conducted by a regulatory agency
in the regular course of business of the Community Entities, no regulatory
agency has initiated any proceeding or, to the best knowledge of the
Community Entities, investigation into the business or operations of any
Community Entity since December 31, 1996. None of the Community Entities
has received any objection from any regulatory agency to any response by
any Community Entity to any violation, criticism or exception with respect
to any report or statement relating to any examinations of the Community
Entities.
(c) No Community Entity has, since January 1, 1994 received
notification from any agency or department of federal, state or local
government (i) asserting a material violation of any such statute or
regulation, (ii) threatening to revoke any license, franchise, permit or
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<PAGE> 15
government authorization, or (iii) restricting or in any way limiting its
operations. No Community Entity is subject to any regulatory or
supervisory cease and desist order, agreement, directive, memorandum of
understanding or commitment, and none of them has received any
communication requesting that it enter into any of the foregoing.
(d) No Community Entity is aware of any reason why the conditions
set forth in Section 5.1(b) hereof would not be satisfied without
significant delay.
2.17. Labor Matters
With respect to their respective employees, the Community Entities
are not parties to any labor agreement with any labor organization, group
or association and have not engaged in any unfair labor practice as defined
under applicable federal law. Since January 1, 1996, no Community Entity
has experienced any attempt by organized labor or its representatives to
make any Community Entity conform to demands of organized labor relating to
its employees or to enter into a binding agreement with organized labor
that would cover the employees of any Community Entity. There is no unfair
labor practice charge or other complaint by any employee or former employee
of any Community Entity against it pending before any governmental agency
arising out of the activities of the Community Entities which charge or
complaint (i) has a reasonable probability of an unfavorable outcome and
(ii) in the event of an unfavorable outcome would, individually or in the
aggregate, have a Material Adverse Effect on Community; there is no labor
strike or labor disturbance pending or, to the knowledge of the Community
Entities, threatened against any Community Entity; and no Community Entity
has experienced a work stoppage or other labor difficulty since January 1,
1996.
2.18. Brokers and Finders
Neither the Community Entities nor any of their respective officers,
directors or employees, has employed any broker, finder or financial
advisor or incurred any liability for any fees or commissions in connection
with the Transactions, except that Community has engaged and will pay a fee
or commission to McConnell, Budd & Downes, Inc., as Previously Disclosed.
2.19. Insurance
Community has made available to CFX true and correct copies of all
material policies of insurance of any Community Entity in effect as of the
date hereof. No Community Entity has any liability for unpaid premiums or
premium adjustments not properly reflected on Community's Financial
Statements, except for any such liability that would not have a Material
Adverse Effect on Community. Except as Previously Disclosed, no Community
Entity has received any notice of termination of any such insurance
coverage or material increase in the premiums therefor or has any reason to
believe that any such insurance coverage will be terminated or the premiums
therefor materially increased except as a result of the Transactions.
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<PAGE> 16
2.20. Environmental Liability
(a) Except for any violation, liability or noncompliance which does
not have a Material Adverse Effect on Community: (i) no Community Entity
has violated during the last five years or is in violation of or is liable
under any federal, state or local environmental law; (ii) none of the
properties owned or leased by any Community Entity (including, without
limitation, soils and surface and ground waters) are contaminated with any
hazardous substance; (iii) no Community Entity is liable for any off-site
contamination; and (iv) each Community Entity is, and during the last five
years has been, in compliance with, all of its respective permits, licenses
and other authorizations issued under any environmental laws. For purposes
of the foregoing, all references to "properties" include, without
limitation, any owned real property or leased real property.
(b) No Community Entity has received any written notice of any
legal, administrative, arbitral or other proceeding, claim or action and,
to the knowledge of the Community Entities, there is no governmental
investigation of any nature ongoing, in each case that could reasonably be
expected to result in the imposition, on the Community Entities of any
liability arising under any local, state or federal environmental statute,
regulation or ordinance including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
which liability would have a Material Adverse Effect on Community; there
are no facts or circumstances which could reasonably be expected to form
the basis for any such proceeding, claim, action or governmental
investigation that would impose any such liability; and no Community Entity
is subject to any agreement, order, judgment, decree or memorandum by or
with any court, governmental authority, regulatory agency or third party
imposing any such liability.
2.21. Administration of Trust Accounts
Except as Previously Disclosed, neither of the Community Banks
currently administers or previously has administered any accounts for which
it acts as a fiduciary or agent, including without limitation accounts for
which it serves as a trustee, agent, custodian, personal representative,
guardian, conservator or investment advisor other than IRA accounts.
2.22. Intellectual Property
The Community Entities own the entire right, title and interest in
and to, or have valid licenses with respect to, all the Intellectual
Property necessary in all material respects to conduct their business and
operations as presently conducted, except where the failure to do so would
not, individually or in the aggregate, have a Material Adverse Effect on
Community. None of such Intellectual Property is subject to any
outstanding order, decree, judgment, stipulation, settlement, lien, charge,
encumbrance or attachment, which order, decree, judgment, stipulation,
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settlement, lien, charge, encumbrance or attachment would have a Material
Adverse Effect on Community.
2.23. Certain Information
As of the effectiveness of the Registration Statement or any post-
effective amendment thereto and as of the date of the Community
shareholders' meeting to vote upon the Transactions, as of the mailing of
any Proxy Statement or any amendment thereto and as of the date of the
Community shareholders' meeting to vote upon the Transactions, such
Registration Statement or Proxy Statement and all amendments or supplements
thereto, with respect to all information set forth therein furnished by
Community relating to Community shall (i) comply in all material respects
with the applicable provisions of the Securities Laws, and (ii) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading.
2.24. Pooling of Interests
The Community Entities know of no reason which would reasonably cause
any of them to believe that the Transactions will not qualify as a pooling
of interests for financial accounting purposes.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF CFX AND CFX BANK
CFX and CFX Bank hereby represent and warrant to Community and the
Community Banks that, except as Previously Disclosed:
3.1. Capital Structure of CFX
(a) The authorized capital stock of CFX consists solely of
22,500,000 shares of common stock, par value $0.66 2/3 per share ("CFX
Common Stock"), and 3,000,000 shares of preferred stock, par value $1.00
per share ("CFX Preferred Stock"). As of December 31, 1996, there were
13,008,787 shares of CFX Common Stock issued and outstanding, 28,000 shares
of CFX Common Stock held in its treasury, no shares of CFX Preferred Stock
issued and outstanding, and no shares of CFX Preferred Stock held in its
treasury. All outstanding shares of CFX's capital stock have been duly
issued and are validly outstanding, fully paid and nonassessable. None of
the shares of CFX's capital stock has been issued in violation of the
preemptive rights of any person. The shares of CFX Common Stock to be
issued in connection with the Share Exchange will have been duly authorized
upon adoption of an amendment to CFX's Articles of Incorporation
authorizing additional shares of CFX Common Stock (a "Charter Amendment"),
and, when issued in accordance with the terms of the Transaction Documents,
will be validly issued, fully paid, nonassessable and free and clear of any
preemptive rights.
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<PAGE> 18
(b) As of December 31, 1996, CFX's Tier 1 risk-based capital ratio,
total risk-based capital ratio, and leverage ratio, each calculated in
accordance with the capital guidelines of the Federal Reserve applicable to
bank holding companies on a fully phased-in basis, were each in excess of
the specified minimum levels for qualification as "well capitalized."
(c) As of the date hereof, except for shares of CFX Common Stock
subject to options under CFX's employee stock option and incentive plans,
and except for shares to be issued pursuant to that certain Agreement and
Plan of Reorganization, dated as of February 13, 1997, by and among CFX,
CFX Bank, Portsmouth Bank Shares, Inc. and Portsmouth Savings Bank, CFX is
not bound by any outstanding Rights. There are no agreements or
understandings to which CFX is a party with respect to the voting of any
shares of CFX Common Stock or which restrict the transfer of such shares.
3.2. Organization, Standing and Authority of CFX
CFX is a duly organized corporation, validly existing and in good
standing under the laws of New Hampshire, with full corporate power and
authority to carry on its business as now conducted and is duly licensed or
qualified to do business in the states of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of
its business requires such qualification, except where the failure to be so
licensed or qualified would not have a Material Adverse Effect on CFX. CFX
is registered as a bank holding company under the BHC Act. CFX has made
available to Community true and correct copies of its charter and bylaws.
3.3. Ownership and Capital Structure of CFX's Subsidiaries
Except as Previously Disclosed, CFX does not own, directly or
indirectly, 25 percent or more of the outstanding capital stock or other
voting securities of any corporation, bank or other organization (each a
"CFX Subsidiary" and collectively the "CFX Subsidiaries"). The outstanding
shares of capital stock or other equity interests of the CFX Subsidiaries
are validly issued and outstanding, fully paid and nonassessable and,
except with respect to CFX Funding L.L.C. in which CFX owns 51% of the
equity interests, all such shares or interests are directly or indirectly
owned by CFX free and clear of all liens, claims and encumbrances. No CFX
Subsidiary has or is bound by any Rights which are authorized, issued or
outstanding with respect to the capital stock or other equity interests of
any CFX Subsidiary, and there are no agreements, understandings or
commitments relating to the right of CFX to vote or to dispose of said
shares or interests. None of the shares of capital stock or other equity
interests of any CFX Subsidiary has been issued in violation of the
preemptive rights of any person.
3.4. Organization, Standing and Authority of CFX Subsidiaries
Each CFX Subsidiary is a duly organized corporation or banking
association, validly existing and in good standing under applicable laws.
Each CFX Subsidiary (i) has full power and authority to carry on its
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business as now conducted, and (ii) is duly licensed or qualified to do
business in the states of the United States and foreign jurisdictions where
its ownership or leasing of property or the conduct of its business
requires such licensing or qualification and where failure to be licensed
or qualified would have a Material Adverse Effect on CFX. Each CFX
Subsidiary has all federal, state, local and foreign governmental
authorizations necessary for it to own or lease its properties and assets
and to carry on its business as it is now being conducted, except where the
failure to be so authorized would not have a Material Adverse Effect on
CFX.
3.5. Authorized and Effective Agreement
(a) Subject to adoption of a Charter Amendment, CFX has all
requisite corporate power and authority to enter into and perform all of
its obligations under the Transaction Documents to which CFX is a party.
The adoption, execution and delivery of the Transaction Documents to which
CFX is a party and the consummation of the Transactions contemplated
thereby have been duly and validly authorized by all necessary corporate
action in respect thereof on the part of CFX, except that a Charter
Amendment must be approved by the affirmative vote of the holders of at
least two thirds of all of the shares of CFX entitled to vote for the
election of directors in accordance with the Articles of Incorporation of
CFX and the issuance of CFX Common Stock pursuant to the Transaction
Documents must be approved by the affirmative vote of the holders of a
majority of the votes cast by the holders of CFX Common Stock eligible to
vote thereon in accordance with AMEX policy. The Board of Directors of CFX
has directed that a Charter Amendment, the Transaction Documents and the
Transactions be submitted to CFX's stockholders for approval at an annual
or special meeting to be held as soon as practicable.
(b) CFX Bank has all requisite corporate power and authority to
enter into and perform all of its obligations under the Transaction
Documents to which CFX Bank is a party. The execution and delivery of this
Reorganization Agreement and the Plan of Merger and the consummation of the
Transactions contemplated thereby have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of CFX Bank.
(c) Assuming the accuracy of the representations contained in
Sections 2.5(c) hereof, the Transaction Documents constitute legal, valid
and binding obligations of CFX and CFX Bank, in each case enforceable
against them in accordance with their respective terms subject, as to
enforceability, to bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity.
(d) Except as Previously Disclosed and subject to adoption of a
Charter Amendment, neither the adoption, execution and delivery of the
Transaction Documents nor the consummation of the Transactions nor
compliance by the CFX Entities with any of the provisions hereof or thereof
shall (i) conflict with or result in a breach of any provision of the
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articles or certificates of incorporation or association, charters or by-
laws of the CFX Entities, (ii) constitute or result in a breach of any
term, condition or provision of, or constitute a default under, or give
rise to any right of termination, cancellation or acceleration with respect
to, or result in the creation of any lien, charge or encumbrance upon any
property or asset of the CFX Entities pursuant to, any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation,
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the CFX Entities, except for such violations,
rights, conflicts, breaches, creations or defaults which, either
individually or in the aggregate, will not have a Material Adverse Effect
on CFX.
(e) Except for the approvals specified in Sections 4.2 and 4.4
hereof, except as Previously Disclosed and except as expressly referred to
in this Reorganization Agreement, no consent, approval or authorization of,
or declaration, notice, filing or registration with, any governmental or
regulatory authority, or any other person, is required to be made or
obtained by the CFX Entities on or prior to the Closing Date in connection
with the execution, delivery and performance of the Transaction Documents
or the consummation of the Transactions other than the filing of
certificates or articles of merger or share exchange or similar documents
with the appropriate New Hampshire state authorities.
3.6. SEC Documents; Regulatory Filings
CFX has filed all SEC Documents required by the Securities Laws and
such SEC Documents complied, as of their respective dates, in all material
respects with the Securities Laws. As of their respective dates, no such
SEC Documents filed with the SEC contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading, except that
information filed as of a later date shall be deemed to modify information
as of an earlier date. CFX and each of the CFX Subsidiaries has filed all
reports required by statute or regulation to be filed with any federal or
state bank regulatory agency, and such reports were prepared in accordance
with the applicable statutes, regulations and instructions in existence as
of the date of filing of such reports in all material respects.
3.7. Financial Statements
The CFX Financial Statements fairly present or when filed will fairly
present the consolidated financial position of CFX and the consolidated CFX
Subsidiaries as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity and cash flows of CFX and the
consolidated CFX Subsidiaries for the periods then ended in conformity with
generally accepted accounting principles applicable to banking
organizations or financial institutions applied on a consistent basis
except as disclosed therein. The books and records of CFX fairly reflect
in all material respects the transactions to which it is a party or by
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which its properties are subject or bound. Such books and records have
been properly kept and maintained and are in compliance in all material
respects with all applicable legal and accounting requirements. The minute
books of the CFX Entities contain records which are accurate in all
material respects of all corporate actions of their respective shareholders
and Boards of Directors (including committees of their respective Boards of
Directors).
3.8. Material Adverse Change
CFX has not, on a consolidated basis, suffered any material adverse
change in its financial condition, results of operations or business since
December 31, 1996.
3.9. Absence of Undisclosed Liabilities
Neither CFX nor any CFX Subsidiary has any liability (contingent or
otherwise) that is material to CFX on a consolidated basis, or that, when
combined with all similar liabilities, would be material to CFX on a
consolidated basis, except as Previously Disclosed, as disclosed in the CFX
Financial Statements filed with the SEC prior to the date hereof and except
for liabilities incurred in the ordinary course of business subsequent to
December 31, 1996.
3.10. Brokers and Finders
Neither the CFX Entities nor any of their respective officers,
directors or employees, has employed any broker, finder or financial
advisor or incurred any liability for any fees or commissions in connection
with the Transactions, except that CFX has engaged and will pay a fee or
commission to Alex. Brown & Sons Incorporated.
3.11. Legal Proceedings
Except for matters which, individually or in the aggregate, would not
have a Material Adverse Effect on CFX, neither CFX nor any of the CFX
Subsidiaries is a party to any, and there are no pending or, to the best of
CFX's knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental investigations of any nature
by or against CFX or any of the CFX Subsidiaries; and neither CFX nor any
of the CFX Subsidiaries is a party to or subject to any order, judgment or
decree. To the knowledge of the CFX Entities, there are no actual or
threatened actions, suits or proceedings which present a claim to restrain
or prohibit the Transactions or to impose any material liability in
connection therewith.
3.12. Compliance with Laws; Regulatory Examinations; Regulatory Approvals
(a) CFX and each of the CFX Subsidiaries holds, and has at all times
held, all licenses, franchises, permits, approvals, consents,
qualifications and authorizations material for the lawful conduct of its
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<PAGE> 22
business under and pursuant to, and has complied with, and is not in
default under, any applicable law, statute, order, rule, regulation,
policy, ordinance, reporting or filing requirement and/or guideline of any
federal, state or local governmental authority relating to CFX or any of
the CFX Subsidiaries, except for violations which, either individually or
in the aggregate, do not or would not have a Material Adverse Effect on
CFX, and neither CFX or any of the CFX Subsidiaries has knowledge of any
violation of any of the above.
(b) Except for normal examinations conducted by a regulatory agency
in the regular course of the business of CFX and the CFX Subsidiaries, no
regulatory agency has initiated any proceeding or, to the best knowledge of
CFX, investigation into the business or operations of CFX or any of the CFX
Subsidiaries since September 30, 1996. None of the CFX Entities has
received any objection from any regulatory agency to any response to any
violation, criticism or exception with respect to any report or statement
relating to any examinations of CFX or any of the CFX Subsidiaries.
(c) No CFX Entity has received notification from any agency or
department of federal, state or local government (i) asserting a material
violation of any such statute or regulation, (ii) threatening to revoke any
license, franchise, permit or government authorization, or
(iii) restricting or in any way limiting its operations. No CFX Entity is
subject to any regulatory or supervisory cease and desist order, agreement,
directive, memorandum of understanding or commitment, and none of them has
received any communication requesting that it enter into any of the
foregoing.
(d) No CFX Entity is aware of any reason why the conditions set
forth in Section 5.1(b) hereof would not be satisfied without significant
delay.
3.13. Certain Information
At all times subsequent to the effectiveness of the Registration
Statement or any post-effective amendment thereto and up to and including
the time of the CFX shareholders' meeting to vote upon the Transactions,
and at all times subsequent to the mailing of any Proxy Statement or any
amendment thereto and up to and including the time of the CFX shareholders'
meeting to vote upon the Transactions, such Registration Statement or Proxy
Statement and all amendments or supplements thereto, with respect to all
information set forth therein furnished by CFX relating to the CFX Entities
shall (i) comply in all material respects with the applicable provisions of
the Securities Laws, and (ii) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements contained therein not
misleading.
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<PAGE> 23
3.14. Pooling of Interests
The CFX Entities know of no reason which would reasonably cause
either of them to believe that the Transactions will not qualify as a pool-
ing of interests for financial accounting purposes.
3.15 Employee Benefits
CFX has Previously Disclosed a list of all benefit plans and programs
made available by CFX to officers and employees of the CFX Entities. True
and correct copies of all such plans and of all documents related to such
programs have been made available to Community.
ARTICLE 4.
COVENANTS
4.1. Shareholders' Meeting
CFX and Community shall submit the Transaction Documents and, in the
case of CFX, adoption of a Charter Amendment and the issuance of CFX Common
Stock thereunder, to their respective shareholders for approval at annual
or special meetings to be held as soon as practicable after the date
hereof. Subject to the fiduciary duties of the respective boards of
directors of Community and CFX as determined by each after consultation
with counsel, the boards of directors of CFX and Community shall recommend
at the respective shareholders' meetings that the shareholders vote in
favor of such approvals. Nothing contained in this Section 4.1 shall
prohibit either CFX or Community from taking and disclosing to its
stockholders a position with respect to a tender offer by a third party
pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act or
making such other disclosure to its stockholders which, in the judgment of
its Board, based upon the advice of outside counsel, may be required under
applicable law, or making disclosure to its stockholders of the absence of
an opinion from Community's investment advisor dated the date of the Proxy
Statement as to the fairness of the consideration to be paid to Community's
stockholders in connection with the Share Exchange.
4.2. Proxy Statement; Registration Statement
As promptly as practicable after the date hereof, CFX and Community
shall cooperate in the preparation of the Proxy Statements to be mailed to
the shareholders of Community and CFX in connection with the Transactions
and, if required, to be filed by CFX as part of the Registration Statement.
In the event that the issuance of CFX Common Stock in connection with the
Share Exchange is exempt from registration under Section 3(a)(10) of the
Securities Act and the SEC's regulations and interpretations thereunder and
shares received will not be considered "restricted securities" for purposes
of Rule 144 under the Securities Act, no Registration Statement will be
filed. CFX will advise Community, promptly after it receives notice
thereof, of the time when the Registration Statement or any post-effective
amendment thereto has become effective or any supplement or amendment has
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<PAGE> 24
been filed, of the issuance of any stop order, of the suspension of
qualification of the CFX Common Stock issuable in connection with the Share
Exchange for offering or sale in any jurisdiction, or the initiation or
threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of the Registration Statement or for
additional information. CFX, after the Effective Date shall file a post-
effective amendment to the Registration Statement or shall file a
registration statement, as appropriate, either with respect to the sale of
the shares of CFX Common Stock provided for in Article III of the Plan of
Exchange to the holders of stock options issued by Community or for the
resale of such shares by such optionees, as CFX and such optionees may
agree. CFX shall take all actions necessary to register or qualify the
shares of CFX Common Stock to be issued in the Share Exchange pursuant to
all applicable state "blue sky" or securities laws and shall maintain such
registrations or qualifications in effect for all purposes hereof. CFX
shall apply for approval to list the shares of CFX Common Stock to be
issued in the Share Exchange on the AMEX, subject to official notice of
issuance, prior to the Effective Date.
4.3. Applications
As promptly as practicable after the date hereof, the Parties shall
take all action necessary or desirable to obtain any required regulatory
approval for the Transactions. Without limiting the generality of the
foregoing sentence, CFX or CFX Bank shall (i) file a request with the
Federal Reserve for a waiver of the application and prior approval
requirements of Section 3 of the BHC Act with respect to the Share Exchange
and the Holding Company Merger, (ii) file an application with the FDIC for
prior approval of the Bank Merger under the Bank Merger Act and the
regulations promulgated thereunder, and (iii) file a notice with the
Commissioner with respect to the Bank Merger pursuant to Chapter 388 or
other applicable section of the New Hampshire Revised Statutes Annotated
and the regulations promulgated thereunder. Each of the Parties shall, and
they shall cause their respective subsidiaries to, submit any applications,
notices, requests or other filings to any other state or federal government
agency, department or body the approval of which is required for
consummation of the Transactions. Community and CFX each represents and
warrants to the other that all information concerning it and its directors,
officers, shareholders and subsidiaries included (or submitted for
inclusion) in any such application, notice, request or other filing and
furnished by it shall be true, correct and complete in all material
respects.
4.4. Best Efforts; Certain Notices and Information
(a) The Parties shall each use their reasonable best efforts in
good faith to (a) furnish such information as may be required in connection
with the preparation of the documents referred to in Sections 4.2 and 4.3
above, and (b) take or cause to be taken all action necessary or desirable
on its part so as to permit consummation of the Transactions at the
earliest possible date, including, without limitation, (i) obtaining the
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<PAGE> 25
consent or approval of each individual, partnership, corporation,
association or other business or professional entity whose consent or
approval is required for consummation of the Transactions, provided that no
Community Entity shall agree to make any payments or modifications to
agreements in connection therewith without the prior written consent of
CFX, and (ii) requesting the delivery of appropriate opinions, consents and
letters from its counsel and independent auditors. No Party shall take or
fail to take, or cause or permit its subsidiaries to take or fail to take,
or to the best of its ability permit to be taken or omitted to be taken by
any third persons, any action that would substantially impair the prospects
of completing the Transactions pursuant to the Transaction Documents, or
that would adversely affect the qualification of the Transactions for
pooling of interests accounting treatment or as a reorganization within the
meaning of Section 368(a) of the Code; provided that nothing herein
contained shall preclude CFX from exercising its rights under the Stock
Option Agreement. In the event that any Party has taken any action,
whether before, on or after the date hereof, that would adversely affect
such qualification, each Party shall take such action as any other Party
may reasonably request to cure such effect to the extent curable without a
Material Adverse Effect on any of the Parties.
(b) Community shall give prompt notice to CFX, and CFX shall give
prompt notice to Community, of (i) the occurrence, or failure to occur, of
any event which occurrence or failure would be likely to cause any
representation or warranty contained in this Reorganization Agreement to be
untrue or inaccurate in any material respect at the date hereof or on the
Closing Date (if so required under Section 5.2(a) or Section 5.3(a)
hereof), and (ii) any material failure of Community or CFX, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, and each Party shall use all
reasonable efforts to remedy such failure.
(c) Community shall provide and shall request its auditors to
provide CFX with such historical financial information regarding it (and
related audit reports and consents) as CFX may reasonably request for
securities disclosure purposes.
4.5. Investigation and Confidentiality
Community and CFX each will keep the other advised of all material
developments relevant to its business or to consummation of the
Transactions, material transactions outside of its ordinary course of
business, and material changes in the normal course of its business or in
the operation of its properties. The Parties each may make or cause to be
made such investigation of the financial and legal condition of the other
Parties as such Party reasonably deems necessary or advisable in connection
with the Transactions; provided, however, that such investigation shall be
reasonably related to such Transactions and shall not interfere
unnecessarily with normal operations. Each Party agrees to furnish the
other Parties and the other Parties' advisors with such financial data and
other information with respect to its business and properties as such other
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<PAGE> 26
Parties shall from time to time reasonably request. No investigation
pursuant to this Section 4.5 shall affect or be deemed to modify any
representation or warranty made by, or the conditions to the obligations to
consummate the Transactions of, any Party. Each Party shall hold all
information furnished by the other Parties or any of such Party's
subsidiaries or representatives pursuant hereto in confidence to the extent
required by, and in accordance with, the provisions of the confidentiality
agreement dated February, 1997 by and between Community and CFX (the
"Confidentiality Agreement").
4.6. Press Releases
Community and CFX shall agree with each other as to the form and
substance of any press release related to the Transactions, and shall
consult each other as to the form and substance of other public disclosures
related thereto; provided, however, that nothing contained herein shall
prohibit any Party, following notification to the other Parties, from
making any disclosure which its counsel deems necessary.
4.7. Covenants of the Community Entities
(a) Prior to the Closing Date, and except as otherwise provided for
by the Transaction Documents or consented to or approved by CFX, the
Community Entities shall, and shall cause each of their respective
subsidiaries to, use their respective reasonable best efforts to preserve
their respective properties, business and relationships with customers,
employees and other persons.
(b) Except with the prior written consent of CFX or except as
Previously Disclosed or except as expressly contemplated or permitted by
the Transaction Documents, no Community Entity shall, and no Community
Entity shall permit any of its subsidiaries to:
(1) carry on its business other than in the usual, regular
and ordinary course in substantially the same manner as heretofore
conducted;
(2) with respect to Community only, declare, set aside, make
or pay any dividend or other distribution in respect of its capital stock
other than its regular cash dividends on Community Common Stock in amounts
not in excess of $.16 per share and in a manner consistent with past
practice and in accordance with applicable law, regulation and contractual
and regulatory commitments, provided that Community's cash dividends may be
increased to the Increased Dividend (as defined below) per share of
Community Common Stock beginning with the dividend payable in the first
quarter of 1998, and provided further that the parties agree (x) to consult
with respect to the amount of the last Community quarterly dividend payable
prior to the Effective Date with the objective of assuring that the
shareholders of Community do not receive a shortfall or dividend or
distribution from both Community and CFX for such quarter based on the
record and payment dates of their last dividend prior to the Holding
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<PAGE> 27
Company Merger and the record and payment dates of the first dividend of
CFX following the Holding Company Merger and (y) that Community may pay a
dividend to holders of record of Community Common Stock immediately prior
to Effective Date consistent with the objective described in clause (x)
above. The "Increased Dividend" shall be determined by multiplying the
quarterly dividend then being paid by CFX with respect to each share of CFX
Common Stock by 2.2;
(3) issue any shares of its capital stock or permit any
treasury shares to become outstanding other than pursuant to the Stock
Option Agreement or Rights outstanding at the date hereof;
(4) incur any additional obligation for borrowed money other
than in the ordinary course of business consistent with past practice;
(5) issue, grant or authorize any Rights or effect any
recapitalization, reclassification, stock dividend, stock split or like
change in capitalization, or redeem, repurchase or otherwise acquire any
shares of its capital stock;
(6) amend its articles or certificate of incorporation or
association, charter or by-laws;
(7) merge with any other corporation, savings association or
bank or permit any other corporation, savings association or bank to merge
into it or consolidate with any other corporation, savings association or
bank; acquire control over any other firm, bank, corporation, savings
association or organization or create any subsidiary;
(8) except in the ordinary course of business consistent with
past practice, waive or release any material right or cancel or compromise
any material debt or claim;
(9) except in connection with the hedging of interest rate
risk related to Community's 1-4 family residential mortgage loan pipeline,
enter into any material swap, hedge or other similar off-balance sheet
transaction;
(10) except as Previously Disclosed, except for foreclosing on
collateral and except for sales of 1-4 family residential mortgage loans,
automobile loans and Small Business Administration loans in the ordinary
course of business consistent with past practice, liquidate or sell or
dispose of any material assets or acquire any material assets; except as
Previously Disclosed, make any capital expenditure in excess of $100,000 in
any instance or $250,000 in the aggregate; or, except as Previously
Disclosed, establish new branches or other similar facilities or enter into
or modify any leases or other contracts relating thereto that involve
annual payments that exceed $25,000 in any instance or $100,000 in the
aggregate;
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<PAGE> 28
(11) except as Previously Disclosed, increase the rate of
compensation of, pay or agree to pay any bonus to, or provide any other
employee benefit or incentive to, any of its directors, officers or
employees except in a manner consistent with past practice;
(12) enter into, modify or extend any employment or severance
contracts with any of its present or former directors, officers or
employees;
(13) enter into or substantially modify (except as may be
required by applicable law) any pension, retirement, stock option, stock
purchase, stock appreciation right, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees;
(14) change its lending, investment, asset/liability
management or other material banking policies in any material respect
except as may be required by changes in applicable law or regulations;
(15) change its methods of accounting in effect at
December 31, 1995, except as required by changes in generally accepted
accounting principles or regulatory requirements concurred in by its
independent certified public accountants, or change any of its methods of
reporting income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns for the year
ended December 31, 1995, except as required by law;
(16) solicit or initiate inquiries or proposals with respect
to any acquisition or purchase of all or a substantial portion of the
assets of, or a substantial equity interest in, any Community Entity or any
business combination with any Community Entity other than as contemplated
by this Reorganization Agreement; or authorize or permit any officer,
director, agent or affiliate of it to do any of the above; or fail to
notify CFX as soon as practicable if any such inquiries or proposals are
received by any Community Entity, or if any Community Entity or any
officer, director, agent or affiliate thereof is requested to or does
furnish any confidential information relating to, or participates in any
negotiations or discussions concerning, any transaction of a type describe
in this paragraph; or
(17) agree to do any of the foregoing.
(c) Each of the Community Entities agrees to approve, execute and
deliver any amendment to the Transaction Documents and any additional plans
and agreements requested by CFX to modify the structure of, or to
substitute parties to, the Transactions; provided, however, that no such
change shall (i) alter or change the amount or kind of consideration to be
delivered to the shareholders of Community in connection with the Share
Exchange, (ii) adversely affect the tax treatment to the shareholders of
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<PAGE> 29
Community as a result of receiving such consideration in the Share
Exchange, or (iii) materially impede or delay receipt of any approval
referred to in Section 4.1 or 4.3 hereof or the consummation of the
Transactions.
(d) CFX, CFX Bank, Community and Concord Bank all acknowledge that
this Reorganization Agreement is binding upon them as of the date hereof.
Community hereby covenants that it shall cause the board of directors of
Centerpoint Bank to approve this Reorganization Agreement and the Plan of
Merger and shall cause Centerpoint Bank to execute this Reorganization
Agreement and the Plan of Merger as soon as practicable, but in no event
later than 10 days after the date hereof. Pending such approval and
execution, the representations and warranties contained in Article 2 hereof
shall be construed on the basis that such approval and execution have yet
to occur.
(e) Community undertakes and agrees that, if so requested by CFX,
it shall take all necessary action to facilitate the liquidation of
Community Subsidiaries or the merger of Community Subsidiaries with
subsidiaries of CFX effective on or after the Effective Date; provided
however, that in no event shall the Closing be delayed in order to
facilitate any such liquidation or merger and provided further, however,
that Community shall not be required to take any action that could
adversely affect the qualification of the Share Exchange as a
reorganization within the meaning of Section 368(a) of the Code.
(f) Immediately prior to the Closing, the CFX Entities and the
Community Entities will supplement or amend their prior disclosures
pursuant to this Reorganization Agreement, including without limitation all
Previously Disclosed documents and information, with respect to any matter
hereafter arising which, at the Closing Date, would be required to be
Previously Disclosed to the CFX Entities or the Community Entities, as
appropriate, if this Reorganization Agreement were dated as of the Closing
Date, or which is necessary to correct any Previously Disclosed document or
information which was inaccurate at the time it was made. No such
supplement or amendment shall have any effect for the purpose of
determining satisfaction of the conditions set forth in Article 5 hereof or
the compliance by any of the Community Entities with the covenants set
forth in this Section 4.7.
4.8. Closing; Effective Date
The Transactions shall be consummated at a closing (the "Closing") to
be held at the offices of CFX, 102 Main Street, Keene, New Hampshire, as
soon as practicable after the date on which the last of all required
approvals for the Transactions has been obtained and the last of all
required waiting periods under such approvals has expired (the "Earliest
Possible Date") but not later than 10:00 a.m. on (x) the first business day
following the last business day of the month containing the Earliest
Possible Date or, (y) if the Earliest Possible Date occurs after the 20th
day of a month, then the first business day following the last business day
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<PAGE> 30
of the following month, or at such other place, date and time as the
Parties may mutually agree upon (the "Closing Date"), with the Transactions
to be consummated in such order and after such intermediate steps as CFX
may specify; provided, however, that the order and any intermediate steps
shall not (i) alter or change the amount or kind of consideration to be
delivered to the shareholders of Community in connection with the Share
Exchange, (ii) adversely affect the tax treatment to the shareholders of
Community as a result of receiving such consideration in the Share
Exchange, or (iii) materially impede or delay receipt of any approval
referred to in Section 4.1 or 4.3 hereof or the consummation of the
Transactions. In the event that the Closing occurs on a date determined
under clause (y) of the preceding sentence and if such determination
results in the passage of an additional calendar quarter prior to the
publication of the financial information contemplated by Section 4.9(b)
hereof, then CFX shall use its reasonable best efforts to publish no later
than 25 days after the end of the first calendar month in which there are
at least 30 days of combined operations following the consummation of the
Transactions (which calendar month may be the calendar month in which the
Effective Date occurs), combined sales and net income figures as
contemplated by and in accordance with the terms of SEC Accounting Series
Release No. 135. The Transactions shall be effective at the times and on
the dates specified in the certificates or articles of merger or share
exchange to be filed with the appropriate New Hampshire state authorities
as contemplated by the Transaction Documents. For purposes of this
Reorganization Agreement, the term "Effective Date" shall mean the
effective time and date of the Share Exchange specified in the articles of
share exchange to be filed with the appropriate New Hampshire state
authorities as contemplated by the Plan of Exchange.
4.9. Affiliates
(a) The Parties shall cooperate and use their reasonable efforts to
identify those persons who may be deemed to be "affiliates" of CFX and
Community within the meaning of Rule 145 promulgated by the SEC under the
Securities Act and for purposes of qualifying the Share Exchange for
"pooling of interests" accounting treatment. Each of Community and CFX
shall use its reasonable best efforts to cause each person so identified to
deliver, no later than 30 days prior to the Effective Date, a written
agreement providing that such person will not dispose of any CFX Common
Stock received in the Share Exchange except in compliance with the
Securities Act, the rules and regulations promulgated thereunder and the
SEC's rules relating to pooling of interests accounting treatment. Shares
of CFX Common Stock issued to such affiliates in exchange for Community
Common Stock shall not be transferable until such time as financial results
covering at least 30 days of combined operations of CFX and Community have
been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies, regardless of whether each
such affiliate has provided the written agreement referred to in this
section.
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<PAGE> 31
(b) CFX shall use its reasonable best efforts to publish no later
than 25 days after the end of the first calendar quarter in which there are
at least 30 days of combined operations following consummation of the
Transactions (which calendar quarter may be the calendar quarter in which
the Effective Date occurs), combined sales and net income figures as
contemplated by and in accordance with the terms of SEC Accounting Series
Release No. 135.
4.10. Community Employees; Directors and Management
(a) All employees of the Community Entities as of the Effective
Date (the "Continuing Employees") shall become employees of one or more of
the CFX Entities, as determined by CFX, as of the Effective Date. Nothing
in the Transaction Documents shall give any Continuing Employee a right to
continued employment with the CFX Entities after the Effective Date. As
soon as practicable after the Effective Date, CFX shall provide or cause to
be provided to all Continuing Employees who remain employed by the CFX
Entities after the Effective Date with employee benefits which, in the
aggregate, are at least substantially equivalent to those generally
afforded to other employees of the CFX Entities holding similar positions,
subject to the terms and conditions under which those employee benefits are
made available to such employees (the "CFX Benefits"); provided that (1)
for purposes of determining eligibility for and vesting of the CFX Benefits
only (and not for pension benefit accrual purposes), service with Community
prior to the Effective Date shall be treated as service with an "employer"
to the same extent as if such Continuing Employees had been employees of
the CFX Entities; (2) for a one-year period after the Effective Date, CFX
shall not be required to provide the CFX Benefits to the Continuing
Employees who continue to be employed by the CFX Entities to the extent
that the Continuing Employees continue to be covered under one or more of
the Plans; (3) this Section 4.10(a) shall not be construed to limit the
ability of the CFX Entities to terminate the employment of any employee or
to review employee benefits programs from time to time and to make such
changes of general applicability to all CFX employees as they deem
appropriate; and (4) CFX will provide Continuing Employees with severance
benefits in accordance with Community's Previously Disclosed Severance
Policy for a period of 12 months following the Effective Date.
(b) Effective upon the Effective Date, Mr. Douglas Crichfield, the
President and Chief Executive Officer of Community and Concord, shall
become an Executive Vice President of CFX and the President and Chief
Executive Officer of CFX Bank and shall be offered a 3-year employment
agreement with CFX on terms substantially equivalent to those contracts of
other Executive Vice Presidents, but which agreement shall be no less
favorable in the aggregate than the current employment agreement between
CFX and its the President and Chief Executive Officer.
(c) Prior to or at the Effective Date, three directors of Community
to be designated by Community (one of whom shall be Mr. Crichfield), after
consultation with and the consent of CFX (which consent shall not be
unreasonably withheld), shall be elected to the Board of Directors of CFX
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<PAGE> 32
effective upon the Effective Date, shall be divided evenly among the
classes, and shall be nominated for re-election, if at all, pursuant to
CFX's then existing policies and procedures.
(d) Prior to or at the Effective Date, three directors of Community
to be designated by Community (one of whom shall be Mr. Crichfield), after
consultation with and the consent of CFX and CFX Bank (which consent shall
not be unreasonably withheld), shall be elected to the Board of Trustees of
CFX Bank effective upon the Effective Date and shall be nominated for re-
election, if at all, pursuant to CFX Bank's then existing policies and
procedures.
(e) From and after the Effective Date, the appropriate CFX Entity
shall assume and honor in accordance with their terms all employment
agreements (including change in control agreements and supplemental
retirement plans) Previously Disclosed by Community. CFX agrees that the
consummation of the Transactions constitutes a "change in control" as
defined in such agreements. This paragraph is intended for the irrevocable
benefit of, and shall be enforceable by, the parties to the agreements.
(f) From and after the Effective Date, CFX shall indemnify persons
who served as directors and officers of Community and the Community Banks
on or before the Effective Date ("Indemnified Parties") in accordance with
and subject to the provisions of Community's Articles of Incorporation
Previously Disclosed to CFX (without regard to any limitation contained in
New Hampshire law, in the By-laws of Community or the By-laws or Articles
of the Community Banks). CFX intends the indemnification provided in the
preceding sentence to be a binding obligation upon it for the irrevocable
benefit of, and enforceable by, those directors and officers so
indemnified. Any Indemnified Party wishing to claim indemnification under
this Section 4.10(f), upon learning of any claim, action, suit, proceeding
or investigation for which indemnification is to be sought, shall promptly
notify CFX thereof; provided, that the failure to so notify shall not
affect the obligations of CFX under this Section 4.10(f), (unless such
failure materially increases CFX's liability here under). In the event of
any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Date), (1) CFX shall have the right to assume
the defense thereof, if it so elects, and CFX shall pay all reasonable fees
and expenses of counsel for the indemnified Parties promptly as statements
therefor are received; provided however, that CFX shall be obligated
pursuant to this Section 4.10(f) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction for any single action, suit or
proceeding or any group of actions, suits or proceedings arising out of or
related to a common body of facts, (2) the Indemnified Parties will
cooperate in the defense of any such matter, and (3) CFX shall not be
liable for any settlement effected without its prior written consent. From
and after the Effective Date, CFX will cause the persons who served as
directors or officers of Community and the Community Banks on or before the
Effective Date to be covered by Community's existing directors' and
officers' liability insurance policy (or policies of at least the same
coverage and amounts and containing terms and conditions which are not less
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advantageous than such policy); provided that no such person shall be
entitled to insurance coverage more favorable than that provided to the
person in such capacity at the date hereof with respect to acts or
omissions resulting from the person's service as such on or prior to the
Effective Date, and provided further that CFX shall not be required to
expend with respect to any year of coverage more than 150 percent of the
current per annum amount expended by Community to maintain or procure
insurance coverage pursuant hereto. Such insurance coverage shall commence
on the Effective Date and will be provided for a period of no less than six
years after the Effective Date. As a condition to receiving
indemnification under this Section 4.10(f), the party claiming
indemnification shall assign, by separate writing, to CFX all right, title
and interest to and in proceeds of any insurance maintained or provided by
Community or CFX or any of their respective affiliates for the benefits of
the claiming party, to the extent of indemnification actually received from
CFX hereunder and shall send such notices as CFX may reasonably request
under any applicable directors' and officers' liability or blanket bond
insurance coverage to preserve claims of which the claiming party is aware.
No person shall be entitled to indemnification under this Section 4.10(f)
if such person is seeking indemnification based on a claim (other than a
claim arising as a supplier to, customer of or borrower from CFX or the CFX
Subsidiaries or Community or the Community Subsidiaries) brought by such
person or by an entity of which such person is a general partner, executive
officer, director, trustee, beneficiary or controlling person unless such
person has waived any right to participate in any damage or other award to
such claiming party or other entity in any such action, suit or proceeding.
ARTICLE 5.
CONDITIONS PRECEDENT
5.1. Conditions Precedent to the Obligations of All the Parties
The respective obligations of the Parties to effect the Transactions
shall be subject to satisfaction or waiver of the following conditions at
or prior to the Closing Date:
(a) All corporate action necessary to authorize the execution,
delivery and performance of the Transaction Documents and the consummation
of the Transactions shall have been duly and validly taken;
(b) The Parties shall have received all regulatory approvals
required or mutually deemed necessary in connection with the Transactions,
all notice periods and waiting periods required after the granting of any
such approvals shall have passed and all conditions contained in any such
approval required to have been satisfied prior to consummation of the
Transactions shall have been satisfied, provided that no such approval
shall have imposed any condition or requirement not reasonably foreseen as
of the date of this Agreement that would, in the reasonable good faith
opinion of the Board of Directors of CFX or Community, materially and
adversely affects the anticipated economic and business benefits to CFX of
the Transactions as to render consummation of the Transactions inadvisable,
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<PAGE> 34
provided that no condition or requirement that relates primarily to
regulatory matters existing at the date hereof with respect to CFX's
business or activities shall be deemed to affect the business, operations,
financial condition, property or assets of the combined enterprise or of
Community or otherwise materially impair the value of Community to CFX;
(c) One of the following shall have occurred:
(i) a Registration Statement (including any post-effective
amendment thereto) shall have been filed with the SEC and shall be
effective under the Securities Act, and no proceeding shall be pending or
to the knowledge of CFX threatened by the SEC to suspend the effectiveness
of such Registration Statement;
(ii) the Parties shall have received a "no-action" letter from
the staff of the SEC stating that, by reason of the exemption afforded by
Section 3(a)(10) of the Securities Act, it will not recommend any
enforcement action to the SEC with respect to the issuance of CFX Common
Stock in exchange for Community Common Stock in connection with the Share
Exchange without registration thereof under the Securities Act and that
such shares do not constitute "restricted securities"; or
(iii) the Parties shall have received an opinion of Arnold &
Porter to the effect that the issuance of CFX Common Stock in exchange for
Community Common Stock in connection with the Share Exchange is exempt from
the registration provisions of the Securities Act by reason of the
exemption afforded by Section 3(a)(10) thereof and that such shares do not
constitute "restricted securities";
(d) CFX shall have received all state securities or "Blue Sky"
permits or other authorizations, or confirmations as to the availability of
an exemption from registration requirements as may be necessary;
(e) To the extent that any lease, license, loan, financing
agreement or other contract or agreement to which Community is a party
requires the consent of or waiver from the other party thereto as a result
of the Transactions, such consent or waiver shall have been obtained,
unless the failure to obtain such consents or waivers, individually or in
the aggregate, would not have a Material Adverse Effect on Community;
(f) None of the Parties shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Transactions;
(g) The shares of CFX Common Stock that may be issued in the Share
Exchange shall have been approved for listing on the AMEX, subject to
official notice of issuance; and
(h) Community and CFX shall have received an opinion of Arnold &
Porter, reasonably satisfactory to tax counsel for Community, substantially
to the effect that, on the basis of facts, representations and assumptions
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set forth in such opinion which are consistent with the state of facts
existing on the Effective Date:
(1) the Share Exchange shall either constitute a
reorganization for federal income tax purposes within the meaning of
Section 368(a) of the Code or be treated as part of a reorganization within
the meaning of Section 368(a) of the Code;
(2) no gain or loss will be recognized by a shareholder of
Community who exchanges all of the shareholder's Community Common Stock
(including each attached right issued pursuant to the Community Rights
Agreement) solely for CFX Common Stock in the Share Exchange (except with
respect to cash received in lieu of a fractional share interest in CFX
Common Stock);
(3) the tax basis of the CFX Common Stock received by a
shareholder who exchanges all of the shareholder's Community Common Stock
solely for CFX Common Stock in the Share Exchange will be the same as the
tax basis of the Community Common Stock surrendered in exchange therefor
(reduced by any amount allocable to a fractional share interest for which
cash is received); and
(4) the holding period of the shares of CFX Common Stock to
be received by a shareholder of Community will include the period during
which such shareholder held the shares of Community Common Stock
surrendered in exchange therefor, provided the Community Common Stock
surrendered is held as a capital asset on the Effective Date.
Each Party shall provide, in writing, a statement of facts,
representations and assumptions on which Arnold & Porter may rely in
rendering its opinion, which facts, representations and assumptions shall
reflect the state of facts existing on the Effective Date.
5.2. Conditions Precedent to the Obligations of Community and the
Community Banks
The obligations of Community and the Community Banks to effect the
Transactions shall be subject to satisfaction of the following additional
conditions at or prior to the Closing Date unless waived by Community
pursuant to Section 6.4 hereof:
(a) The representations and warranties of CFX and CFX Bank set
forth in Article 3 hereof shall be true and correct in all material
respects as of the date of this Reorganization Agreement and as of the
Closing Date as though made on and as of the Closing Date (or on the date
when made in the case of any representation and warranty which specifically
relates to an earlier date), except as otherwise contemplated or permitted
by this Reorganization Agreement or consented to in writing by Community;
provided, however, that (i) in determining whether or not the condition
contained in this paragraph (a) shall be satisfied, no effect shall be
given to any exceptions in such representations and warranties relating to
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<PAGE> 36
materiality or Material Adverse Effect, and (ii) the condition contained in
this paragraph (a) shall be deemed to be satisfied unless the failure of
such representations and warranties to be so true and correct constitute,
individually or in the aggregate, a Material Adverse Effect on CFX;
(b) CFX and CFX Bank shall have in all material respects performed
all obligations and complied with all of their covenants required by the
Transaction Documents prior to the Effective Date (including, without
limitation, the covenant set forth in Section 4.10(b) hereof);
(c) CFX and CFX Bank each shall have delivered to Community a
certificate, dated the Closing Date and signed by its President or Chief
Financial Officer to the effect that the conditions set forth in paragraphs
(a) and (b) of this section have been satisfied; and
(d) Community shall have received an opinion of Devine, Millimet &
Branch, counsel to CFX, dated the Closing Date, as to such matters as
Community may reasonably request with respect to the Transactions.
5.3. Conditions Precedent to the Obligations of CFX and CFX Bank
The respective obligations of CFX and CFX Bank to effect the
Transactions shall be subject to satisfaction of the following additional
conditions at or prior to the Closing Date unless waived by CFX pursuant to
Section 6.4 hereof:
(a) The representations and warranties of Community and the
Community Banks set forth in Article 2 hereof shall be true and correct in
all material respects as of the date of this Reorganization Agreement and
as of the Closing Date as though made on and as of the Closing Date (or on
the date when made in the case of any representation and warranty which
specifically relates to an earlier date), except as otherwise contemplated
or permitted by this Reorganization Agreement or consented to in writing by
CFX; provided, however, that (i) in determining whether or not the
condition contained in this paragraph (a) shall be satisfied, no effect
shall be given to any exceptions in such representations and warranties
relating to materiality or Material Adverse Effect, and (ii) the condition
contained in this paragraph (a) shall be deemed to be satisfied unless the
failure of such representations and warranties to be so true and correct
constitute, individually or in the aggregate, a Material Adverse Effect on
Community;
(b) Community and the Community Banks shall have, in all material
respects, performed all obligations and complied with all of their
covenants required by the Transaction Documents;
(c) Community and the Community Banks each shall have delivered to
CFX a certificate, dated the Closing Date and signed by its President and
Chief Executive Officer to the effect that the conditions set forth in
paragraphs (a) and (b) of this section have been satisfied;
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<PAGE> 37
(d) No event shall have occurred that shall preclude the
Transactions from being accounted for as a pooling of interests;
(e) The Rights issued pursuant to the Community Rights Agreement
shall not have become nonredeemable, exercisable, distributed or triggered
pursuant to the terms of such agreement (unless, in the case of a
distribution or trigger, the effects can be cured by Community);
(f) CFX shall have received from KPMG Peat Marwick LLP a "comfort
letter" dated not more than five days prior to (i) the effective date of
the Registration Statement, if any, and, otherwise, the mailing date of the
Proxy Statement, and (ii) the Closing Date, with respect to certain
financial information regarding Community, in form and substance which is
customary in transactions such as the Transactions; and
(g) CFX shall have received an opinion of Foley, Hoag & Eliot LLP,
counsel to Community, dated the Closing Date, as to such matters as CFX may
reasonably request with respect to the Transactions.
ARTICLE 6.
TERMINATION, WAIVER AND AMENDMENT
6.1. Termination
This Reorganization Agreement and the other Transaction Documents
(other than the Stock Option Agreement, which shall be governed by the
terms thereof) may be terminated, either before or after approval by the
shareholders of CFX and Community:
(a) At any time on or prior to the Effective Date, by the mutual
consent in writing of the Parties;
(b) At any time on or prior to the Closing Date, by CFX in writing,
if Community or either of the Community Banks has, or by Community in
writing, if CFX or CFX Bank has, in any material respect, breached, and the
Party seeking to terminate the Transaction Documents has not, in any
material respect, breached (i) any covenant or agreement contained in the
Transaction Documents, or (ii) any representation or warranty contained
herein (without giving effect to any exceptions in such representations or
warranties relating to materiality or a Material Adverse Effect), and in
either case if such breach has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the Party
committing such breach or the Closing Date (unless the breach, by its
nature, is curable within 30 days after the date of written notice thereof
and such 30-day cure period extends beyond the Closing Date, in which case
the Closing Date shall be delayed to permit the cure of the breach by the
breaching Party within such 30-day cure period); provided, however, that no
breach or breaches of any representation or warranty referenced in this
paragraph 6.1(b) shall be grounds for termination pursuant to this
paragraph 6.1(b) unless such breach or breaches, singly or in the
aggregate, shall have a Material Adverse Effect on the breaching party;
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<PAGE> 38
(c) At any time, by any Party in writing, if the applications for
prior approval or consents referred to in Section 4.3 hereof have been
denied, and the time period for appeals and requests for reconsideration
has run, or if any governmental entity of competent jurisdiction shall have
issued a final non-appealable order enjoining or otherwise prohibiting the
Transactions or any of them;
(d) At any time, by any Party in writing, if the shareholders of
CFX or Community do not approve the Transactions or the shareholders of CFX
do not approve the Charter Amendment at the annual or special meetings duly
called for that purpose;
(e) By any Party in writing, if the Closing Date has not occurred
by the close of business on March 31, 1998 (the "Termination Date"), unless
the failure of the Closing to occur by such date shall be due to the
failure of the Party seeking to terminate this Reorganization Agreement and
the other Transaction Documents to perform or observe the covenants and
agreements set forth herein, provided that the Termination Date may be
extended until June 30, 1998 by any Party by written notice to the other
Parties (given not later than February 28, 1998) if the Closing shall not
have occurred because of failure to obtain approval from one or more
regulatory authorities whose approval is required in connection with this
Reorganization Agreement and the Transactions under circumstances in which
neither party has the right to terminate this Reorganization Agreement
pursuant to Section 6.1(c) hereof; or
(f) By Community, if (i) the CFX Price (as that term is defined in
the Plan of Exchange) is less than the Floor Price (as that term is defined
in the Plan of Exchange), (ii) Community provides written notice to CFX
prior to the third business day immediately preceding the Closing Date of
its intent to terminate this Reorganization Agreement and the other
Transaction Documents (other than the Stock Option Agreement) pursuant to
this Section 6.1(f), and (iii) CFX does not elect prior to the close of
business on the business day immediately preceding the Closing Date to
increase the Exchange Ratio (as that term is defined in the Plan of
Exchange) to the Cure Ratio (as that term is defined in the Plan of
Exchange).
6.2. Effect of Termination
(a) In the event this Reorganization Agreement and the other
Transaction Documents are terminated pursuant to Section 6.1 hereof, the
Transaction Documents (other than the Stock Option Agreement) shall become
void and have no effect, except that (i) this Section 6.2, the provisions
relating to confidentiality, expenses and governing law set forth in
Sections 4.5, 7.1 and 7.7 hereof, respectively, shall survive any such
termination and (ii) a termination pursuant to Section 6.1(b)(i) shall not
relieve the breaching Party from liability (in an action at law or
otherwise) for an uncured willful breach of such covenant or agreement
giving rise to such termination.
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<PAGE> 39
(b) If this Reorganization Agreement is terminated, expenses of the
Parties hereto shall be determined as follows:
(1) Any termination of this Reorganization Agreement pursuant
to Sections 6.1(a), 6.1(c), 6.1(d), 6.1(e) or 6.1(f) hereof (other than as
a result of a willful breach or gross negligence by a Party hereto) shall
be without cost or expense on the part of any Party to the others; and
(2) In the event of a termination of this Reorganization
Agreement pursuant to Section 6.1(b) hereof as a result of a breach of a
representation, warranty or covenant which is caused by the willful conduct
or gross negligence of a Party, such Party shall (while remaining liable
for any liabilities or damages arising out of such willful breach or gross
negligence) be obligated to reimburse the other Parties for all
out-of-pocket costs and expenses, including, without limitation, reasonable
legal, accounting and investment banking fees and expenses, incurred by
such other Parties in connection with the entering into of this
Reorganization Agreement and the carrying out of any and all acts
contemplated hereunder (collectively referred to as "Expenses").
(c) The payment of Expenses is not an exclusive remedy, but is in
addition to any other rights or remedies available to the parties hereto at
law or in equity and notwithstanding anything to the contrary contained
herein, no Party shall be relieved or released from any liabilities or
damages arising out of its gross negligence or willful breach of any
provision of this Reorganization Agreement.
6.3. Non-Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Reorganization
Agreement and the other Transaction Documents or in any instrument
delivered pursuant hereto or thereto shall expire on, and be terminated and
extinguished at, the Effective Date other than covenants that by their
terms are to survive or be performed after the Effective Date, provided
that no such representations, warranties or covenants shall be deemed to be
terminated or extinguished so as to deprive any Party (or any director,
officer or controlling person thereof) of any defense in law or equity
which otherwise would be available against the claims of any person,
including, without limitation, any shareholder or former shareholder of
either CFX or Community, the aforesaid representations, warranties and
covenants being material inducements to the consummation by the Parties of
the Transactions.
6.4. Waiver
Except with respect to any required shareholder or regulatory
approval, CFX and Community, respectively, by written instrument signed by
an executive officer of such Party, may at any time (whether before or
after approval of the Transaction Documents by the shareholders of CFX and
Community) extend the time for the performance of any of the obligations or
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<PAGE> 40
other acts of the Community Entities, on the one hand, or the CFX Entities,
on the other hand, and may waive (i) any inaccuracies of the Parties in the
representations or warranties contained in the Transaction Documents or any
document delivered pursuant hereto or thereto, (ii) compliance with any of
the covenants, undertakings or agreements of the Parties, or satisfaction
of any of the conditions precedent to its obligations, contained in the
Transaction Documents, or (iii) the performance by such parties of any of
its obligations set out herein or therein; provided, however, that, after
any such approval by the shareholders of Community, no such modification
shall (i) alter or change the amount or kind of consideration to be
received by holders of Community Common Stock as provided in the Plan of
Exchange, or (ii) adversely affect the tax treatment to Community
shareholders as a result of the receipt of such consideration.
6.5. Amendment or Supplement
The Transaction Documents may be amended or supplemented at any time
by mutual agreement of the parties thereto. Any such amendment or
supplement must be in writing and approved by their respective boards of
directors and/or officers authorized thereby and shall be subject to the
proviso in Section 6.4 hereof.
ARTICLE 7.
MISCELLANEOUS
7.1. Expenses
Except as provided in Section 6.2(b) hereof, each Party shall bear
and pay all costs and expenses incurred by it in connection with the
Transactions, including fees and expenses of its own financial consultants,
accountants and counsel, provided, however, that CFX and Community each
shall bear and pay 50 percent of all filing fees associated with the Proxy
Statements insofar as they pertain to the Transactions and with the
Registration Statement, if required.
7.2. Entire Agreement
The Transaction Documents contain the entire agreement between the
parties with respect to the Transactions and supersede all prior
arrangements or understandings with respect thereto, written or oral, other
than documents referred to herein or therein and the Confidentiality
Agreement. The terms and conditions of the Transaction Documents shall
inure to the benefit of and be binding upon the Parties and thereto and
their respective successors. Except as specifically set forth in the
Transaction Documents, nothing in the Transaction Documents, expressed or
implied, is intended to confer upon any person, other than the Parties, and
their respective successors, any rights, remedies, obligations or
liabilities.
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<PAGE> 41
7.3. No Assignment
No Party may assign any of its rights or obligations under this
Reorganization Agreement to any other person.
7.4. Notices
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or
sent by facsimile transmission or overnight express or by registered or
certified mail, postage prepaid, addressed as follows:
If to Community or the Community Banks:
Community Bankshares, Inc.
43 North Main Street
Concord, NH 03301
Attention: Mr. Douglas Crichfield
Facsimile No.: 603-228-5190
With a copy to:
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Peter W. Coogan, Esquire
Facsimile No.: 617-832-7000
If to CFX or CFX Bank:
CFX Corporation
102 Main Street
Keene, NH 03431
Attention: Mark A. Gavin
Facsimile No.: 603-358-5028
With a copy to:
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Attention: Steven Kaplan, Esquire
Facsimile No.: 202-942-5999
7.5. Captions
The captions contained in this Reorganization Agreement are for
reference purposes only and are not part of this Reorganization Agreement.
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<PAGE> 42
7.6. Counterparts
This Reorganization Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement. This Agreement may be executed by facsimile transmission.
7.7. Governing Law
This Reorganization Agreement shall be governed by and construed in
accordance with the laws of the State of New Hampshire applicable to
agreements made and entirely to be performed within such jurisdiction,
except to the extent federal law may be applicable.
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<PAGE> 43
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement and Plan of Reorganization to be
executed in counterparts by their duly authorized officers and their
corporate seal to be hereunto affixed and attested by their officers
thereunto duly authorized, all as of the day and year first above written.
COMMUNITY BANKSHARES, INC.
By:
---------------------------------------
Douglas Crichfield
President and Chief Executive Officer
CONCORD SAVINGS BANK
By:
---------------------------------------
Douglas Crichfield
President and Chief Executive Officer
CENTERPOINT BANK
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CFX CORPORATION
By:
---------------------------------------
Peter J. Baxter,
President and Chief Executive Officer
CFX BANK
By:
---------------------------------------
Peter J. Baxter,
President and Chief Executive Officer
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<PAGE> 44
ANNEX A
PLAN OF SHARE EXCHANGE
PURSUANT TO THIS PLAN OF SHARE EXCHANGE (this "Plan of Exchange"),
dated as of March 24, 1997, CFX CORPORATION ("CFX"), a New Hampshire
corporation, shall, subject to the terms and conditions specified herein
and in a related Agreement and Plan of Reorganization dated as of even date
herewith (the "Reorganization Agreement"), acquire through a share exchange
all the outstanding shares of COMMUNITY BANKSHARES, INC. ("Community"), a
New Hampshire corporation.
ARTICLE 1.
SHARE EXCHANGE
1.1. On the Effective Date (as hereinafter defined), each share of
common stock of Community, par value $1.00 per share ("Community Common
Stock"), outstanding immediately prior to the Effective Date (except as
provided in Paragraphs 4, 7 and 8 of this Article), including each attached
right issued pursuant to the Community Rights Agreement (as defined in
Section 2.1(a) of the Reorganization Agreement), shall be converted without
any action on the part of the holder thereof into an amount of common
stock, par value $0.66 2/3 per share, of CFX ("CFX Common Stock") equal to
one share multiplied by the Exchange Ratio as determined below (rounded to
the nearest four decimal places).
1.2. As used herein, the term "CFX Price" shall mean the average of
the averages of the high and low prices of CFX Common Stock on the American
Stock Exchange (as reported by The Wall Street Journal) for each of the 15
consecutive trading days ending on the business day before the Effective
Date.
1.3. (a) For purposes of this Plan of Exchange, the Exchange Ratio
shall be 2.2 shares of CFX Common Stock for each share of Community Common
Stock; provided, however, that (i) the Exchange Ratio shall be 2.0 shares
of CFX Common Stock for each share of Community Stock if the CFX Price is
greater than $20.00; (ii) the Exchange Ratio shall be $40.00 / the CFX
Price, if the CFX Price is greater than $18.18 but not greater than $20.00;
and (iii) the Exchange Ratio shall be $29.70 / the CFX Price (the "Cure
Ratio"), if the CFX Price is $13.50 (the "Floor Price") or less and CFX has
elected to increase the Exchange Ratio in accordance with Section 6.1(f) of
the Reorganization Agreement.
(b) Notwithstanding the provisions of the preceding
subparagraph (a), in the event that before the Effective Date an
announcement is made with respect to a business combination involving the
acquisition of CFX or a substantial portion of its assets, the Exchange
Ratio shall not be less than 2.2 shares of CFX Common Stock for each share
of Community Common Stock
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<PAGE> 45
1.4. On the Effective Date, all shares of Community Common Stock
held in the treasury of Community or owned beneficially by any subsidiary
of Community other than in a fiduciary capacity or in connection with a
debt previously contracted and all shares of Community Common Stock owned
by CFX or owned beneficially by any subsidiary of CFX other than in a
fiduciary capacity or in connection with a debt previously contracted shall
be canceled and no cash, stock or other property shall be delivered in
exchange therefor.
1.5. (a) Prior to the Effective Date, CFX shall appoint a bank,
trust company or other stock transfer agent selected by CFX as the exchange
agent (the "Exchange Agent") to effect the exchange of certificates
evidencing shares of Community Common Stock (any such certificate being
hereinafter referred to as a "Certificate") for shares of CFX Common Stock
to be received in the share exchange. On the Effective Date, CFX shall
have granted the Exchange Agent the requisite power and authority to effect
for and on behalf of CFX the issuance of the number of shares of CFX Common
Stock issuable in the share exchange.
(b) Within five business days after the Effective Date, the
Exchange Agent shall mail to each holder of record of Community Common
Stock as of the Effective Date a notice of consummation of the share
exchange and a form of transmittal letter pursuant to which each such
shareholder shall transmit the Certificate or Certificates, or, in lieu
thereof, such evidence of lost, stolen or mutilated Certificate or
Certificates and such surety bond as the Exchange Agent may reasonably
require in accordance with customary exchange practices. Community
shareholders who satisfy such requirements for lost, stolen or mutilated
certificates shall for purposes of the exchange procedures set forth herein
be deemed to have submitted Certificates for Community Common Stock. As
soon as practicable after surrender of such Certificate to the Exchange
Agent with a properly completed transmittal letter, the Exchange Agent will
promptly mail by first class mail to such shareholder a certificate or
certificates representing the number of full shares of CFX Common Stock
into which the shares of Community Common Stock evidenced by the
Certificate surrendered shall have been converted pursuant to this Plan of
Exchange.
(c) The Exchange Agent shall accept such Certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent
may impose to effect an orderly exchange thereof in accordance with
customary exchange practices. Until so surrendered, each Certificate shall
be deemed for all purposes to evidence ownership of the number of shares of
CFX Common Stock into which the shares represented by such Certificates
have been changed or converted as aforesaid. No dividends or other
distributions declared after the Effective Date with respect to CFX Common
Stock shall be paid to the holder of any unsurrendered Certificate until
the holder thereof shall surrender such Certificate in accordance with this
Article I. After the surrender of a Certificate in accordance with this
Article I, the record holder thereof shall be entitled to receive any such
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<PAGE> 46
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of CFX Common Stock
represented by such Certificate.
(d) No transfer taxes shall be payable by any shareholders of
Community in respect of the issuance of certificates for CFX Common Stock
and no expenses shall be imposed on any shareholder of Community in
connection with the conversion of shares of Community Common Stock into
shares of CFX Common Stock and the delivery of such shares to the former
holder of Community Common Stock entitled thereto, except that, if any
certificate for shares of CFX Common Stock is to be issued in a name other
than that in which a certificate or certificates for shares of Community
Common Stock surrendered shall have been registered, it shall be a
condition to such issuance that the person requesting such issuance shall
pay to CFX any transfer taxes payable by reason thereof or of any prior
transfer of such surrendered certificate or certificates or establish to
the reasonable satisfaction of the Exchange Agent that such taxes have been
paid or are not payable.
(e) Certificates surrendered for exchange by any person who is
an "affiliate" of Community for purposes of Rule 145(c) under the
Securities Act of 1933, as amended, shall not be exchanged for certificates
representing shares of CFX Common Stock until CFX has received the written
agreement of such person contemplated by Section 4.9 of the Reorganization
Agreement. If any certificate for shares of Community Common Stock is to
be issued in a name other than that in which a certificate surrendered for
exchange is issued, the certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and the person
requesting such exchange shall affix any requisite stock transfer tax
stamps to the certificate surrendered or provide funds for their purchase
or establish to the reasonable satisfaction of CFX or its agent that such
taxes are not payable.
1.6. Upon the Effective Date, the stock transfer books of Community
shall be closed and no transfer of Community Common Stock shall thereafter
be made or recognized. Any other provision of this Plan of Exchange
notwithstanding, neither CFX or its agent nor any party to the share
exchange shall be liable to a holder of Community Common Stock for any
amount paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.7. In the event that, between the date hereof and prior to the
Effective Date, the outstanding shares of CFX Common Stock or Community
Common Stock shall have been increased, decreased or changed into or
exchanged for a different number or kind of shares or securities by
reorganization, recapitalization, reclassification, stock split or other
like changes in the capitalization of CFX or Community, or if a stock
dividend is declared on CFX Common Stock or Community Common Stock with a
record date within such period, then an appropriate and proportionate
adjustment shall be made in the number and kind of shares of CFX Common
Stock to be thereafter delivered pursuant to this Plan of Exchange, and the
A-3
<PAGE> 47
dollar amounts and the Exchange Ratio set forth in Section 3 of this
Article I, so that each shareholder of Community shall be entitled to
receive such number of shares of CFX Common Stock or other securities as
such shareholder would have received pursuant to such reorganization,
recapitalization, reclassification, stock split, exchange or shares or
readjustment or other like changes in the capitalization of CFX or
Community, or as a result of a stock dividend on CFX Common Stock or
Community Common Stock, had the record date therefor been immediately
following the Effective Date.
1.8. Notwithstanding any other provision hereof, each holder of
shares, or of options to purchase shares, of Community Common Stock who
would otherwise have been entitled to receive a fraction of a share of CFX
Common Stock (after taking into account all Certificates delivered by such
holder or all shares such holder is entitled to receive in accordance with
Article III hereof) shall receive (by check from the Exchange Agent, mailed
to the shareholder with the certificate(s) for CFX Common Stock which such
holder is to receive pursuant to the share exchange), in lieu thereof, cash
in an amount equal to such fractional part of a share of CFX Common Stock
multiplied by the "market value" of such Common Stock. The "market value"
of one share of CFX Common Stock shall be the closing price of CFX Common
Stock on the American Stock Exchange (as reported by The Wall Street
Journal) on the last business day preceding the Effective Date. No such
holder shall be entitled to dividends, voting rights or any other
shareholder right in respect of any fractional share.
1.9. On the Effective Date, the share exchange contemplated hereby
shall have the effect set forth in Section 293-A:11.06 of the New Hampshire
Revised Statutes Annotated.
ARTICLE 2.
DISSENTERS' RIGHTS
Notwithstanding anything in this Plan of Exchange to the contrary and
unless otherwise provided by applicable New Hampshire law, shares of
Community Common Stock that are issued and outstanding immediately prior to
the Effective Date and that are owned by stockholders who, pursuant to
applicable New Hampshire law, (1) deliver to Community before the taking of
the vote of Community's stockholders on the Plan of Exchange a written
notice of their intent to demand payment for their shares of Community
Common Stock if the share exchange is effectuated, and (2) do not vote
their shares in favor of this Plan of Exchange (the "Dissenting Shares"),
shall not be converted into the right to receive, or be exchangeable for,
shares of CFX Common Stock, but, instead, the holders of such Dissenting
Shares shall be entitled to payment of the fair value of such Dissenting
Shares, plus accrued interest, in accordance with applicable New Hampshire
law. If any holders of Community Common Stock shall have failed to perfect
or shall have effectively withdrawn, waived or lost the right to dissent
from the share exchange and to receive the fair value of such shares as
provided under applicable New Hampshire law, the shares of Community Common
A-4
<PAGE> 48
Stock held by such holder shall be deemed to have been converted into and
be exchangeable for shares of CFX Common Stock on the Effective Date.
ARTICLE 3.
STOCK OPTIONS
On the Effective Date, each then outstanding stock option to
purchase Community Common Stock ("Community Option") pursuant to the 1985
Stock Option Plan, the 1988 Stock Option Plan, the 1989 Centerpoint Bank
Stock Option Plan, the 1992 Stock Option Plan or the 1991 Employee Stock
Purchase Plan (collectively, the "Community Stock Option Plans") (it being
understood that the aggregate number of shares of Community Common Stock
subject to purchase pursuant to the exercise of such Community Options
(excluding those under the 1991 Employee Stock Purchase Plan) is not and
shall not be more than 95,379), whether vested or unvested, will be assumed
by CFX. Each Community Option so assumed by CFX under this Agreement shall
continue to have, and be subject to, the same terms and conditions set
forth in the Community Stock Option Plans immediately prior to the
Effective Date, except that (i) such Community Option shall be exercisable
(when vested) for that number of whole shares of CFX Common Stock equal to
the product of the number of shares of Community Common Stock covered by
the Community Option multiplied by the Exchange Ratio, provided that any
fractional share of CFX Common Stock resulting from such multiplication
shall be rounded down to the nearest share; and (ii) the exercise price per
share of CFX Common Stock shall be equal to the exercise price per share of
Community Common Stock of such Community Option, divided by the Exchange
Ratio, provided that such exercise price shall be rounded up to the nearest
cent. It is the intention of the parties that the Community Options
assumed by CFX qualify following the Effective Date as incentive stock
options as defined in Section 422 of the Internal Revenue Code of 1986, as
amended to the extent that the Community Options qualified as incentive
stock options immediately prior to the Effective Date.
ARTICLE 4.
EFFECTIVE DATE OF THE SHARE EXCHANGE
Articles of share exchange evidencing the transactions contemplated
herein shall be delivered to the New Hampshire Secretary of State in
accordance with applicable New Hampshire law. The share exchange
contemplated hereby shall be effective at the time and on the date
specified in such articles of share exchange (such date and time being
herein referred to as the "Effective Date").
ARTICLE 5.
CONDITIONS PRECEDENT
The obligations of CFX and Community to effect the share exchange as
herein provided shall be subject to satisfaction, unless duly waived, of
the conditions set forth in the Reorganization Agreement.
A-5
<PAGE> 49
ARTICLE 6.
TERMINATION
Anything contained in this Plan of Exchange to the contrary
notwithstanding, and notwithstanding the adoption hereof by the
shareholders of Community, this Plan of Exchange may be terminated and the
share exchange abandoned as provided in the Reorganization Agreement.
ARTICLE 7.
MISCELLANEOUS
7.1. This Plan of Exchange may be amended or supplemented at any
time prior to its Effective Date by mutual agreement of CFX and Community.
Any such amendment or supplement must be in writing and approved by their
respective Boards of Directors and/or by officers authorized thereby and
shall be subject to the proviso in Section 6.4 of the Reorganization
Agreement.
7.2. Any notice or other communication required or permitted under
this Plan of Exchange shall be given, and shall be effective, in accordance
with the provisions of the Reorganization Agreement.
7.3. The headings of the several Articles herein are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Plan of Exchange.
7.4. This Plan of Exchange shall be governed by and construed in
accordance with the laws of New Hampshire applicable to the internal
affairs of Community and CFX.
A-6
<PAGE> 50
ANNEX B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Plan of Merger"), dated as
of March 24, 1997, is by and among Concord Savings Bank, a New Hampshire
state-chartered savings bank ("Concord Bank"), Centerpoint Bank, a New
Hampshire state-chartered commercial bank ("Centerpoint Bank"), and CFX
BANK ("CFX Bank"), a New Hampshire state chartered savings bank, and is
joined in by COMMUNITY BANKSHARES, INC. ("Community"), a New Hampshire
corporation, and CFX CORPORATION ("CFX"), a New Hampshire Corporation.
WITNESSETH
WHEREAS, the respective Boards of Directors of Concord Bank,
Centerpoint Bank and CFX Bank deem the merger of Concord Bank and
Centerpoint Bank with and into CFX Bank, under and pursuant to the terms
and conditions herein set forth or referred to, desirable and in the best
interests of the respective banks and their respective shareholders, and
the respective Boards of Directors of Concord Bank, Centerpoint Bank and
CFX Bank have adopted resolutions approving this Plan of Merger and a
related Agreement and Plan of Reorganization dated as of even date herewith
(the "Reorganization Agreement").
WHEREAS, Community, the sole shareholder of Concord Bank and
Centerpoint Bank, and CFX, the sole shareholder of CFX Bank, have consented
to and joined in this Plan of Merger and have entered into the
Reorganization Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto do hereby agree as follows:
ARTICLE 1.
BANK MERGER
Subject to the terms and conditions of this Plan of Merger, on the
Effective Date (as hereinafter defined), Concord Bank and Centerpoint Bank
shall be merged with and into CFX Bank, pursuant to the provisions of, and
with the effect provided in, Title 35 of the New Hampshire Revised Statutes
Annotated (the "Bank Merger"). On the Effective Date, the separate
existence of Concord Bank and Centerpoint Bank shall cease and CFX Bank, as
the surviving entity, shall continue unaffected and unimpaired by the Bank
Merger (CFX Bank, as existing on and after the Effective Date, being
hereinafter sometimes referred to as the "Surviving Bank").
ARTICLE 2.
ARTICLES OF AGREEMENT AND BY-LAWS
The Amended and Restated Articles of Agreement and the By-laws of CFX
Bank in effect immediately prior to the Effective Date shall be the
Articles of Agreement and the By-laws of the Surviving Bank, amended as set
B-1
<PAGE> 51
forth below, in each case until amended in accordance with applicable law.
The Articles of Agreement of the Surviving Bank shall be amended effective
upon the Effective Date to add the following paragraph to the end of
existing Article VI:
"The Bank shall assume the Distribution and Liquidation Account (the
"Liquidation Account") initially established and maintained by
Concord Savings Bank for the benefit of Concord Savings Bank's
eligible savings account holders as of May 8, 1986 ("eligible
savers"). Notwithstanding any provision of these Articles or of the
By-laws of the Bank to the contrary, in the event of a complete
liquidation of the Bank, it shall comply with such regulations with
respect to the amount and the priorities on liquidation of each of
the Bank's eligible savers' inchoate interest in the Liquidation
Account, to the extent it is still in existence; provided, that an
eligible saver's inchoate interest in the Liquidation Account shall
not entitle such eligible saver to any voting rights at meetings of
the Bank's shareholders."
ARTICLE 3.
DIRECTORS AND OFFICERS
The directors of CFX Bank immediately prior to the Effective Date,
together with three directors of Community to be designated by Community in
accordance with Section 4.10(c) of the Reorganization Agreement, will be
the directors of the Surviving Bank on the Effective Date. The officers of
CFX Bank immediately prior to the Effective Date shall be the officers of
the Surviving Bank on the Effective Date, except then Mr. Douglas
Crichfield, if he is the President and Chief Executive Officer of Concord
Bank immediately prior to the Effective Date, shall become the President
and Chief Executive Officer of the Surviving Bank on the Effective Date.
ARTICLE 4.
CAPITAL
The shares of capital stock of CFX Bank issued and outstanding
immediately prior to the Effective Date shall be the shares of the
Surviving Bank issued and outstanding on the Effective Date.
ARTICLE 5.
CANCELLATION OF CONCORD AND CENTERPOINT STOCK
Each share of Concord Bank and Centerpoint Bank capital stock issued
and outstanding immediately prior to the Effective Date shall, by virtue of
the Bank Merger, be cancelled on the Effective Date, and no cash, stock or
other property shall be delivered in exchange therefor.
B-2
<PAGE> 52
ARTICLE 6.
EFFECTIVE DATE OF THE BANK MERGER
Certificates or articles of merger evidencing the transactions
contemplated herein shall be delivered to the New Hampshire Secretary of
State in accordance with applicable New Hampshire law. The Bank Merger
shall be effective at the time and on the date specified in such
certificates or articles of merger (such date and time being herein
referred to as the "Effective Date").
ARTICLE 7.
CONDITIONS PRECEDENT
The obligations of Concord Bank, Centerpoint Bank and CFX Bank to
effect the Bank Merger as herein provided shall be subject to satisfaction,
unless duly waived, of the conditions set forth in the Reorganization
Agreement.
ARTICLE 8.
TERMINATION
Anything contained in this Plan of Merger to the contrary
notwithstanding, this Plan of Merger may be terminated and the Bank Merger
abandoned as provided in the Reorganization Agreement.
ARTICLE 9.
MISCELLANEOUS
9.1. This Plan of Merger may be amended or supplemented at any time
prior to the Effective Date by mutual agreement of the parties hereto. Any
such amendment or supplement must be in writing and approved by the
parties' respective Boards of Directors and/or by officers authorized
thereby.
9.2. Any notice or other communication required or permitted under
this Plan of Merger shall be given, and shall be effective, in accordance
with the provisions of the Reorganization Agreement.
9.3. The headings of the several Articles herein are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Plan of Merger.
9.4. This Plan of Merger shall be governed by and construed in
accordance with the laws of New Hampshire applicable to the internal
affairs of Concord Bank, Centerpoint Bank and CFX Bank.
B-3
<PAGE> 53
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement and Plan of Merger to be executed in
counterparts by their duly authorized officers and their corporate seals to
be hereunto affixed and attested by their officers thereunto duly
authorized, all as of the day and year first above written.
CONCORD SAVINGS BANK
By:
---------------------------------------
Douglas Crichfield
President and Chief Executive Officer
CENTERPOINT BANK
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
CFX BANK
By:
---------------------------------------
Peter J. Baxter,
President and Chief Executive Officer
JOINED IN BY:
COMMUNITY BANKSHARES, INC.
By:
---------------------------------------
Douglas Crichfield
President and Chief Executive Officer
CFX CORPORATION
By:
---------------------------------------
Peter J. Baxter,
President and Chief Executive Officer
B-4
<PAGE> 1
Exhibit 10.5
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 27th day of January, 1997 between CFX
CORPORATION, a New Hampshire corporation (hereinafter "Company") and Gregg R.
Tewksbury, residing at Keene, New Hampshire (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:
<PAGE> 2
(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
-2-
<PAGE> 3
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 twelve 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 1.0 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
-3-
<PAGE> 4
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
-4-
<PAGE> 5
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 Bank 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.
-5-
<PAGE> 6
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.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the undersigned parties have executed or caused to
be executed this Agreement as of the day and year first above written.
CFX CORPORATION
---------------
By: /s/
------------------------------------
Peter J. Baxter its duly
---------------------------
authorized President and CEO .
-------------------------
"EXECUTIVE"
/s/
-----------------------------------
Gregg R. Tewksbury
-7-
<PAGE> 1
DIVERSITY
MORTGAGE BANKING
[GRAPHIC]
RETAIL BANKING
[GRAPHIC]
COMMERCIAL BANKING
[GRAPHIC]
INVESTMENT & TRUST SERVICES
[GRAPHIC]
EQUIPMENT LEASE FUNDING
[GRAPHIC]
CFX CORPORATION
1996 Annual Report
<PAGE> 2
- -----------------------
SELECTED FINANCIAL DATA
- -----------------------
<TABLE>
<CAPTION>
===================================================================================================================
AT OR FOR
YEARS ENDED DECEMBER 31 (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 (2&3) 1993 (2) 1992
===================================================================================================================
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net interest and dividend income $ 56,859 $ 52,026 $ 47,998 $ 46,478 $ 45,409
Provision for loan and lease losses 2,935 3,037 2,697 11,608 6,728
Net income available to common stock (5) 12,641 11,249 6,976 3,927 4,986
Common earnings per share (3 & 5) .99 .89 .58 .34 .42
Common dividends declared per share (3) .55 .50 .31 .27 .25
Preferred dividends declared per share - .4625 1.3875 1.3875 1.3875
- -------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets 1,547,092 1,344,880 1,267,113 1,218,394 1,152,323
Net loans and leases 1,102,424 911,981 828,355 731,738 749,447
Investments 278,191 311,814 308,241 369,297 290,752
Deposits 1,157,207 1,056,824 999,217 974,694 1,006,977
Advances from Federal Home
Loan Bank of Boston 175,081 102,814 94,201 49,801 3,000
Other borrowed funds 67,374 44,012 45,295 32,822 17,421
Total shareholders' equity 132,953 127,032 118,918 117,327 115,627
Common shareholders' equity 132,953 127,032 118,725 113,949 112,224
Common shareholders' equity per share (3) 10.22 10.52 9.74 9.77 9.38
- -------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE DATA:
Total assets 1,475,860 1,311,455 1,256,260 1,155,507 1,160,949
Interest earning assets 1,360,296 1,214,876 1,140,680 1,065,317 1,074,168
Loans and leases (net of unearned income) (5) 1,025,013 878,952 790,554 765,294 769,692
Interest bearing liabilities 1,194,994 1,053,060 997,080 940,905 965,791
Common shareholders' equity 131,974 122,733 113,939 114,546 110,133
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average common shareholders'
equity (4) 9.58% 9.17% 6.12% 3.43% 4.53%
Return on average assets (4) .86% .86% .56% .34% .43%
Efficiency ratio (4) 69.58% 68.69% 75.00% 71.46% 70.78%
Net interest margin 4.24% 4.36% 4.27% 4.41% 4.27%
====================================================================================================================
</TABLE>
(1) On July 1, 1996, the Company acquired The Safety Fund Corporation
(Safety Fund), a bank holding company, and the Milford Co/operative
Bank (Milford), a state-chartered co/operative bank. Both transactions
were accounted for as a pooling-of-interests. Accordingly, all prior
period balances have been restated to reflect this transaction. See
Note B of the "Notes to Consolidated Financial Statements."
(2) 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.
(3) Common per share data has been restated to reflect the Company's 5%
stock dividend declared on December 10, 1996.
(4) As a result of the Safety Fund and Milford acquisitions discussed in
(1) above, the Company recorded a charge to earnings in the third
quarter of 1996 of $3,722,000, on an after-tax basis for merger
related costs. Also during the third quarter of 1996, the Company
recorded adjustments relating to a pension settlement gain of $539,000
after tax and an FDIC-SAIF assessment of $424,000 after tax. See
"Management's Discussion and Analysis."
(5) Average loans and leases include total loans and leases and mortgage
loans held for sale.
<PAGE> 3
THE COMPANY
CFX(R) Corporation is a bank holding company headquartered in Keene, New
Hampshire. The Company operates 42 full-service offices and 68 automated
teller and remote service banking locations in New Hampshire and central
Massachusetts. The Company's three banking subsidiaries (the Banks) are CFX
Bank, with headquarters in Keene, New Hampshire, Safety Fund National Bank,
with headquarters in Fitchburg, Massachusetts, and Orange Savings Bank, with
headquarters in Orange, Massachusetts. The principal business of the Banks is
to serve as financial intermediaries, attracting deposits from, and making
loans to, consumers and small-and mid-sized businesses. A Trust Division
furnishes trust and investment services to individuals, corporations,
municipalities and charitable organizations.
CFX Mortgage, CFX Bank's mortgage banking subsidiary, operates loan
production offices in Bedford and Keene, New Hampshire and throughout the
Bank's branch network.
CFX Bank owns 51 percent of CFX Funding L.L.C., which engages in the
facilitation of lease financing and securitization nationwide.
<PAGE> 4
- -------------------
TO OUR SHAREHOLDERS
- -------------------
<TABLE>
<CAPTION>
TOTAL
ASSETS
(in Millions)
Year Ended
1994 1995 1996
<S> <C> <C>
$1,267 $1,345 $ 1,547
</TABLE>
<TABLE>
<CAPTION>
TOTAL
DEPOSITS
(in Millions)
Year Ended
1994 1995 1996
<S> <C> <C>
$ 999 $1,057 $1,157
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(in Millions)
Year Ended
1994 1995 1996
<S> <C> <C>
$ 119 $ 127 $ 133
</TABLE>
[PHOTO]
PETER J. BAXTER
President & Chief Executive Officer
The long-term financial success of an institution is dependent upon its
ability to retain profitable business, develop new growth markets, protect
itself from economic cycles by diversifying its revenue base, and preserve the
dedication of its people. During 1996, we made substantial progress toward all
of these success measurements, resulting in increased shareholder value.
Completing the acquisition of The Milford Co/operative Bank has
contributed greatly to the retention and expansion of our core markets in
southwestern New Hampshire. New branches in Laconia and Merrimack will provide
new high-growth markets to our retail banking franchise. Adding
Massachusetts-based Safety Fund National Bank to our Company opened up a
significant new geographic market to our mortgage banking subsidiary and a very
important investment and trust operation, which will be expanded throughout the
CFX franchise.
I am pleased to report another year of record earnings; achieved by
diversifying our revenue stream, leveraging our balance sheet, and improving
our operating efficiency. The condensed financial review that follows presents
a summary of the lines of business that are driving our Company's performance.
Looking ahead, CFX Corporation will continue to grow core product lines
by focusing on customer satisfaction and retention, and by penetrating our new,
higher-growth markets. Our recently announced acquisitions of Portsmouth Bank
Shares, Inc. ("POBS") and Community Bankshares, Inc. ("Community") bring to CFX
a state-wide presence in New Hampshire. With Portsmouth, we extend our
franchise to the seacoast region of Rockingham County while Community advances
the Company to the number two position in Merrimack County, the state's largest
market area.
In addition to the pursuit of new growth markets, we will continue to
seek new products and technologies that will enhance our revenue stream, reduce
our costs, and provide our customers with high-quality and convenient banking
options.
Standing behind our initiatives is our most diverse resource and the
foundation of our success-- our Board of Directors, management, and staff who
dedicate themselves to the pursuit of excellence. My thanks to them and you for
your continued support and confidence.
Peter J. Baxter
President &
Chief Executive Officer
<PAGE> 5
- --------------------------
CONDENSED FINANCIAL REVIEW
- --------------------------
<TABLE>
<CAPTION>
EARNINGS
PER SHARE
Year Ended
1994 1995 1996
<S> <C> <C>
$ .58 $ .89 $1.27
</TABLE>
*Excludes Charges for Mergers and
Other Adjustments
<TABLE>
<CAPTION>
RETURN
ON EQUITY
Year Ended
1994 1995 1996
<S> <C> <C>
5.94% 9.08% 12.31%
</TABLE>
*Excludes Charges for Mergers and
Other Adjustments
<TABLE>
<CAPTION>
RETURN
ON ASSETS
Year Ended
1994 1995 1996
<S> <C> <C>
0.56% 0.86% 1.10%
</TABLE>
*Excludes Charges for Mergers and
Other Adjustments
[GRAPHIC]
OVERVIEW
For the year-ended December 31, 1996, CFX Corporation (the Company)
reported earnings of $12.6 million, or $.99 per share, compared to earnings of
$11.2 million, or $.89 per share, for the prior year. Return on assets and
return on equity were .86% and 9.58%, respectively, for 1996 compared to .86%
and 9.08%, respectively for 1995. The increase in earnings came despite charges
for mergers and other adjustments (see "Management's Discussion and Analysis").
Excluding charges for mergers and other adjustments, net income was $16.2
million, or $1.27 per share, an increase of 44% over 1995. On the same basis,
return on assets, return on equity, and the efficiency ratio (the cost to earn
a dollar of revenue) were 1.10%, 12.31%, and 63.33%, respectively. Net income
per share, excluding merger and other adjustments, has increased at a compound
annual growth rate of 24.77% over the last five years. Note: The charts within
this section, "Condensed Financial Review", exclude charges for mergers and
other adjustments for 1996.
The improvement in the Company's earnings for 1996 can be attributed to
the following factors:
- - DIVERSIFIED REVENUE INITIATIVES: In addition to traditional income from
loans and investments, the Company has developed strong revenue sources from
mortgage banking, the facilitation of commercial lease financing and
securitization, consumer leasing, and investment and trust operations.
- - BALANCE SHEET LEVERAGE: The Company has successfully leveraged its capital,
resulting in the generation of significant loan and lease assets. Increased
leverage reduced the Company's Tier 1 leverage capital ratio from 8.78% in
1995 to 8.00% in 1996.
- - LOAN AND LEASE GROWTH: The Company experienced strong loan growth across all
product lines. For the year ended December 31, 1996, the loan and lease
portfolio increased as follows:
<TABLE>
<CAPTION>
Annual Increase
--------------------
$000's %
-------- -----
<S> <C> <C>
Residential mortgage and construction $125,402 21.05%
Consumer 42,506 58.38
Commercial and commercial real estate 22,826 8.82
--------
Total Loans $190,734 20.57
========
</TABLE>
<PAGE> 6
- --------------------------
CONDENSED FINANCIAL REVIEW
- --------------------------
<TABLE>
<CAPTION>
EFFICIENCY
RATIO
Year Ended
1994 1995 1996*
<S> <C> <C>
75.00% 68.69% 63.33%
</TABLE>
*Excludes Charges for Mergers and
Other Adjustments
<TABLE>
<CAPTION>
TIER 1 LEVERAGE
CAPITAL RATIO
Year Ended
1994 1995 1996*
<S> <C> <C>
9.04% 8.78% 8.00%
</TABLE>
Year Ended
<TABLE>
<CAPTION>
NET
REVENUE*
($ in Millions)
Year Ended
1994 1995 1996*
<S> <C> <C>
$59,077 $66,337 $72,809
</TABLE>
*Net interest and dividend income
plus other income, exclusive of pension
settlement gain in 1996
[GRAPHIC]
- - EXPANDED DEPOSIT FRANCHISE: Over the past three years, the Company has
significantly strengthened and expanded its deposit franchise into markets
that offer greater opportunities for growth.
<TABLE>
<S> <C>
De novo Branch--Gilford, NH (Central NH) 12/01/94
Acquisition--Orange Savings Bank (North Central MA) 04/28/95
De novo Branch--Manchester, NH (Southern NH) 06/30/95
Acquisition--The Safety Fund Corporation (Central MA) 07/01/96
Acquisition--Milford Co/operative Bank (South Central NH) 07/01/96
De novo Branch--Laconia, NH (Central NH) 10/01/96
</TABLE>
- - IMPROVED EFFICIENCY: The consummation of three acquisitions within three
years has afforded the Company the opportunity to reduce overhead and
improve key efficiency ratios through the consolidation of operations and
the elimination of duplicative administrative overhead. The Company has
successfully grown its balance sheet by leveraging its employee and
financial resources, thereby maintaining a constant level of operating
costs.
- - BALANCED RISKS: The Company has grown its balance sheet while monitoring
overall credit and interest rate risk through a disciplined approach to
managing the Company's asset quality and asset/liability position.
BUSINESS STRATEGY
As a public company, the principal objective of the Company is to improve
shareholder value through enhancing profitability by growing and diversifying
revenue streams. Since 1993, the Company has made significant strides in
achieving the above objective.
The successful leverage of the Company's capital and generation of higher
shareholder returns has been consistently achieved through the expansion and
strengthening of the Company's lines of business and a strong dividend. A brief
summary of the Company's key lines of business are as follows:
MORTGAGE BANKING
CFX Corporation operates a mortgage banking subsidiary, CFX Mortgage,
Inc., which originates residential housing loans to be held in portfolio by
the Company's banking subsidiaries, as well as loans for sale to secondary
market investors. Residential loans are originated through various channels,
including the subsidiary banks' branch networks and through loan production
offices. In addition, CFX Mortgage originates approximately half of its loan
volumes through a correspondent network of community banks, mortgage bankers,
and mortgage brokers throughout New Hampshire, Massachusetts, Maine, and
Vermont.
<PAGE> 7
- --------------------------
CONDENSED FINANCIAL REVIEW
- --------------------------
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
PER SHARE
Year Ended
1994 1995 1996
<S> <C> <C>
.31 .50 .55
</TABLE>
<TABLE>
<CAPTION>
CORE
DEPOSITS*
($ in Millions)
Year Ended
1994 1995 1996
<S> <C> <C>
$999,118 $1,036,158 $1,087,447
</TABLE>
*Excludes Brokered Deposits
<TABLE>
<CAPTION>
TOTAL
LOANS AND LEASES
($ in Millions)
Year Ended
1994 1995 1996
<S> <C> <C>
$842,756 $927,430 $1,118,164
</TABLE>
[GRAPHIC]
Loans originated by CFX Mortgage in 1996 totalled $300 million of which
$179 million were sold to one of the Company's banking affiliates, contributing
to the 1996 increase in the Company's residential and construction real estate
portfolio of $125 million or 21%. At year-end, CFX Mortgage serviced over $1.3
billion in mortgage loans, including the subsidiary banks' mortgage portfolios
which totaled $721 million.
RETAIL BANKING
CFX Corporation gathers deposits to meet its various funding requirements
through the banking subsidiaries' branch networks and, to a lesser degree,
through the purchase of brokered deposits from around the country. During the
year, core deposits (excluding brokered deposits) increased by $51 million or
5%. Total core deposits at year-end were $1.1 billion.
Consumer loans, both collateralized and unsecured, are also originated
through the subsidiary banks' branch networks. Additionally, consumer loans
and leases are originated through an extensive, state-wide (New Hampshire)
merchant referral and dealer network which provide financing for a multitude of
consumer purchases. Expectations are to expand these same networks throughout
Worcester County in Massachusetts.
During the year, consumer loans outstanding increased by $43 million or
58%. Total outstandings at year-end were $115 million.
COMMERCIAL BANKING
The Company's commercial banking division provides a complete line of
deposit, loan and fee-based products to small and medium-sized businesses in
the New Hampshire and Massachusetts market areas. The operating philosophy is
to develop close relationships with commercial customers, provide them with
unparalleled customer service and ensure a commitment to local
decision-making.
The recent acquisition of Safety Fund National Bank has greatly increased
both the geographic coverage and the number of commercial customers. As a
larger, more geographically diverse company, the subsidiary banks offer a more
competitive and sophisticated product line including a full range of cash
management services and an expanded small business lending program. These
products, combined with an active sales program, will contribute to the
Company's loan and deposit growth and generate fee income.
During the year, commercial and commercial real estate loans increased by
$23 million or 9%. At the end of 1996, our commercial loan portfolio exceeded
$280 million and the credit quality of our portfolio remained strong.
<PAGE> 8
- --------------------------
CONDENSED FINANCIAL REVIEW
- --------------------------
<TABLE>
<CAPTION>
NET
INTEREST MARGIN
Year Ended
1994 1995 1996*
<S> <C> <C>
4.27% 4.36% 4.24%
</TABLE>
[GRAPHIC]
INVESTMENT AND TRUST SEVICES
With the acquisition of Safety Fund National Bank, the Company gained an
Investment and Trust Services Division with a long history of solid
performance. A comprehensive array of investment and trust products and
services now complement our traditional product offerings. The emphasis of the
Investment and Trust Services Division is focused on the investor as much as on
the investments. We employ a disciplined investment process, assisted by
state-of-the-art technology and our combined years of experience in the trust
and investment industry, to yield superior investment performance. We offer
investment management and financial planning for individuals, corporations,
municipalities and non-profit organizations. We are a leading provider of
investment management and administrative services to funeral homes for pre-need
funeral trusts.
Strong new business growth and excellent investment performance
contributed to an outstanding year for the Investment and Trust Services
Division. In 1996, the proprietary "Equity Buy List", a model portfolio of
equity selection, outperformed the S&P 500 Stock Index. With trust assets
approaching $400 million, continued growth is anticipated in 1997 as the
Company expands into new markets throughout New Hampshire and Massachusetts.
EQUIPMENT LEASE FUNDING
A unique concept within the banking industry, CFX Funding facilitates the
funding, accumulation, sale and servicing of small-ticket leases originated by
participating lessors and provides the structural enhancements and
administrative coordination needed to create attractive products for the
capital markets. CFX Funding arranges short-term warehouse lines of credit with
CFX Bank based on the credit of the participating leasing company. The
warehouse lines of credit enable the Program participants to originate leases
for portfolio sale or securitization.
During the year, lease receivables serviced by CFX Funding increased by
$48 million or 96%. At year-end, total lease receivables serviced amounted to
approximately $98 million.
<PAGE> 9
- --------------------------
CONDENSED FINANCIAL REVIEW
- --------------------------
[GRAPHIC]
SHAREHOLDER VALUE
The Company's corporate culture is focused on maximizing shareholder
value. The accompanying graph displays the Company common stock, the
broad-based Standard & Poor's (S&P) 500 Index, and Keefe, Bruyette & Woods'
(KBW) New England Bank Index. The total return as shown on this graph is
measured using both stock price appreciation and the effect of continuous
reinvestment of dividend payments. The graph indicates that an initial $100
investment in the Company common stock on December 31, 1991 would be worth $410
on December 31, 1996, provided that all quarterly dividends were reinvested in
the Company common stock. This increase in value is equivalent to a compound
annual return of 32.6% over those five years for an investment in the Company
common stock, compared to 15.2% for the S&P 500 Index and 38.5% for the KBW New
England Bank Index.
CFX CORPORATION (CFX) VS.
THE FIVE YEAR TOTAL RETURN FOR
THE KBW NEW ENGLAND BANK INDEX
AND S&P 500 INDEX
[GRAPH]
<PAGE> 10
- --------------------------------------------------------------------------------
FINANCIAL CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................................... 10
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................................ 25
Consolidated Statements of Income.......................................................... 26
Consolidated Statements of Shareholders' Equity............................................ 27
Consolidated Statements of Cash Flows...................................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Significant Accounting Policies......................................................... 29
B. Mergers and Acquisitions................................................................ 34
C. Restrictions on Cash and Due From Bank Accounts......................................... 35
D. Investment Securities................................................................... 35
E. Loans and Leases........................................................................ 38
F. Allowance for Loan and Lease Losses..................................................... 39
G. Premises and Equipment.................................................................. 39
H. Foreclosed Real Estate.................................................................. 39
I. Deposits................................................................................ 40
J. Short-Term Borrowed Funds............................................................... 41
K. Advances from Federal Home Loan Bank of Boston.......................................... 41
L. Preferred Stock......................................................................... 42
M. Income Taxes............................................................................ 42
N. Pension and 401(k) Plans................................................................ 44
O. Stock Compensation Plans................................................................ 46
P. Commitments and Contingencies........................................................... 47
Q. Related Party Transactions.............................................................. 48
R. Derivative Financial Instruments........................................................ 48
S. Financial Instruments with Off-Balance-Sheet Lending Risk............................... 50
T. Fair Value of Financial Instruments..................................................... 51
U. Regulatory Capital Requirements and Other Restrictions.................................. 53
V. Mortgage Loan Servicing................................................................. 54
W. Subsequent Events....................................................................... 54
X. CFX Corporation (Parent-Company-Only)
Condensed Financial Statements.......................................................... 55
Y. Quarterly Results of Operations (Unaudited)............................................. 57
REPORT OF MANAGEMENT--ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING................ 58
REPORTS OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS......................................59 & 60
DIRECTORS AND OFFICERS OF CFX CORPORATION..................................................... 61
TRUSTEES AND BANKING PARTNERS OF CFX BANK..................................................... 61
DIRECTORS OF CFX FINANCIAL SERVICES, INC...................................................... 61
MANAGEMENT OF CFX FUNDING L.L.C............................................................... 61
DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC.................................. 62
DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK.................................... 62
DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK......................................... 62
INFORMATION ON COMMON STOCK................................................................... 63
CORPORATE INFORMATION......................................................................... 64
</TABLE>
9
<PAGE> 11
- --------------------------------------------------------------------------------
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 and its subsidiaries (the Company)
taken as a whole.
CFX Corporation is a bank holding company
incorporated under the laws of the State of New
Hampshire. Diversified financial services are provided
to customers through its three wholly-owned
subsidiaries: CFX Bank, headquartered in Keene, New
Hampshire, Safety Fund National Bank, headquartered in
Fitchburg, Massachusetts, and Orange Savings Bank
(Orange), headquartered in Orange, Massachusetts. CFX
Bank has two wholly-owned subsidiaries: CFX Capital
Systems, Inc. (CFX Capital) and CFX Financial Services,
Inc. (CFX Financial). CFX Capital's wholly-owned
subsidiary is CFX Mortgage, Inc. (CFX Mortgage) which
engages in mortgage banking. CFX Financial owns 51% of
CFX Funding L.L.C. (CFX Funding), which engages in the
facilitation of lease financing and securitization.
Services provided to our customer base by these
subsidiaries include traditional depository banking
services, retail and commercial banking, and investment
and trust services. CFX Mortgage, Inc. offers a full
complement of mortgage products to our customers, as
well as purchases approximately one-half of its total
originations through a correspondent network located
throughout northern New England. CFX Funding, through
its national small-ticket lease financing program,
facilitates the funding, accumulation, sale and
servicing of the small-ticket leases originated by
participating lessors and provides the structure, credit
enhancements, and administrative coordination needed to
create attractive investments for the capital markets.
Both CFX Mortgage and CFX Funding have been
instrumental in the growth, both in total assets and
profitability, and the diversity of the Company.
CFX Corporation has grown profitably over the past
several years by leveraging its capital and through a
series of strategic acquisitions. This activity has
strengthened the franchise and assisted in the
transition from a traditional thrift institution to a
full-service bank. The operating results of the Company
depend primarily on its net interest and dividend
income, which is the difference between (i) interest and
dividend income on earnings assets, primarily loans,
leases, and investment securities, and (ii) interest
expense on interest bearing liabilities, which consist
of deposits and borrowings. Also affecting the Company's
operations are the levels of the provision for loan and
lease losses; the level of other operating income
consisting of deposit fees, trust and investment fees,
gains and losses on the sale of investment securities,
mortgage banking activities and leasing activities; the
level of operating expenses; and income taxes.
- --------------------------------------------------------------------------------
ACQUISITIONS
- --------------------------------------------------------------------------------
On July 1, 1996, the Company acquired The Safety Fund
Corporation, and its subsidiary bank, Safety Fund
National Bank (Safety Fund), a commercial bank with
total assets of $308 million headquartered in Fitchburg,
Massachusetts. In connection with the merger of Safety
Fund, the Company issued 2,973,000 shares of its common
stock in exchange for all of the outstanding shares of
Safety Fund common stock. Under the terms of the
agreement, Safety Fund shareholders received 1.785
shares of CFX Corporation common stock for each share of
Safety Fund common stock they owned. The transaction was
accounted for as a pooling-of-interests and as such, the
Consolidated Financial Statements have been restated to
include Safety Fund for all periods presented. The
acquisition of Safety Fund provided an expanded
penetration of the Company into commercial business
services. In addition, Safety Fund provided the foothold
into trust and investment services for the Company.
Safety Fund has trust assets totaling approximately $370
million.
Also on July 1, 1996, the Company acquired the Milford
Co/operative Bank (Milford), a state-chartered
co/operative bank located in Milford, New Hampshire with
total assets of $160 million. In connection with the
merger of Milford, the Company issued 1,914,000 shares
of its common stock in exchange for all of the
outstanding shares of Milford common stock. Under the
terms of the agreement, Milford shareholders received
2.777 shares of CFX Corporation common stock for each
share of their Milford common stock. The transaction was
accounted for as a pooling-of-interests and as such, the
Consolidated Financial Statements have been restated to
include Milford for all periods presented. In
conjunction with the acquisition, the Company merged
Milford into its CFX Bank subsidiary as of the
acquisition date. The Milford acquisition serves to
connect existing branch facilities in western and
central New Hampshire without creating any market
overlap.
In connection with the mergers, the Company incurred
merger-related expenses totaling $4,552,000 (pre-tax).
These expenses are described in detail in the "Other
Expense" section of this Management's Discussion and
Analysis.
On February 13, 1997 and on March 24, 1997,
respectively, the Company entered into separate
definitive agreements for the acquisitions of Portsmouth
Bank Shares, Inc. (Portsmouth) headquartered in
Portsmouth, New hampshire and Community Bankshares, Inc.
(Community), headquartered in Concord, New Hampshire.
As a result of these acquisitions, which are anticipated
to be accounted for by the pooling-of-interests method
of accounting, the Company anticipates that it will take
charges to earnings in 1997 of approximately $7.7
million on an after-tax basis for one-time costs of the
transactions. It is intended that substantially all of
the costs will be recognized
10
<PAGE> 12
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
upon consummation of the acquisitions and will be paid
in 1997 and/or 1998. The one-time after-tax charges of
the transactions pertain to the following areas: data
processing $1,400,000; personnel, $1,398,000; and other,
$4,902,000. Data processing costs consist primarily of
write-offs due to duplication of computer hardware,
software, telecommunications equipment, and certain
conversion related expenses. Personnel costs consist
primarily of charges related to employee severance and
employment outplacement assistance. Other costs include
investment banking fees, legal and accounting fees, due
diligence costs, proxy registration/filing fees and
mailing costs. A significant portion of other costs are
capitalized for tax purposes and, therefore, are not tax
deductible. CFX management continues to review all these
costs. There can be no assurance that such costs will
not exceed the amounts described above.
Pursuant to the definitive agreement for Portsmouth,
each outstanding share of Portsmouth common stock will
be converted to .95 share of CFX Corporation common
stock. If the average price of CFX Corporation common
stock for the ten trading days preceeding the last
regulatory approval required for the transaction is
below $15.70, the exchange ratio becomes 1.05 shares,
and the exchange ratio floats between .95 and 1.05
shares if the average price of CFX Corporation common
stock is between $17.375 and $15.70. Portsmouth may
terminate the agreement if the average price of CFX
Corporation common stock is below $14.20 per share
unless the Company agrees to increase the exchange
ratio. In the event that, prior to the closing, the
outstanding shares of the Company's common stock or
Portsmouth's common stock shall have been increased due
to a stock dividend declared on the respective stock
with a record date prior to the closing, then an
appropriate and apportionate adjustment shall be made in
the number of shares exchanged. See "Capital Resources"
of this "Management's Discussion and Analysis" for
further discussion of leverage strategies for the
Portsmouth transaction.
Pursuant to the definitive agreement for Community,
each outstanding share of Community common stock will be
converted to 2.20 shares of CFX common stock. If the
average price of CFX common stock for the fifteen days
preceding the closing date is between $18.18 and $20.00,
the exchange ratio floats between 2.20 and 2.00 shares.
Community may terminate the agreement if the average
price of CFX common stock is below $13.50 per share
unless the Company agrees to increase the exchange
ratio.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION--LOANS AND LEASES
- --------------------------------------------------------------------------------
The table below sets forth the composition of the
Company's loan and lease portfolio at the dates
indicated. Loan categories are presented net of
unearned income and net deferred origination costs.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
December 31 (Dollars in thousands) 1996 1995
--------------------------------------------------------------------------------------------------
% OF % OF
BALANCES PORTFOLIO BALANCES PORTFOLIO
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Residential $ 712,980 63.76% $586,489 63.24%
Construction 8,101 .72 9,190 .99
Commercial 142,989 12.79 141,618 15.27
Commercial, financial, and agricultural 120,380 10.77 104,412 11.26
Warehouse lines of credit to leasing companies 18,393 1.64 12,906 1.39
Consumer lease financing 67,146 6.01 24,399 2.63
Other consumer 48,175 4.31 48,416 5.22
---------- ------- -------- -------
Total loans and leases 1,118,164 100.00% 927,430 100.00%
======= =======
Less: Allowance for loan and lease losses 15,740 15,449
---------- --------
Net loans $1,102,424 $911,981
========== ========
</TABLE>
Net loans and leases were $1,102,424,000 or
71% of total assets, at December 31, 1996, compared
with $911,981,000, or 68% of total assets, at
December 31, 1995. Total loans and leases have
increased by $190,734,000 primarily due to a
$126,491,000 increase in residential real estate
loans, a $42,747,000 increase in consumer lease
financing, and a $15,968,000 increase in commercial
business loans. Residential loan production is
primarily generated by a combination of originations
and purchases by the Company's mortgage banking
affiliate, CFX Mortgage. Residential loans are
originated using standards established by the Federal
National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC) allowing CFX
Mortgage to sell to the secondary market those loans
which are not desired by the Company's banking
subsidiaries. During 1996, lower interest rates
spawned higher refinancing activity generating
significant volume for CFX Mortgage. These lower
rates, coupled with an improving economy, allowed CFX
Mortgage to originate and purchase $300 million in
residential loans during the year, compared to $133
million in 1995. Of the $300 million loan production,
a total of $179 million was sold to the Company's
subsidiary banks for portfolio.
The growth in the consumer lease portfolio is
the result of a maturing lease program targeted
toward automobile dealerships throughout New
Hampshire and central Massachusetts. This program
began in December 1994 and continues to grow as
consumers choose leasing as an acceptable alternative
to purchasing.
Commercial lending continues to grow, but at
a slower rate as compared to the other two
portfolios. Strong lending volumes remain in the
warehouse lines of credit to leasing companies
participating in CFX Funding's lease financing and
securitization programs. During 1996, the average
balance of these warehouse lines of credit totaled
$14,752,000. During 1996, CFX Funding facilitated
lease portfolio securitizations totaling
approximately $55,814,000, and sold lease portfolios
totaling approximately $16,430,000.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
----------------------------------------------------------
RISK ELEMENTS
----------------------------------------------------------
The Company operates principally in New Hampshire and
central Massachusetts. Through acquisitions of banking
franchises in new marketplaces, the opening of de novo
branches in geographically dispersed markets, the
purchase and origination of mortgages and leases
throughout northern New England, and with the
introduction of CFX Funding's national lease financing
program, the Company has diversified its credit risk in
terms of both loan type and geographic concentrations.
The majority of the Company's assets still remain in
residential real estate loans as this portfolio comprises
46% of all assets as of December 31, 1996, compared with
44% a year ago. Asset quality remains strong as
nonperforming loans and leases were .74% of total loans
and leases at December 31, 1996, compared to 1.09% a year
earlier.
All loans and leases past due 90 days or more as to
principal or interest are generally placed on nonaccrual
status. In addition, a loan (including a loan impaired
under Financial Accounting Standards Board Statement No.
114, "Accounting by Creditors for Impairment of a Loan,"
(SFAS No. 114) defined below) is generally classified as
nonaccrual when management determines that significant
doubt exists as to the collectibility of principal or
interest. An impaired loan may remain on accrual status
if it is guaranteed or well secured. Interest accrued but
not received on loans placed on nonaccrual status is
reversed and charged against current income. Interest on
nonaccrual loans is recognized when received. Loans are
restored to accrual status when the borrower has
demonstrated the ability to make future payments of
principal and interest, as scheduled. Prior to 1996,
certain loans past due 90 days or more originated by
Safety Fund National Bank, remained on accrual status if,
in management's judgment, they were fully secured and in
the process of collection.
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) 1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Loans 90 days or more past due, still accruing $ - $ 235
Nonaccrual loans 8,299 9,840
------- -------
Total nonperforming loans 8,299 10,075
Foreclosed real estate 2,233 1,236
Valuation allowance on foreclosed real estate (10) (50)
------- -------
Total nonperforming assets $10,522 $11,261
======= =======
Nonperforming loans as a percent of total loans and leases .74% 1.09%
======= =======
Nonperforming assets as a percent of
total loans and leases and foreclosed real estate .94% 1.21%
======= =======
</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) 1996 1995
-----------------------------------------------------------------------------------------------
% of % of
BALANCES TOTAL BALANCES TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 5,986 72.13% $ 6,218 61.72%
Commercial 1,146 13.81 1,710 16.97
Commercial, financial, and agricultural 1,021 12.30 2,039 20.24
Consumer and other 146 1.76 108 1.07
------- ------- -------- ------
8,299 100.00% 10,075 100.00%
------- ======= -------- =======
Foreclosed real estate:
Residential 1,383 62.21% 735 61.97%
Construction 428 19.25 128 10.79
Commercial 422 18.98 373 31.45
Valuation allowance (10) (.44) (50) (4.21)
------- ------- -------- -------
2,223 100.00% 1,186 100.00%
------- ======= -------- =======
Total nonperforming assets $10,522 $ 11,261
======= ========
</TABLE>
12
<PAGE> 14
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table provides a rollforward of the
Company's foreclosed real estate at the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year, net $ 1,186 $ 2,599
Reclassification to nonperforming loans
to reflect adoption of SFAS No. 114
(See Note A to "Notes to Consolidated
Financial Statements") - (665)
Additions 2,870 3,053
Pay-offs/sales/other (1,833) (3,801)
-------- -------
Balance at end of year, net $ 2,223 $ 1,186
======== =======
</TABLE>
--------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES
--------------------------------------------------------
The allowance for loan and lease losses is maintained
through charges to earnings. Loan and lease losses
realized, and recoveries received, are charged or
credited directly to the allowance. The Company's
management determines the level of the allowance for
loan and lease losses based upon a review of the
Company's loan and lease portfolio. This review
identifies specific problem loans and leases requiring
allocations of the allowance and also estimates an
allocation for potential loan and lease losses based on
current economic conditions and historical experience.
Changes in the allowance for loan and lease losses
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $15,449 $14,401 $16,168
Provision for loan and lease losses 2,935 3,037 2,697
Loans and leases charged-off (3,301) (2,934) (5,467)
Recoveries of loans and leases previously charged-off 657 945 1,003
------ ------ ------
Balance at end of year $15,740 $15,449 $14,401
====== ====== ======
Allowance for loan and lease losses
as a percent of total loans and leases 1.41% 1.67% 1.71%
====== ====== ======
Allowance for loan and lease losses
as a percent of total nonperforming loans 189.66% 153.34% 129.20%
====== ====== ======
</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.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
---------------------------------------------------------
TRADING SECURITIES AND INVESTMENT SECURITIES
---------------------------------------------------------
Investment securities consist of the following at the
dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------
December 31 (In thousands) 1996 1995
------------------------------------------------------------
<S> <C> <C>
Securities available for sale $245,324 $201,246
Securities held to maturity 32,670 97,093
-------- --------
Total $277,994 $298,339
======== ========
</TABLE>
As a result of the Company's acquisition of Safety
Fund and Milford on July 1, 1996, and to be consistent
with the Company's current interest rate risk profile,
certain securities held to maturity were transferred to
securities available for sale.
The table below describes those securities and the
net unrealized losses associated with such securities
which were transferred to securities available for sale
from securities held to maturity as a result of the 1996
acquisitions:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Net Unrealized
(In thousands) Amortized Cost Losses
-------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency obligations $54,581 $ 2,036
Federal agency mortgage pass-through securities 22,268 486
------- -------
$76,849 $ 2,522
======= =======
</TABLE>
During 1996 and 1995, the Company had assets in its
trading portfolio. Trading securities primarily related
to investments in money market mutual funds that
generated capital gains to offset capital loss
carryforwards. The average balances in the trading
portfolio for 1996 and 1995 were $15,220,000 and
$19,636,000, respectively.
14
<PAGE> 16
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
DEPOSITS AND BORROWED FUNDS
---------------------------------------------------------
The following table shows the various components of
average deposits and borrowed funds and the respective
rates paid for the periods indicated:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ended December 31 (Dollars in thousands) 1996 1995
-----------------------------------------------------------------------------------------------
AMOUNT RATES AMOUNT RATES
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 131,008 -% $ 119,021 -%
Regular savings deposits 169,648 2.69 164,944 2.81
NOW and money market deposits 279,353 2.14 300,905 2.37
Time deposits 477,556 5.55 438,463 5.43
---------- ----------
Total retail deposits 1,057,565 3.50 1,023,333 3.73
Brokered time deposits 64,389 5.73 27,562 6.30
---------- ----------
Total deposits $1,121,954 3.63% $1,050,895 3.55%
========== ==== ========== ====
Borrowed Funds:
Advances from Federal Home Loan
Bank of Boston $ 131,913 5.67% $ 75,508 6.28%
Other borrowed funds 72,135 4.64 45,678 5.13
---------- ----------
Total borrowed funds $ 204,048 5.31% $ 121,186 5.84%
========== ==== ========== ====
</TABLE>
During 1996, the Company increased average demand
deposits by $11,987,000 and average interest bearing
retail deposits by $22,245,000. The majority of the
increase in overall retail deposits is the result of two
de-novo New Hampshire branches opened in Gilford
(December 1994) and Manchester (June 1995). In addition,
as a result of fixed rate deposits (time deposits)
becoming more attractive to our customers, the Company
has experienced a shift in deposits from shorter-term
variable rate deposits (NOW and money market accounts)
to longer-term fixed rate deposits.
The increase in Federal Home Loan Bank of Boston
advances, brokered deposits and other borrowings funded
asset growth. Management customarily directs movement of
funding between brokered deposits, advances from the
Federal Home Loan Bank and repurchase agreements
(included in other borrowed funds) in order to achieve a
more favorable cost of funds.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS--GENERAL
- --------------------------------------------------------------------------------
CFX Corporation (the Company) reported net income of
$12,641,000, or $.99 per share, compared to earnings of
$11,249,000, or $.89 per share, for the prior year.
Return on assets and return on equity were .86% and
9.58%, respectively, for 1996 compared to .86% and
9.08%, respectively, for 1995. Excluding charges for
mergers and other adjustments, earnings and earnings per
share were $16,248,000 and $1.27 per share,
respectively, in 1996 representing an increase of
$4,999,000, or 44% over prior year earnings. Return on
assets and return on equity in 1996 were 1.10% and
12.31%, respectively, excluding merger charges and
special adjustments.
During 1996, the Company incurred charges associated
with the mergers of Safety Fund and Milford totaling
$3,722,000 (after tax). Other adjustments included a
special assessment related to the recapitalization of
the Savings Association Insurance fund (SAIF) of
$424,000 (after tax) and a gain of $539,000 (after tax)
related to the termination of the Company's previous
pension plans in order to transfer the assets and
liabilities to a multi-employer pension plan.
The increase in earnings was primarily due to
increased net interest and dividend income and higher
noninterest income, while maintaining noninterest
expenses at 1995 levels. The increased net interest and
dividend income was primarily due to leveraging the
Company's balance sheet with loans and leases which
increased $191 million, or 20.57% over the past twelve
months. The increase in noninterest income of $2,516,000
in 1996 over that in 1995 primarily came from mortgage
banking and leasing activities. Also included in this
increase was the pension settlement gain of $877,000
discussed earlier. Noninterest expense for 1996 totaled
$51,370,000 and was $46,157,000 excluding merger-related
charges and the one-time SAIF assessment charge. Despite
the growth in core earnings (net interest and dividend
income and other income), the noninterest expenses in
1996, excluding special charges, compared favorably to
those in 1995 which totaled $46,202,000. The 1996
expenses were contained due to efficiencies gained from
the 1996 mergers in the back-room operations of the
Company, eliminations of various professional fees
resulting from the mergers, and the reduction of the
FDIC insurance premiums at two of the Company's banking
subsidiaries.
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1996 AND 1995--NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
Taxable-equivalent net interest and dividend income was
$57,721,000 in 1996, up 9% from $52,950,000 in 1995.
The $4,771,000 increase in net interest and dividend
income was due to an increase in average interest
earning assets in 1996, offset by a decline in the
Company's interest rate spread from 3.80% in 1995 to
3.71% in 1996.
The increase in average interest earning assets
resulted primarily from an increase in loans and leases.
See "Financial Condition--Loans and Leases" of this
"Management's Discussion and Analysis."
The interest rate spread in 1996 decreased nine basis
points to 3.71% compared to 3.80% for 1995, primarily
due to the increase in costs of interest bearing
liabilities outpacing the increase in yields on interest
earning assets, indicating an increasingly competitive
market for retail deposits. See "Other Income" section
for a discussion of the impact of bank-owned life
insurance on the net interest margin. Most of the
interest earning assets were funded by higher cost
products such as certificates of deposit or borrowings.
The cost of time deposits increased from 5.48% in 1995
to 5.57% in 1996. The Company continues to see a shift
in its deposit mix from lower variable rate deposits
(NOW and money market accounts) to the higher rate time
deposits. The dollar effect of the decline in net
interest spread was partially offset by an increase in
demand deposits in 1996 compared to 1995.
16
<PAGE> 18
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth comparisons of average
interest earning assets and interest bearing
liabilities, and interest income and interest expense
expressed as a percentage of the related asset or
liability. In order to reflect the economic impact of
the Company's tax-exempt loans and investments in state
and municipal securities and to present data on a
comparative basis, the income from and yields on these
loans and securities have been restated to a
taxable-equivalent basis (using a 34.00% and 38.62% tax
rate, respectively). The taxable-equivalent income
adjustments for loans and leases are $346,000, $294,000,
and $211,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The taxable-equivalent
income adjustments for investment securities are
$516,000, $630,000, and $533,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. These
adjustments, however, are for comparison purposes only
and have no impact on reported net income.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average
(Dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loans and leases (1) $1,016,088 $87,743 8.64% $ 871,620 $76,176 8.74% $ 784,113
Tax-exempt loans and leases (2) 8,925 1,019 11.42 7,332 865 11.80 6,441
Taxable securities (3) 303,307 18,565 6.12 286,907 17,420 6.07 298,840
Tax-exempt securities (4) 18,054 1,337 7.41 22,605 1,632 7.22 21,365
Other 13,922 623 4.47 26,412 1,220 4.62 29,921
---------- ------- ---------- ------- ----------
Total interest earning assets 1,360,296 109,287 8.03 1,214,876 97,313 8.01 1,140,680
------- -------
Noninterest earning assets 115,564 96,579 115,580
---------- ---------- ----------
Total $1,475,860 $1,311,455 $1,256,260
========== ========== ==========
Liabilities and Shareholders'
Equity
Interest bearing liabilities:
Savings deposits $ 449,001 10,539 2.35 $ 465,849 11,745 2.52 $ 512,109
Time deposits 541,945 30,201 5.57 466,025 25,534 5.48 359,619
Advances from Federal Home
Loan Bank of Boston 131,913 7,476 5.67 75,508 4,740 6.28 97,960
Other borrowed funds 72,135 3,350 4.64 45,678 2,344 5.13 27,392
--------- ------- ---------- ------- ----------
Total interest bearing liabilities 1,194,994 51,566 4.32 1,053,060 44,363 4.21 997,080
------- -------
Noninterest bearing liabilities:
Demand deposits 131,008 119,021 102,152
Other 17,884 15,496 39,510
Shareholders' equity 131,974 123,878 117,518
---------- ---------- ----------
Total $1,475,860 $1,311,455 $1,256,260
========== ========== ==========
Net interest and
dividend income $57,721 $52,950
======= =======
Interest rate spread 3.71% 3.80%
Net interest margin 4.24% 4.36%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ended December 31 1994
- ------------------------------------------------------------
Interest
Income/ Yield/
(Dollars in thousands) Expense Rate
- ------------------------------------------------------------
<S> <C> <C>
Assets
Interest and dividend
earning assets:
Loans and leases (1) $62,136 7.92%
Tax-exempt loans and leases (2) 621 9.64
Taxable securities (3) 17,178 5.75
Tax-exempt securities (4) 1,380 6.46
Other 1,066 3.56
-------
Total interest earning assets 82,381 7.22
-------
Noninterest earning assets
Total
Liabilities and Shareholders'
Equity
Interest bearing liabilities:
Savings deposits 12,400 2.42
Time deposits 15,722 4.37
Advances from Federal Home
Loan Bank of Boston 4,529 4.62
Other borrowed funds 988 3.61
-------
Total interest bearing liabilities 33,639 3.37
-------
Noninterest bearing liabilities:
Demand deposits
Other
Shareholders' equity
Total
Net interest and
dividend income $48,742
=======
Interest rate spread 3.85%
Net interest margin 4.27%
</TABLE>
(1) For the purpose of these computations, nonaccrual loans and mortgage loans
held for sale are included in loans.
(2) Tax-exempt loans are included within loans and leases.
(3) Taxable securities include trading securities and investment securities.
(4) Tax-exempt securities are included within investment securities.
17
<PAGE> 19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table presents changes in interest and
dividend income, interest expense, and net interest and
dividend income which are attributable to changes in the
average amounts of interest earning assets and interest
bearing liabilities and/or changes in rates earned or
paid thereon. The net changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(In thousands) 1996 vs 1995 1995 vs 1994
----------------------------------------------------------------------------------------------
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 $12,648 $(1,081) $11,567 $ 7,284 $ 6,756 $14,040
Tax-exempt loans and leases 185 (31) 154 93 151 244
Taxable securities 1,045 100 1,145 (700) 942 242
Tax-exempt securities (333) 38 (295) 83 169 252
Other (556) (41) (597) (136) 290 154
Total interest and
------- ------- ------- ------- ------- -------
dividend income 12,989 (1,015) 11,974 6,624 8,308 14,932
------- ------- ------- ------- ------- -------
Interest paid on:
Savings deposits (411) (795) (1,206) (1,155) 500 (655)
Time deposits 4,307 360 4,667 5,280 4,532 9,812
FHLB advances 3,250 (514) 2,736 (1,188) 1,399 211
Other borrowings 1,253 (247) 1,006 832 524 1,356
------- ------- ------- ------- ------- -------
Total interest expense 8,399 (1,196) 7,203 3,769 6,955 10,724
------- ------- ------- ------- ------- -------
Change in net interest
and dividend income $ 4,590 $ 181 $ 4,771 $ 2,855 $ 1,353 $ 4,208
======= ======= ======= ======= ======= =======
</TABLE>
---------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
---------------------------------------------------------
The allowance for loan and lease losses is maintained
primarily through charges to earnings. Loan and lease
losses realized, and recoveries received, are charged or
credited directly to the allowance. The Company's
management determines the level of the allowance for
loan and lease losses based upon a review of the
Company's loan and lease portfolio. This review
identifies specific problem loans and leases requiring
allocations of the allowance and also estimates an
allocation for potential loans and leases based on
current economic conditions and historical experience.
The provision for loan and lease losses in
1996 was $2,935,000, compared to $3,037,000 in 1995.
Total net charge-offs amounted to $2,644,000 for 1996,
compared to $1,989,000 for 1995. The increase in net
charge offs in 1996 as compared to 1995 was primarily
due to our increase in gross charge-offs of $367,000 and
a decrease in recoveries of 288,000. The increase in
gross charge-offs was primarily in the residential loan
portfolio and is attributable to the higher volume of
loans in this category.
At December 31, 1996, nonperforming loans stood at
$8,299,000, or .74% of total loans and leases, compared
to $10,075,000, or 1.09% of total loans and leases, as
of December 31, 1995. The allowance for loan and lease
losses as a percentage of nonperforming loans as of
December 31, 1996 and December 31, 1995 amounted to
189.66% and 153.34%, respectively.
Despite the improvements in asset quality, the
provision for loan and lease losses remained consistent
with the prior year due to the growth in the loan and
lease portfolio.
18
<PAGE> 20
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
OTHER INCOME
---------------------------------------------------------
Other income totaled $16,827,000 for 1996, up
$2,516,000, or nearly 18%, when compared to $14,311,000
for 1995. Excluding the pension settlement gain of
$877,000 recognized in 1996, year-over-year increases in
noninterest income totaled $1,639,000, or 11%. Although
service charges on deposit accounts and trust fees were
up 7% and 5%, respectively, the significant increases
came in the areas of mortgage banking services, leasing
activities and income earned on an investment in
bank-owned life insurance.
Mortgage banking income includes net gains on sales of
loans which totaled $1,383,000 in 1996 compared to
$648,000 in 1995, a 113% increase in income. This is
primarily due to the higher level of mortgage production
in 1996 where a total of $300 million of loans were
originated and purchased compared to $133 million in
1995. The increase in production resulted from a more
favorable interest rate environment as well as a larger
correspondent network. A portion ($256,000) of the net
gains on sales of loans came from a sale of performing
residential loans totaling approximately $12 million
from one of the Company's banking subsidiaries to an
independent financial institution. Total net loan
servicing fees in 1996 nearly kept pace with 1995 totals
despite higher amortization of mortgage servicing rights
resulting from a high level of refinancing activity.
Income generated from leasing activities totaled
$2,487,000 in 1996, up $520,000, or 26%, from 1995
levels. The increase is due to more lease
securitizations in 1996 than in 1995, and an increase in
servicing income as a result of a larger servicing base.
The pension settlement gain of $877,000 resulted when
the Company terminated certain pension plans and
transferred the plans' assets and liabilities to a
multi-employer benefit plan. See Note N - "Pension and
401(k) Plans" of the Notes to Consolidated Financial
Statements for more detail on this transaction.
Included in other noninterest income is $975,000 of
income resulting from the Company's investment in
bank-owned life insurance (BOLI). During 1996, the
Company invested $30 million in bank-owned life
insurance to help finance the cost of certain employee
benefit plan expenses. The BOLI investment is
accomplished through the purchase of life insurance on
the lives of certain employees through two insurance
companies with a Standard & Poors rating of AA+ or
better. The Company, not the employee or family, is the
beneficiary of the insurance policies. The first source
of income is from the growth of the cash value of the
policy. The cash value increases each year as interest
(rate is guaranteed each year and changes annually to
reflect market rates) is added by the insurance company.
The second source of income comes from the insurance
proceeds paid to the bank upon the death of an employee.
The payment of the insurance proceeds and the earnings
from the cash value are income tax free (unless the
policy is surrendered). The Company finances the cost of
the premium payment with wholesale funding (i.e. Federal
Home Loan Bank borrowings). While the earnings from the
investment are captured in other income as the cash
surrender value increases, the net interest margin is
negatively impacted as a result of funding the
investment with wholesale borrowings.
---------------------------------------------------------
OTHER EXPENSE
---------------------------------------------------------
Noninterest expenses for 1996 totaled $51,370,000,
compared to $46,202,000 for 1995. Included in the 1996
totals are merger-related charges incurred with the
acquisitions of Safety Fund and Milford for $4,522,000
and a one-time SAIF special assessment of $691,000.
Excluding these charges, total noninterest expenses
decreased by $45,000 in 1996 compared to 1995.
Salaries and employee benefits increased 3% in 1996
due to increases in wage rates, additional hires to
staff new initiatives, and a full year of salary expense
for a branch which was opened in June 1995, partially
offset by employee reductions resulting from
efficiencies gained from the mergers. Similarly,
professional fees are down 19% from the prior year as a
result of the mergers and the elimination of certain
services required as separate institutions.
The insurance premiums assessed by the Federal Deposit
Insurance Corporation (FDIC) were $377,000 in 1996, down
$1,006,000 from $1,383,000 in 1995. Effective June 1,
1995, the FDIC's Bank Insurance Fund was adequately
reserved allowing the FDIC to charge significantly lower
premiums for future periods. The reduction of expense in
1996 reflects the benefit of the lower premiums for an
entire year.
19
<PAGE> 21
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In conjunction with the acquisitions of Safety Fund and
Milford, the Company incurred charges of $4,522,000.
These charges were comprised of the following:
<TABLE>
<CAPTION>
---------------------------------------
December 31 (In thousands) 1996
---------------------------------------
<S> <C>
Personnel $1,440
Data processing 118
Facilities 157
Other 2,807
------
$4,522
======
</TABLE>
Personnel charges relate primarily to the costs of
employee severance and employment outplacement
assistance. Data processing costs consist primarily of
write-offs due to duplication of computer hardware,
software, and certain telecommunications equipment.
Facilities charges are the result of the consolidation
of certain back-office operations and consist of
write-downs of properties owned. Other merger expenses
include investment banking fees, legal and accounting
fees, due diligence costs, proxy registration/filing
fees and mailing costs. All costs were recorded in
earnings during 1996, although not all cash has been
paid out for such expenses. The following table presents
a summary of activity with respect to the merger
accrual:
<TABLE>
<CAPTION>
-------------------------------------------------
Year Ended December 31 (In thousands) 1996
-------------------------------------------------
<S> <C>
Balance at beginning of year $ -
Provision charged against income 4,522
Cash outlays 3,207
Noncash write-downs 275
------
Balance at end of year $1,040
======
</TABLE>
In 1996, Congress passed a bill which required savings
institutions (i.e., Milford) which have deposits insured
by the FDIC-Savings Association Insurance Fund (SAIF)
be charged a special assessment in order to capitalize
the insurance fund. This assessment totaled $691,000 and
was paid to the SAIF during the fourth quarter of 1996.
---------------------------------------------------------
INCOME TAXES
---------------------------------------------------------
In 1996, the Company recognized income tax expense of
$6,740,000, an effective tax rate of 34.8%, compared to
$5,760,000 and an effective tax rate of 33.7% for 1995.
The higher tax rate for 1996 is primarily due to
nondeductible merger-related expenses, partially offset
by income earned from the bank-owned life insurance
investment which is exempt from income taxes, higher tax
credits pertaining to low income housing projects, and
the reversal of a valuation allowance established by
Safety Fund for net operating loss carryforwards at one
of their subsidiaries as a result of current and
projected profits from that subsidiary.
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1995 AND 1994
- --------------------------------------------------------------------------------
CFX Corporation reported earnings of $11,249,000, or
$.89 per share, for 1995 compared to $6,976,000, or $.58
per share, for the prior year. The increase of
$4,273,000, or 61%, in earnings from 1994 to 1995 was
primarily due to stronger core earnings (net interest
and dividend income and other income). Core earnings for
the year ended December 31, 1995 were $66,337,000
compared to $59,077,000 for 1994. Return on assets and
return on equity were .86% and 9.08%, respectively, for
1995 compared to .56% and 5.94%, respectively, for 1994.
---------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME
---------------------------------------------------------
Net interest and dividend income on a fully taxable
equivalent basis totaled $52,950,000 in 1995, compared
to $48,742,000 in 1994. The interest rate spread and net
interest margin were 3.80% and 4.36%, respectively, for
1995 compared to 3.85% and 4.27%, respectively, for
1994. The decrease of 5 basis points in the interest
rate spread was principally due to the rise in interest
rates during 1995 as the increased cost of funding
sources outpaced the increase in yield on earning
assets. An increase of 9 basis points in net interest
margin was due to an increase of $74,196,000 in average
earning assets from $1,140,680,000 in 1994 to
$1,214,876,000 in 1995. This increase in average earning
assets was primarily comprised of loans and leases
which have higher yields than other interest earning
assets.
20
<PAGE> 22
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
---------------------------------------------------------
The provision for loan and lease losses in 1995 was
$3,037,000, compared to $2,697,000 in 1994. The higher
provision for loan and lease losses in 1995 was
primarily due to the significant increase in outstanding
loans and leases which increased $85 million from 1994
to 1995 and a change in loan mix toward consumer loans
and leases.
At December 31, 1995, nonperforming loans stood at
$11,261,000, or 1.09% of total loans and leases,
compared to $11,146,000, or 1.32% of total loans and
leases, as of December 31, 1994. The allowance for loan
and lease losses as a percentage of nonperforming loans
as of December 31, 1995 and 1994 amounted to 153.34% and
129.20%, respectively.
---------------------------------------------------------
OTHER INCOME
---------------------------------------------------------
Other income totaled $14,311,000 for 1995, up $3,232,000
or 29%, from $11,079,000 in 1994. The increase is
primarily due to increases of $708,000 in service
charges on deposit accounts, $1,586,000 in leasing
activities, and $1,349,000 in gains on trading
securities, partially offset by a decrease in mortgage
banking revenues of $357,000.
The increased income from service charges on deposit
accounts is due to an increase in fees and enhanced
collection practices. Gains on the sale of loans
increased in 1995 as a result of the implementation of
SFAS No. 122, "Accounting for Mortgage Servicing
Rights." See Note A of the "Notes to Consolidated
Financial Statements." The Company adopted SFAS No. 122
as of January 1, 1995, which resulted in a $484,000
increase in gains on the sales of loans. Offsetting this
increase was a decrease in gains on the sale of
servicing rights, which amounted to $677,000 in 1994.
The increase in other income from leasing activities is
due principally to fees generated by CFX Funding and the
amortization of deferred credits relating to an
investment in leasehold residuals. The increase in gains
on trading securities principally represents capital
gains realized from an investment in a money market
mutual fund. This investment reflected gains totaling
$1,092,000 in 1995 compared to losses of $271,000 in
1994, principally due to a larger investment during
1995. In addition, 1994 had $528,000 in losses
associated with a wholesale leverage program.
---------------------------------------------------------
OTHER EXPENSE
---------------------------------------------------------
Other expense for 1995 totaled $46,202,000, compared to
$44,864,000 for 1994. The increase in other expense was
primarily attributable to the increase in salaries and
employee benefits, losses on the sale of real estate
investment properties in the first and second quarters
of 1995, and costs incurred in connection with the
acquisition of Orange Savings Bank. The higher salaries
and employee benefits are the result of normal salary
adjustments, higher medical costs, higher profit
sharing, and lower deferred salary cost in CFX Mortgage
pertaining to loan origination. In addition,
contributing to the higher salary and employee benefits
was an increase in staff in both commercial and consumer
lending, along with new employees hired for the de novo
New Hampshire branches opened in Gilford (December 1994)
and Manchester (June 1995).
21
<PAGE> 23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
However, the above increase in other expense was offset
by lower insurance premiums from the FDIC. The FDIC's
Bank Insurance Fund (BIF) surpassed its congressionally
mandated reserve ratio of 1.25 percent of insured
deposits during the month of May, 1995. The new
assessment rate schedule for the BIF, which
substantially lowered rates for most banks, thus became
effective June 1, 1995, enabling the FDIC to refund
excess premiums already paid by BIF insured institutions
for the four-month period from June 1, 1995 to
September 30, 1995 and charge lower premiums for the
fourth quarter of 1995.
---------------------------------------------------------
TAXES
---------------------------------------------------------
Income taxes for 1995 were 33.7% of pretax income,
compared to 37.1% of pretax income for 1994. The
effective tax rate for 1995 was lower due principally to
the reversal of a $125,000 valuation allowance relating
to Orange Savings Bank's capital loss carryforward.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Total shareholders' equity at December 31, 1996 was
$132,953,000, compared to $127,032,000 a year earlier.
The increase is primarily due to the retention of 43% of
earnings, partially offset by an increase in the net
unrealized losses on securities available for sale. The
Consolidated Statements of Shareholders' Equity provide
details of changes in equity since December 31, 1993.
The Company's capital position is an indication of
financial performance and stability and provides
protection against loss to depositors and creditors. The
Company's objective is to maintain an optimum level of
capital to provide maximum shareholder return while
serving the needs of the depositor and creditor.
Federal regulation requires the Company to maintain
minimum capital standards. Tier 1 capital is composed
primarily of common stock and retained earnings less
certain intangibles. The minimum requirements include a
3% Tier 1 leverage capital ratio for the most
highly-rated institutions; all other institutions are
required to meet a minimum leverage ratio that is at
least 1% to 2% above the 3% minimum. In addition, the
Company is required to satisfy certain capital adequacy
guidelines relating to the risk nature of an
institution's assets. These guidelines, established by
the Federal Reserve Board and the Federal Deposit
Insurance Corporation (FDIC), are applicable to bank
holding companies and state chartered non-member banks,
respectively. Under the "risk-based" capital rules,
banks and bank holding companies are required to have a
level of Tier 1 capital equal to 4% of total
risk-weighted assets, as defined. Banks and bank holding
companies are also required to have total capital
composed of Tier 1 plus "supplemental" or Tier 2
capital, the latter being composed primarily of the
allowances for loan and lease losses, equal to 8% of
total risk-weighted assets.
As of December 31, 1996, the Company's Tier 1 leverage
capital ratio was 8.0%. In addition, the Company's Tier
1 risk-based capital ratio and total risk-based capital
ratio were 13.5% and 14.8%, respectively. In an effort
to optimize the capital level, the Company has leveraged
its balance sheet by originating and purchasing loans
and leases and funding these assets with deposits and
borrowed funds. The tier 1 leverage capital has been
reduced from 8.8% at December 31, 1995 to 8.0% at
December 31, 1996, still substantially above the minimum
level of 6% to be considered well capitalized by the
regulatory agencies. The Company will continue this
leverage strategy in 1997 to maximize the use of the
capital of Portsmouth Bank Shares, Inc., assuming
affirmative approval of shareholders and regulators. At
December 31, 1996, Portsmouth had a Tier 1 leverage
capital ratio of 24.3%. A total of approximately $300
million in interest earning assets and interest bearing
liabilities are anticipated to be added to the Company
to leverage this higher capital base. These assets will
be both loans and leases and investments.
- --------------------------------------------------------------------------------
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).
22
<PAGE> 24
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To measure the impact of interest rate changes, the
Company utilizes a comprehensive financial planning
model that recalculates the fair value of the Company
assuming instantaneous, permanent parallel shifts in the
yield curve of both up and down 100 and 200 basis
points, or four separate calculations. Larger increases
or decreases in forecasted net income and the net market
value of the Company as a result of these interest rate
changes represent greater interest rate risk than do
smaller increases or decreases.
The results of the financial planning model are
highly dependent on numerous assumptions. These
assumptions generally fall into two categories: those
relating to the interest rate environment and those
relating to general business and economic factors.
Assumptions related to the interest rate environment
include the prepayment speeds on mortgage-related assets
and the cash flows and maturities of financial
instruments. Assumptions related to general business and
economic factors include changes in market conditions,
loan volumes and pricing, deposit sensitivity, customer
preferences, competition, and management's financial and
capital plans. The assumptions are developed based on
current business and asset/liability management
strategies, historical experience, the current economic
environment, forecasted economic conditions and other
analyses. These assumptions are inherently uncertain and
subject to change as time passes. Accordingly, the
Company adjusts the pro forma net income and net fair
values as it believes appropriate on the basis of
historical experience and prudent business judgment. The
Company endeavors to maintain a position where it
experiences no material change in net fair value and no
material fluctuation in forecasted net income as a
result of assumed 100 and 200 basis point increases and
decreases in interest rates. However, there can be no
assurances that the Company's projections in this
regard will be achieved.
Management 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, 1996. 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. Derivative financial instruments, are reflected
in the gap table. For further discussion on strategies
for derivatives, see Note R - Derivative Financial
Instruments in the "Notes to Consolidated Financial
Statements."
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
(In thousands) 0-3 4-12 1-5 5-10 Over 10
December 31, 1996 Months Months Years Years Years Total
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits
with other banks $ 197 $ - $ - $ - $ - $ 197
Investment securities 38,469 39,488 156,694 42,904 439 277,994
Loans and leases 276,610 356,260 391,388 68,525 40,593 1,133,376
---------- ---------- ---------- ---------- ---------- ----------
Total interest earning assets 315,276 395,748 548,082 111,429 41,032 1,411,567
---------- ---------- ---------- ---------- ---------- ----------
Interest bearing liabilities:
Savings and time deposits 203,994 473,049 275,244 68,045 - 1,020,332
Advances from Federal Home
Loan Bank of Boston 149,661 25,014 80 326 - 175,081
Short-term borrowed funds 67,374 - - - - 67,374
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 421,029 498,063 275,324 68,371 - 1,262,787
---------- ---------- ---------- ---------- ---------- ----------
Periodic gap $ (105,753) $ (102,315) $ 272,758 $ 43,058 $ 41,032 $ 148,780
========== ========== ========== ========== ========== ==========
Cumulative gap $ (105,753) $ (208,068) $ 64,690 $ 107,748 $ 148,780 $ -
========== ========== ========== ========== ========== ==========
</TABLE>
The ability to assess interest rate risk using gap
analysis is limited. Gap analysis does not capture the
impact of cash flow or balance sheet mix changes over a
forecasted future period and it does not measure the
amount of price change expected to occur in the various
asset and liability categories. Thus, management does
not use gap analysis exclusively in its assessment of
interest rate risk. The Company's interest rate risk
exposure is also measured by the forecasted net income
and discounted cash flow market value sensitivities
referred to above.
23
<PAGE> 25
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIQUIDITY
- --------------------------------------------------------------------------------
The Company maintains numerous sources of liquidity in
the form of marketable assets and borrowing capacity.
Interest bearing deposits with other banks, trading and
available for sale securities, regular cash flows from
loan and securities portfolios and Federal Home Loan
Bank of Boston borrowings are the primary sources of
asset liquidity. At December 31, 1996, unrestricted cash
equivalents and interest bearing deposits with other
banks totaled $22,429,000 and available for sale
securities totaled $245,324,000.
Because the Company's bank subsidiaries maintain large
residential mortgage portfolios, a substantial
capability exists to borrow funds from the Federal Home
Loan Bank of Boston. Additionally, investment portfolios
are predominantly made up of securities which can be
readily borrowed against through the repurchase
agreement market. Relationships with deposit brokers and
correspondent banks are also maintained to facilitate
possible borrowing needs.
- --------------------------------------------------------------------------------
IMPACT OF INFLATION
- --------------------------------------------------------------------------------
The consolidated financial statements and related
consolidated financial data herein have been presented
in accordance with generally accepted accounting
principles which require the measurement of financial
position and operating results in terms of historical
dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Inflation can affect the Company in a number of ways,
including increased operating costs and interest rate
volatility. Management attempts to minimize the effects
of inflation by maintaining an approximate match
interest rate sensitive assets and interest rate
sensitive liabilities and, where practical, by adjusting
service fees to reflect changing costs.
- --------------------------------------------------------------------------------
SUBSEQUENT ACCOUNTING PRONOUNCEMENT
- --------------------------------------------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." See Note A -
"Significant Accounting Policies," of the Notes to
Consolidated Financial Statements for more detail.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
The Company is aware of the issues associated with the
programming code in existing computer systems as the
millennium (year 2000) approaches. The "year 2000"
problem is pervasive and complex as virtually every
computer operation will be affected in some way by the
rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date
sensitive information when the year changes to 2000.
Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external
resources to identify, correct or reprogram, and test
the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time
for testing. To date, confirmations have been received
from the Company's primary processing vendors that plans
are being developed to address processing of
transactions in the year 2000. Management has not yet
assessed the year 2000 compliance expense and related
potential affect on the Company's earnings.
24
<PAGE> 26
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 50,404 $ 44,393
Federal funds sold - 2,500
----------- -----------
CASH AND CASH EQUIVALENTS 50,404 46,893
Interest bearing deposits with other banks 197 13,475
Securities available for sale 245,324 201,246
Securities held to maturity 32,670 97,093
Mortgage loans held for sale 15,212 7,085
Loans and leases 1,118,164 927,430
Less allowance for loan and lease losses 15,740 15,449
----------- -----------
NET LOANS AND LEASES 1,102,424 911,981
Premises and equipment 27,386 25,253
Mortgage servicing rights 5,313 4,373
Goodwill and deposit base intangibles 9,235 9,884
Foreclosed real estate 2,223 1,186
Bank-owned life insurance 30,975 -
Other assets 25,729 26,411
----------- -----------
$ 1,547,092 $ 1,344,880
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 1,020,332 $ 932,209
Noninterest bearing 136,875 124,615
----------- -----------
TOTAL DEPOSITS 1,157,207 1,056,824
Short-term borrowed funds 67,374 44,012
Advances from Federal Home Loan Bank of Boston 175,081 102,814
Other liabilities 14,477 14,198
----------- -----------
TOTAL LIABILITIES 1,414,139 1,217,848
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share--authorized 4,000,000 shares,
no shares outstanding in 1996 or 1995 - -
Common stock, par value $.66 2/3 per share--authorized 22,500,000
shares, issued 13,008,787 shares in 1996 and 12,078,268 shares in 1995 8,672 8,052
Paid-in capital 97,406 85,902
Retained earnings 28,223 32,488
Net unrealized gains (losses) on securities available for sale, after tax effects (929) 590
Cost of 28,055 shares of common stock in treasury (419) -
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 132,953 127,032
----------- -----------
$ 1,547,092 $ 1,344,880
=========== ===========
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
25
<PAGE> 27
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 88,416 $ 76,747 $ 62,546
Interest on investment securities:
Taxable 18,239 17,050 15,149
Tax-exempt 821 1,002 847
-------- -------- --------
19,060 18,052 15,996
Interest and dividends on trading securities - 6 1,725
Dividends on marketable equity securities 326 364 304
Other 623 1,220 1,066
-------- -------- --------
TOTAL INTEREST AND DIVIDEND INCOME 108,425 96,389 81,637
-------- -------- --------
Interest expense:
Interest on deposits 40,740 37,279 28,122
Interest on borrowings:
Short-term 10,807 7,074 5,507
Long-term 19 10 10
-------- -------- --------
TOTAL INTEREST EXPENSE 51,566 44,363 33,639
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME 56,859 52,026 47,998
Provision for loan and lease losses 2,935 3,037 2,697
-------- -------- --------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 53,924 48,989 45,301
-------- -------- --------
Other income:
Service charges on deposit accounts 4,001 3,756 3,048
Loan servicing fees 1,671 1,726 1,862
Net gain (loss) on trading securities 564 1,092 (257)
Net gain on sale of investment securities 147 204 184
Net gain on sale of loan servicing rights - - 677
Net gain on sale of loans 1,383 648 192
Leasing activities 2,487 1,967 381
Trust fees 2,351 2,246 2,169
Pension settlement gain 877 - -
Other 3,346 2,672 2,823
-------- -------- --------
16,827 14,311 11,079
-------- -------- --------
Other expense:
Salaries and employee benefits 23,847 23,138 22,530
Occupancy and equipment 6,991 6,567 6,091
Professional fees 1,963 2,413 2,469
Advertising and marketing 1,711 1,598 1,198
Operation of foreclosed real estate 345 430 620
FDIC deposit insurance 377 1,383 2,244
Goodwill and deposit base intangible amortization 653 714 757
Merger expenses 4,522 - -
SAIF special assessment 691 - -
Other 10,270 9,959 8,955
-------- -------- --------
51,370 46,202 44,864
-------- -------- --------
INCOME BEFORE INCOME TAXES 19,381 17,098 11,516
Income taxes 6,740 5,760 4,272
-------- -------- --------
NET INCOME 12,641 11,338 7,244
Preferred stock dividends - 89 268
-------- -------- --------
NET INCOME AVAILABLE TO COMMON STOCK $ 12,641 $ 11,249 $ 6,976
======== ======== ========
Weighted average common shares outstanding 12,823 12,701 12,052
======== ======== ========
Earnings per common share $ .99 $ .89 $ .58
======== ======== ========
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
26
<PAGE> 28
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CFX CORPORATION AND
SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
Preferred Stock Common Stock on Securities Treasury Stock
--------------- ---------------- Paid-in Retained Available --------------
(In thousands, except per share data) Shares Dollars Shares Dollars Capital Earnings for Sale Shares Dollars Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 194 $ 194 11,696 $ 7,797 $ 81,749 $ 33,391 $ 1,303 (866) $(7,198) $117,236
Net income - - - - - 7,244 - - - 7,244
Common cash dividends
declared--$.31 per share - - - - - (3,731) - - - (3,731)
Preferred cash dividends
declared--$1.3875 per share - - - - - (268) - - - (268)
Issuance of common stock under
stock option plan - - 139 93 820 - - - - 913
Issuance of common stock under
employee stock purchase plan - - 16 11 139 - - - - 150
Issuance of common stock under
dividend reinvestment plan - - 6 4 60 - - - - 64
Preferred stock converted
to common stock (1) (1) 1 1 - - - - - -
5% common stock dividend - - 276 184 3,041 (3,245) - - - (20)
Change in net unrealized
gains (losses) on securities
available for sale - - - - - - (4,537) - - (4,537)
---- ------ ------ -------- -------- -------- -------- ------ ------- --------
BALANCE AT DECEMBER 31, 1994 193 193 12,134 8,090 85,809 33,391 (3,234) (866) (7,198) 117,051
Net income - - - - - 11,338 - - - 11,338
Common cash dividends
declared--$.50 per share - - - - - (6,341) - - - (6,341)
Preferred cash dividends
declared--$.4625 per share - - - - - (89) - - - (89)
Issuance of common stock under
stock option plan - - 110 72 833 - - - - 905
Issuance of common stock under
employee stock purchase plan - - 4 3 32 - - - - 35
Issuance of common stock under
dividend reinvestment plan - - 22 15 312 - - - - 327
Preferred stock converted
to common stock (193) (193) 318 212 (19) - - - - -
Fractional shares paid out - - (1) (1) (17) - - - - (18)
5% common stock dividend - - 357 238 5,573 (5,811) - - -
Change in net unrealized
gains (losses) on securities
available for sale - - - - - - 3,824 - - 3,824
Retirement of treasury shares - - (866) (577) (6,621) - - 866 7,198 -
---- ------ ------ -------- -------- -------- ------- ------ ------- --------
BALANCE AT DECEMBER 31, 1995 - - 12,078 8,052 85,902 32,488 590 - - 127,032
Net income - - - - - 12,641 - - - 12,641
Common cash dividends
declared--$.55 per share - - - - - (7,171) - - - (7,171)
Issuance of common stock under
stock option plan and
related tax effects - - 296 198 2,058 - - - - 2,256
Issuance of common stock under
employee stock purchase plan - - 17 11 148 - - - - 159
Fractional shares paid out - - (2) (1) (25) - - - - (26)
5% common stock dividend - - 620 412 9,323 (9,735) - 1 - -
Change in net unrealized
gains (losses) on securities
available for sale - - - - - - (1,519) - - (1,519)
Cost of shares acquired for
treasury - - - - - - - 27 (419) (419)
---- ------ ------ -------- -------- -------- -------- ------ ------- --------
BALANCE AT DECEMBER 31, 1996 - $ - 13,009 $ 8,672 $ 97,406 $ 28,223 $ (929) 28 $ (419) $132,953
==== ====== ====== ======== ======== ======== ======== ====== ======= ========
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
27
<PAGE> 29
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,641 $ 11,338 $ 7,244
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,532 4,497 4,307
Amortization of deferred credit on leasehold residual (1,412) (1,347) -
Provision for loan and lease losses 2,935 3,037 2,697
Provision for foreclosed real estate losses 10 31 373
Loans originated and acquired for sale (100,445) (92,242) (107,366)
Principal balance of loans sold 92,317 94,207 122,636
Net (gain) loss on sale of portfolio loans (256) (14) 227
Net gain on sale of foreclosed real estate (102) (51) (257)
Net gain on sale of investment securities (147) (204) (184)
Net decrease in trading securities - 236 39,595
Net deferred income tax provision 5,822 2,933 232
Increase in cash surrender value of bank-owned life insurance (975) - -
Other (2,974) (5,754) (1,744)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,946 16,667 67,760
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 21,805 28,507 33,494
Proceeds from maturities of securities available for sale 115,748 21,651 6,786
Purchase of securities available for sale (103,862) (46,969) (41,567)
Proceeds from sales of securities held to maturity - 6,006 -
Proceeds from maturities of securities held to maturity 30,102 29,884 71,887
Purchase of securities held to maturity (42,033) (42,457) (118,061)
Proceeds from the sale of, or payments on, foreclosed real estate 1,954 1,405 1,553
Proceeds from the sale of portfolio loans 12,287 250 999
Net decrease in interest bearing deposits with other banks 13,278 10,375 11,451
Net increase in loans and leases (211,885) (86,763) (105,804)
Purchases of bank-owned life insurance (30,000) - -
Purchases of premises and equipment (5,438) (1,520) (4,922)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (198,044) (79,631) (144,184)
--------- --------- ---------
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits and savings accounts (5,580) (20,840) (13,498)
Net increase in time certificates of deposit 105,963 84,275 31,588
Net increase (decrease) in short-term borrowed funds 23,362 (1,284) 12,473
Proceeds from Federal Home Loan Bank of Boston advances
with maturities in excess of three months 180,500 68,500 -
Payment of Federal Home Loan Bank of Boston advances
with maturities in excess of three months (157,000) (6,000) -
Net increase (decrease) in Federal Home Loan Bank of Boston
advances with maturities of three months or less 48,767 (54,887) 45,400
Common cash dividends paid (7,067) (4,654) (3,642)
Preferred cash dividends paid - (89) (268)
Proceeds from issuance of common stock 2,109 1,267 1,127
Payments on fractional shares (26) (18) (20)
Acquisition of treasury shares (419) - -
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 190,609 66,270 73,160
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,511 3,306 (3,264)
Cash and cash equivalents at beginning of year 46,893 43,587 46,851
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 50,404 $ 46,893 $ 43,587
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid on deposit accounts $ 38,645 $ 36,680 $ 28,091
Interest paid on borrowed funds 10,990 6,765 5,177
Income taxes paid 1,425 3,883 2,684
</TABLE>
See notes to consolidated financial statements and independent auditors'
report.
28
<PAGE> 30
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
PRINCIPLES OF PRESENTATION AND CONSOLIDATION
---------------------------------------------------------
The consolidated financial statements include the
accounts of CFX Corporation and its wholly-owned
subsidiaries, CFX Bank, Safety Fund National Bank and
Orange Savings Bank (collectively referred to as Banks),
and the Banks' subsidiaries which engage in investment
activities, mortgage banking, and property management.
One of the Bank's subsidiaries has a 51% ownership
interest in CFX Funding, L.L.C., which engages in the
facilitation of lease financing and securitization. All
significant intercompany accounts and transactions are
eliminated upon consolidation. See Note B - "Mergers and
Acquisitions."
---------------------------------------------------------
USE OF ESTIMATES
---------------------------------------------------------
The accompanying consolidated financial statements have
been prepared in conformity with generally accepted
accounting principles and with general practices within
the banking industry. In preparing the consolidated
financial statements, management is required to make
estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the
balance sheet and income and expenses for the period.
Actual results could differ significantly from these
estimates.
Material estimates that are particularly susceptible
to significant change in the near term relate to the
determination of valuation allowances applicable to
loans and leases, foreclosed real estate, and deferred
tax assets, and of prepayment speeds used to value
mortgage servicing rights.
---------------------------------------------------------
BUSINESS
---------------------------------------------------------
The Company, through its bank subsidiaries, serves as a
financial intermediary, attracting deposits from, and
making loans to, consumers and small to mid-sized
businesses through its 42 full service offices and two
loan production offices in New Hampshire and central
Massachusetts. The Company's Trust Division furnishes
trust and investment services to individuals,
corporations, municipalities and charitable
organizations.
---------------------------------------------------------
RECLASSIFICATIONS AND RESTATEMENTS
---------------------------------------------------------
The consolidated financial statements as of December 31,
1995 and for the years ended December 31, 1995 and 1994
have been restated to reflect the pooling-of-interests
with The Safety Fund Corporation and Milford
Co/operative Bank. See Note B - "Mergers and
Acquisitions." In addition, certain amounts have been
reclassified in the 1995 and 1994 consolidated financial
statements to conform to the 1996 presentation.
Prior period common stock data has been restated to
reflect the pooling-of-interests with The Safety Fund
Corporation and Milford Co/operative Bank and the
Company's 5% stock dividend declared on December 10,
1996 to shareholders of record on December 20, 1996.
---------------------------------------------------------
CASH FLOW INFORMATION
---------------------------------------------------------
Cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are sold
for one-day periods.
---------------------------------------------------------
TRADING AND INVESTMENT SECURITIES
---------------------------------------------------------
Investments in debt securities that management has the
positive intent and ability to hold to maturity are
classified as "held to maturity" and reflected at
amortized cost. Investments that are purchased and held
principally for the purpose of selling them in the near
term are classified as "trading securities" and
reflected on the 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 tax
effects.
Purchase premiums and discounts are amortized to
earnings by a method which approximates the interest
method over the terms of the investments. Declines in
the value of investments that are deemed to be other
than temporary are reflected in earnings when
identified. Gains and losses on disposition of
investments are recorded on the trade date and are
computed by the specific identification method.
The carrying values of Federal Home Loan Bank of
Boston and Federal Reserve Bank of Boston stock
approximate fair value.
29
<PAGE> 31
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
---------------------------------------------------------
INTEREST RATE SWAP AGREEMENTS: Interest rate swap
agreements are designated as hedges against future
fluctuations in the interest rates of specifically
identified assets or liabilities, and are accounted for
on the same basis as the underlying asset or liability.
Accordingly, interest rate swaps designated as hedges
against floating rate loan portfolios (carried at
historical cost) are reflected at cost. Interest rate
swaps which hedge the Company's trading securities
portfolio (carried at fair value) are marked to fair
value through net gains (losses) on trading securities
included in the consolidated statements of income. The
net interest paid or received under swap agreements is
recorded in the interest income or expense account
related to the asset or liability being hedged.
INTEREST RATE FLOOR AGREEMENTS: Interest rate floor
agreements are used to manage exposure to interest rate
risk. The amounts paid on the floors are accounted for
as adjustments to the yield on the hedged assets. The
Company applies hedge accounting as the asset being
hedged exposes the Company to interest rate risk, and
the floor is designated and effective as a hedge of a
specific pool of assets. The Company receives an
interest payment if the three-month London Interbank
Offered Rate (LIBOR) declines below a predetermined
rate. This payment would be based upon the rate
difference between current LIBOR and the predetermined
rate accrued on the notional value of the instrument.
The transaction fee paid is amortized over the life of
the contract.
FINANCIAL FUTURES CONTRACTS: Interest rate futures
contracts had been entered into by the Company as hedges
against interest rate risk in its trading securities
portfolio. These instruments were marked to fair value
through net gains (losses) on trading securities
included in the consolidated statements of income. No
such contracts were in effect during 1996 and 1995.
FINANCIAL OPTION CONTRACTS: Option premiums paid or
received, and designated as hedges against future
fluctuations in the interest rates of specifically
identified assets or liabilities, are accounted for on
the same basis as the underlying asset or liability.
Accordingly, option contracts designated as hedges
against mortgage loans held for sale are carried at the
lower of cost or estimated fair value in the aggregate.
Option contracts which hedge the Company's available for
sale securities are marked to fair value and changes in
fair value are reflected in shareholders' equity, net of
related tax effects.
---------------------------------------------------------
MORTGAGE LOANS HELD FOR SALE
---------------------------------------------------------
Mortgage loans originated or purchased and intended for
sale in the secondary market are carried at the lower of
cost or estimated fair value in the aggregate. Net
unrealized losses are recognized in a valuation
allowance by charges to earnings when applicable.
---------------------------------------------------------
LOANS AND LEASES
---------------------------------------------------------
All loans past due 90 days or more as to principal or
interest are placed on nonaccrual status. In addition, a
loan (including a loan impaired under SFAS No. 114,
defined below) is generally classified as nonaccrual
when management determines that significant doubt exists
as to the collectibility of principal or interest. An
impaired loan may remain on accrual status if it is
guaranteed or well secured. Interest accrued but not
received on loans placed on nonaccrual status is
reversed and charged against current income. Interest
on nonaccrual loans is recognized when received. Cash
received on impaired loans is generally allocated to
principal and interest based on the contractual terms of
the note, unless management believes such receipt should
be applied directly to principal based on collection
concerns. Loans are restored to accrual status when the
borrower has demonstrated the ability to make future
payments of principal and interest, as scheduled.
Loan origination and commitment fees and certain
direct origination costs are deferred, and the net
amount is amortized as an adjustment of the related
loan's yield using the interest method over the
contractual life of the related loans.
Consumer lease financing loans are carried at the
amount of minimum lease payments plus residual values,
less unearned income which is amortized into interest
income using the interest method.
30
<PAGE> 32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In May 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended in October,
1994 by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan, Income Recognition and
Disclosure." The Company adopted SFAS No. 114 on January
1, 1995. Under this Statement, a loan is considered
impaired when, based on current information and events,
it is probable that a creditor will be unable to collect
the scheduled payments of principal or interest when due
according to the contractual terms of the loan
agreement. Factors considered by management in
determining impairment include payment status,
collateral value, and the probability of collecting
scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally
are not classified as impaired. Management determines
the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the
loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in
relation to the principal and interest owed. The
Statement is not applicable to large groups of smaller
balance homogeneous loans that are collectively
evaluated for impairment, and loans that are measured at
fair value or the lower of cost or fair value.
Accordingly, the Company has not applied SFAS No. 114 to
its consumer and residential mortgage loans which are
collectively evaluated for impairment, or to loans held
for sale. The Company measures impairment on a loan by
loan basis by either the present value of expected
future cash flows discounted at the loan's effective
interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral
dependent. Collateralized loans are generally measured
by fair value of existing collateral, unless market
prices or discounted cash flow information is deemed to
be more current and reflective of the economies of the
lending relationship. At December 31, 1996, the Company
had $5,401,000 in impaired loans of which approximately
93% were measured by the fair value of collateral and 7%
by discounted cash flow analysis.
SFAS No. 114 also limits the classification of loans
as in-substance foreclosures to situations where the
creditor actually receives physical possession of the
debtor's assets. Accordingly, upon adoption of SFAS No.
114, the Company transferred $796,000 of loans
previously classified as in-substance foreclosures and
$131,000 of the valuation allowance for foreclosed real
estate losses to nonperforming loans.
The adoption of SFAS No. 114 had no effect on the
Company's assessment of the overall adequacy of the
allowance for loan and lease losses. The restatement of
previously issued financial statements to conform with
SFAS No. 114 is expressly prohibited.
Loan losses, including those applicable to impaired
loans, are charged against the allowance for loan and
lease losses when management believes the collectibility
of the loan balance is unlikely. The allowance is an
estimate and is increased by charges to current income
in amounts sufficient to maintain the adequacy of the
allowance. The adequacy is determined by management's
evaluation of the extent of existing risk in the loan
portfolio, prevailing economic conditions and historical
loss experience.
---------------------------------------------------------
BANK-OWNED LIFE INSURANCE
---------------------------------------------------------
During 1996, the Company invested $30 million in
bank-owned life insurance (BOLI) to help finance the
cost of certain employee benefit plan expenses. The BOLI
investment is accomplished through the purchase of life
insurance on the lives of certain employees through two
insurance companies with a Standard & Poors rating of
AA+ or better. The Company, not the employee or family,
is the beneficiary of the insurance policies. Increases
in the cash value of the policies, as well as insurance
proceeds received, are recorded in other income, and are
not subject to income taxes.
31
<PAGE> 33
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
PREMISES AND EQUIPMENT
---------------------------------------------------------
Premises and equipment are stated at cost less
accumulated depreciation and amortization. Expenditures
for maintenance and repairs are charged to income as
incurred, and the costs of major additions and
improvements are capitalized.
The provision for depreciation and amortization is
computed on the straight-line method based on the
estimated useful lives of the assets or the terms of the
leases, if shorter.
---------------------------------------------------------
MORTGAGE SERVICING RIGHTS
---------------------------------------------------------
Effective January 1, 1995, the Company prospectively
adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," whereby rights to service mortgage loans for
others are capitalized as separate assets, whether
acquired through purchase or origination, if such loans
are sold or securitized with servicing rights retained.
Accordingly, the total cost of the mortgage loan is
allocated to the related servicing right and to the loan
based on their relative fair values if it is practicable
to estimate those fair values. The Company estimates
fair value based on the present value of estimated
expected future cash flows using prepayment speeds and
discount rates commensurate with the risks involved.
Prior to the adoption of SFAS No. 122, the
capitalization of originated mortgage servicing rights
was not allowed under generally accepted accounting
principles. The effect of the accounting change for the
year ended December 31, 1995 was to increase net income
by $265,000 or $.02 per share.
Capitalized mortgage servicing rights are amortized to
servicing revenue in proportion to, and over the
period of, estimated net servicing revenues. Impairment
of mortgage servicing rights is assessed based on the
fair value of those rights. For purposes of measuring
impairment, the rights are stratified based on the
following predominant risk characteristics of the
underlying loans: loan type (fixed rate, variable rate
or state housing programs) and note rate. Impairment is
recognized through a valuation allowance for an
individual stratum, to the extent that fair value is
less than the capitalized amount for the stratum. No
such impairment was recognized during 1996 or 1995.
---------------------------------------------------------
INVESTMENTS IN LEASEHOLD RESIDUALS AND LIMITED
PARTNERSHIPS
---------------------------------------------------------
Assets acquired in connection with leasehold residual
positions have been accounted for using the purchase
method of accounting. Resultant deferred credits are
amortized to leasing activities income over the period
of, and in proportion to, the related tax benefits
realized. At December 31, 1996 and 1995, the leasehold
residual position of $1,906,000 is included in other
assets and deferred credits of $3,184,000 and
$4,596,000, respectively, are included in other
liabilities in the consolidated balance sheets.
Investments in real estate development limited
partnerships are accounted for using the equity method.
---------------------------------------------------------
INTANGIBLE ASSETS
---------------------------------------------------------
Deposit base intangibles, which represent the value
attributable to the capacity of deposit accounts of
purchased bank subsidiaries to generate future income,
are included in other assets and are being amortized on
a straight-line basis over a period of five years. The
excess of the cost of purchased subsidiaries over the
fair value of tangible and intangible net assets
acquired has been allocated to goodwill and is being
amortized on a straight-line basis over 25 years for
banking operations and 15 years for mortgage banking
operations.
The accumulated amortizations of deposit base
intangibles and goodwill were $1,605,000 and
$4,087,000, respectively, as of December 31, 1996.
---------------------------------------------------------
FORECLOSED REAL ESTATE
---------------------------------------------------------
Foreclosed real estate consists of properties that the
Company has formally received title to, or has taken
possession of, in partial or total satisfaction of
loans. Loan losses arising from the write-down of
properties to fair value at the time of acquisition are
charged against the allowance for loan and lease losses.
Valuations are periodically performed by management,
and an allowance for losses is established through a
charge to earnings if the carrying value of a property
exceeds its fair value less estimated costs to sell.
Prior to 1995, the Company classified certain loans
meeting more extensive in-substance foreclosure criteria
as foreclosed real estate. Upon the adoption of SFAS No.
114, the Company reclassified all in-substance
foreclosed assets that were not in its possession to
loans.
Operating expenses of foreclosed real estate and gains
and losses upon disposition are reported in earnings.
32
<PAGE> 34
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
---------------------------------------------------------
PENSION AND 401(k) PLANS
---------------------------------------------------------
The Company and its subsidiaries have defined benefit
and defined contribution pension plans which cover
substantially all full-time employees. The benefits are
based on years of service and the employee's
compensation during the years immediately preceding
retirement. The Company's funding policy is to
contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions
are intended to provide not only for benefits attributed
to service to date, but also for those expected to be
earned in the future.
The Company maintains a Section 401(k) savings plan
for employees of the Company, Safety Fund National Bank,
CFX Bank, and CFX Bank's subsidiaries. Under the plan,
the Company makes a matching contribution of one-half to
one-third of the amount contributed by each
participating employee, up to 6% of the employee's
yearly salary. The plan allows for supplementary profit
sharing contributions by the Company, at its discretion,
for the benefit of participating employees.
---------------------------------------------------------
STOCK COMPENSATION PLANS
---------------------------------------------------------
In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This
Statement encourages all entities to adopt a fair value
based method of accounting for employee stock
compensation plans, whereby compensation cost is
measured at the grant date based on the value of the
award and is recognized over the service period, which
is usually the vesting period. However, it also allows
an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," whereby compensation
cost is the excess, if any, of the quoted market price
of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire
the stock. Entities electing to remain with the
accounting in Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, as if
the fair value based method of accounting had been
applied. The disclosure requirements of this statement
are effective for the Company's consolidated financial
statements for the year ended December 31, 1996. The pro
forma disclosures include the effects of all awards
granted on or after January 1, 1995. See Note O - "Stock
Compensation Plans."
---------------------------------------------------------
INCOME TAXES
---------------------------------------------------------
The Company and its subsidiaries file a consolidated
federal income tax return. Deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to temporary differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that
includes the enactment date. Income taxes are allocated
to each entity in the consolidated group based on its
share of taxable income.
Tax credits generated from limited partnerships are
reflected in earnings when realized for federal income
tax purposes.
---------------------------------------------------------
PARENT-COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS
---------------------------------------------------------
In the parent-company-only condensed financial
statements, the investment in bank subsidiaries is
stated at cost plus equity in the undistributed earnings
of the subsidiary.
---------------------------------------------------------
EARNINGS PER SHARE
---------------------------------------------------------
Earnings per common share are computed by dividing net
income by the weighted average number of common shares
outstanding and common share equivalents with a material
dilutive effect. Common share equivalents are shares
which may be issuable to employees and non-employee
directors upon exercise of outstanding stock options.
---------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENT
---------------------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The accounting and
reporting standards of this Statement are based on a
financial components approach that focuses on control,
whereby after a transfer of financial assets, an entity
recognizes only financial and servicing assets it
controls and liabilities it has incurred. Liabilities
incurred will be initially recognized at fair value, if
practicable. Financial assets are derecognized when
control has been surrendered, and liabilities are
derecognized when extinguished. The determination of
whether control over a financial asset has been
surrendered is based on meeting specific criteria as
defined in the Statement.
33
<PAGE> 35
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Statement provides standards for distinguishing
transfers of financial assets that are sales from
transfers that are secured borrowings, and impacts the
accounting for various transactions including the
servicing of financial assets, securitizations,
securities lending transactions, repurchase agreements,
loan participations, and transfers of receivables with
recourse.
The Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied
on a prospective basis. In December 1996, the FASB voted
to defer for one year the provisions of the Statement
that relate to secured borrowings and collateral.
Management is currently evaluating the impacts of the
Statement on its secured borrowings such as repurchase
agreements but does not expect, based on the general
terms of its current agreements, that the Statement will
significantly change its accounting for similar
transactions in the future. Other provisions of the
Statement will not, in management's opinion, have a
significant impact on the consolidated financial
statements, except that servicing rights pertaining to
lease sales and securitizations will be capitalized
prospectively at their estimated fair value, with a
corresponding credit to earnings, and amortized over the
servicing period.
- --------------------------------------------------------------------------------
NOTE B--MERGERS AND ACQUISITIONS
- --------------------------------------------------------------------------------
On July 1, 1996, the Company acquired The Safety Fund
Corporation (Safety Fund) and the Milford Co/operative
Bank (Milford). Each of Safety Fund's 1,665,000
outstanding shares of common stock and Milford's 689,000
outstanding shares of common stock were converted into
1.785 shares and 2.777 shares, respectively, of the
Company's common stock, resulting in the issuance of
2,973,000 shares and 1,914,000 shares, respectively, of
the Company's common stock to Safety Fund and Milford
shareholders. Outstanding stock options were similarly
exchanged for CFX stock options. Milford was a
state-chartered co/operative bank, headquartered in
Milford, New Hampshire. Milford was merged into CFX's
New Hampshire banking subsidiary, CFX Bank, as part of
the transaction. Safety Fund was a bank holding company
headquartered in Fitchburg, Massachusetts. Safety Fund's
subsidiary bank, Safety Fund National Bank, continues to
operate as a subsidiary of the Company.
Both the Safety Fund and Milford mergers were
accounted for by the pooling-of-interests method of
accounting, and, accordingly, the financial information
for all prior periods presented has been restated to
present the combined financial condition and results of
operations as if the combination had been in effect for
all periods presented. Expenses directly attributable to
the mergers amounted to $4,522,000 and were charged to
earnings at the date of combination. Separate financial
information of CFX Corporation, Safety Fund, and Milford
for periods prior to the acquisition is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30, Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ----------------------------------------------------------- ----------------------------------- ---------------------------------
SAFETY Safety Safety
CFX FUND MILFORD CFX Fund Milford CFX Fund Milford
(Unaudited)
- ----------------------------------------------------------- ----------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest and
dividend income $18,180 $ 7,102 $ 2,739 $32,881 $13,816 $ 5,329 $31,304 $12,036 $ 4,658
Provision for loan and
lease losses 1,500 105 50 1,624 1,300 113 437 2,200 60
Other income 5,222 2,277 325 9,421 4,059 831 6,516 3,823 740
Other expense 14,606 6,518 1,903 28,397 14,016 3,789 27,929 13,424 3,511
Income taxes 2,358 692 394 4,335 706 719 3,548 77 647
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income 4,938 2,064 717 7,946 1,853 1,539 5,906 158 1,180
Preferred dividends - - - 89 - - 268 - -
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income available
to common stock $ 4,938 $ 2,064 $ 717 $ 7,857 $ 1,853 $ 1,539 $ 5,638 $ 158 $ 1,180
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
34
<PAGE> 36
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE C--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
- --------------------------------------------------------------------------------
The Federal Reserve Bank requires the Banks to maintain
average reserve balances. The average amounts of these
reserve balances for the years ended December 31, 1996
and 1995 were approximately $28,172,000 and $26,443,000,
respectively.
- --------------------------------------------------------------------------------
NOTE D--INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of
investment securities, with gross unrealized gains and
losses, follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
December 31 (In thousands) 1996
------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and
agency obligations $129,426 $ 798 $ 1,361 $128,863
State and municipal 439 2 - 441
Corporate bonds 3,138 25 - 3,163
Federal agency mortgage
pass-through securities 76,068 215 1,130 75,153
Other collateralized mortgage
obligations (CMO's) 19,799 15 206 19,608
Marketable equity securities 5,960 104 103 5,961
Federal Home Loan Bank of Boston
and Federal Reserve Bank
of Boston stock 12,135 - - 12,135
-------- -------- -------- --------
Total securities available for sale $246,965 $ 1,159 $ 2,800 $245,324
======== ======== ======== ========
Securities held to maturity:
Debt securities:
United States Treasury and
agency obligations $ 9,417 $ 18 $ 46 $ 9,389
State and municipal 13,986 118 21 14,083
Federal agency mortgage
pass-through securities 7,783 116 25 7,874
Other collateralized mortgage
obligations (CMO's) 1,184 1 - 1,185
Other 300 - - 300
-------- -------- -------- --------
Total securities held to maturity $ 32,670 $ 253 $ 92 $ 32,831
======== ======== ======== ========
</TABLE>
At December 31, 1996, the Company pledged debt
securities with an amortized cost of $114,891,000, and a
fair value of $114,368,000, as collateral to secure
public funds and repurchase agreements. See Note J -
"Short-Term Borrowed Funds."
35
<PAGE> 37
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
---------------------------------------------------------
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) 1996
-----------------------------------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
-----------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 11,023 $ 11,079 $ 4,154 $ 4,159
After one year through five years 74,607 74,737 15,580 15,617
After five years through ten years 44,934 44,244 3,969 3,996
After ten years through twenty years 2,439 2,407 - -
-------- -------- -------- --------
133,003 132,467 23,703 23,772
Pass-through securities and CMO's 95,867 94,761 8,967 9,059
-------- -------- -------- --------
$228,870 $227,228 $ 32,670 $ 32,831
======== ======== ======== ========
</TABLE>
Proceeds from the sale of securities available for
sale during the years ended December 31, 1996, 1995 and
1994 were $21,805,000, $28,507,000 and $33,494,000,
respectively. Gross gains of $220,000, $297,000 and
$265,000, respectively, were recognized on such sales.
Gross losses of $73,000, $99,000 and $81,000,
respectively, were realized on such sales. In the third
quarter of 1996, the acquisitions of Safety Fund and
Milford (see Note B - "Mergers and Acquisitions")
necessitated a transfer of securities held to maturity
with an amortized cost of $76,849,000 and a net
unrealized loss of $2,522,000 to securities available
for sale in order to maintain the Company's existing
interest rate risk profile. In November 1995, the FASB
issued guidance allowing a one-time reassessment of an
entity's investment classifications during the period
November 15, 1995 to December 31, 1995. As a result,
securities held to maturity with an amortized cost of
$95,819,000 and a net unrealized loss of $815,000 were
transferred to securities available for sale and
securities held to maturity with an amortized cost of
$6,000,000 were sold at a net realized gain of $6,000.
At December 31, 1996 and 1995, net unrealized gains
(losses) on securities available for sale included in
the shareholders' equity section of the consolidated
balance sheets, included net unrealized gains (losses)
of $126,000 and $(138,000), respectively, on securities
transferred from available for sale to held to maturity
during 1994 and 1995.
36
<PAGE> 38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
December 31 (In thousands) 1995
----------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and
agency obligations $100,966 $ 1,720 $ 155 $102,531
Corporate bonds 5,002 70 - 5,072
Federal agency mortgage
pass-through securities 55,953 28 274 55,707
Other collateralized mortgage
obligations (CMO's) 24,345 75 262 24,158
Marketable equity securities 5,565 28 139 5,454
Federal Home Loan Bank of Boston and
Federal Reserve Bank of Boston stock 8,324 - - 8,324
Total securities available -------- -------- -------- --------
for sale $200,155 $ 1,921 $ 830 $201,246
======== ======== ======== ========
Securities held to maturity:
Debt securities:
United States Treasury and
agency obligations $ 48,323 $ 647 $ 90 $ 48,880
State and municipal 19,229 154 38 19,345
Federal agency mortgage
pass-through securities 21,243 406 147 21,502
Other collateralized mortgage
obligations (CMO's) 8,098 167 22 8,243
Other 200 - 28 172
-------- -------- -------- --------
Total securities held to maturity $ 97,093 $ 1,374 $ 325 $ 98,142
======== ======== ======== ========
</TABLE>
37
<PAGE> 39
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E--LOANS AND LEASES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Loans and leases consist of the following:
-------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Residential $ 711,440 $ 586,074
Construction 8,099 9,194
Commercial 143,179 141,833
Commercial, financial and agricultural 120,114 104,308
Warehouse lines of credit to leasing companies 18,393 12,906
Consumer lease financing 76,343 27,457
Other consumer 48,182 48,497
---------- ----------
1,125,750 930,269
Unearned income (10,045) (3,604)
Deferred origination costs, net 2,459 765
---------- ----------
$1,118,164 $ 927,430
========== ==========
</TABLE>
The following is a summary of information pertaining to
impaired and nonaccrual loans:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C>
Loans with a valuation allowance $ 2,816 $ 7,383
Loans without a valuation allowance 2,585 3,212
------- -------
Total impaired loans $ 5,401 $10,595
======= =======
Valuation allowance allocated to impaired loans $ 934 $ 2,884
======= =======
Nonaccrual loans $ 8,299 $ 9,840
======= =======
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Average investment in impaired loans $ 7,262 $13,526
======= =======
Interest income recognized on impaired loans $ 613 $ 1,087
======= =======
Interest income recognized on cash basis $ 497 $ 1,002
======= =======
</TABLE>
The Company is not committed to lend additional funds
to borrowers whose loans have been modified in
connection with troubled debt restructurings or whose
loans have been classified as impaired.
The primary geographic concentration of credit risk
for loans originated by the Company is the State of New
Hampshire and central Massachusetts. The remainder of
the portfolio is distributed principally throughout the
other New England states.
38
<PAGE> 40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE F--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) 1996 1995 1994
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 15,449 $ 14,401 $ 16,168
Provision for loan and lease losses 2,935 3,037 2,697
Loans and leases charged-off (3,301) (2,934) (5,467)
Recoveries of loans and leases previously charged-off 657 945 1,003
-------- -------- --------
Balance at end of year $ 15,740 $ 15,449 $ 14,401
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
NOTE G--PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
December 31 (In thousands) 1996 1995
----------------------------------------------------------------------
<S> <C> <C>
Land $ 3,616 $ 3,683
Buildings and leasehold improvements 22,641 24,246
Furniture and equipment 17,490 15,585
------- -------
43,747 43,514
Less accumulated depreciation and amortization 16,361 18,261
------- -------
$27,386 $25,253
======= =======
</TABLE>
Depreciation and amortization expense was $3,305,000,
$3,267,000 and $2,944,000, for the years ended December
31, 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
NOTE H--FORECLOSED REAL ESTATE
- --------------------------------------------------------------------------------
Foreclosed real estate is presented net of a valuation
allowance as follows:
<TABLE>
<CAPTION>
------------------------------------------------
December 31 (In thousands) 1996 1995
------------------------------------------------
<S> <C> <C>
Foreclosed real estate $2,233 $1,236
Less allowance for losses 10 50
------ ------
$2,223 $1,186
====== ======
</TABLE>
An analysis of the allowance for losses on foreclosed
real estate follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 50 $ 367 $ 407
Reclassification to non-performing loans
upon adoption of SFAS No. 114 - (131) -
Provision for losses 10 31 373
Charge-offs, net of recoveries (50) (217) (413)
----- ----- -----
Balance at end of year $ 10 $ 50 $ 367
===== ===== =====
</TABLE>
The following table presents the components of the
operation of foreclosed real estate:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expenses, net of rental income $ 437 $ 450 $ 504
Provision for losses 10 31 373
Net gain on sales of real estate (102) (51) (257)
----- ----- -----
$ 345 $ 430 $ 620
===== ===== =====
</TABLE>
39
<PAGE> 41
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE I--DEPOSITS
- --------------------------------------------------------------------------------
Total deposits consist of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------
December 31 (In thousands) 1996 1995
------------------------------------------------------------
<S> <C> <C>
Noninterest bearing $ 136,875 $ 124,615
Savings:
Regular savings 167,465 173,345
NOW accounts 134,467 132,562
Money market accounts 133,555 147,420
---------- ----------
Total savings 435,487 453,327
Time certificates of deposit 584,845 478,882
---------- ----------
Total deposits $1,157,207 $1,056,824
========== ==========
</TABLE>
Time deposits with a minimum balance of $100,000 at
December 31, 1996 and 1995 totaled $137,248,000 and
$70,343,000, respectively. Brokered certificates of
deposit at December 31, 1996 and 1995 amounted to
$69,760,000 and $20,666,000, respectively.
A summary of time certificates, by maturity, is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
December 31 (Dollars in thousands) 1996 1995
----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $462,180 5.55% $337,969 5.68%
After one year through three years 96,803 5.69 99,870 5.84
After three years through five years 25,862 6.25 41,043 6.20
-------- --------
$584,845 5.61% $478,882 5.76%
======== ========
</TABLE>
40
<PAGE> 42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE J--SHORT-TERM BORROWED FUNDS
- --------------------------------------------------------------------------------
The following summarizes short-term borrowed funds:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
December 31 (In thousands) 1996 1995
-----------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreement to repurchase:
Retail $44,165 $28,591
Wholesale 23,160 14,264
Treasury tax and loan 49 1,157
------- -------
Total short-term borrowed funds $67,374 $44,012
======= =======
</TABLE>
Retail securities sold under agreement to repurchase
at December 31, 1996 and 1995 mature within three months
at a weighted average interest rate of 4.28% and 4.30%,
respectively. Wholesale repurchase agreements mature
within three months at a weighted average interest rate
of 5.50% and 5.83% at December 31, 1996 and 1995,
respectively. Short-term borrowed funds are secured by
investment securities. See Note D - "Investment
Securities."
- --------------------------------------------------------------------------------
NOTE K--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) 1996 1995
-----------------------------------------------------------------
<S> <C> <C>
Short-term $174,657 $102,613
Long-term:
5.00% (fixed rate) due January, 2003 201 201
5.00% (fixed rate) due March, 2006 223 -
-------- --------
Total advances $175,081 $102,814
======== ========
</TABLE>
Short-term advances mature within six months and have
a weighted average interest rate of 5.88% and 6.16% at
December 31, 1996 and 1995, respectively.
The Banks have available lines of credit with the
FHLBB at an interest rate that adjusts daily. Borrowings
under the lines are limited to $30,000,000 as of
December 31, 1996. Additional credit may be available
upon written request to the FHLBB. All borrowings from
the FHLBB are secured by a blanket lien on certain
qualified collateral, defined principally as 75% of the
carrying value of first mortgage loans on owner-occupied
residential property and 90% of the fair value of U.S.
Government and federal agency securities.
41
<PAGE> 43
- --------------------------------------------------------------------------------
CFX Corporation and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note L--Preferred Stock
- --------------------------------------------------------------------------------
The Company's preferred stock was converted to common
stock on April 30, 1995, the mandatory conversion date.
- --------------------------------------------------------------------------------
NOTE M--INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 1,037 $ 2,590 $ 3,490
State 320 414 550
Federal tax credits (439) (177) -
------- ------- -------
Total current 918 2,827 4,040
------- ------- -------
Deferred tax provision (benefit):
Federal 5,438 2,785 110
State 926 463 (133)
Effect of tax law change - 10 17
Effect of change in valuation allowance (542) (325) 238
------- ------- -------
Total deferred 5,822 2,933 232
------- ------- -------
Provision for income taxes $ 6,740 $ 5,760 $ 4,272
======= ======= =======
</TABLE>
The components of the net deferred tax asset included in
other assets are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31 (In thousands) 1996 1995
-------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal $ 10,624 $ 10,746
State 1,497 1,852
Valuation allowance - (542)
-------- --------
Total deferred tax assets, net 12,121 12,056
-------- --------
Deferred tax liabilities:
Federal 8,521 3,864
State 836 555
-------- --------
Total deferred tax liabilities 9,357 4,419
-------- --------
Net deferred tax asset $ 2,764 $ 7,637
======== ========
</TABLE>
A summary of the change in the net deferred tax asset is
as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,637 $ 5,270 $ 3,399
Deferred tax provision (5,822) (2,933) (232)
Purchase accounting effects of leasehold
residual acquisition - 6,907 -
Tax effects of net unrealized losses on investment
securities reflected in shareholders' equity 949 (1,607) 2,103
------- ------- -------
Balance at end of year $ 2,764 $ 7,637 $ 5,270
======= ======= =======
</TABLE>
42
<PAGE> 44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of each type of income and expense item
that give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 5,454 $ 5,301
Investment in leasehold residual 4,354 5,654
Alternative minimum tax credit carryforward 1,079 282
State net operating loss carryforward 40 261
Capital loss carryforwards - 208
Severance accrual 368 96
Net unrealized losses on investment securities available for sale 586 -
Book reserves 185 520
Other 55 276
-------- --------
12,121 12,598
Valuation allowance - (542)
-------- --------
Total deferred tax assets, net 12,121 12,056
-------- --------
Deferred tax liabilities:
Depreciation 513 891
Deferred point income 752 141
Mortgage servicing rights 1,009 1,041
Consumer lease financing 5,986 1,368
Net unrealized gains on investment securities available for sale - 363
Other 1,097 615
-------- --------
Total deferred tax liabilities 9,357 4,419
-------- --------
Net deferred tax asset $ 2,764 $ 7,637
======== ========
</TABLE>
The change in the valuation allowance applicable to
deferred tax assets is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 542 $ 946 $ 708
Benefits generated by current year's operations (542) (325) 238
Benefits lost - (79) -
----- ----- -----
Balance at end of year $ - $ 542 $ 946
===== ===== =====
</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. In prior
years, the Company believed that uncertainty existed
with respect to future realization of a portion of its
capital loss carryforwards and with respect to deferred
Massachusetts state tax assets. Therefore, the Company
had established a valuation allowance relating to net
operating and capital loss carryforwards. The valuation
allowance was reversed to the extent that capital gains
and ordinary income for state tax purposes in certain
subsidiaries were realized.
43
<PAGE> 45
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For CFX Bank and Orange Savings Bank, the base amounts
of federal income tax reserves for loan losses are
permanent differences for which there is no recognition
of deferred tax liabilities. However, the loan loss
allowance maintained for financial reporting purposes is
a temporary difference with allowable recognition of a
related deferred tax asset, if it is deemed realizable.
At December 31, 1996, retained earnings include tax
loan loss reserves of approximately $7,038,000 at the
base year for which no provision for income taxes has
been made. If, in the future, such amounts are used for
any purpose other than to absorb loan losses, the
Company will incur a tax liability at the current
applicable income tax rates. The Company anticipates
that the $7,038,000 of retained earnings will not be
used for any purpose that would result in the payment of
income taxes. The unrecognized deferred tax liability on
such amount at December 31, 1996 is approximately
$2,800,000.
The following is a reconciliation of the statutory
federal income tax rate applied to pre-tax accounting
income, with the effective income tax rate provided in
the consolidated statements of income:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at the
statutory rate $ 6,590 34% $ 5,813 34% $ 3,915 34%
Increase (decrease) resulting from:
Tax-exempt interest income (427) (2) (477) (2) (388) (3)
Goodwill and deposit base
intangible amortization 199 1 212 1 232 2
Nondeductible merger expenses 863 5 56 - - -
State income taxes, net of
federal income tax benefit 797 4 589 3 278 2
Cash surrender value (332) (2) - - - -
Low income housing tax credits (439) (2) (177) (1) - -
Change in valuation allowance (542) (3) (325) (2) 238 2
Other, net 31 - 69 1 (3) -
------- -- ------- -- ------- --
Income tax expense $ 6,740 35% $ 5,760 34% $ 4,272 37%
======= == ======= == ======= ==
</TABLE>
- --------------------------------------------------------------------------------
NOTE N--PENSION AND 401(k) PLANS
- --------------------------------------------------------------------------------
The Company's defined benefit pension plans and 401(k)
savings plan are summarized in the following tables:
--------------------------------------------------------
MULTI-EMPLOYER PENSION PLAN
--------------------------------------------------------
During 1996, CFX Corporation and its subsidiaries,
excluding Orange Savings Bank, terminated their defined
benefit pension plans, and transferred plan assets to a
multi-employer plan in amounts that would effectively
settle the plans' accumulated benefit obligations as of
January 1, 1996. As a result, the Company recognized
settlement and curtailment gains totaling $877,000 in
1996. Orange Savings Bank maintained its single-employer
defined benefit plan in the Savings Banks Employees
Retirement Association (SBERA) during 1996.
The multi-employer plan is a defined benefit pension
plan that covers all eligible employees of CFX
Corporation and its wholly-owned subsidiaries, excluding
Orange Savings Bank. Pension expense attributable to the
plan in 1996 was $479,000.
44
<PAGE> 46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
---------------------------------------------------------
SINGLE-EMPLOYER PENSION PLANS
---------------------------------------------------------
The following table sets forth the funded status of
single-employer defined benefit plans and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $592,000 in 1996 and $4,608,000 in 1995 $ (595) $(4,997)
======= =======
Projected benefit obligation for service rendered to date $(1,031) $(6,844)
Plan assets at fair value 866 5,309
------- -------
Projected benefit obligation in excess of plan assets (165) (1,535)
Unrecognized net (gain) loss from past experience different
from that assumed and effects of changes in assumptions (167) 316
Prior service cost not yet recognized in net periodic pension cost - 114
Unrecognized net assets at end of year (17) (97)
------- -------
Accrued pension cost included in other liabilities $ (349) $(1,202)
======= =======
</TABLE>
Net pension expense attributable to these plans includes
the following components:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during
the period $ 74 $ 524 $ 553
Interest cost on projected benefit obligation 71 469 493
Actual return on plan assets (108) (70) (56)
Net amortization and deferral 48 (383) (361)
----- ----- -----
Net pension expense $ 85 $ 540 $ 629
===== ===== =====
</TABLE>
Assumptions used in determining the actuarial present
value of the projected benefit obligation under these
plans, and the expected long-term rate of return on plan
assets, are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rates 7.5% 7.25%-8.0% 8.0%
Annual salary increases 6.0% 5.0%-6.0% 5.0%-6.0%
Expected return on plan assets 8.0% 7.5%-8.0% 7.0%-8.0%
</TABLE>
---------------------------------------------------------
401(k) PLAN
---------------------------------------------------------
The following table sets forth the Company's 401(k) plan
expense:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C>
Matching contribution $264 $272 $129
Supplemental profit sharing contribution 326 318 328
---- ---- ----
$590 $590 $457
==== ==== ====
</TABLE>
45
<PAGE> 47
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE O--STOCK COMPENSATION PLANS
- --------------------------------------------------------------------------------
At December 31, 1996, the Company has three stock-based
compensation plans which are described below. The
Company applies APB Opinion 25 and related
interpretations in accounting for the plans.
Accordingly, no compensation cost has been recognized
for the option plans. Had compensation cost for the
Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards
under those plans consistent with the method prescribed
by SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands, except per share data) 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income available to common stock:
As reported $12,641 $11,249
Pro forma 12,472 10,619
Earnings per share:
As reported $ .99 $ .89
Pro forma .97 .84
</TABLE>
--------------------------------------------------------
FIXED STOCK OPTION PLANS
--------------------------------------------------------
The Company has a 1996 and a 1995 stock option plan
(the Option Plans) whereby options may be granted to
certain key employees and directors of the Company and
its subsidiaries to purchase shares of common stock of
the Company at a price not less than fair value at the
date of grant.
Both incentive stock options and nonqualified stock
options may be granted pursuant to the Option Plans. A
total of 658,000 shares of authorized but unissued
common stock of the Company has been reserved for
issuance pursuant to incentive stock options granted
under the Option Plans, and 443,000 shares of authorized
but unissued common stock have been reserved for
issuance pursuant to nonqualified stock options granted.
The options are exercisable over a period not to exceed
ten years from the date of grant.
The fair value of each option grant is estimated on
the date of grant using the Black - Scholes
option-pricing model with the following weighted average
assumptions used in 1996 and 1995, respectively:
dividend yield of 5.5% and 5.2%; expected volatility of
29%; risk-free interest rates of 5.8% and 5.4%; and
expected lives of 6.9 years for both periods.
Changes in the status of options are summarized as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
December 31 (Options in thousands) 1996 1995 1994
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year $ 961 $ 9.36 728 $ 7.26 794 $ 6.63
Granted 88 13.89 352 13.12 134 8.21
Exercised (312) 6.25 (119) 7.50 (151) 6.02
Cancelled (3) 12.07 - - (49) 9.86
------- ------- ------
Outstanding at end of year 734 $ 11.24 961 $ 9.36 728 $ 7.26
======= ======= ======= ======= ====== ======
Exercisable at end of year 713 $ 11.37 928 $ 9.37 715 $ 7.29
======= ======= ======= ======= ====== ======
Weighted average fair value of
options granted during the year $ 17.01 $16.05 N/A
</TABLE>
Information pertaining to options outstanding at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(Options in thousands) Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Number Contractual Life Price Number Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.49 - $8.91 293 4.84 years $ 7.86 272 $ 7.95
9.27 - 13.61 217 7.50 12.65 217 12.65
14.29 224 8.94 14.29 224 14.29
------- -------
734 6.88 years $11.24 713 $11.37
======= =======
</TABLE>
---------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
---------------------------------------------------------
The Company has an employee stock purchase plan (the
Stock Purchase Plan) whereby employees of the Company
and its subsidiaries with more than one-half year of
continuous service, except for certain employees with
substantial stock interests in the Company or with
substantial rights to purchase common stock, may
purchase up to an aggregate of 183,000 shares of the
Company's common stock.
Eligible employees have the right to purchase common
stock by authorizing payroll deductions of up to seven
percent of their base salary. The Stock Purchase Plan
provides for periodic offerings at a purchase price
which would not be less than the lesser of (1) 90% of
the fair value per share on the offering date or (2) 90%
of the fair value per share on the date of exercise. The
Board of Directors of the Company may change the option
price for subsequent offerings by increasing the
percentage of fair value to a percentage not greater
than 100% or decreasing the percentage of fair value to
a percentage not less than 85%. Purchase discounts have
not been material to date and, accordingly, no
compensation cost has been recognized.
46
<PAGE> 48
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE P--COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
In the ordinary course of business, there are
outstanding commitments and contingencies which are not
reflected in the accompanying consolidated financial
statements.
---------------------------------------------------------
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
---------------------------------------------------------
The Company has entered into employment agreements with
three senior executives. The agreements provide for
automatic one-year extensions unless either party elects
to limit the agreement to its then existing term, and
generally provide for a specified minimum annual
compensation and the continuation of benefits currently
received, including provisions following a "Change of
Control." However, such employment may be terminated for
cause, as defined, without incurring any continuing
obligations. In addition to the above agreements, the
Company has entered into special termination agreements
with certain additional senior executives. The
agreements generally provide for certain lump sum or
periodic severance payments following a "Change in
Control" as defined in the agreements.
---------------------------------------------------------
INVESTMENT IN LIMITED PARTNERSHIPS
---------------------------------------------------------
At December 31, 1996, the Company was committed to
invest $4,098,000 in seven real estate development
limited partnerships. At December 31, 1996 and 1995, the
Company had $2,493,000 and $937,000, respectively,
invested in such partnerships, which are included in
other assets.
---------------------------------------------------------
LEASE SECURITIZATION
---------------------------------------------------------
In connection with the lease securitization transactions
completed by CFX Funding, the Company has guaranteed a
portion of the loss reserve accounts by executing
letters of credit arrangements with third party banks.
At December 31, 1996, the letters of credit amounted to
$1,716,000 and will reduce monthly and expire during the
period April 1998 through December 1998. The Company's
guarantees are secured by the equipment giving rise to
the securitizations.
---------------------------------------------------------
MORTGAGE SERVICING RIGHTS
---------------------------------------------------------
At December 31, 1996, the Company was committed to
purchase servicing rights for approximately $105,000,000
in mortgage loans for $1,300,000.
---------------------------------------------------------
OPERATING LEASE COMMITMENTS
---------------------------------------------------------
Pursuant to the terms of noncancelable lease agreements
in effect at December 31, 1996, pertaining to banking
premises and equipment, future minimum rent commitments
are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Year Ending December 31 (In thousands)
---------------------------------------------------------
<S> <C>
1997 $ 816
1998 673
1999 589
2000 449
2001 253
Thereafter 197
------
$2,977
======
</TABLE>
Certain of the leases include options to renew for
periods ranging from 5 to 15 years. The cost of such
rentals is not included above. Total rent expense for
the years ended December 31, 1996, 1995 and 1994
amounted to $640,000, $594,000 and $365,000,
respectively.
---------------------------------------------------------
OTHER CONTINGENCIES
---------------------------------------------------------
Various legal claims also arise from time to time in the
ordinary course of business which, in the opinion of
management, will have no material effect on the
Company's consolidated financial statements.
47
<PAGE> 49
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE Q--RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
In the ordinary course of business, the Company makes
loans to directors, officers and their associates and
affiliated companies (related parties) at substantially
the same terms, including interest rates and collateral,
as those prevailing at the time of origination for
comparable transactions with other borrowers.
The total amounts due from directors, officers and
their associates were $3,560,000 and $11,344,000 at
December 31, 1996 and 1995, respectively. During the
year ended December 31, 1996, new loans totaling
$285,000 were made, and reductions were made to
outstanding loan balances totalling $8,069,000, of which
$1,054,000 was from repayments and $7,015,000 was
attributable to directors no longer being affiliated
with the Company.
During the year ended December 31, 1996, payments
amounting to $695,000 were made by the Company to a
construction company in which a director holds a 100%
ownership interest, for renovations to banking
facilities. In addition, at December 31, 1996, the
Company was committed to pay $500,000 to this company
for further construction services.
- --------------------------------------------------------------------------------
NOTE R--DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The Company uses certain derivative financial
instruments in managing the interest rate risk included
in the consolidated balance sheet.
Derivative instruments are monitored regularly to
assess market price changes. On at least a monthly
basis, rate change analyses are done in order to assess
potential market risk in changing interest rate
environments. When the price volatility of derivative
instruments varies from the price volatility of assets
being hedged, positions are adjusted to maintain an
appropriate match.
The Company includes all off-balance sheet and
derivative positions in its analysis of interest rate
risk. Increases and decreases of both 100 and 200 basis
points are analyzed in order to determine anticipated
changes in earnings and market values.
The detail on the specific financial instruments used
is as follows:
---------------------------------------------------------
INTEREST RATE AGREEMENTS
---------------------------------------------------------
Interest-rate swaps generally involve the exchange of
fixed and floating-rate interest obligations without the
exchange of the underlying principal amounts. The
Company typically becomes a principal in the exchange of
interest payments between the parties and, therefore, is
exposed to loss should one of the parties default. The
Company minimizes this risk by performing normal credit
reviews on its swap counterparties. Notional principal
amounts often are used to express the volume of these
transactions, but the amounts potentially subject to
credit risk are much smaller.
Interest rate floor agreements provide for the receipt
of interest to the extent that the three-month LIBOR is
the specified rate.
At December 31, 1996 and 1995, interest rate agreements
were comprised of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------------------------------------------
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Gain
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1996
---------------------------------------------------------------------------------------------
Variable rate Fixed - 7.95% Variable - $ 5,000 12/16/97 $ 99
commercial loans 3 mo. LIBOR
Variable rate Variable - N/A $10,000 02/15/00 $174
commercial loans LIBOR floor(6.25%)
Variable rate Variable - N/A $10,000 06/03/99 $ 74
commercial loans LIBOR floor(5.75%)
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31, 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Variable rate Fixed - 7.95% Variable - $5,000 12/16/97 $254
commercial loans 3 mo. LIBOR
Variable rate Variable - N/A $10,000 02/15/00 $400
commercial loans LIBOR floor(6.25%)
</TABLE>
48
<PAGE> 50
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
---------------------------------------------------------
FINANCIAL OPTION CONTRACTS
---------------------------------------------------------
The Company periodically uses financial options to hedge
interest rate exposure generally on secondary mortgage
market operations. Options are contracts that allow the
holder of the option to purchase or sell a financial
instrument at a specified price within a specified
period of time. For most options transactions, the
Company uses recognized and centralized exchanges for
execution. These exchanges act as the counterparty to
all transactions, thereby minimizing the credit risk of
market participants. Option contracts are used
explicitly for hedge purposes and are not undertaken for
speculation. The Company's intent and general practice
is to liquidate option contract obligations before
stated exercise or delivery dates through established
market transactions. The Company does not generally
intend to deliver or receive the securities underlying
option contracts, but may execute delivery or receipt if
it is financially prudent to do so. At December 31,
1996, to hedge mortgage loans held for sale, the Company
held put options (the option to sell securities at a
stated price within a specified term) on 30-year
treasury obligations totaling $4,000,000 and covered
call options on 5-year treasury obligations totaling
$10,000,000 extending through March 1997. The unrealized
gain on the option contracts at December 31, 1996 was
$189,000.
---------------------------------------------------------
TRADING ACTIVITIES
---------------------------------------------------------
In 1994, as mortgage-backed securities were purchased for
the trading portfolio, the Company assessed their price
volatility under varying interest rates. A hedge using a
combination of interest rate swap agreements, financial
futures contracts and financial option contracts was
constructed to closely resemble the volatility of the
underlying security. Derivatives held for trading
purposes, as well as the overall program for which they
were used, were liquidated in October, 1994.
Net gains (losses) on trading securities, included
separately in the consolidated statements of income, are
summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Year Ended December 31
(In thousands) 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities $ - $ - $(2,985)
Other debt securities - - (4)
Equity securities 564 1,092 271
Futures, options and swaps - - 2,461
------- ------- -------
$ 564 $ 1,092 $ (257)
======= ======= =======
</TABLE>
49
<PAGE> 51
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE S--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK
- --------------------------------------------------------------------------------
In addition to using derivative financial instruments to
manage interest rate risk (see Note R), the Company is
party to financial instruments with off-balance sheet
risk in the normal course of business to meet the
financing needs of its customers. These financial
instruments include commitments to extend credit,
standby letters of credit and forward delivery
contracts. These instruments involve, to varying
degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated
balance sheet.
The Company's exposure to credit loss for commitments
to extend credit and standby letters of credit is
represented by the contractual amount of these specific
instruments. The Company uses the same credit policies
in making these commitments and conditional obligations
as it does for on-balance sheet instruments.
At December 31, 1996 and 1995, the following financial
instruments were outstanding:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Contract or
Notional Amount
-----------------------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments for which contract
amounts represent credit risk:
Commitments to originate and purchase loans $ 56,043 $ 63,298
Unadvanced funds on lines of credit 115,978 78,205
Standby letters of credit 1,840 2,566
Financial instruments for which contract amounts exceed credit risk:
Outstanding forward delivery contracts 94,888 128,182
</TABLE>
A commitment to extend credit is an agreement to
provide financing to a customer contingent upon
compliance with all conditions established in the
contract. A commitment generally has a fixed expiration
date or other termination clause and may require payment
of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment
amount does not necessarily represent future cash
requirements. The Company evaluates each customer's
credit worthiness on an individual basis. The amount of
collateral obtained, if deemed necessary upon extension
of credit, is based on management's evaluation of the
counterparty. The collateral held varies but may include
cash, accounts receivable, inventory, property, plant
and equipment, income-producing commercial properties,
and residential real estate.
Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a
customer to a third party. These commitments are
primarily issued to support private borrowing
arrangements on a short-term basis. The credit risk
involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities
to customers.
Forward delivery contracts are contracts for delayed
delivery of mortgage loans or mortgage- backed
securities in which the Company agrees to make delivery
at a specified future date of a specified instrument, at
a specified price or yield. Credit risk to the Company
arises from the possible inability of counterparties to
meet the terms of their contracts. In the event of
nonacceptance by the counterparty, the Company would be
subject to the credit risk of the loans retained. These
loans would have been originated in the ordinary course
of business complying with the Company's standard credit
evaluation and collateral requirements. Failure to
fulfill delivery requirements for these contracts may
result in payment of fees to certain investors.
50
<PAGE> 52
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE T--FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of estimated fair
values of all financial instruments where it is
practicable to estimate such values. In cases where
quoted market prices are not available, fair values are
based on estimates using present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly,
the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying
value of the Company.
The following methods and assumptions were used by the
Company in estimating fair value disclosures for
financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash
and short-term instruments approximate fair values.
INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying
values of interest bearing deposits with other banks
approximate fair values.
RESTRICTED SECURITIES: The carrying values of Federal
Home Loan Bank of Boston and Federal Reserve Bank of
Boston stock approximate fair value, based on redemption
provisions.
INVESTMENT SECURITIES: Fair values of all other
investment securities are based on quoted market prices.
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 amounts of advances from the Federal Home Loan
Bank of Boston maturing within 90 days approximate their
fair values. The fair values of other advances are
estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates for
similar types of advances.
ACCRUED INTEREST: The carrying amounts of accrued
interest approximate fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options,
swaps and interest rate agreements are based on quoted
market prices. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter
into similar agreements, taking into account the
remaining terms of the agreements and the
counterparties' credit standing.
51
<PAGE> 53
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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) 1996 1995
- --------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 50,404 $ 50,404 $ 46,893 $ 46,893
Interest bearing deposits with other banks 197 197 13,475 13,475
Securities available for sale 245,324 245,324 201,246 201,246
Securities held to maturity 32,670 32,831 97,093 98,142
Mortgage loans held for sale 15,212 15,302 7,085 7,196
Loans and leases, net 1,102,424 1,096,876 911,981 919,184
Accrued interest receivable 9,741 9,741 10,218 10,218
Financial liabilities:
Deposits 1,157,207 1,159,738 1,056,824 1,058,869
Short-term borrowed funds 67,374 67,374 44,012 44,012
Advances from the Federal Home
Loan Bank of Boston 175,081 175,050 102,814 102,877
Accrued interest payable 3,834 3,834 1,908 1,908
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to originate and
purchase loans 56,043 (260) 63,298 (145)
Standby letters of credit 1,840 (2) 2,566 (15)
Unadvanced funds on lines of credit 115,978 (558) 78,205 (304)
Interest-rate swap agreements 5,000 99 5,000 254
Financial option contracts (long position) 4,000 37 - -
Financial option contracts (short position) 10,000 152 - -
Interest-rate floor agreements 20,000 248 10,000 400
</TABLE>
52
<PAGE> 54
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE U--REGULATORY CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
- --------------------------------------------------------------------------------
The Company (on a consolidated basis) and each Bank (on
a consolidated basis) are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and
Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt
corrective action, the Company and the Banks must meet
specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and
classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to
ensure capital adequacy require the Company and the
Banks to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as
defined) to average assets (as defined). Management
believes, as of December 31, 1996, that the Company and
the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notifications
from the Federal Reserve Board and the Federal Deposit
Insurance Corporation categorized the Company and the
Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well
capitalized, they must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the following table. There are no
conditions or events since the notifications that
management believes have changed these categories. The
Company's and the Banks' actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------------------------
December 31, 1996 (In thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted
assets:
Consolidated $136,210 14.8% $ 73,875 8.0% $ 92,344 10.0%
CFX Bank 86,845 12.2 57,110 8.0 71,388 10.0
Safety Fund National Bank 24,345 13.9 14,048 8.0 17,560 10.0
Orange Savings Bank 10,108 20.9 3,859 8.0 4,823 10.0
------------------------------------------------------------------------------------------------
Tier 1 capital to risk-weighted
assets:
Consolidated 124,615 13.5 36,938 4.0 55,407 6.0
CFX Bank 78,912 11.0 28,555 4.0 42,833 6.0
Safety Fund National Bank 22,090 12.6 7,024 4.0 10,536 6.0
Orange Savings Bank 9,503 19.7 1,929 4.0 2,894 6.0
------------------------------------------------------------------------------------------------
Tier 1 capital to average assets:
Consolidated 124,615 8.0 62,323 - 4.0 - 77,903 5.0
77,903 5.0
CFX Bank 78,912 6.8 46,406 - 4.0 - 58,008 5.0
58,008 5.0
Safety Fund National Bank 22,090 7.0 12,568 - 4.0 - 15,710 5.0
15,710 5.0
Orange Savings Bank 9,503 9.8 3,870 - 4.0 - 4,837 5.0
4,837 5.0
</TABLE>
Certain restrictions exist regarding the ability of
the Banks to transfer funds to the Company in the form
of cash dividends, loans and advances. Applicable rules
prohibit the payment of a cash dividend by the Banks if
the effect thereof would cause the net worth of the
Banks to be reduced below applicable net worth
requirements.
Accordingly, $62,844,000 of the Company's equity in
the net assets of the Banks was restricted at December
31, 1996.
Under Federal Reserve regulations, the Banks are also
limited as to the amount they may loan to the Company,
unless such loans are collateralized by specified
obligations. At December 31, 1996, the maximum amount
available for transfer from the Banks to the Company in
the form of loans approximated $12,625,000.
53
<PAGE> 55
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE V-- MORTGAGE LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in
the accompanying consolidated balance sheets. The unpaid
principal balances of mortgage loans serviced for others
were $765,000,000 and $672,000,000 at December 31,
1996 and 1995, respectively.
Substantially all loans serviced for others were sold
without recourse provisions.
The following is an analysis of the changes in mortgage
servicing rights:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,373 $ 4,207 $ 4,557
Additions 1,826 682 406
Sales - - (126)
Amortization (886) (516) (630)
------- ------- -------
Balance at end of year $ 5,313 $ 4,373 $ 4,207
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the fair value of
capitalized mortgage servicing rights was $7,848,000 and
$5,696,000, respectively. There was no activity in the
valuation allowances for mortgage servicing rights for
the years ended December 31, 1996 and 1995.
- --------------------------------------------------------------------------------
NOTE W--SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
On February 13, 1997, the Company signed a definitive
agreement to acquire all of the outstanding capital
stock of Portsmouth Bank Shares, Inc. (Portsmouth), a
New Hampshire bank holding company, headquartered in
Portsmouth, NH.
Pursuant to the definitive agreement each of
Portsmouth's outstanding shares of common stock has the
potential to be converted into .95 shares of the
Company's common stock. The actual number of shares of
the Company's common stock issuable in the transaction
is subject to adjustment based on the average price of
the Company's common stock for the ten trading days
immediately before the Company receives the last
regulatory approval required to consummate the
transaction. In the event that the average price of the
Company's common stock is below $15.70, the exchange
ratio becomes 1.05 shares; and the exchange ratio floats
between .95 and 1.05 shares if the average price of the
Company's common stock is between $17.375 and $15.70.
Portsmouth has the right to terminate the agreement if
the average price of the Company's common stock is below
$14.20 per share unless the Company agrees to increase
the exchange ratio.
The transaction is tax free to the owners of
Portsmouth and is subject to regulatory approval and the
approval of both the Company's and Portsmouth's
shareholders. It is anticipated that the transaction
will be accounted for by the pooling-of-interests method
of accounting.
At December 31, 1996, Portsmouth had (unaudited) total
assets of $272 million, deposits of $198 million and
stockholders' equity of $66 million.
Portsmouth's bank subsidiary, Portsmouth Savings Bank,
operates 3 full service offices in Portsmouth, North
Hampton and Greenland, New Hampshire.
On March 24, 1997, the Company entered into a
definitive agreement to acquire all of the outstanding
capital stock of Community Bankshares, Inc. (Community),
a New Hampshire bank holding company, headquartered in
Concord, New Hampshire. Pursuant to the definitive
agreement, each outstanding share of Community common
stock will be converted into 2.20 shares of CFX common
stock. If the average price of CFX common stock for the
fifteen days preceding the closing date is between
$18.18 and $20.00, the exchange ratio floats between 2.2
and 2.0 shares. Community may terminate the agreement if
the average price of CFX common stock is below $13.50
per share unless CFX agrees to increase the exchange
ratio.
The transaction is tax free to the owners of Community
and is subject to regulatory approval and the approval
of both the Company's and Community's shareholders. It
is anticipated that the transaction will be accounted for
by the pooling-of-interests method of accounting.
At December 31, 1996, Community had (unaudited) total
assets of $550 million, deposits of $396 million and
stockholder's equity of $41 million.
Community's bank subsidiaries, Concord Savings Bank,
headquartered in Concord, New Hampshire and Centerpoint
Bank, headquartered in Bedford, New Hampshire, operate
11 branches located in Merrimack, Hillsborough, Belknap
and Rockingham Counties.
In the event that, prior to the closings, the
outstanding shares of the Company's common stock or
Portsmouth's common or Community's common stock shall
have been increased due to a stock dividend declared on
the respective stock with a record date prior to the
closings, then appropriate and apportionate adjustments
shall be made in the number of shares exchanged.
54
<PAGE> 56
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE X--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Sheets
-----------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 199 $ 1,174
Interest bearing deposits with bank subsidiaries 2,481 2,611
Securities held to maturity 320 577
Receivables from subsidiaries 7,992 8,233
Investment in bank subsidiaries 118,841 116,191
Other assets 5,661 2,670
-------- --------
$135,494 $131,456
======== ========
Liabilities $ 2,541 $ 4,424
Shareholders' Equity 132,953 127,032
-------- --------
$135,494 $131,456
======== ========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
----------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income $ 258 $ 340 $ 289
Dividends from subsidiaries 10,639 4,461 5,490
Gain on sale of investment securities - 28 -
-------- -------- --------
10,897 4,829 5,779
General and administrative expenses 2,020 891 1,022
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries 8,877 3,938 4,757
Income tax expense (benefit) 38 (141) (345)
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries 8,839 4,079 5,102
Equity in undistributed net income
of subsidiaries 3,802 7,259 2,142
-------- -------- --------
Net Income $ 12,641 $ 11,338 $ 7,244
======== ======== ========
</TABLE>
55
<PAGE> 57
- --------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------
Year Ended December 31 (In thousands) 1996 1995 1994
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,641 $ 11,338 $ 7,244
Adjustments to reconcile net income to
net cash provided by operating activities:
Net deferred income tax provision (benefit) - 7 (111)
Gain on sale of investment securities - (28) -
Equity in undistributed net income
of subsidiaries (3,802) (7,259) (2,142)
Net change in other assets and other liabilities (1,789) (2,140) 2,532
-------- -------- --------
Net Cash Provided
by Operating Activities 7,050 1,918 7,523
-------- -------- --------
INVESTING ACTIVITIES
Capital contribution to subsidiary - (200) -
Net decrease (increase) in interest
bearing deposits with bank subsidiaries 130 8,775 (3,630)
Decrease (increase) in receivables from subsidiaries 241 (7,940) 110
Purchases of securities available for sale - - (1,027)
Proceeds from sales of securities available for sale - 1,075 -
Purchases of securities held to maturity - - (3,002)
Proceeds from maturities of securities
held to maturity 257 18 3,275
Purchase of bank-owned life insurance (3,250) - -
NET CASH PROVIDED (USED) -------- -------- --------
BY INVESTING ACTIVITIES (2,622) 1,728 (4,274)
-------- -------- --------
FINANCING ACTIVITIES
Common cash dividends paid (7,067) (4,654) (3,642)
Preferred cash dividends paid - (89) (268)
Proceeds from issuance of common stock 2,109 1,267 1,127
Payments on fractional shares (26) (18) (20)
Acquisition of treasury shares (419) - -
NET CASH USED
-------- -------- --------
BY FINANCING ACTIVITIES (5,403) (3,494) (2,803)
-------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (975) 152 446
Cash and cash equivalents at beginning of year 1,174 1,022 576
CASH AND CASH EQUIVALENTS -------- -------- --------
AT END OF YEAR $ 199 $ 1,174 $ 1,022
======== ======== ========
</TABLE>
56
<PAGE> 58
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE Y--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of the consolidated quarterly
results of operations for the years ended December 31,
1996 and 1995:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Three Months Ended March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------------------------------------
(In thousands, except per share data)
----------------------------------------------------------------------------------------
1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income $ 25,740 $ 26,892 $ 27,416 $ 28,377
Interest expense 12,039 12,573 13,005 13,949
-------- -------- -------- --------
Net interest and dividend income 13,701 14,319 14,411 14,428
Provision for loan and lease losses 905 750 680 600
Trading securities gains, net 153 - - 411
Investment securities gains, net 57 146 (13) (43)
Other income (2 & 3) 3,622 3,846 4,428 4,220
Other expenses (1) 11,577 11,450 16,587 11,756
-------- -------- -------- --------
Income before income taxes 5,051 6,111 1,559 6,660
Income taxes 1,496 2,098 1,108 2,038
======== ======== ======== ========
Net income $ 3,555 $ 4,013 $ 451 $ 4,622
======== ======== ======== ========
Earnings per common share $ .28 $ .31 $ .04 $ .36
======== ======== ======== ========
----------------------------------------------------------------------------------------
1995
----------------------------------------------------------------------------------------
Interest and dividend income $ 22,875 $ 23,963 $ 24,499 $ 25,053
Interest expense 10,262 11,100 11,460 11,542
-------- -------- -------- --------
Net interest and dividend income 12,613 12,863 13,039 13,511
Provision for loan and lease losses 705 953 625 754
Trading securities gains, net 224 294 273 301
Investment securities gains, net 3 106 73 22
Other income 2,938 3,440 3,354 3,283
Other expenses (4) 11,677 11,589 11,261 11,675
-------- -------- -------- --------
Income before income taxes 3,396 4,161 4,853 4,688
Income taxes 1,204 1,406 1,624 1,526
-------- -------- -------- --------
Net income 2,192 2,755 3,229 3,162
Preferred stock dividends 67 22 - -
-------- -------- -------- --------
Net income available to
common stock $ 2,125 $ 2,733 $ 3,229 $ 3,162
======== ======== ======== ========
Earnings per common share $ .17 $ .21 $ .26 $ .25
======== ======== ======== ========
</TABLE>
(1) For the quarter ended September 30, 1996, the
Company recorded costs related to the mergers
of Safety Fund and Milford totaling
$4,522,000, and costs associated with a SAIF
special assessment of $691,000.
(2) For the quarter ended September 30, 1996, the
Company terminated CFX Corporation's and
Safety Fund's pension plans and transferred
the assets and liabilities to a
multi-employer pension plan. A gain from the
settlement of the pension plan was recorded
totaling $877,000.
(3) For the quarter ended December 31, 1996, the
Company recorded $411,000 in gains on trading
securities on an investment purchased and
sold during the same quarter.
(4) For the quarter ended September 30, 1995, the
Company received a $424,000 insurance premium
refund from the Federal Deposit Insurance
Corporation (FDIC). In addition, for the
quarter ended December 31, 1995 the insurance
premiums paid to the FDIC were significantly
reduced.
57
<PAGE> 59
- --------------------------------------------------------------------------------
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 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, 1996. 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, 1996, CFX
Corporation and subsidiaries maintained an effective
internal control structure over financial reporting
presented in conformity with both generally accepted
accounting principles and call report instructions.
<TABLE>
<S> <C> <C>
Peter J. Baxter Mark A. Gavin Gregg R. Tewksbury
President and Chief Chief Operating Officer Chief Financial Officer
Executive Officer
</TABLE>
58
<PAGE> 60
- --------------------------------------------------------------------------------
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of CFX
Corporation:
We have audited the accompanying consolidated balance
sheets of CFX Corporation and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash
flows for each of the years in the three-year period
ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
The consolidated financial statements as of December
31, 1995, and for the years ended December 31, 1995 and
1994 have been restated to reflect the pooling of
interests with The Safety Fund Corporation and Milford
Co/operative Bank as described in Note B to the
consolidated financial statements. We did not audit the
1995 and 1994 financial statements of The Safety Fund
Corporation, which statements reflect total assets of
$287,483,000 as of December 31, 1995 and net interest
and dividend income of $13,816,000 and $12,036,000 for
the years ended December 31, 1995 and 1994,
respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts
included for The Safety Fund Corporation as of December
31, 1995 and for the years ended December 31, 1995 and
1994 is based solely on the reports of other auditors.
The consolidated financial statements as of and for
the year ended December 31, 1994 reflect the pooling of
interests with Orange Savings Bank. We did not audit the
1994 financial statements of Orange Savings Bank, which
statements reflect total assets of $83,268,000 as of
December 31, 1994 and net interest and dividend income
of $3,255,000 for the year ended December 31, 1994.
Those statements were audited by other auditors whose
report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Orange
Savings Bank as of and for the year ended December 31,
1994 is based solely on the report of other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of
other auditors, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of CFX Corporation and
subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," effective January 1, 1995.
Boston, Massachusetts
January 29, 1997, except for Note W
as to which the date is March 24, 1997
59
<PAGE> 61
- --------------------------------------------------------------------------------
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of CFX
Corporation:
We have examined management's assertion that CFX
Corporation and subsidiaries maintained an effective
internal control structure over financial reporting as
of December 31, 1996, 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 we 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 subsidiaries maintained an effective
internal control structure over financial reporting
presented in conformity with both generally accepted
accounting principles and call report instructions as of
December 31, 1996, is fairly stated, in all material
respects, based on Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Boston, Massachusetts
January 29, 1997
60
<PAGE> 62
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF CFX CORPORATION
- --------------------------------------------------------------------------------
Directors
Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court
Richard F. Astrella
President, Orange Savings Bank
William E. Aubuchon, III
Chairman of the Board and CEO
W.E. Aubuchon Company, Inc.
Peter J. Baxter
President and Chief Executive Officer,
CFX Corporation and CFX Bank
Richard B. Baybutt
Chairman of the Board,
Baybutt Construction
Christopher V. Bean
Attorney,
Bean Law Offices
Christopher W. Bramley
President and CEO
Safety Fund National Bank
P. Kevin Condron
President
Central Supply Company, Inc.
Calvin L. Frink
Retired
David R. Grenon
Chairman of Advisory Board
& Asst. Clerk
The Protector Group Insurance Agency, Inc.
Elizabeth Sears Hager
New Hampshire
State Representative
Douglas S. Hatfield, Jr.
President and Treasurer,
Hatfield, Moran & Barry, P.A
Philip A. Mason
Attorney, Mason & Martin
Walter R. Peterson
President Emeritus
Franklin Pierce College
L. William Slanetz
Owner, Cheshire Realty
Officers
Peter J. Baxter
President and Chief Executive Officer
Mark A. Gavin, CPA
Executive Vice President and
Chief Operating Officer
Gregg R. Tewksbury, CPA
Chief Financial Officer
William H. Dennison
Treasurer
John F. Foley
Senior Vice President,
Human Resources
Laurence E. Babcock
Vice President,
Data Processing
Daniel J. LaPlante
Vice President,
Investment Manager
Philip B. Emma
Corporate Controller
Donald E. Leroux, CPA
Director of Audit
Charles B. Troccia
Director of Marketing
Karen M. Mayo, CPA
Director of Compliance
Christopher V. Bean
Secretary
Winifred M. Brooks
Assistant Secretary
- --------------------------------------------------------------------------------
TRUSTEES AND BANKING PARTNERS OF CFX BANK
- --------------------------------------------------------------------------------
Trustees
Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court
Richard B. Baybutt
Chairman of the Board,
Baybutt Construction
Peter J. Baxter
President and
Chief Executive Officer
CFX Bank
Delcie D. Bean
President,
D.D. Bean & Sons, Inc.
Richard D. D'Amato
Former President,
Milford Co/operative Bank
William H. Dennison
Banking Partner,
CFX Bank
Calvin L. Frink
Retired
Emerson H. O'Brien
President, Economy Plumbing
& Heating
J. Justin Pestana, Jr.
Chairman of the Board, President,
J.P. Chemical Company
L. William Slanetz
Owner, Cheshire Realty
David B. Walters
Director of Community Relations,
CFX Bank
Honorary Trustee
Mario G. Farina
Chairman of the Board, M.G.F., Inc.
Banking Partners
Peter J. Baxter
President and
Chief Executive Officer
Daniel J. LaPlante
Treasurer
Keith D. Armstrong
Benoit J. Asselin
Judith Avery-Dunning
Laurence E. Babcock
Susan Martore-Baker
A. Jane Beauchamp
Claire J. Castanino
Kathleen A. Cleveland
Martha A. Curtis
William H. Dennison
Janice P. Dokla
Brian P. Donovan
Gordon R. Edmonds
John F. Foley
Carole E. Fredericks
Mark A. Gavin, CPA
Carol M. Harwood
Ellen M. Jones
Donald E. Leroux, CPA
Karen M. Mayo, CPA
William J. McIver
Lee K. Robator
Larry E. Ruest
Gregg R. Tewksbury, CPA
Charles B. Troccia
Peter T. Whittemore
Liane T. Wiley
Debra T. Wilner
- --------------------------------------------------------------------------------
DIRECTORS OF CFX FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
Eugene E. Gaffey
Chairman of the Board
Retired Justice, Hinsdale
Municipal Court
Philip A. Mason
Attorney, Mason & Martin
Peter J. Baxter
President and Chief Executive Officer,
CFX Corporation and CFX Bank
Mark A. Gavin, CPA
Executive Vice President and Chief Operating Officer
CFX Corporation
William C. Mears
President
CFX Funding L.L.C.
Steven T. Platten
Vice President
CFX Funding L.L.C.
- --------------------------------------------------------------------------------
MANAGEMENT OF CFX FUNDING L.L.C.
- --------------------------------------------------------------------------------
William C. Mears
President
Steven T. Platten
Vice President
Mark A. Gavin, CPA
Treasurer
James Valz
Controller
61
<PAGE> 63
- --------------------------------------------------------------------------------
DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC.
- --------------------------------------------------------------------------------
Directors
Peter J. Baxter
President and
Chief Executive Officer,
CFX Corporation and CFX Bank
Paul T. Pouliot, CMB
President
Mortgage Banking Partner,
CFX Mortgage, Inc.
Mark A. Gavin, CPA
Executive Vice President and
Chief Operating Officer
CFX Corporation
Mortgage Banking Partners
Paul T. Pouliot, CMB
President
Winnie F. Thibault
Treasurer
Dianne M. Bishop
Daniel J. McKenney
Pauline D. Tessier
- --------------------------------------------------------------------------------
DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK
- --------------------------------------------------------------------------------
Directors
William E. Aubuchon, III
Chairman of the Board and CEO
W.E. Aubuchon Company, Inc.
Christopher W. Bramley
President and CEO
Safety Fund National Bank
P. Kevin Condron
President
Central Supply Company, Inc.
David R. Grenon
Chairman of Advisory Board
& Asst. Clerk
The Protector Group Insurance
Agency, Inc.
Donald L. Hall
President and Director
Higley, Hall & Company, Inc.
Directors
Douglas S. Hatfield, Jr.
President and Treasurer,
Hatfield, Moran & Barry, P.A.
John E. Howard, CPA
Managing Partner
William S. Reagan & Company, LLP
Philip A. Mason
Attorney, Mason & Martin
Walter R. Peterson
President Emeritus
Franklin Pierce College
Allen I. Rome
President
Rome Insurance Agency, Inc.
Henri L. Sans, Jr.
Attorney
LeBlanc and Sans
J. Robert Seder
Attorney
Seder & Chandler
Senior Officers
Christopher W. Bramley
President and
Chief Executive Officer
James C. Garvey
Senior Vice President and
Senior Commercial Loan Officer
Michael A. L'Ecuyer
Senior Vice President -
Retail Banking
Stephen R. Shirley
Senior Vice President and
Senior Trust Officer
Michael D. Thibeault
Senior Vice President
Diane Whitten
Senior Vice President - Loan
Resolution
- --------------------------------------------------------------------------------
DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK
- --------------------------------------------------------------------------------
Directors
Elwyn C. Hayden
Chairman of the Board
Retired,
Hayden Realty & Development Corp.
Richard F. Astrella
President,
Orange Savings Bank
Robert G. Allen
Sales Engineer,
L.S. Starrett, Co.
Christopher V. Bean
Attorney
Bean Law Offices
Paul A. Larocque, D.D.S.
Semi-Retired,
Dentist
Thomas S. Mann, III
President,
T. S. Mann Lumber Company
Philip A. Mason
Attorney, Mason & Martin
Directors
Andrea L. Shaughnessy
President,
Duall Plastics, Inc.
John B. Stevenson
Accounting & MIS Manager
Riveto Manufacturing Company
Arlan D. Willard
Retired,
L. S. Starrett, Co.
Banking Partners
Richard F. Astrella
Connie A. Zani
62
<PAGE> 64
- --------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1996, there were 4,268 holders of record
of CFX Corporation's common stock. The stock is traded
on the American Stock Exchange (AMEX) under the symbol
"CFX." The following table sets forth cash dividends
declared on the Company's common stock and the high and
low sale prices as reported by AMEX for the appropriate
periods.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1996 First Second Third Fourth
Calendar Quarters Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividends declared per share (1) $ .1714 $ - $ .1905 $ .2095
Stock price (1):
High 15 3/8 14 3/8 15 1/4 16 5/8
Low 12 7/8 12 1/4 11 5/8 13 5/8
Last sale 14 12 3/8 14 1/8 15 1/2
<CAPTION>
------------------------------------------------------------------------------------------------
1995 First Second Third Fourth
Calendar Quarters Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividends declared per share (1) $ .1391 $ .1451 $ .1451 $ .3266
Stock price (1):
High 11 3/4 15 3/8 16 1/2 16 5/8
Low 9 1/2 11 13 1/2 13 1/4
Last sale 11 1/8 15 16 3/8 14 7/8
------------------------------------------------------------------------------------------------
</TABLE>
(1) Common cash dividends and common stock sale
prices have been restated to reflect the
Company's 5% common stock dividend declared on
December 10, 1996.
63
<PAGE> 65
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXECUTIVE OFFICES
102 Main Street
Keene, NH 03431
REGISTRAR AND TRANSFER AGENT
Chemical Mellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-288-9541
INDEPENDENT AUDITORS
Wolf & Company, P.C.
One International Place
Boston, MA 02110-9801
COMMON STOCK INFORMATION
Listed on AMEX: CFX
Shares outstanding as of 12/31/96: 12,980,732
REQUEST FOR INFORMATION
For more information on the Company's products and
services, call or write:
Mark A. Gavin, CPA
Chief Operating Officer
CFX Corporation
P.O. Box 429
102 Main Street
Keene, NH 03431
(603) 352-2502
A copy of Form 10-K filed for the year ended December
31, 1996 by the Company with the Securities and Exchange
Commission and quarterly financial reports may be
obtained without charge by written request to:
Gregg R. Tewksbury, CPA
Chief Financial Officer
CFX Corporation
P.O. Box 429
102 Main Street
Keene, NH 03431
(603) 352-2502
DIVIDEND REINVESTMENT PLAN
CFX Corporation offers a dividend reinvestment plan
which permits participating shareholders of record to
reinvest dividends in CFX Corporation Common Stock
without paying brokerage commissions or service charges.
A minimum of fifty shares of common stock owned is
required to be eligible for participation in the plan.
Participating shareholders may also invest up to $5,000
in additional funds each quarter for the purchase of
additional shares. A copy of the dividend reinvestment
plan prospectus and application may be requested from
the transfer agent at the above address or from
Shareholder Services at CFX Corporation.
64
<PAGE> 1
Exhibit 23.1
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,
in the Registration Statement (Form S-8, No. 33-52598) pertaining to the 1992
Employee Stock Purchase Plan of CFX Corporation, and in the Registration
Statement (Form S-8, No. 33-61787) pertaining to the 1995 Stock Option Plan for
CFX Corporation of our report dated January 29, 1997, except for Note W as to
which the date is March 27, 1997, with respect to the consolidated financial
statements of CFX Corporation as of December 31, 1996, and for the year then
ended, incorporated by reference in the Annual Report on Form 10-K of CFX
Corporation for the year ended December 31, 1996.
/s/
--------------------------
Wolf & Company, P.C.
Boston, Massachusetts
March 27, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-61787, 33-17071, and 33-52598 of CFX Corporation on Forms S-8 of our report
on the financial statements of Orange Savings Bank dated January 27, 1995,
appearing in the Annual Report on Form 10-K of CFX Corporation and Subsidiaries
for the year ended December 31, 1996.
/s/
Deloitte & Touche LLP
March 27, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The Safety Fund Corporation:
We consent to the incorporation by reference on Registration Statement Nos.
33-61787, 33-17071 and 33-52598 on Form S-8 filed by CFX Corporation of our
report dated January 22, 1996, relating to the consolidated balance sheets of
The Safety Fund Corporation and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years then ended, which report appears in the December
31, 1995 annual report on For 10-KSB of The Safety Fund Corporation which is
included as an exhibit to the December 31, 1996 Form 10-K of CFX Corporation.
/s/
-------------------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<CASH> 0 44,393 50,404
<INT-BEARING-DEPOSITS> 0 13,475 197
<FED-FUNDS-SOLD> 0 2,500 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 201,246 245,324
<INVESTMENTS-CARRYING> 0 97,093 32,670
<INVESTMENTS-MARKET> 0 98,142 32,831
<LOANS> 0 927,430 1,118,164
<ALLOWANCE> 0 15,449 15,740
<TOTAL-ASSETS> 0 1,344,880 1,547,092
<DEPOSITS> 0 1,056,824 1,157,207
<SHORT-TERM> 0 146,626 242,031
<LIABILITIES-OTHER> 0 14,198 14,477
<LONG-TERM> 0 201 424
0 0 0
0 0 0
<COMMON> 0 8,052 8,672
<OTHER-SE> 0 118,980 124,281
<TOTAL-LIABILITIES-AND-EQUITY> 0 1,344,880 1,547,092
<INTEREST-LOAN> 62,546 76,747 88,416
<INTEREST-INVEST> 17,721 18,058 19,060
<INTEREST-OTHER> 1,370 1,584 949
<INTEREST-TOTAL> 81,637 96,389 108,425
<INTEREST-DEPOSIT> 28,122 37,279 40,740
<INTEREST-EXPENSE> 33,639 44,363 51,566
<INTEREST-INCOME-NET> 47,998 52,026 56,589
<LOAN-LOSSES> 2,697 3,037 2,935
<SECURITIES-GAINS> (73) 1,296 711
<EXPENSE-OTHER> 44,864 46,202 51,370
<INCOME-PRETAX> 11,516 17,098 19,381
<INCOME-PRE-EXTRAORDINARY> 6,976 11,249 12,641
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,976 11,249 12,641
<EPS-PRIMARY> .58 .89 .99
<EPS-DILUTED> 0 0 0
<YIELD-ACTUAL> 4.27 4.36 4.24
<LOANS-NON> 10,577 8,299 9,840
<LOANS-PAST> 569 235 0
<LOANS-TROUBLED> 2,804 1,360 1,895
<LOANS-PROBLEM> 661 4,852 2,205
<ALLOWANCE-OPEN> 16,168 14,401 15,449
<CHARGE-OFFS> 5,467 2,934 3,301
<RECOVERIES> 1,003 945 657
<ALLOWANCE-CLOSE> 14,401 15,449 15,740
<ALLOWANCE-DOMESTIC> 14,401 15,449 15,740
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 7,387 6,026 5,213
</TABLE>
<PAGE> 1
EXHIBIT 99.3
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Option Agreement"), dated as of
March 24, 1997, is by and between COMMUNITY BANKSHARES, INC.
("Community"), a New Hampshire corporation, and CFX CORPORATION ("CFX"),
a New Hampshire corporation.
WITNESSETH
WHEREAS, the respective Boards of Directors of Community and CFX
have approved a Plan of Share Exchange (the "Plan of Exchange"), and the
respective Boards of Directors of Community, Concord Savings Bank
("Concord Bank"), a New Hampshire state-chartered savings bank subsidiary
of Community, Centerpoint Bank ("Centerpoint Bank"), a New Hampshire
state-chartered commercial bank subsidiary of Community, CFX and CFX
Bank, a New Hampshire state-chartered savings bank subsidiary of CFX,
have approved an Agreement and Plan of Reorganization (the
"Reorganization Agreement") and an Agreement and Plan of Merger (the
"Plan of Merger" and, together with the Plan of Exchange, the
Reorganization Agreement and certain other agreements contemplated by the
Reorganization Agreement, the "Transaction Documents"), providing for
certain transactions pursuant to which CFX would acquire all the
outstanding capital stock of Community through a share exchange,
Community would be merged with and into CFX, and Concord Bank and
Centerpoint Bank would be merged with and into CFX Bank (collectively,
the "Transactions");
WHEREAS, as a condition to CFX's entry into the Transaction
Documents and the Transactions, and to induce such entry, Community has
agreed to grant CFX the option set forth herein to purchase authorized
but unissued shares of Community Common Stock;
NOW, THEREFORE, in consideration of the premises herein contained,
the parties agree as follows:
1. Certain Definitions.
(a) Capitalized terms used but not defined herein shall
have the same meanings as in the Transaction Documents.
(b) The term "Effective Date" shall have the meaning
specified in the Reorganization Agreement.
(c) The term "person" shall have the meanings specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act, and shall also include
persons (other than Community, any Community subsidiary, CFX, or any CFX
affiliate), who have entered into an agreement, arrangement or
understanding (whether or not in writing), or who are acting in concert
<PAGE> 2
or with conscious parallel behavior, for the purpose of acquiring,
holding, voting or disposing of any voting securities of Community
(except pursuant solely to a revocable proxy given in response to a
public proxy or consent solicitation made pursuant to, and in accordance
with, the applicable provisions of the Exchange Act and the regulations
promulgated thereunder).
(d) The term "Purchase Event" shall mean any of the
following events or transactions occurring after the date hereof:
(1) any person (other than Community, any Community
subsidiary, CFX, or any CFX affiliate) shall have commenced (as such term
is defined in Rule 14d-2 under the Exchange Act), or shall have filed a
registration statement under the Securities Act with respect to, a bona
fide tender or exchange offer to purchase shares of Community Common
Stock such that upon consummation of such offer such person would own or
control 15 percent or more of the outstanding shares of Community Common
Stock;
(2) any person (other than Community, any Community
subsidiary, CFX, or any CFX affiliate), other than in connection with a
transaction to which CFX has given its prior written consent, shall have
filed an application or notice with any federal or state regulatory
agency for clearance or approval, to (i) merge or consolidate, or enter
into any similar transaction, with Community or any Community subsidiary,
(ii) purchase, lease or otherwise acquire all or substantially all the
assets of Community or any Community subsidiary, or (iii) purchase or
otherwise acquire (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing 15 percent
or more of the voting power of Community or any Community subsidiary;
(3) any person (other than Community, any Community
subsidiary, subsidiaries of Community in a fiduciary capacity, CFX,
affiliates of CFX, or subsidiaries of CFX in a fiduciary capacity) shall
have acquired beneficial ownership or the right to acquire beneficial
ownership of 15 percent or more of the outstanding shares of Community
Common Stock (the term "beneficial ownership" for purposes of this Option
Agreement having the meaning assigned thereto in Section 13(d) of the
Exchange Act and the regulations promulgated thereunder);
(4) any person (other than Community, any Community
subsidiary, CFX or any CFX affiliate) shall have made a bona fide
proposal to Community by public announcement or written communication
that is or becomes the subject of public disclosure to (i) acquire
Community or any Community subsidiary by merger, consolidation, purchase
of all or substantially all its assets or any other similar transaction,
or (ii) make an offer described in clause (1) above; or
(5) Community shall have willfully breached any
Specified Covenant (as defined below), which breach would entitle CFX to
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<PAGE> 3
terminate the Transaction Documents (without regard to the cure periods
provided for therein) and such breach shall not have been cured prior to
the Notice Date (as defined below).
(e) The term "Repurchase Event" shall mean any of the
following:
(1) any person (other than Community, any Community
subsidiary, CFX, or any CFX affiliate) shall have acquired beneficial
ownership of 25 percent or more of the outstanding shares of Community
Common Stock; or
(2) any person (other than CFX or any CFX affiliate)
shall have entered into an agreement, arrangement or understanding
(whether or not in writing) with Community or any Community subsidiary to
(i) merge or consolidate, or enter into any similar transaction, with
Community or any Community subsidiary, (ii) purchase, lease or otherwise
acquire all or substantially all the assets of Community or any Community
subsidiary, or (iii) purchase or otherwise acquire (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing 25 percent or more of the voting power of
Community or any Community subsidiary.
(f) The term "Specified Covenant" shall mean any covenant
contained in Sections 4.1, 4.2, 4.3, 4.4 or 4.8 or subsections (2), (3),
(4), (5), (6), (7), (11), (16) and, to the extent applicable to the
foregoing subsections, (17) of Section 4.7(b) of the Reorganization
Agreement.
2. Grant of Option. Subject to the terms and conditions set
forth herein, Community hereby grants to CFX an option (the "Option") to
purchase up to 493,000 shares of Community Common Stock at a price of
$28.50 per share payable in cash as provided in Section 4 hereof;
provided, however, that in the event Community issues or agrees to issue
any shares of Community Common Stock in breach of its obligations under
the Transaction Documents at a price less than $28.50 per share (as
adjusted pursuant to Section 6 hereof), the exercise price shall be equal
to such lesser price.
3. Exercise of Option.
(a) If not then in material breach of the Transaction
Documents, CFX may exercise the Option, in whole or part, at any time or
from time to time if a Purchase Event shall have occurred and be
continuing; provided that, to the extent the Option shall not have been
exercised, it shall terminate and be of no further force and effect upon
the earliest to occur of (i) the Effective Date, (ii) termination of the
Transaction Documents in accordance with the terms of the Reorganization
Agreement before the occurrence of a Purchase Event (other than a
- 3 -
<PAGE> 4
termination resulting from a willful breach by Community, Concord Bank or
Centerpoint Bank of any Specified Covenant contained in the
Reorganization Agreement) or (iii) six months after the termination of
the Transaction Documents if such termination follows the occurrence of a
Purchase Event or is due to a willful material breach by Community,
Concord Bank or Centerpoint Bank of any Specified Covenant contained in
the Reorganization Agreement; and provided further that any such exercise
shall be subject to compliance with applicable provisions of law.
(b) If more than one of the transactions giving rise to a
Purchase Event is undertaken or effected, then all such transactions
shall give rise only to one Purchase Event, which Purchase Event shall be
deemed continuing for all purposes hereunder until all such transactions
are abandoned.
(c) In the event CFX wishes to exercise the Option, it
shall send to Community a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise, and (ii) a place and
date not earlier than three business days nor later than 30 business days
from the Notice Date for the closing of such purchase (the "Closing
Date"); provided that, if prior notification to or approval of any
federal or state regulatory agency is required in connection with such
purchase, CFX shall promptly file the required notice or application for
approval and shall expeditiously process the same and the period of time
that otherwise would run pursuant to this sentence shall run instead from
the date on which any required notification period has expired or been
terminated or such approval has been obtained and any requisite waiting
period shall have passed.
4. Payment and Delivery of Certificates.
(a) At the closing referred to in Section 3 hereof, CFX
shall pay to Community the aggregate purchase price for the shares of
Community Common Stock purchased pursuant to the exercise of the Option
in immediately available funds by a wire transfer to a bank account
designated by Community.
(b) At such closing, simultaneously with the delivery of
cash as provided in subsection (a), Community shall deliver to CFX a
certificate or certificates representing the number of shares of
Community Common Stock purchased by CFX, and CFX shall deliver to
Community a letter agreeing that CFX will not offer to sell, pledge or
otherwise dispose of such shares in violation of applicable law or the
provisions of this Option Agreement.
(c) Certificates for Community Common Stock delivered at a
closing hereunder may be endorsed with a restrictive legend which shall
read substantially as follows:
- 4 -
<PAGE> 5
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the
registered holder hereof and Community Bankshares, Inc. and to
resale restrictions arising under the Securities Act of 1933, as
amended, a copy of which agreement is on file at the principal
office of Community Bankshares, Inc. A copy of such agreement will
be provided to the holder hereof without charge upon receipt by
Community Bankshares, Inc. of a written request."
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if CFX shall
have delivered to Community a copy of a letter from the staff of the SEC,
or an opinion of counsel, in form and substance satisfactory to
Community, to the effect that such legend is not required for purposes of
the Securities Act and any applicable state securities laws and this
Option Agreement.
5. Representations. Community hereby represents, warrants and
covenants to CFX as follows:
(a) Community shall at all times maintain sufficient
authorized but unissued shares of Community Common Stock so that the
Option may be exercised without authorization of additional shares of
Community Common Stock.
(b) The shares to be issued upon due exercise, in whole or
in part, of the Option, when paid for as provided herein, will be duly
authorized, validly issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization. In the event of
any change in Community Common Stock by reason of stock dividends,
split-ups, recapitalizations, combinations, exchanges of shares or the
like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted
appropriately. In the event that any additional shares of Community
Common Stock are issued or otherwise become outstanding after the date of
this Option Agreement (other than pursuant to this Option Agreement), the
number of shares of Community Common Stock subject to the Option shall be
adjusted so that, after such issuance, it equals 19.99 percent of the
number of shares of Community Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the
Option. Nothing contained in this Section 6 shall be deemed to authorize
Community to breach any provision of the Transaction Documents.
7. Registration Rights. Community shall, if requested by CFX,
as expeditiously as possible file a registration statement on a form of
general use and available for use by Community under the Securities Act
if necessary in order to permit or assist the sale or other disposition
of the shares of Community Common Stock that have been acquired upon
exercise of the Option in accordance with the intended method of sale or
- 5 -
<PAGE> 6
other disposition requested by CFX. CFX shall provide all information
reasonably requested by Community for inclusion in any registration
statement to be filed hereunder. Community will use its best efforts to
cause such registration statement first to become effective and then to
remain effective for such period not in excess of 270 days from the day
such registration statement first becomes effective as may be reasonably
necessary to effect such sales or other dispositions. The obligations of
Community hereunder to file a registration statement and to maintain its
effectiveness may be suspended for one or more periods of time not
exceeding 60 days in the aggregate if the Board of Directors of Community
shall have determined that the filing of such registration statement or
the maintenance of its effectiveness would require disclosure of non-
public information that would materially and adversely affect Community.
The first registration statement prepared under this Section 7 shall be
at Community's expense except for underwriting commissions and the fees
and disbursements of CFX's counsel attributable to the offering of
Community Common Stock by CFX. The preparation of a second registration
statement may be requested and effected hereunder at CFX's sole expense.
In no event shall Community be required to effect more than two
registrations hereunder. The filing of any registration statement
hereunder may be delayed for such period of time as may reasonably be
required to facilitate any public distribution by Community of Community
Common Stock. If requested by CFX in connection with any registration,
Community will become a party to any underwriting agreement relating to
the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements for parties
similarly situated. In any such transaction Community and CFX will also
agree to indemnify each other on customary terms with respect to any
information provided by such party.
8. Repurchase.
(a) Subject to the giving of any notices and the receipt of
any required approvals, at the request of CFX at any time commencing upon
the occurrence of a Repurchase Event and ending nine months thereafter
(the "Repurchase Period"), Community shall repurchase the Option (but not
later than the termination of the Option pursuant to Section 3(a) hereof)
from CFX together with any shares of Community Common Stock purchased by
CFX pursuant thereto with respect to which CFX then has beneficial
ownership, at a price (per share, the "Per Share Repurchase Price") equal
to the sum of:
(1) the exercise price paid by CFX for any shares of
Community Common Stock acquired pursuant to the Option;
(2) the difference between (A) the "market/tender
offer" price for shares of Community Common Stock (defined as the higher
of (x) the highest price per share at which a tender or exchange offer
has been made or (y) the highest reported sale price for shares of
- 6 -
<PAGE> 7
Community Common Stock within that portion of the Repurchase Period
preceding the date CFX gives notice of the required repurchase under this
Section 8) and (B) the exercise price as determined pursuant to Section 2
hereof (subject to adjustment as provided in Section 6) multiplied by the
number of shares of Community Common Stock with respect to which the
Option has not been exercised, but only if the market/tender offer price
is greater than such exercise price;
(3) the difference between the market/tender offer
price (as defined in Section 8(a)(2) hereof) and the exercise price paid
by CFX for any shares of Community Common Stock purchased pursuant to the
exercise of the Option, multiplied by the number of shares so purchased,
but only if the market/tender offer price is greater than such exercise
price; and
(4) CFX's out-of-pocket expenses incurred in
connection with the transactions contemplated by the Transaction
Documents, including without limitation legal, accounting and investment
banking fees.
(b) In the event CFX exercises its rights under this
Section 8, Community shall, within thirty business days thereafter, pay
the required amount to CFX in immediately available funds and CFX shall
surrender to Community the Option and the certificates evidencing the
shares of Community Common Stock purchased thereunder and CFX shall
warrant that it owns such shares and that the same are then free and
clear of all liens, charges, claims, restrictions and encumbrances;
provided that, if prior notification to any federal or state regulatory
agency is required in connection with such purchase, Community shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification period has expired or been terminated or
such approval has been obtained and any requisite waiting period shall
have passed.
9. Severability. If any term, provision, covenant or
restriction contained in this Option Agreement is held by a court or a
federal or state regulatory agency of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions
and covenants and restrictions contained in this Option Agreement shall
remain in full force and effect, and shall in no way be affected,
impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option will not permit the holder to acquire
or Community to repurchase the full number of shares of Community Common
Stock provided in Section 2 hereof (as adjusted pursuant to Section 6
hereof), it is the express intention of Community to allow the holder to
acquire or to require Community to repurchase such lesser number of
shares as may be permissible, without any amendment or modification
hereof.
- 7 -
<PAGE> 8
10. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of
the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
(b) Entire Agreement. Except as otherwise expressly
provided herein, this Option Agreement and the Transaction Documents
contain the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements
or understandings with respect thereto, written or oral. The terms and
conditions of this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns. Nothing in this Option Agreement, expressed or implied, is
intended to confer upon any party, other than the parties hereto, and
their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Option Agreement,
except as expressly provided herein.
(c) Assignment. Other than as provided in Sections 7 and 8
hereof, neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder
to any other person, without the express written consent of the other
party.
(d) Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if
delivered personally or sent by overnight express or by registered or
certified mail, postage prepaid, addressed as provided in the
Reorganization Agreement. A party may change its address for notice
purposes by written notice to the other party hereto.
(e) Counterparts. This Option Agreement may be executed in
any number of counterparts, and each such counterpart shall be deemed to
be an original instrument, but all such counterparts together shall
constitute but one agreement.
(f) Specific Performance. The parties agree that damages
would be an inadequate remedy for a breach of the provisions of this
Option Agreement by either party hereto and that this Option Agreement
may be enforced by either party hereto through injunctive or other
equitable relief.
(g) Governing Law. This Option Agreement shall be governed
by and construed in accordance with the laws of New Hampshire applicable
to agreements made and entirely to be performed within such state and
such federal laws as may be applicable.
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, each of the parties hereto has executed this
Option Agreement as of the day and year first written above.
CFX CORPORATION
By:
-------------------------------------
Peter J. Baxter,
President and Chief Executive Officer
COMMUNITY BANKSHARES, INC.
By:
-------------------------------------
Douglas Crichfield
President and Chief Executive Officer
- 9 -
<PAGE> 1
Exhibit 99.2
CFX CORPORATION
TO ACQUIRE
COMMUNITY BANKSHARES, INC.
Keene, N.H., March 24, 1997 - CFX Corporation (AMEX: CFX),
headquartered in Keene, New Hampshire and Community Bankshares, Inc.
("Community") (NASDAQ: CBNH), headquartered in Concord, New Hampshire,
announced today that they have signed a definitive agreement under which CFX
will acquire Community and Community's bank subsidiaries, Concord Savings Bank,
headquartered in Concord, New Hampshire and Centerpoint Bank, headquartered in
Bedford, New Hampshire.
Based on an exchange ratio of 2.2:1 and on the closing price of CFX
common stock on March 21, 1997 of $17.25, the indicated value of the
transaction would be $37.95 per Community share, for a total aggregate
consideration of approximately $96 million. The agreement also provides CFX
with an option to acquire up to 19.9% of the outstanding shares of Community
common stock under certain circumstances.
In connection with the merger, Concord and Centerpoint will be merged
into CFX's New Hampshire banking subsidiary, CFX Bank. The addition of these
new banks will bolster CFX Bank's position as the largest locally-owned banking
enterprise in New Hampshire. The Bank's and consolidated CFX Corporation's
total assets will grow to approximately $2.3 and $2.7 billion, respectively,
after the mergers of Concord Savings Bank, Centerpoint Bank, the previously
announced acquisition of Portsmouth Bank Shares, Inc. (NASDAQ: POBS), and
planned increases in the balance sheet leverage associated with the Portsmouth
transaction.
In announcing the transaction, Peter J. Baxter, President and Chief
Executive Officer of CFX Corporation stated, "I am very pleased that CFX will
affiliate with such a strong and growing community banking franchise. The
markets served by Community provide CFX the number two position in the
attractive Merrimack County and enhances our existing position in Belknap,
Hillsborough and Rockingham Counties.
We anticipate that after 30% ($5 million pre-tax) expense savings, the
transaction will be accretive to earnings per share in the first year. Upon
consummation of the merger, CFX will take a special charge of approximately
$4.8 million to earnings for one-time costs of the transaction."
Mr. Baxter added, "I am also pleased to announce that Douglas
Crichfield, President and Chief Executive Officer of Community will become the
President and Chief Executive Officer of CFX Bank. Doug brings to the Company a
wealth of banking experience and is a great addition to the Company's overall
management team.
- More -
Page 1 of 2
<PAGE> 2
Doug Crichfield stated, "The combination of Community's affiliates,
Concord Savings Bank and Centerpoint Bank with CFX Bank, and the recently
announced acquisition of Portsmouth Savings Bank creates a New Hampshire
banking company with a strong geographic presence in all of the major banking
markets in New Hampshire. It brings together three New Hampshire community
banking companies that trace their roots back to the 1800's. Our expanded
organization will be the leading community banking franchise based in New
Hampshire, with a shared commitment to servicing the needs of our local
markets. The many complementary strengths of CFX, Concord Savings and
Centerpoint will enable us to significantly enhance the array and quality of
our banking products and services. I am particularly pleased with being able to
offer CFX's Trust and Investment Services to our customer base."
Pursuant to the definitive agreement, each outstanding share of
Community will be converted into 2.2 shares of CFX common stock. If the average
price of CFX common stock for the fifteen trading days preceding the effective
date of the merger is between $18.18 and $20.00, the exchange ratio floats
between 2.2 and 2.0 shares. The exchange ratio will be 2.0 shares of CFX common
stock for each Community share if the average CFX stock price exceeds $20.00.
Community may terminate the agreement if the average price of CFX common stock
is below $13.50 per share unless CFX agrees to increase the exchange ratio.
Three Community Bankshares Directors will join the CFX Board and three
will become Directors of CFX Bank. The transaction is tax free to the
shareholders of Community and is subject to regulatory approval and the
approval of both CFX's and Community's shareholders. It is anticipated that the
transaction will be accounted for by the pooling-of-interests method of
accounting.
The parties expect to complete the transaction in the third quarter of
1997.
CFX Corporation is a multi-bank holding company with total assets of
$1.6 billion as of December 31, 1996. The Company's three banking subsidiaries
are CFX Bank, headquartered in Keene, New Hampshire, Orange Savings Bank,
headquartered in Orange, Massachusetts, and The Safety Fund National Bank,
headquartered in Fitchburg, Massachusetts. CFX Mortgage, Inc., CFX Bank's
mortgage banking subsidiary, services approximately $765 million in mortgage
loans for others. In addition, CFX Funding L.L.C., a 51% owned subsidiary of
CFX Bank that engages in the facilitation of lease financing and rated
securitizations, now services over $100 million in leases for others. The
Company operates 43 full service offices, 2 loan production offices, and 68
automated teller and remote service banking locations in New Hampshire and
central Massachusetts, and operates a trust division with assets of
approximately $370 million.
As of December 31, 1996, Community had total assets of $550 million,
eleven branches located in Merrimack, Hillsborough, Belknap and Rockingham
Counties, and a distribution of ATM locations throughout the State.
Upon completion of the acquisition of Community and Portsmouth Bank
Shares, Inc., CFX will have $2.7 billion in assets, 57 full service banking
offices, 2 loan production offices and 88 automated teller and remote service
locations in New Hampshire and central Massachusetts. The combined Company will
have a portfolio of loans serviced for others in excess of $1.1 billion.
###
