<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 352-2502
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
----- -----
As of October 31, 1997, 24,001,467 shares of the registrant's common stock were
outstanding.
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<PAGE> 2
CFX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets -- September 30, 1997
and December 31, 1996......................................................1
Consolidated Statements of Income -- Three
months ended September 30, 1997 and 1996;
Nine months ended September 30, 1997 and 1996..............................2
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1997.......................................3
Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1997 and 1996...................................4
Notes to Consolidated Financial Statements -
September 30, 1997.........................................................5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................7
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings...................................................................21
Item 2 Changes in Securities...............................................................21
Item 3 Defaults Upon Senior Securities.....................................................21
Item 4 Submission of Matters to a Vote of Security Holders.................................21
Item 5 Other Information...................................................................21
Item 6 Exhibits and Reports on Form 8-K....................................................21
SIGNATURES..........................................................................22
----------
</TABLE>
<PAGE> 3
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================================================
SEPTEMBER 30, December 31,
================================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
================================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 70,833 $ 77,123
Federal funds sold and overnight deposits 47,190 53,983
------------------ ------------------
CASH AND CASH EQUIVALENTS 118,023 131,106
Interest bearing deposits with other banks 814 287
Securities available for sale 585,452 414,896
Securities held to maturity 37,396 104,682
Mortgage loans held for sale 28,909 16,967
Loans and leases 1,913,377 1,594,399
Less allowance for loan and lease losses 21,408 20,332
------------------ ------------------
NET LOANS AND LEASES 1,891,969 1,574,067
Premises and equipment 39,306 38,195
Mortgage servicing rights 8,152 7,523
Goodwill and deposit base intangibles 8,856 9,235
Foreclosed assets 3,614 3,349
Bank-owned life insurance 62,347 30,975
Other assets 36,344 37,975
------------------ ------------------
$ 2,821,182 $ 2,369,257
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 1,714,412 $ 1,557,562
Noninterest bearing 221,202 193,579
------------------ ------------------
TOTAL DEPOSITS 1,935,614 1,751,141
Other borrowed funds 197,791 104,750
Advances from Federal Home Loan Bank of Boston 415,455 246,593
Other liabilities 26,631 26,937
------------------ ------------------
TOTAL LIABILITIES 2,575,491 2,129,421
------------------ ------------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share authorized
4,000,000 shares, no shares outstanding in 1997 or 1996 - -
Common stock, par value $.66 2/3 per share-authorized
50,000,000 shares, issued 24,015,181 shares at September
30, 1997 and 23,609,434 shares at December 31, 1996 16,010 15,740
Paid-in capital 147,756 142,761
Retained earnings 80,494 81,265
Net unrealized gains on securities available for sale,
after tax effects 2,022 489
Cost of 37,877 shares at September 30, 1997 and 28,055
shares at December 31, 1996 of common stock in treasury (591) (419)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 245,691 239,836
------------------ ------------------
$ 2,821,182 $ 2,369,257
================== ==================
Number of common shares outstanding 23,977 23,581
================== ==================
Common shareholders' equity per share $ 10.25 $ 10.17
================== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE> 4
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
====================================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 40,915 $ 32,595 $ 113,138 $ 94,330
Interest on investment securities:
Taxable 10,945 8,354 29,369 24,575
Tax-exempt 253 278 736 953
------------ ------------ ------------ ------------
11,198 8,632 30,105 25,528
Dividends on marketable equity securities 405 388 1,127 1,070
Other 516 972 2,126 3,194
------------ ------------ ------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 53,034 42,587 146,496 124,122
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 18,730 15,892 52,306 47,277
Interest on borrowings:
Short-term 5,953 4,135 14,892 9,721
Long-term 2,979 48 6,034 1,396
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 27,662 20,075 73,232 58,394
------------ ------------ ------------ ------------
NET INTEREST AND DIVIDEND INCOME 25,372 22,512 73,264 65,728
Provision for loan and lease losses 1,423 980 3,385 3,210
------------ ------------ ------------ ------------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 23,949 21,532 69,879 62,518
------------ ------------ ------------ ------------
Other income:
Service charges on deposit accounts 1,245 1,302 3,807 3,797
Mortgage banking activities 1,381 947 4,660 3,326
Net gains on trading securities - - 18 -
Net gains on investment securities 689 373 1,403 1,823
Leasing activities 276 459 1,443 1,820
Bank-owned life insurance 527 315 1,372 558
Trust fees 631 553 1,898 1,717
Pension settlement gain - 877 - 877
Other 1,504 794 2,942 2,185
------------ ------------ ------------ ------------
6,253 5,620 17,543 16,103
------------ ------------ ------------ ------------
Other expense:
Salaries and employee benefits 9,914 8,645 28,878 25,304
Occupancy and equipment expense 2,989 2,469 8,913 7,285
Professional fees 800 387 1,902 1,571
Advertising and marketing 677 491 1,768 1,792
Operation of foreclosed real estate 179 150 427 437
Goodwill and deposit base intangible amortization 155 167 465 502
SAIF special assessment - 908 - 908
Merger expenses 11,031 4,522 11,031 4,522
Other 4,167 3,788 12,035 11,691
------------ ------------ ------------ ------------
29,912 21,527 65,419 54,012
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 290 5,625 22,003 24,609
Income taxes 463 2,459 7,013 8,575
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCK $ (173) $ 3,166 $ 14,990 $ 16,034
============ ============ ============ ============
Weighted average common shares outstanding 23,955 23,571 23,813 23,519
============ ============ ============ ============
Earnings (loss) per common share $ (.01) $ .13 $ .63 $ .68
============ ============ ============ ============
Dividends declared per common share $ .22 $ .19 $ .66 $ .36
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE> 5
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
===============================================================================================
COMMON STOCK
-------------------- PAID-IN RETAINED
(IN THOUSANDS) SHARES DOLLARS CAPITAL EARNINGS
===============================================================================================
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 23,609 $ 15,740 $ 142,761 $ 81,265
Net income - - - 14,990
Common cash dividends
declared - $.66 per share - - - (15,754)
Issuance of common stock
under stock option plan
and related tax effects 377 250 4,569 -
Issuance of common stock under
employee stock purchase plan 17 12 215 -
Issuance of common stock under
dividend reinvestment program 12 8 211 -
Cash in lieu of fractional shares - - - (7)
Change in net unrealized gains
on securities available for sale - - - -
Cost of shares acquired for treasury - - - -
------------ ---------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1997 24,015 $ 16,010 $ 147,756 $ 80,494
============ ========== =========== ==========
<CAPTION>
===============================================================================================
NET
UNREALIZED
GAINS
ON SECURITIES TREASURY STOCK
AVAILABLE ----------------------
(IN THOUSANDS) FOR SALE SHARES DOLLARS TOTAL
===============================================================================================
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 489 (28) $ (419) $ 239,836
Net income - - - 14,990
Common cash dividends
declared - $.66 per share - - - (15,754)
Issuance of common stock
under stock option plan
and related tax effects - - - 4,819
Issuance of common stock under
employee stock purchase plan - - - 227
Issuance of common stock under
dividend reinvestment program - - - 219
Cash in lieu of fractional shares - - - (7)
Change in net unrealized gains
on securities available for sale 1,533 - - 1,533
Cost of shares acquired for treasury - (10) (172) (172)
----------- --------- -------- -----------
BALANCE AT SEPTEMBER 30, 1997 $ 2,022 (38) $ (591) $ 245,691
=========== ========= ======== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE> 6
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
===============================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
===============================================================================================================================
(IN THOUSANDS) 1997 1996
===============================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,990 $ 16,034
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 3,899 5,455
Amortization of deferred credit on leasehold residual (1,980) (1,059)
Provision for loan and lease losses 3,385 3,210
Loans originated and acquired for sale (156,388) (121,582)
Principal balance of loans sold 144,446 117,347
Net gain on sale of portfolio loans (1,025) (932)
Net gain on sale of foreclosed real estate (52) (25)
Net gains on investment securities (1,403) (1,823)
Net deferred income tax provision 4,840 603
Increase in cash surrender value of bank-owned life insurance (1,072) (315)
Other (3,128) (3,827)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,512 13,086
------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 206,616 70,627
Proceeds from maturities of securities available for sale 196,091 115,328
Purchase of securities available for sale (510,724) (183,929)
Proceeds from maturities of securities held to maturity 40,911 66,311
Purchases of securities held to maturity (31,009) (74,414)
Proceeds from the sale of, or payments on, repossessed assets 4,486 1,174
Proceeds from sales of portfolio loans 53,102 4,069
Net decrease (increase) in interest bearing deposits with other banks (527) 12,169
Net increase in loans and leases (377,713) (196,123)
Purchase of Bank-owned life insurance (30,300) (30,000)
Purchases of premises and equipment (8,538) (4,857)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (457,605) (219,645)
------------ ------------
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits and savings accounts 26,210 31,045
Net increase in time certificates of deposit 158,263 80,445
Net increase in other borrowed funds 93,041 64,724
Proceeds from FHLBB advances with maturities in excess of three months 344,421 35,225
Payments of FHLBB advances with maturities in excess of three months (202,000) (12,607)
Net proceeds from (payments of) FHLBB advances with maturities of three
months or less 26,441 18,027
Common cash dividends paid (13,068) (8,225)
Proceeds from issuance of common stock 4,874 1,561
Fractional shares paid out - (33)
Acquisition of treasury shares (172) (193)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 438,010 209,969
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (13,083) 3,410
Cash and cash equivalents at beginning of period 131,106 139,010
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 118,023 $ 142,420
============ ============
SUPPLEMENTARY INFORMATION:
Interest paid on deposit accounts $ 51,077 $ 49,679
Interest paid on borrowed funds 20,064 6,910
Income taxes paid 2,641 4,477
Transfers from loans to foreclosed real estate 4,699 3,341
Transfers from securities held to maturity to securities available for sale 57,689 76,849
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE> 7
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
================================================================================
NOTE A-BASIS OF PRESENTATION
================================================================================
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
current fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the CFX Corporation (CFX
or the Company) annual report on Form 10-K for the year ended December 31,
1996.
================================================================================
NOTE B-MERGERS AND ACQUISITIONS
================================================================================
On October 27, 1997, the Company announced that it entered into a definitive
agreement to be acquired by Peoples Heritage Financial Group, Inc. (Peoples
Heritage), a multi-bank and financial services holding company headquartered in
Portland, Maine. Under the terms of the agreement, each of CFX's outstanding
shares of common stock will be converted into .667 shares of Peoples Heritage
common stock. The agreement is subject to approval by shareholders of both
companies and by regulatory authorities. The transaction will be a tax-free
reorganization and is anticipated to be accounted for as a pooling-of-
interests. In connection with the agreement, CFX has granted to Peoples
Heritage an option to acquire up to 19.9 percent of the outstanding shares of
CFX common stock under certain circumstances. Additionally, Peoples Heritage
has granted CFX an option to acquire up to 10.0 percent of the outstanding
shares of Peoples Heritage common stock under certain circumstances.
On August 29, 1997, the Company acquired Portsmouth Bank Shares, Inc.
(Portsmouth) and Community Bankshares, Inc. (Community). Pursuant to the
definitive agreements, each of Portsmouth's 5,907,000 outstanding shares of
common stock and Community's 2,489,000 outstanding shares of common stock were
converted into .9314 shares and 2.113 shares, respectively, of the Company's
common stock, resulting in the issuance of 5,502,000 shares and 5,259,000
shares, respectively, of the Company's common stock to Portsmouth and Community
shareholders. Cash was paid in lieu of issuing fractional shares.
Portsmouth was a New Hampshire bank holding company, headquartered in
Portsmouth, New Hampshire. Portsmouth was merged into CFX, and Portsmouth's
subsidiary bank, Portsmouth Savings Bank, was merged into CFX's New Hampshire
banking subsidiary, CFX Bank, as part of the transaction.
Community was a New Hampshire bank holding company, headquartered in Concord,
New Hampshire. Community was merged into CFX and Community's subsidiary banks,
Concord Savings Bank and Centerpoint Bank, were merged into CFX's New Hampshire
banking subsidiary, CFX Bank, as part of the transaction.
Both the Portsmouth and Community mergers were accounted for by the
pooling-of-interests method of accounting. 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.
As a result of these acquisitions, the Company recorded a charge to earnings in
the third quarter of $8,372,000, on an after-tax basis for merger related
costs. The one-time after-tax charge of the transactions pertains to the
following areas: equipment, $899,000; personnel, $1,967,000; and other,
$5,506,000. Equipment costs consist primarily of write-offs due to
consolidation of data processing, termination charges, and duplication of
computer hardware, software, and certain telecommunications equipment.
Personnel costs consist primarily of charges related to employee severance and
employee outplacement assistance. Other costs include investment banking fees,
legal and accounting fees, due diligence costs, proxy registration/filing fees
and mailing and printing costs. A significant portion of other costs are
capitalized for tax purposes and, therefore, are not tax deductible.
-5-
<PAGE> 8
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997
================================================================================
GENERAL
================================================================================
All information within this section should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this Form
10-Q and Annual Report on Form 10-K for the year ended December 31, 1996. All
references in this discussion to the financial condition and results of
operations are to the consolidated position of the Company and its subsidiaries
taken as a whole.
CFX Corporation is a multi-bank holding company incorporated under the laws of
the State of New Hampshire. The Company's wholly-owned subsidiaries are CFX
Bank, headquartered in Keene, New Hampshire, Orange Savings Bank, headquartered
in Orange, Massachusetts, and Safety Fund National Bank, headquartered in
Fitchburg, Massachusetts. Included in the financial information herein are
restated numbers reflecting the acquisitions of Community and Portsmouth. Both
mergers were accounted for by the pooling-of-interests method of accounting.
The results of operations for 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, expenses, and income tax
expense.
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 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
Board, continued customer disintermediation, customers' acceptance of the
Company's products and services, the extent and timing of legislative and
regulatory actions and reforms, and the ability of the Company to realize the
benefits of its' integration plans associated with acquisitions.
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.
NET INCOME AND EARNINGS PER COMMON SHARE
The Company incurred a loss of $173,000, or $.01 per share, and earnings of
$14,990,000, or $.63 per share for the three and nine months ended September
30, 1997, respectively, compared to earnings of $3,166,000, or $.13 per share,
and $16,034,000 or $.68 per share, for the corresponding periods a year ago.
Return (loss) on average assets was (.02%) and .76% for the three and nine
months ended September 30, 1997, respectively, compared to .55% and .96% for
the corresponding periods a year ago. Excluding merger-related charges,
earnings and earnings per share were $8,199,000 or $.34 per share, and
$23,362,000, or $.98 per share, for the three and nine months ended September
30, 1997, respectively, compared to earnings of $6,888,000, or $.29 per share
and $19,756,000, or $.84 per share for the corresponding periods a year ago.
Excluding merger related charges, return on average assets and return on
average equity were 1.15% and 12.82%, and 1.19% and 11.61% for the three months
ended September 30, 1997 and 1996, respectively. Excluding merger charges, for
the nine months ended September 30, 1997 and 1996, the return on average assets
and average equity were 1.23% and 11.76%, and 1.18% and 11.32%, respectively.
-6-
<PAGE> 9
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL
================================================================================
The increase in net income, excluding merger-related charges, was primarily due
to increased net revenues (net interest and dividend income and other income).
Net revenues were $31,625,000 and $90,807,000 for the three and nine months
ended September 30, 1997, respectively, compared to $28,132,000 and $81,831,000
for the corresponding periods a year ago, an increase of 12% and 11% for the
three and nine months ended September 30, 1997, respectively. The stronger net
revenues were the result of a $359 million, or 17%, increase in average
interest earning assets during the nine months ended September 30, 1997,
compared to the same period in 1996 and continued focus on noninterest income.
However, a portion of the increase in net revenues was offset by an increase in
certain operating expenses. The increase in interest earning assets was
primarily due to retail loan growth and a planned balance sheet leverage
strategy designed as a result of the acquisition of Portsmouth which had high
capital ratios. (See "Financial Condition - Investment Securities" section of
this Management's Discussion and Analysis.)
NET INTEREST AND DIVIDEND INCOME
The following tables set forth comparisons of average interest earning assets
and interest bearing liabilities, and interest income and interest expense
expressed as a percentage of the related asset or liability. In order to
reflect the economic impact of the Company's tax-exempt loans and leases and
investments in state and municipal securities and to present data on a
comparative basis, the income from, and yields on, these loans and leases 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 $108,000 and $268,000 for the three and nine months ended
September 30, 1997, respectively, compared to $85,000 and $259,000 for the
corresponding periods a year ago. The taxable-equivalent income adjustments for
investment securities are $160,000 and $463,000 for the three and nine months
ended September 30, 1997, respectively, compared to $142,000 and $456,000 for
the corresponding periods a year ago. These adjustments, however, are for
comparison purposes only and have no impact on reported net income.
<TABLE>
<CAPTION>
===================================================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 1997 1996
===================================================================================================================================
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) RATE Balance Expense (1) Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest and dividend earning assets:
Loans and leases $ 1,899,776 $ 40,705 8.50% $ 1,486,181 $ 32,430 8.68%
Tax-exempt loans and leases 12,139 318 10.39 9,111 250 10.92
Taxable securities 642,400 11,350 7.01 528,589 8,742 6.58
Tax-exempt securities 22,329 413 7.34 26,105 420 6.40
Other 60,867 516 3.36 78,368 972 4.93
--------------- --------------- --------------- ---------------
Total interest earning assets 2,637,511 53,302 8.02 2,128,354 42,814 8.00
--------------- ---------------
Noninterest earning assets 194,157 165,574
--------------- ---------------
TOTAL $ 2,831,668 $ 2,293,928
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 667,379 4,029 2.40 $ 683,318 4,116 2.40
Time deposits 1,033,192 14,701 5.65 849,205 11,776 5.52
Advances from Federal Home Loan
Bank of Boston 439,857 6,442 5.81 203,082 2,875 5.63
Other borrowed funds 195,465 2,490 5.05 110,077 1,308 4.73
--------------- --------------- --------------- ---------------
Total interest bearing liabilities 2,335,893 27,662 4.70 1,845,682 20,075 4.33
--------------- ---------------
Noninterest bearing liabilities:
Demand deposits 218,329 182,736
Other 23,806 29,387
Shareholders' equity 253,640 236,123
--------------- ---------------
TOTAL $ 2,831,668 $ 2,293,928
=============== ===============
Net interest and dividend income $ 25,640 $ 22,739
=============== ===============
Interest rate spread 3.32% 3.67%
Net interest margin 3.86% 4.25%
</TABLE>
(1) Income from tax-exempt securities and tax-exempt loans and leases has been
restated to a tax-equivalent basis using a 38.62% and 34.00% tax rate,
respectively.
-7-
<PAGE> 10
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
<TABLE>
<CAPTION>
===================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
===================================================================================================================================
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) RATE Balance Expense (1) Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest and dividend earning assets:
Loans and leases $ 1,751,578 $ 112,618 8.60% $ 1,423,507 $ 93,827 8.80%
Tax-exempt loans and leases 10,188 788 10.34 8,816 762 11.55
Taxable securities 591,355 30,496 6.89 535,952 25,645 6.39
Tax-exempt securities 21,786 1,199 7.36 29,168 1,409 6.45
Other 62,970 2,126 4.51 81,886 3,194 5.21
--------------- --------------- --------------- ---------------
Total interest earning assets 2,437,877 147,227 8.07 2,079,329 124,837 8.02
--------------- ---------------
Noninterest earning assets 191,857 153,518
--------------- ---------------
TOTAL $ 2,629,734 $ 2,232,847
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 666,701 11,760 2.36 $ 680,557 12,257 2.41
Time deposits 969,743 40,546 5.59 840,985 35,020 5.56
Advances from Federal Home Loan
Bank of Boston 353,395 15,260 5.77 180,223 7,683 5.69
Other borrowed funds 150,385 5,666 5.04 95,407 3,434 4.81
--------------- --------------- --------------- ---------------
Total interest bearing liabilities 2,140,224 73,232 4.57 1,797,172 58,394 4.34
--------------- ---------------
Noninterest bearing liabilities:
Demand deposits 207,710 174,985
Other 34,059 27,643
Shareholders' equity 247,741 233,047
--------------- ---------------
TOTAL $ 2,629,734 $ 2,232,847
=============== ===============
Net interest and dividend income $ 73,995 $ 66,443
=============== ===============
Interest rate spread 3.50% 3.68%
Net interest margin 4.06% 4.27%
</TABLE>
(1) Income from tax-exempt securities and tax-exempt loans and leases has been
restated to a tax-equivalent basis using a 38.62% and 34.00% tax rate,
respectively.
-8-
<PAGE> 11
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
The following table presents changes in interest and dividend income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon. The net changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
====================================================================================================================================
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 VS. 1996 1997 VS. 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
====================================================================================================================================
(IN THOUSANDS) VOLUME RATE NET VOLUME RATE NET
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $ 8,950 $ (607) $ 8,343 $ 18,496 $ 321 $ 18,817
Investments 1,916 685 2,601 2,674 1,967 4,641
Other (189) (267) (456) (370) (698) (1,068)
---------- ----------- ----------- ---------- ----------- -----------
Total interest and
dividend income 10,677 (189) 10,488 20,800 1,590 22,390
---------- ----------- ----------- ---------- ----------- -----------
Interest paid on:
Savings and time deposits 2,510 328 2,838 4,983 46 5,029
Borrowed funds 4,547 202 4,748 9,498 311 9,809
---------- ----------- ----------- ---------- ----------- -----------
Total interest expense 7,057 530 7,586 14,481 357 14,838
---------- ----------- ----------- ---------- ----------- -----------
Change in net interest
and dividend income $ 3,620 $ (719) $ 2,901 $ 6,319 $ 1,233 $ 7,552
========== =========== =========== ========== =========== ===========
</TABLE>
-9-
<PAGE> 12
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
Taxable-equivalent net interest and dividend income was $25,640,000, and
$73,995,000, respectively, for the three and nine months ended September 30,
1997, compared to $22,739,000, and $66,443,000 for the same periods a year ago.
The increase in net interest and dividend income in the 1997 periods was
principally due to higher average interest earning assets and higher demand
deposits.
Although net interest and dividend income has increased during the 1997 periods
compared to the respective 1996 periods, the net interest margin has declined.
The Company's net interest margin of 3.86% for the three months ended September
30, 1997 decreased from 4.25% for the corresponding period a year ago. The net
interest margin for the nine months ended September 30, 1997 was 4.06%,
compared to 4.27% for the corresponding period a year ago. The decreases in net
interest margins were primarily due to the increase in average earning assets
being funded with higher cost liabilities (predominantly Federal Home Loan Bank
of Boston (FHLBB) borrowings, repurchase agreements and brokered certificates
of deposits). The increase in average interest earning assets was primarily the
result of a leverage strategy invoked to utilize excess capital acquired with
the Portsmouth merger. These assets are being funded with wholesale borrowings,
which have higher rates than lower cost core deposits, creating a reduction in
the net interest margin (see "Financial Condition - Investment Securities"
section of this Management's Discussion and Analysis).
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses in the three and nine months ended
September 30, 1997 was $1,423,000, and $3,385,000, respectively, compared to
$980,000 and $3,210,000, respectively, for the same periods a year ago. The
higher provision for loan and lease losses in 1997 is primarily the result of
continued growth in the loan portfolios and the increases in nonperforming
asset levels during 1997 versus 1996, offset by lower net charge-offs in 1997
as discussed in the "Risk Elements - Allowance for Loan and Lease Losses"
section of the Management's Discussion and Analysis. Total net charge-offs
amounted to $2,309,000 for the nine months ended September 30, 1997, as
compared to $2,850,000 for the same period a year ago.
The higher net charge-offs in 1996 were principally due to residential real
estate foreclosures and the resolution of several long-term problem commercial
loan relationships.
At September 30, 1997, nonperforming loans stood at $11,914,000, or .62% of
total loans and leases, compared to $10,783,000, or .68% of total loans and
leases, as of December 31, 1996. The allowance for loan and lease losses as a
percentage of nonperforming loans as of September 30, 1997 and December 31,
1996 amounted to 179.69% and 188.56%, respectively.
For the three months ended September 30, 1997, the higher 1997 provisions
compared to 1996 primarily relates to specific charge-offs to one borrower
totaling $350,000, and additional loan growth.
-10-
<PAGE> 13
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
OTHER INCOME
Other income for the three and nine months ended September 30, 1997 totaled
$6,253,000 and $17,543,000, respectively, compared to $5,620,000, and
$16,103,000 for the same periods a year ago.
The $633,000 increase in other income for the third quarter of 1997 compared to
the third quarter of 1996 and the $1,440,000 increase for the nine months is
principally due to mortgage banking activities, net gains on investment
securities, investments in Bank-owned life insurance (BOLI), trust fees, and
other income.
The increase in mortgage banking activities in 1997 compared to 1996 is due to
higher net gains on sales of loans and mortgage loan servicing. Net gains on
the sale of loans for the first nine months of 1997 increased by $304,000 over
the same period a year ago. Also during the second quarter of 1997, mortgage
loan servicing rights were sold for a pre-tax gain of $435,000.
The increase of $212,000 in BOLI income in the third quarter of 1997 versus
1996 resulted from an additional investment. The investment, totaling $62
million at September 30, 1997 generated $631,000 in other income during the
third quarter of 1997, and $1,372,000 for the nine months ended September 30,
1997. (For more information on BOLI, see "Financial Condition - Other Assets"
section of this Management's Discussion and Analysis.) The increase in trust
fees resulted from trust assets increasing 20% over the past year to end at
$429 million at September 30, 1997, translating into higher fees of $78,000 and
$181,000, respectively, for the three and none months ended September 30, 1997,
compared to the same period a year ago. Other income increased by $710,000 in
the third quarter of 1997 versus 1996 as a result of the sale of the merchant
credit card program for a pre-tax gain of approximately $600,000.
Offsetting the increases in other income for the three and nine months ended
September 30, 1997, as compared to the same period a year ago, was a decrease
in revenues from leasing activities as a result of fewer securitizations
(portfolio sales) in 1997, and a reduction of deferred income pertaining to
lease residuals.
Also during 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. This transaction resulted in a settlement gain of $877,000 during
the third quarter of 1996 and a reduction of pension expense.
OTHER EXPENSE
Other expense for the three and nine months ended September 30, 1997 totaled
$29,912,000 and $65,419,000, respectively, compared to $21,527,000 and
$54,012,000, respectively, for the same periods a year ago.
Other expenses increased by $8,385,000 in the three months ended September 30,
1997, compared to the same period a year ago, principally due to the increase
in merger-related expenses, which totaled $11,031,000 in 1997 for the
acquisitions of Portsmouth and Community, and $4,522,000 in 1996 with the
acquisitions of Safety Fund Corporation and Milford Co/operative (see Note B -
Mergers and Acquisitions in the "Notes to Consolidated Financial Statements"
section), and salaries and employee benefits which increased as a result of
merit increases, an increase in staffing in the lending and data processing
functions, the additional staffing for two de novo branches, the development of
a trust function at CFX Bank and the expansion of the trust function at Safety
Fund National Bank. Occupancy and equipment expenses have increased as a result
of opening a new operations center, technology enhancements, the creation of
two de novo branches, and the relocation of two branches. Offsetting the
above-mentioned increases was a reduction in the SAIF special assessment of
$908,000 resulting from the acquisition of Milford Co/operative in 1996.
For the nine months ended September 30, 1997, other expenses increased
$11,407,000 over the same period a year ago. This increase was primarily due to
the increase in the merger-related expenses incurred in the third quarter of
1997 and 1996 totaling $11,031,000 and $4,522,000, respectively, and salaries,
employee benefits, occupancy and equipment as noted above. Offsetting the
above mentioned increases was a reduction in the SAIF special assessment of
$908,000.
-11-
<PAGE> 14
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
INCOME TAX
Income taxes for the three and nine months ended September 30, 1997 were
159.66% and 31.87%, respectively, of pretax income, compared to 43.72% and
34.85% of pretax income for the same periods a year ago. The effective tax
rates were higher due to the merger-related expenses of $11,031,000 in 1997, of
which $4,145,000 were non-tax deductible, and $4,522,000 in 1996, of which
$2,537,000 were non-tax deductible. Excluding these charges, the effective tax
rates for the three and nine months ended September 30, 1997 and 1996 would
have been 27.38% and 29.28%, and 32.12% and 32.18%, respectively. The lower
rates for 1997 are primarily due to higher tax credits pertaining to low income
housing projects and the reversal of a portion 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
and the development of a Real Estate Investment Trust (REIT).
================================================================================
FINANCIAL CONDITION
================================================================================
INVESTMENT SECURITIES
The carrying value and estimated fair value of investment securities at
September 30, 1997 and December 31, 1996, follows:
<TABLE>
<CAPTION>
==============================================================================================================================
SEPTEMBER 30, December 31,
1997 1996
==============================================================================================================================
CARRYING FAIR Carrying Fair
(IN THOUSANDS) VALUE VALUE Value Value
==============================================================================================================================
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Treasury and agency obligations $ 156,835 $ 156,835 $ 226,126 $ 226,126
Corporate bonds 7,867 7,867 14,284 14,284
Federal agency mortgage pass-through securities 168,173 168,173 108,931 108,931
Collateralized mortgage obligations (CMO's)
and other asset backed 197,584 197,584 19,608 19,608
State and municipal 2,563 2,563 2,005 2,005
Marketable equity securities 52,430 52,430 39,073 39,073
Other securities - - 4,869 4,869
-------------- ------------- -------------- -------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 585,452 $ 585,452 $ 414,896 $ 414,896
============== ============= ============== =============
Securities held to maturity:
Debt securities:
U.S. Treasury and agency obligations $ 7,644 $ 7,659 $ 45,883 $ 45,760
Corporate Bonds - - 2,013 2,007
State and municipal 21,514 21,655 13,986 14,083
Federal agency mortgage pass-through securities 7,255 7,346 28,338 28,470
Collateralized mortgage obligations (CMO's)
and other asset backed 583 584 1,184 1,185
Other securities 400 400 13,278 13,278
-------------- ------------- -------------- -------------
TOTAL SECURITIES HELD TO MATURITY $ 37,396 $ 37,644 $ 104,682 $ 104,783
============== ============= ============== =============
</TABLE>
As discussed in Note B - Mergers and Acquisitions in the "Notes to Consolidated
Financial Statements" section, the Company acquired Portsmouth and Community on
August 29, 1997, as a result, to be consistent with the Company's current
interest risk profile, certain securities held to maturity with an amortized
cost of $61,170,000 and a net unrealized loss of $95,000 were transferred to
securities available for sale.
In the first quarter of 1997, as part of the acquisition of Portsmouth, the
Company commenced a leverage strategy to utilize the higher capital levels at
Portsmouth. At June 30, 1997, Portsmouth had a Tier 1 Leverage Capital Ratio of
25.7%. As of September 30, 1997, the Company had purchased or originated in
excess of $300 million in investment securities and loans, which were funded by
additional advances from the FHLBB and brokered deposits. The current leverage
strategy is designed to optimize the use of capital, enhance earnings and the
return on equity. As traditional retail opportunities become available, it is
the Company's intent that the leveraged assets, or wholesale assets, will be
redeployed into higher yielding assets and wholesale funding will be replaced
with core deposits.
-12-
<PAGE> 15
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
FINANCIAL CONDITION - (Cont'd.)
================================================================================
LOANS AND LEASES
The table below sets forth the composition of the Company's loan and lease
portfolio, net of unearned income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
SEPTEMBER 30, December 31,
===========================================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
===========================================================================================================================
% OF % of
BALANCES TOTAL Balances Total
===========================================================================================================================
<S> <C> <C> <C> <C>
Real estate:
Residential $ 1,083,665 56.64% $ 873,794 54.81%
Construction 31,270 1.63 19,830 1.24
Commercial 253,830 13.27 248,083 15.56
Commercial, financial, and agricultural 204,552 10.69 170,146 10.67
Warehouse lines of credit to leasing companies 14,236 0.74 18,393 1.15
Consumer lease financing 103,987 5.44 67,146 4.21
Other consumer 221,837 11.59 197,007 12.36
----------------- -------- ----------------- -------
1,913,377 100.00% 1,594,399 100.00%
======== =======
Less allowance for loan and lease losses 21,408 20,332
----------------- -----------------
Net loans and leases $ 1,891,969 $ 1,574,067
================= =================
</TABLE>
The $318,978,000 increase in total loans and leases was primarily due to a
$209,871,000 increase in residential real estate loans from the Company's
leverage strategy (See "Financial Condition - Investment Securities" section of
this Management's Discussion and Analysis), a $36,841,000 increase in consumer
lease financing, and a $24,830,000 increase in other consumer loans, primarily
indirect automobile loans. Residential loan production is generated by a
combination of originations and purchases by the Company's mortgage banking
affiliate, CFX Mortgage. The consumer lease financing and indirect automobile
loans are generated through automobile dealerships throughout New Hampshire and
central Massachusetts.
OTHER ASSETS
As of September 30, 1997, the Company's investment in BOLI totaled $62
million. During the third quarter of 1997, the Company invested an additional
$30,000,000 in BOLI to 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).
-13-
<PAGE> 16
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
FINANCIAL CONDITION - (Cont'd.)
================================================================================
DEPOSITS AND BORROWED FUNDS
The following table shows the various components of deposits and borrowed funds
at the dates indicated:
<TABLE>
<CAPTION>
=============================================================================================================================
SEPTEMBER 30, 1997 DECEMBER 31, 1996
=============================================================================================================================
(DOLLARS IN THOUSANDS) AMOUNT % OF TOTAL AMOUNT % OF TOTAL
=============================================================================================================================
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 221,202 11.43% $ 193,579 11.05%
Regular savings deposits 326,140 16.85 343,169 19.60
NOW & money market deposits 339,124 17.52 323,508 18.47
Time deposits 835,180 43.15 820,925 46.88
----------------- ------ ---------------- ------
Total retail deposits 1,721,646 88.95 1,681,181 96.00
Brokered deposits 213,968 11.05 69,960 4.00
----------------- ------ ---------------- ------
Total deposits $ 1,935,614 100.00% $ 1,751,141 100.00%
================= ====== ================ ======
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston
Short-Term $ 214,800 35.03% $ 207,733 59.13%
Long-Term 200,655 32.72 38,860 11.06
Other borrowed funds 197,791 32.25 104,750 29.81
----------------- ------ ---------------- ------
Total borrowed funds $ 613,246 100.00% $ 351,343 100.00%
================= ====== ================ ======
</TABLE>
The increase in deposits, advances from the FHLBB, and other borrowed funds
funded asset growth and the leverage strategy over the past nine months. (See
"Financial Condition - Investment Securities" of this Management's Discussion
and Analysis.) Management customarily directs movement of funding between
brokered deposits, advances from the FHLBB and repurchase agreements (included
in borrowed funds). During 1997, there has been a shift from short-term to
long-term funding from FHLBB to meet interest-risk parameters and secure
long-term funding costs.
================================================================================
SHAREHOLDERS' EQUITY
================================================================================
Shareholders' equity increased by $5,855,000 from $239,836,000 at December 31,
1996 to $245,691,000 at September 30, 1997. The increase was due to $14,990,000
in net income, issuance of $4,819,000 in common stock under the stock option
plan, issuance of $227,000 in common stock under the employee stock purchase
plan offset by a $1,533,000 increase in net unrealized gains on securities
available for sale, issuance of $219,000 in common stock under the dividend
reinvestment plan, offset by the cost of shares acquired for treasury of
$172,000, $7,000 paid for fractional shares, and $15,754,000 in common cash
dividends declared on common stock.
-14-
<PAGE> 17
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RISK ELEMENTS
================================================================================
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets is
reasonable and in accordance with generally accepted accounting principles,
regulatory requirements, and the Company's policies. Loans are placed on
nonaccrual status when management determines that significant doubt exists as
to the collectibility of principal or interest on a loan. Moreover, loans past
due 90 days or more as to principal or interest are placed on nonaccrual
status.
The following table provides the composition of the Company's nonperforming
loans and foreclosed assets at the dates indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
SEPTEMBER 30, December 31,
===========================================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
===========================================================================================================================
% OF % of
BALANCES TOTAL Balances Total
===========================================================================================================================
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 6,785 56.95% $ 6,944 64.44%
Commercial 3,167 26.58 1,904 17.66
Commercial, financial, and agricultural 1,490 12.51 1,634 15.15
Consumer and other 472 3.96 301 2.79
------------- ------- ------------- -------
11,914 100.00% 10,783 100.00%
------------- ======= ------------- =======
Foreclosed assets:
Residential real estate 2,016 55.78% 2,108 62.94%
Construction 468 12.95 467 13.94
Commercial real estate 503 13.92 496 14.81
Leasing receivable-equipment 206 5.70 - -
Non-real estate repossessions 421 11.65 288 8.60
Valuation allowance - - (10) (.29)
------------- ------- ------------- -------
3,614 100.00% 3,349 100.00%
------------- ======= ------------- =======
TOTAL NONPERFORMING ASSETS $ 15,528 $ 14,132
============= =============
Nonperforming loans as a percent of total
loans and leases .62% .68%
============= =============
Nonperforming assets as a percent of total
loans and leases and foreclosed assets .81% .88%
============= =============
</TABLE>
-15-
<PAGE> 18
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
RISK ELEMENTS - (CONT'D.)
================================================================================
The increase in nonperforming assets over the December 31, 1996 balance is more
reflective of the increase in the size of the overall portfolio than an
indication of economic deterioration. Loans delinquent less than 90 days have
decreased from $31,020,000 at December 31, 1996 to $27,343,000 at September 30,
1997 as a result of the continued focus on collection efforts from the
increases in the loan portfolios.
The following is a summary of information pertaining to impaired loans at the
dates indicated:
<TABLE>
<CAPTION>
=======================================================================================================================
SEPTEMBER 30 December 31
=======================================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
=======================================================================================================================
<S> <C> <C>
Loans with a valuation allowance $ 1,785 $ 2,816
Loans without a valuation allowance 4,194 3,090
------------ ------------
Total impaired loans $ 5,979 $ 5,906
============ ============
Valuation allowance allocated to impaired loans $ 873 $ 934
============ ============
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses recognized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loan and lease losses based on
current economic conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
=======================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1997 1996
=======================================================================================================================
<S> <C> <C>
Balance at beginning of period $ 20,332 $ 19,843
Provision for loan and lease losses 3,385 3,210
Loans charged-off (3,636) (3,598)
Recoveries of loans previously charged-off 1,327 748
------------ ------------
Balance at end of period $ 21,408 $ 20,203
============ ============
Allowance for loan and lease losses
as a percent of total loans and leases 1.12% 1.35%
============ ============
Allowance for loan and lease losses as a
percent of total nonperforming loans 179.69% 187.36%
============ ============
Net charge-offs/average loans and leases (1) .18% .17%
============ ============
</TABLE>
(1) Annualized
Management considers the allowance for loan and lease losses to be adequate in
view of its evaluation of the Company's loan and lease portfolio, the level of
nonperforming loans and leases, current economic conditions and historical
experience with loan and lease losses. However, if economic conditions
deteriorate, the Company may have to increase the allowance for loan and lease
losses from its current level.
-16-
<PAGE> 19
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
SEPTEMBER 30, 1997
================================================================================
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 cash flows and repricing
characteristics of assets, liabilities, and off-balance-sheet items.
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 considers interest rate risk exposure in concert with other business
risks, such as credit risk and liquidity risk. The Company's Board of Directors
and the directors of each subsidiary bank establish various policy guidelines
and limitations for interest rate risk. Management communicates regularly with
boards of directors and board committees about key assumptions, current
strategies, and exposure positions being deliberated by the Company's
Asset/Liability Management Committee. Management feels that these processes in
place at the Company are in compliance with new risk management guidelines
issued jointly by the Company's three primary regulatory agencies.
================================================================================
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 impact of the pending acquisition on the year 2000
compliance issues.
-17-
<PAGE> 20
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1997
================================================================================
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 are the primary sources of asset liquidity.
Because the Company's subsidiaries maintain large residential mortgage loan
portfolios, a substantial capability exists to borrow funds from the Federal
Home Loan Bank of Boston. Additionally, investment portfolios are predominantly
made up of securities which can be readily borrowed against through the
repurchase agreement market. Relationships with deposit brokers and
correspondent banks are also maintained to facilitate possible borrowing needs.
================================================================================
CAPITAL RESOURCES
================================================================================
Federal regulation requires the Company to maintain minimum capital standards.
Tier 1 capital is composed primarily of common stock, retained earnings and
perpetual preferred stock in limited amounts less certain intangibles. In
addition, the Company and its subsidiary banks are required to satisfy certain
capital adequacy guidelines relating to the risk nature of an institution's
assets. These guidelines, established by the Federal Reserve Board and the FDIC
are applicable to bank holding companies and state chartered non-member banks,
respectively. Banks and bank holding companies are also required to have total
capital (composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter
being composed primarily of allowances for loan and lease losses, perpetual
preferred stock in excess of the amount included in Tier 1 capital, and certain
"hybrid capital instruments" including mandatory convertible debt).
As of September 30, 1997, the Company and each of its banking subsidiaries were
in compliance with all applicable regulatory capital requirements. The decline
in the capital ratios since year end is the result of the continued asset
growth and the Company's leverage program. (See "Financial Condition -
Investment Securities" of this Management's Discussion and Analysis.)
The following table sets forth the minimum regulatory capital requirements and
the actual capital ratios of the Company and its banking subsidiaries at
September 30, 1997:
<TABLE>
<CAPTION>
=======================================================================================================================
ACTUAL
=======================================================================================================================
REQUIRED SEPTEMBER 30,
MINIMUM 1997
=======================================================================================================================
<S> <C> <C>
Total capital to risk-weighted assets:
Consolidated 8.0% 15.0%
CFX Bank 8.0 12.5
Safety Fund 8.0 13.3
Orange 8.0 21.3
Tier 1 capital to risk-weighted assets:
Consolidated 4.0 13.7
CFX Bank 4.0 11.5
Safety Fund 4.0 12.0
Orange 4.0 20.1
Tier 1 capital to average assets:
Consolidated 4.0 8.4
CFX Bank 4.0 7.0
Safety Fund 4.0 7.0
Orange 4.0 10.8
</TABLE>
-18-
<PAGE> 21
CFX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
SEPTEMBER 30, 1997
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company, its subsidiaries, or any directors, officers,
affiliates or any owner of record or beneficiary of more than
five percent (5%) of the common stock of the Company, or any
associate of any such director, officer, affiliate of the
Company or any security holder is a party adverse to the Company
or its subsidiaries or has a material interest adverse to the
Company or its subsidiaries.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
99.1 Change of Control Agreement by and between CFX Corporation and Gregg R. Tewksbury
99.2 Change of Control Agreement by and between CFX Corporation and Edwin L. Herbert
99.3 Change of Control Agreement by and between CFX Corporation and David N. Rasmussen
99.4 CFX Corporation 1997 Long-Term Incentive Plan
</TABLE>
(b) REPORTS ON FORM 8-K
(i) On November 3, 1997, a Current Report on
Form 8-K was filed announcing the Company
entered into a definitive agreement to merge
with Peoples Heritage Financial Group, Inc.
(ii) On September 15, 1997, a Form 8-K was filed
announcing the Company consummated the
acquisitions of Portsmouth Bank Shares, Inc.
and Community Bankshares, Inc. on August 29,
1997.
-19-
<PAGE> 22
CFX CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFX CORPORATION
November 14, 1997 By: /s/
---------------------------------
Gregg R. Tewksbury
Authorized Officer
Chief Financial Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1997
<PERIOD-END> SEP-30-1996 SEP-30-1996 DEC-31-1996 DEC-31-1997
<CASH> 0 0 77,123 70,833
<INT-BEARING-DEPOSITS> 0 0 54,270 48,004
<FED-FUNDS-SOLD> 0 0 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 414,896 585,452
<INVESTMENTS-CARRYING> 0 0 104,682 37,396
<INVESTMENTS-MARKET> 0 0 104,783 37,644
<LOANS> 0 0 1,594,399 1,913,377
<ALLOWANCE> 0 0 20,332 21,408
<TOTAL-ASSETS> 0 0 2,369,257 2,821,182
<DEPOSITS> 0 0 1,751,141 1,935,614
<SHORT-TERM> 0 0 207,733 412,591
<LIABILITIES-OTHER> 0 0 26,937 26,631
<LONG-TERM> 0 0 143,610 200,655
0 0 0 0
0 0 0 0
<COMMON> 0 0 15,740 16,010
<OTHER-SE> 0 0 224,096 229,681
<TOTAL-LIABILITIES-AND-EQUITY> 0 0 2,369,257 2,821,182
<INTEREST-LOAN> 94,330 32,595 0 113,138
<INTEREST-INVEST> 26,598 9,020 0 31,232
<INTEREST-OTHER> 3,194 972 0 2,126
<INTEREST-TOTAL> 124,122 42,587 0 146,496
<INTEREST-DEPOSIT> 47,277 15,892 0 52,306
<INTEREST-EXPENSE> 58,394 20,075 0 73,232
<INTEREST-INCOME-NET> 65,728 22,512 0 73,264
<LOAN-LOSSES> 3,210 980 0 3,385
<SECURITIES-GAINS> 1,823 373 0 1,421
<EXPENSE-OTHER> 54,012 21,527 0 65,419
<INCOME-PRETAX> 24,609 5,625 0 22,003
<INCOME-PRE-EXTRAORDINARY> 16,034 3,166 0 14,990
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 16,034 3,166 0 14,990
<EPS-PRIMARY> 0.68 0.13 0 0.63
<EPS-DILUTED> 0 0 0 0
<YIELD-ACTUAL> 4.27 4.25 0 4.06
<LOANS-NON> 0 0 0 11,914
<LOANS-PAST> 0 0 0 31,020
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 19,843 0 0 20,332
<CHARGE-OFFS> 3,598 0 0 3,636
<RECOVERIES> 748 0 0 1,327
<ALLOWANCE-CLOSE> 20,203 0 0 21,408
<ALLOWANCE-DOMESTIC> 0 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 26th day of October, 1997, between CFX
CORPORATION, a New Hampshire corporation (hereinafter "Company"), and Gregg R.
Tewksbury (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 11 hereof (the "Term").
On each October 26th 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 September 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 Executive's
annual base salary of $90,000 plus the gross amount of the incentive payment
paid to the Executive under the Company's 1997 Incentive Compensation Plan.
-1-
<PAGE> 2
(b) A "Change of Control" shall be deemed to have occurred if any
of the following have occurred:
(i) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity or any
group of persons acting in concert becomes the beneficial owner, as that
concept is defined in Rule 13d-3 promulgated by the Securities Exchange
Commission under the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock repurchases but
excluding transactions described in subdivision (ii) following) of securities
of the Company possessing fifty-one percent (51%) or more of the voting power
for the election of directors of the Company;
(ii) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving securities of the Company in which the
holders of voting securities of the Company immediately prior to such
consummation own, as a group, immediately after such consummation, voting
securities of the Company (or if the Company does not survive such transaction,
voting securities of the corporation surviving such transaction) having less
than fifty percent (50%) of the total voting power in an election of directors
of the Company (or such other surviving corporation), excluding securities
received by any members of such group which represent disproportionate
percentage increases in their shareholdings vis-a-vis the other members of such
group;
(iii) "approved directors" shall constitute less than a
majority of the entire Board of Directors of the Company, with "approved
directors" defined to mean the members of the Board of Directors of the Company
as of the date of this Agreement and any subsequently elected members of the
Board of Directors of the Company who shall be nominated or approved by a
majority of the approved directors on the Board of Directors of the Company
prior to such election; or
(iv) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions,
excluding any transaction described in subdivision (ii) above), of all, or
substantially all, of the assets of the Company or its subsidiaries to a party
which is not controlled by or under common control with the Company.
(c) A "Termination Event" shall be deemed to have occurred if,
within the twelve 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
-2-
<PAGE> 3
responsibility, authority, or compensation (including any compensation or
benefit plan in which the Executive participates or substitute plans adopted
prior to the Change of Control) to which the Executive was charged or empowered
with or entitled to immediately prior to a Change of Control of the Company or
to which he would normally be charged or empowered with or entitled to from
time to time by reason of his office, for other than good cause.
(d) Termination for Good Cause.
"Termination for good cause" means termination:
(i) based on the willful and continued failure by the
Executive to perform his duties for the Company or a subsidiary (other than
such failure resulting from the Executive's incapacity due to physical or
mental illness), after a written demand for performance is delivered to the
Executive by the Board of Directors of the Company which specifically
identifies the manner in which the Board believes the Executive has not
performed his duties; an act or acts of dishonesty taken by the Executive; or
an act or acts intended to result in his personal enrichment at the expense of
the Company or a subsidiary; or an act or acts of willful misconduct which are
materially injurious to the Company. Termination shall be by written notice to
the Executive identifying the cause; or
(ii) If the Executive shall have been absent from the
full-time performance of his duties with the Company for six consecutive
months as the result of the Executive's incapacity due to physical or mental
illness, and the Executive shall not have returned to full-time performance of
his duties within thirty days after written notice of proposed termination, the
Executive's employment may be terminated by the Company on or after the
expiration of such thirty day period for disability. Termination shall be by
written notice to the Executive. Termination of the Executive's employment
based on retirement shall mean termination in accordance with the Company's
generally applicable retirement policy or with any retirement arrangement
established with the Executive's consent.
4. Cash Payments.
Upon the occurrence of both a Change of Control of the Company and
a Termination Event, the Company shall, immediately upon the occurrence of the
Termination Event, make a lump sum payment to the Executive in an amount that
equals two (2.0) times the Base Amount.
-3-
<PAGE> 4
5. 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 amount determined pursuant to paragraph 4
hereof.
6. 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.
7. 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, and the Executive shall not be under any obligation
to seek other employment or gainful pursuit as a result of this Agreement.
8. Health and Life Insurance Benefits
The Company agrees to maintain, for a period of twenty-four (24)
months following the date of the occurrence of the Termination Event, 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 and upon the same basis and cost as prior to the Termination
Event.
9. 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.
10. 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.
-4-
<PAGE> 5
11. No Right to Continued Employment.
This Agreement shall not confer upon the Executive any right with
respect to continuance of employment by the Company or any subsidiary, nor
shall it interfere in any way with the right of his employer to terminate his
employment at any time. No payments hereunder shall be required except upon the
occurrence of both a Change of Control of the Company and a Termination Event
as set forth in Section 3 herein. Thus, except as specifically provided in
Section 2 herein, no payments hereunder shall be made on account of termination
of the Executive's employment (i) upon the Executive's death, disability or
retirement, (ii) by the Company with or without cause or (iii) upon the
Executive's voluntary termination.
12. 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.
13. 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.
14. 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. This Agreement supersedes and replaces any
earlier agreement on the subject matter hereof.
15. Counterparts.
This Agreement may be made and executed in counterparts, each of
which may be considered an original for all purposes.
16. 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.
17. 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.
-5-
<PAGE> 6
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
President and Chief Executive Officer
"EXECUTIVE"
/s/
-------------------------------------
Gregg R. Tewksbury
-6-
<PAGE> 1
EXHIBIT 99.2
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 26th day of October, 1997, between CFX
CORPORATION, a New Hampshire corporation (hereinafter "Company"), and Edwin L.
Herbert (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 11 hereof (the "Term").
On each October 26th 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 September 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 Executive's
annual base salary of $100,000 plus the gross amount of the incentive payment
paid to the Executive under the Company's 1997 Incentive Compensation Plan.
-1-
<PAGE> 2
(b) A "Change of Control" shall be deemed to have occurred if any
of the following have occurred:
(i) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity or any
group of persons acting in concert becomes the beneficial owner, as that
concept is defined in Rule 13d-3 promulgated by the Securities Exchange
Commission under the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock repurchases but
excluding transactions described in subdivision (ii) following) of securities
of the Company possessing fifty-one percent (51%) or more of the voting power
for the election of directors of the Company;
(ii) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving securities of the Company in which the
holders of voting securities of the Company immediately prior to such
consummation own, as a group, immediately after such consummation, voting
securities of the Company (or if the Company does not survive such transaction,
voting securities of the corporation surviving such transaction) having less
than fifty percent (50%) of the total voting power in an election of directors
of the Company (or such other surviving corporation), excluding securities
received by any members of such group which represent disproportionate
percentage increases in their shareholdings vis-a-vis the other members of such
group;
(iii) "approved directors" shall constitute less than a
majority of the entire Board of Directors of the Company, with "approved
directors" defined to mean the members of the Board of Directors of the Company
as of the date of this Agreement and any subsequently elected members of the
Board of Directors of the Company who shall be nominated or approved by a
majority of the approved directors on the Board of Directors of the Company
prior to such election; or
(iv) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions,
excluding any transaction described in subdivision (ii) above), of all, or
substantially all, of the assets of the Company or its subsidiaries to a party
which is not controlled by or under common control with the Company.
(c) A "Termination Event" shall be deemed to have occurred if,
within the twelve 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
-2-
<PAGE> 3
responsibility, authority, or compensation (including any compensation or
benefit plan in which the Executive participates or substitute plans adopted
prior to the Change of Control) to which the Executive was charged or empowered
with or entitled to immediately prior to a Change of Control of the Company or
to which he would normally be charged or empowered with or entitled to from
time to time by reason of his office, for other than good cause.
(d) Termination for Good Cause.
"Termination for good cause" means termination:
(i) based on the willful and continued failure by the
Executive to perform his duties for the Company or a subsidiary (other than
such failure resulting from the Executive's incapacity due to physical or
mental illness), after a written demand for performance is delivered to the
Executive by the Board of Directors of the Company which specifically
identifies the manner in which the Board believes the Executive has not
performed his duties; an act or acts of dishonesty taken by the Executive; or
an act or acts intended to result in his personal enrichment at the expense of
the Company or a subsidiary; or an act or acts of willful misconduct which are
materially injurious to the Company. Termination shall be by written notice to
the Executive identifying the cause; or
(ii) If the Executive shall have been absent from the full-
time performance of his duties with the Company for six consecutive months as
the result of the Executive's incapacity due to physical or mental illness, and
the Executive shall not have returned to full-time performance of his duties
within thirty days after written notice of proposed termination, the
Executive's employment may be terminated by the Company on or after the
expiration of such thirty day period for disability. Termination shall be by
written notice to the Executive. Termination of the Executive's employment
based on retirement shall mean termination in accordance with the Company's
generally applicable retirement policy or with any retirement arrangement
established with the Executive's consent.
4. Cash Payments.
Upon the occurrence of both a Change of Control of the Company and
a Termination Event, the Company shall, immediately upon the occurrence of the
Termination Event, make a lump sum payment to the Executive in an amount that
equals one and one-half (1.5) times the Base Amount.
-3-
<PAGE> 4
5. 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 amount determined pursuant to paragraph 4
hereof.
6. 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.
7. 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, and the Executive shall not be under any obligation
to seek other employment or gainful pursuit as a result of this Agreement.
8. Health and Life Insurance Benefits
The Company agrees to maintain, for a period of eighteen (18)
months following the date of the occurrence of the Termination Event, 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 and upon the same basis and cost as prior to the Termination
Event.
9. 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.
10. 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.
-4-
<PAGE> 5
11. No Right to Continued Employment.
This Agreement shall not confer upon the Executive any right with
respect to continuance of employment by the Company or any subsidiary, nor
shall it interfere in any way with the right of his employer to terminate his
employment at any time. No payments hereunder shall be required except upon the
occurrence of both a Change of Control of the Company and a Termination Event
as set forth in Section 3 herein. Thus, except as specifically provided in
Section 2 herein, no payments hereunder shall be made on account of termination
of the Executive's employment (i) upon the Executive's death, disability or
retirement, (ii) by the Company with or without cause or (iii) upon the
Executive's voluntary termination.
12. 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.
13. 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.
14. 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.
15. Counterparts.
This Agreement may be made and executed in counterparts, each of
which may be considered an original for all purposes.
16. 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.
17. 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.
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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
President and Chief Executive Officer
"EXECUTIVE"
/s/
-------------------------------------
Edwin L. Herbert
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EXHIBIT 99.3
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 26th day of October, 1997, between CFX
CORPORATION, a New Hampshire corporation (hereinafter "Company"), and David N.
Rasmussen (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 11 hereof (the "Term").
On each October 26th 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 September 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 Executive's
annual base salary of $130,000 plus the gross amount of the incentive payment
paid to the Executive under the Company's 1997 Incentive Compensation Plan.
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(b) A "Change of Control" shall be deemed to have occurred if any
of the following have occurred:
(i) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity or any
group of persons acting in concert becomes the beneficial owner, as that
concept is defined in Rule 13d-3 promulgated by the Securities Exchange
Commission under the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock repurchases but
excluding transactions described in subdivision (ii) following) of securities
of the Company possessing fifty-one percent (51%) or more of the voting power
for the election of directors of the Company;
(ii) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving securities of the Company in which the
holders of voting securities of the Company immediately prior to such
consummation own, as a group, immediately after such consummation, voting
securities of the Company (or if the Company does not survive such transaction,
voting securities of the corporation surviving such transaction) having less
than fifty percent (50%) of the total voting power in an election of directors
of the Company (or such other surviving corporation), excluding securities
received by any members of such group which represent disproportionate
percentage increases in their shareholdings vis-a-vis the other members of such
group;
(iii) "approved directors" shall constitute less than a
majority of the entire Board of Directors of the Company, with "approved
directors" defined to mean the members of the Board of Directors of the Company
as of the date of this Agreement and any subsequently elected members of the
Board of Directors of the Company who shall be nominated or approved by a
majority of the approved directors on the Board of Directors of the Company
prior to such election; or
(iv) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions,
excluding any transaction described in subdivision (ii) above), of all, or
substantially all, of the assets of the Company or its subsidiaries to a party
which is not controlled by or under common control with the Company.
(c) A "Termination Event" shall be deemed to have occurred if,
within the twelve month period following a Change of Control, the Executive
experiences the loss of his position by reason of discharge or demotion, for
other than termination for good cause, or the Executive's voluntary termination
following the substantial withholding, substantial adverse alteration or
substantial reduction of responsibility, authority, or compensation (including
any compensation or benefit plan in which the Executive participates or
substitute plans adopted prior to the Change of Control) to which the Executive
was charged or empowered with or entitled to immediately prior to a Change of
Control of the Company or to which he would normally be charged or empowered
with or entitled to from time to time by reason of his office, for other than
good cause.
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<PAGE> 3
(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, immediately upon the occurrence of the
Termination Event, make a lump sum payment to the Executive in an amount that
equals one (1.0) times the Base Amount.
5. 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 amount determined pursuant to paragraph 4
hereof.
6. 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.
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7. 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, and the Executive shall not be under any obligation
to seek other employment or gainful pursuit as a result of this Agreement.
8. Health and Life Insurance Benefits
The Company agrees to maintain, for a period of eighteen (18)
months following the date of the occurrence of the Termination Event, 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 and upon the same basis and cost as prior to the Termination
Event.
9. 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.
10. 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.
11. No Right to Continued Employment.
This Agreement shall not confer upon the Executive any right with
respect to continuance of employment by the Company or any subsidiary, nor
shall it interfere in any way with the right of his employer to terminate his
employment at any time. No payments hereunder shall be required except upon the
occurrence of both a Change of Control of the Company and a Termination Event
as set forth in Section 3 herein. Thus, except as specifically provided in
Section 2 herein, no payments hereunder shall be made on account of termination
of the Executive's employment (i) upon the Executive's death, disability or
retirement, (ii) by the Company with or without cause or (iii) upon the
Executive's voluntary termination.
12. 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.
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13. 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.
14. 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.
15. Counterparts.
This Agreement may be made and executed in counterparts, each of
which may be considered an original for all purposes.
16. 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.
17. 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.
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<PAGE> 6
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
President and Chief Executive Officer
"EXECUTIVE"
/s/
-------------------------------------
David N. Rasmussen
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<PAGE> 1
EXHIBIT 99.4
CFX CORPORATION
1997 LONG-TERM INCENTIVE PLAN
1. Definitions. In this Plan, except where the context otherwise
indicates, the following definitions shall apply:
1.1. "Agreement" means a written agreement implementing an Award.
1.2. "Award" means a grant of an Option.
1.3. "Board" means the Board of Directors of the Corporation.
1.4. "Code" means the Internal Revenue Code of 1986, as amended.
1.5. "Committee" means the committee or subcommittee of the Board
appointed by the Board to administer this Plan. Unless otherwise determined
by the Board, the Stock Option Committee of the Board shall be the
Committee.
1.6. "Common Stock" means the common stock, par value $0.66 2/3 per
share, of the Corporation.
1.7. "Corporation" means CFX Corporation.
1.8. "Date of Exercise" means the date on which the Corporation
receives notice of the exercise of an Option in accordance with the terms
of Section 7.1.
1.9. "Date of Grant" means the date on which an Option is granted
under this Plan.
1.10. "Director" means a member of the Board of the Corporation or
any Subsidiary.
1.11. "Employee" means any employee of the Corporation or a
Subsidiary, including an Employee Director or any person who has been hired
to be an employee of the Corporation or a Subsidiary.
1.12. "Employee Director" means a Director who is also an Employee.
1.13. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.14. "Fair Market Value" means an amount equal to the closing sale
price for a Share, on the date such fair market value is to be determined
(or if there is no sale of Shares on such date, the closing sale price on
the nearest trading date preceding such date), in the principal trading
market for the Shares as reported by such source as the Committee may
select, or, if such price quotations of the Common Stock are not then
reported, then the fair market value of a Share as determined by the
Committee pursuant to a reasonable method adopted in good faith for such
purpose.
1.15. "Incentive Stock Option" means an Option granted under this
Plan that qualifies as an incentive stock option under Section 422 of the
Code and that the Corporation designates as such in the Agreement granting
the Option.
1.16. "Independent Director" means a Director who is not an Employee
Director.
1.17. "Nonstatutory Stock Option" means an Option granted under this
Plan that is not an Incentive Stock Option.
1.18. "Option" means an option to purchase Shares granted under this
Plan in accordance with the terms of Section 6.
1.19. "Option Period" means the period during which an Option may be
exercised.
1.20. "Option Price" means the price per Share at which an Option may
be exercised. The Option Price shall be determined by the Committee and
shall not be less than the Fair Market Value determined as of the Date of
Grant. Notwithstanding the foregoing, in the case of an Incentive Stock
Option granted
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to a Ten-Percent Stockholder, the Option Price shall not be less than 110%
of the Fair Market Value on the Date of Grant.
1.21. "Optionee" means an Employee or Independent Director to whom an
Option has been granted.
1.22. "Plan" means the CFX Corporation 1997 Long-Term Incentive Plan.
1.23. "Rule 16b-3" means Rule 16b-3 under Section 16 of the Exchange
Act, or any successor rule.
1.24. "Share" means a share of Common Stock.
1.25. "Subsidiary" means a corporation at least 50% of the total
combined voting power of all classes of stock of which is owned by the
Corporation, either directly or through one or more other Subsidiaries.
1.26. "Ten-Percent Stockholder" means an Optionee who (applying the
rules of Section 424(d) of the Code) owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Corporation
or a Subsidiary.
2. Purpose. This Plan is intended to assist the Corporation and its
Subsidiaries in attracting and retaining Employees and Independent Directors of
outstanding ability and to promote the identification of their interests with
those of the stockholders of the Corporation.
3. Administration. The Committee shall administer this Plan and shall
have plenary authority, in its discretion, to award Options to Employees and
Independent Directors, subject to the provisions of this Plan. The Committee
shall have plenary authority and discretion, subject to the provisions of this
Plan, to determine the terms (which terms need not be identical) of all Awards
to Employees and Independent Directors, including without limitation the
exercise price of Options, the time or times at which Awards are made, the
number of Shares covered by Awards, whether an Option shall be an Incentive
Stock Option or a Nonstatutory Stock Option, any exceptions to
non-transferability, any provisions relating to vesting, any circumstances in
which the Options would terminate, the period during which Options may be
exercised, and the period during which Options shall be subject to restrictions.
In making these determinations, the Committee may take into account the nature
of the services rendered by the Award recipients, their present and potential
contributions to the success of the Corporation and its Subsidiaries, and such
other factors as the Committee in its discretion shall deem relevant. Subject to
the provisions of this Plan, the Committee shall have plenary authority to
interpret this Plan, prescribe, amend and rescind rules and regulations relating
to it, and make all other determinations deemed necessary or advisable for the
administration of this Plan. The determinations of the Committee on the matters
referred to in this Section 3 shall be binding and final.
4. Eligibility. Incentive Stock Options may be granted or awarded only to
Employees. Nonstatutory Stock Options may be granted or awarded to Employees or
Independent Directors.
5. Stock Subject to Plan.
5.1. Subject to adjustment as provided in Section 8, the maximum
number of Shares that may be issued under this Plan is 500,000 Shares. The
maximum number of Shares with respect to which an Employee may receive
Awards under this Plan during its term is 100,000.
5.2. If an Option expires or terminates for any reason without having
been fully exercised, the unissued or forfeited Shares which had been
subject to the Award shall become available for the grant of additional
Awards.
6. Options.
6.1. Options granted under this Plan to Employees shall be either
Incentive Stock Options or Nonstatutory Stock Options, as designated by the
Committee. Each Option granted under this Plan shall be clearly identified
either as a Nonstatutory Stock Option or an Incentive Stock Option and
shall be evidenced by an Agreement that specifies the terms and conditions
of the grant. Options granted to
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Employees shall be subject to the terms and conditions set forth in this
Section 6 and such other terms and conditions not inconsistent with this
Plan as the Committee may specify. All Incentive Stock Options granted
under this Plan shall comply with the provisions of the Code governing
incentive stock options and with all other applicable rules and
regulations.
6.2. The Option Period for Options granted to Employees shall be
determined by the Committee and specifically set forth in the Agreement;
provided, however, that an Option shall not be exercisable after ten years
(five years in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder) from its Date of Grant.
6.3. The Committee, in its discretion, may provide in an Agreement
for the right of the Optionee to surrender to the Corporation an Option (or
a portion thereof) that has become exercisable and to receive upon such
surrender, without any payment to the Corporation (other than required tax
withholding amounts) that number of Shares (equal to the highest whole
number of Shares) having an aggregate fair market value as of the date of
surrender equal to that number of Shares subject to the Option (or portion
thereof) being surrendered multiplied by an amount equal to the excess of
(i) the Fair Market Value on the date of surrender over (ii) the Option
Price, plus an amount of cash equal to the fair market value of any
fractional Share to which the Optionee would be entitled but for the
parenthetical above relating to whole number of Shares. Any such surrender
shall be treated as the exercise of the Option (or portion thereof).
6.4. Options made under this Plan shall not be transferable other
than by will, the laws of descent and distribution, or as provided by the
Committee in an Agreement.
7. Exercise of Options.
7.1. An Option may, subject to the terms of the applicable Agreement
under which it was granted, be exercised in whole or in part by the
delivery to the Corporation of written notice of the exercise, in such form
as the Committee may prescribe, accompanied by full payment for the Shares
with respect to which the Option is exercised. To the extent provided in
the applicable Option Agreement, payment may be made in whole or in part by
delivery (including constructive delivery) of Shares valued at Fair Market
Value on the Date of Exercise or by delivery of a promissory note as
provided in Section 7.2 hereof.
7.2. To the extent provided in an Agreement and permitted by
applicable law, the Committee may accept as partial payment of the Option
Price a promissory note executed by the Optionee evidencing his or her
obligation to make future cash payment thereof. Promissory notes made
pursuant to this Section 7.2 shall be payable upon such terms as may be
determined by the Committee, shall be secured by a pledge of the Shares
received upon exercise of the Option and shall bear interest at a rate
fixed by the Committee.
8. Capital Adjustments. In the event of any change in the outstanding
Common Stock by reason of any stock dividend, split-up, recapitalization,
reclassification, combination or exchange of shares, merger, consolidation or
liquidation and the like, the Committee may, in its discretion, provide for a
substitution for or adjustment in (1) the number and class of Shares subject to
outstanding Options, (2) the Option Price of Options, and (3) the aggregate
number and class of Shares for which Awards thereafter may be made under this
Plan and to individual Award recipients.
9. Termination or Amendment. The Board may amend, alter or terminate this
Plan in any respect at any time; provided, however, that, after this Plan has
been approved by the stockholders of the Corporation, no amendment, alteration
or termination of this Plan shall be made by the Board without approval of (1)
the Corporation's stockholders to the extent stockholder approval of the
amendment is required by applicable law or regulations or the requirements of
the principal exchange or interdealer quotation system on which the Common Stock
is listed or quoted, and (2) each affected Optionee if such amendment,
alteration or termination would adversely affect his or her rights or
obligations under any Award made prior to the date of such amendment, alteration
or termination.
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10. Modification, Extension, Renewal, Substitution.
10.1. Subject to the terms and conditions of this Plan, the Committee
may modify, extend or renew outstanding Options, or accept the surrender of
outstanding Options granted under this Plan or options granted under any
other plan of the Corporation or a Subsidiary (to the extent not
theretofore exercised), and authorize the granting of new Options pursuant
to this Plan in substitution therefor. Any substituted Options may specify
a lower exercise price than the surrendered options, a longer term than the
surrendered options, or have any other provisions that are authorized by
this Plan. Notwithstanding the foregoing, however, no modification of an
Award shall, without the consent of the Optionee, alter or impair any of
the Optionee's rights or obligations under such Award.
10.2. Anything contained herein to the contrary notwithstanding,
Options may, at the discretion of the Committee, be granted under this Plan
in substitution for options to purchase shares of capital stock of another
corporation which is merged into, consolidated with, or all or a
substantial portion of the property or stock of which is acquired by, the
Corporation or one of its Subsidiaries. The terms and conditions of the
substitute Options so granted may vary from the terms and conditions set
forth in this Plan to such extent as the Committee may deem appropriate in
order to conform, in whole or part, to the provisions of the options in
substitution for which they are granted. Such Options shall not be counted
toward the 100,000 Share limit imposed by the second sentence of Section
5.1, except to the extent it is determined by the Committee that the
applicability of such sentence is required in order for grants of Options
hereunder to be eligible to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code.
11. Effectiveness of this Plan. This Plan and any amendments requiring
stockholder approval pursuant to Section 9 are subject to approval by vote of
the stockholders of the Corporation within 12 months after their adoption by the
Board. Subject to that approval, this Plan and any amendments are effective on
the date on which they are adopted by the Board. Options may be granted or
awarded prior to stockholder approval of this Plan or amendments, but each such
Award shall be subject to the approval of this Plan or amendments by the
stockholders. The date on which any Option granted or awarded prior to
stockholder approval of this Plan or amendment is granted or awarded shall be
the Date of Grant for all purposes as if the Option had not been subject to
approval; no such Option may be exercised prior to such stockholder approval,
and any such Option shall be void ab initio if such stockholder approval is not
obtained.
12. Withholding. The Corporation's obligation to deliver Shares or pay
any amount pursuant to the terms of any Award hereunder shall be subject to the
satisfaction of applicable federal, state and local tax withholding
requirements. To the extent provided in the applicable Agreement and in
accordance with rules prescribed by the Committee, an Optionee may satisfy any
such withholding tax obligation by any of the following means or by a
combination of such means: (1) tendering a cash payment, (2) authorizing the
Corporation to withhold Shares otherwise issuable to the Optionee, or (3)
delivering to the Corporation already owned and unencumbered Shares.
13. Term of this Plan. Unless sooner terminated by the Board pursuant to
Section 9, this Plan shall terminate on December 10, 2006, and no Option, may be
granted or awarded after such date. The termination of this Plan shall not
affect the validity of any Award outstanding on the date of termination.
14. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Corporation against all
reasonable expenses, including attorneys' fees, actually and reasonably incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with this
Plan or any Option granted or awarded hereunder, and against all amounts
reasonably paid by them in settlement thereof or paid by them in satisfaction of
a judgment in any such action, suit or proceeding, if such members acted in good
faith and in a manner which they believed to be in, and not opposed to, the best
interests of the Corporation.
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15. General Provisions.
15.1. The establishment of this Plan shall not confer upon any
Employee or Independent Director any legal or equitable right against the
Corporation, any Subsidiary or the Committee, except as expressly provided
in this Plan.
15.2. This Plan does not constitute inducement or consideration for
the employment of any Employee or the service of any Independent Director,
nor is it a contract between the Corporation or any Subsidiary and any
Employee or Independent Director. Participation in this Plan shall not give
an Employee or Independent Director any right to be retained in the service
of the Corporation or any Subsidiary.
15.3. Neither the adoption of this Plan nor its submission to the
stockholders, shall be taken to impose any limitations on the powers of the
Corporation or its Subsidiaries to issue, grant, or assume options,
warrants, rights, or restricted stock, otherwise than under this Plan, or
to adopt other stock option or restricted stock plans or to impose any
requirement of stockholder approval upon the same.
15.4. The interests of any Employee or Independent Director under
this Plan are not subject to the claims of creditors and may not, in any
way, be assigned, alienated or encumbered except as provided in an
Agreement.
15.5. This Plan shall be governed, construed and administered in
accordance with the laws of the State of New Hampshire and it is the
intention of the Corporation that Incentive Stock Options granted under
this Plan qualify as such under Section 422 of the Code.
15.6. The Committee may require each person acquiring Shares pursuant
to Awards hereunder to represent to and agree with the Corporation in
writing that such person is acquiring the Shares without a view to
distribution thereof. The certificates for such Shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
transfer. All certificates for Shares issued pursuant to this Plan shall be
subject to such stock transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable federal or
state securities laws. The Committee may place a legend or legends on any
such certificates to make appropriate reference to such restrictions.
15.7. The Corporation shall not be required to issue any certificate
or certificates for Shares with respect to Awards under this Plan, or
record any person as a holder of record of such Shares, without obtaining,
to the complete satisfaction of the Committee, the approval of all
regulatory bodies deemed necessary by the Committee, and without complying
to the Committee's complete satisfaction, with all rules and regulations,
under federal, state or local law deemed applicable by the Committee.
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