-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EIizlTldI3XxDf9zVSANYMFDV69V59gKkTuXlhmTltEVaWdniwJ/TqPJ4zd3ipNn i9zULmAqk9AorRaewgiSZQ== 0000910647-95-000001.txt : 19950608 0000910647-95-000001.hdr.sgml : 19950608 ACCESSION NUMBER: 0000910647-95-000001 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950113 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFX CORP CENTRAL INDEX KEY: 0000800042 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 020402421 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-56875 FILM NUMBER: 95501303 BUSINESS ADDRESS: STREET 1: 194 WEST ST CITY: KEENE STATE: NH ZIP: 03431 BUSINESS PHONE: 6033522502 MAIL ADDRESS: STREET 1: 194 WEST STREET STREET 2: P O BOX 429 CITY: KEENE STATE: NH ZIP: 03431 FORMER COMPANY: FORMER CONFORMED NAME: CHESHIRE FINANCIAL CORP DATE OF NAME CHANGE: 19920703 POS AM 1 POST EFFECTIVE AMENDEMENT #1 ON FORM S-3 As filed with the Securities and Exchange Commission on January 13, 1995. Registration No. 033-56875 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CFX CORPORATION (Exact name of registrant as specified in its charter) NEW HAMPSHIRE (State or other jurisdiction of incorporation or organization) 6711 (Primary Standard Industrial Classification Code No.) 02-0402421 (I.R.S. Employer Identification No.) 102 Main Street Keene, New Hampshire 03431 (603) 352-2502 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) PETER J. BAXTER President and Chief Executive Officer CFX Corporation 102 Main Street, Keene, New Hampshire 03431 (603) 352-2502 (Name, address, including zip code, and telephone number, including area code, of agent of service) Copies to: Paul C. Remus, Esq. Peter W. Coogan, Esq. Devine, Millimet & Branch Foley, Hoag, & Eliot Professional Association One Post Office Square 111 Amherst Street, P.O. Box 719 Boston, Massachusetts 02109 Manchester, New Hampshire 03101 Approximate date of commencement of proposed sale of securities to the public: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
Proposed Proposed Maximum Title of Each Class Maximum Aggregate of Securities to Amount to be Offering Price Offering Amount of be Registered Registered Per Share(1) Price(1) Registration Fee Common Stock, $1.00 par value 713,111(2) $13.3329 $9,507,907.50 $3,278.59(3) Estimated solely for the purpose of computing the registration fee. Represents the maximum number of shares of Common Stock to be issued by the Registrant in the proposed acquisition of Orange Savings Bank. This Registration Statement also covers such indeterminable number of shares of Common Stock as may be issued upon the conversion of the shares of Common Stock by reason of adjustments of the conversion ratio in certain contingencies. Since such Common Stock, if issued, will be issued for no additional consideration, no registration fee is required. The registration fee is calculated pursuant to Rule 457(f)(1) under the Securities Act of 1933 based on the aggregate market value of the common stock of Orange Savings Bank based on the average bid and asked prices of such stock on the Nasdaq Small-Cap Market on January 6, 1995. Since the proposed maximum aggregate offering price has not changed, no additional registration fee is payable.
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. CFX CORPORATION Cross-Reference Sheet showing the location in the Proxy Statement- Prospectus of information required by items of Form S-4:
Caption or Location Registration Statement In Proxy Statement- Item and Heading Prospectus 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus Front Cover Page; Prospectus Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus Available Information; Information Incorpo-rated By Reference; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information Summary of Proxy Statement-Prospectus; Selected Historical and Pro Forma Financial Data 4. Terms of the Transaction The Merger; Description of CFX Capital Stock; Comparison of Rights of CFX and Orange Stockholders 5. Pro Forma Financial Information Pro Forma Combined Financial Data 6. Material Contracts with the Company Being Acquired Not Applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to Be Underwriters Not Applicable 8. Interests of Named Experts and Counsel The Merger 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Not Applicable 10. Information with Respect to S-3 Registrants Not Applicable 11. Incorporation of Certain Information by Reference Not Applicable 12. Information with Respect to S-2 or S-3 Registrants Available Information; Information Incorpo-rated by Reference; Information about CFX; Comparative Stock Prices and Dividends; Selected Historical and Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations of CFX; Index to Financial Statements 13. Incorporation of Certain Information by Reference Information Incorporated by Reference 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants Not Applicable 15. Information with Respect to S-3 Companies Not Applicable 16. Information with Respect to S-2 or S-3 Companies Available Information; Information Incorpo-rated By Reference; Information about Orange; Comparative Stock Prices and Dividends; Selected Historical and Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations of Orange Savings Bank; Index to Financial Statements 17. Information with Respect to Companies other than S-2 or S-3 Companies Not Applicable 18. Information if Proxies, Consents or Authorizations are to be Solicited Meeting Information; The Merger; Information Incorporated by Reference 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer Not Applicable
Orange Savings Bank 30 East Main Street Orange, Massachusetts 01364 January 17, 1995 Dear Holder of Orange Common Stock: You are cordially invited to attend a Special Meeting of the Stockholders (the "Special Meeting") of Orange Savings Bank, a Massachusetts- chartered savings bank ("Orange"), to be held on Friday, February 24, 1995, at 12:00 noon at the Athol-Orange Lodge of Elks, Route 2A, Orange, Massachusetts. At the Special Meeting, holders of the outstanding shares of common stock, par value $.10 per share, of Orange ("Orange Common Stock") will be asked to consider and vote upon a proposal to approve and adopt an Amended and Restated Agreement and Plan of Merger, dated as of July 26, 1994 (the "Merger Agreement"), by and between Orange and CFX Corporation, a New Hampshire corporation ("CFX"), and each of the transactions contemplated thereby. Under the terms of the Merger Agreement, CFX will form a Massachusetts trust company subsidiary which will then be merged with and into Orange (the "Merger"). Following the Merger, Orange will be operated as a wholly-owned subsidiary of CFX. A copy of the Merger Agreement is attached to the accompanying Proxy Statement-Prospectus as Annex A. Upon consummation of the Merger, each outstanding share of Orange Common Stock, except for any dissenting shares and except for shares held by CFX or its subsidiaries or by Orange or its subsidiaries (other than in both cases shares held in a fiduciary capacity or as a result of debts previously contracted), will be converted into the right to receive the number of shares of CFX common stock, $1.00 par value ("CFX Common Stock"), determined by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the denominator of which is the Average Closing Price, subject to adjustment as described in the next paragraph (the "Exchange Ratio"). The "Average Closing Price" is the average closing sale price per share of CFX Common Stock on the American Stock Exchange (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source), for the ten American Stock Exchange trading days ending on the business day before the date on which the approval of the Massachusetts Commissioner of Banks required to consummate the Merger is obtained. Notwithstanding the foregoing paragraph, if the Average Closing Price is equal to or greater than $20.00, the Exchange Ratio will be 0.7500; and if the Average Closing Price is equal to or less than $15.2381, the Exchange Ratio will be 0.9844; except that (a) if, before the effective time of the Merger, an announcement is made with respect to a business combination involving the acquisition of CFX or a substantial portion of its assets, the Exchange Ratio shall not be less than 0.7875, and (b) if the Average Closing Price is equal to or less than $13.3333, Orange shall have the right, waivable by it, to terminate the Merger Agreement, unless CFX shall have elected, with the approval of Orange, to adopt as the Exchange Ratio the "Adjusted Maximum Exchange Ratio", which shall be determined by dividing $13.13 by the Average Closing Price. In accordance with adjustment provisions contained in the Merger Agreement, these ratios have been adjusted from those set forth in the Merger Agreement to reflect a 5% common stock dividend declared by CFX on December 12, 1994. After January 1, 1995, Orange shall have the right to increase its regular quarterly cash dividend to an amount equal to the quarterly dividend then being paid by CFX with respect to each share of CFX Common Stock, multiplied by .8750. For the quarter ended September 30, 1994, CFX paid a dividend of $.23 with respect to each share of CFX Common Stock. Enclosed are a Notice of Special Meeting of Stockholders and a Proxy Statement-Prospectus which describe the Merger, the background of the transaction and the businesses of CFX and Orange. You are urged to read all these materials carefully. The Board of Directors has fixed the close of business on December 30, 1994 as the record date for the Special Meeting. Accordingly, only stockholders of record on that date will be entitled to notice of, and to vote at, the Special Meeting or any adjournments or postponements thereof. The affirmative vote of the holders of two-thirds of the shares of Orange Common Stock outstanding and entitled to vote is necessary to approve and adopt the Merger Agreement. THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION APPROVING THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF APPROVING AND ADOPTING THE MERGER AGREEMENT. EDS Management Consulting Services, Banking Group, formerly BEI Golembe, a division of EDS ("EDS"), Orange's financial advisor, has rendered a written opinion to the Board of Directors of Orange that states, among other things, that, as of the date of this Proxy Statement-Prospectus, the Exchange Ratio is fair to Orange's stockholders from a financial point of view. The written opinion of EDS, dated the date of this Proxy Statement-Prospectus, is reproduced in full as Annex B to the accompanying Proxy Statement-Prospectus, and I urge you to read the opinion carefully. The affirmative vote of two-thirds (66 2/3%) of all of the outstanding shares of Orange Common Stock is required to approve the Merger Agreement. Consequently, the failure to vote will have the same effect as a vote against the proposal. Accordingly, it is essential that you take the time to consider and to vote upon this significant matter and that your shares be represented at the Special Meeting, regardless of whether you plan to attend. A form of proxy solicited by the Board of Directors is enclosed for your convenience. YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. If you attend the Special Meeting, you may vote in person if you wish, even if you have previously returned your proxy card. Promptly after the Merger, a letter of transmittal will be mailed to all holders of record of shares of Orange Common Stock to use in connection with surrendering their stock certificates. PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD OR TO THE EXCHANGE AGENT UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL, WHICH WILL INCLUDE INSTRUCTIONS AS TO THE PROCEDURE TO BE USED IN SENDING YOUR STOCK CERTIFICATES. I strongly support the acquisition of Orange by CFX and join with the other members of the Board in recommending the Merger to you. We urge you to vote in favor of approval and adoption of the Merger Agreement. If you should have any questions about the Merger or need assistance in completing your proxy please contact the undersigned or Dana C. Robinson, Treasurer, at Orange at (508) 544-6915. Very truly yours, RICHARD F. ASTRELLA President IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. ORANGE SAVINGS BANK 30 East Main Street Orange, Massachusetts 01364 (508) 544-6915 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To Be Held On February 24, 1995 A Special Meeting of Stockholders (the "Special Meeting") of Orange Savings Bank, a Massachusetts chartered savings bank ("Orange") will be held on Friday, February 24, 1995, at 12:00 noon at the Athol-Orange Lodge of Elks, Route 2A, Orange, Massachusetts, for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 (the "Merger Agreement"), by and between Orange and CFX Corporation, a New Hampshire corporation ("CFX"), and each of the transactions contemplated thereby. Pursuant to the Merger Agreement, CFX Interim Trust Company ("Interim Bank"), a Massachusetts chartered trust company, will be organized as a wholly-owned subsidiary of CFX for the purpose of facilitating the acquisition of Orange by CFX. Interim Bank will be merged with and into Orange (the "Merger") upon the terms and subject to the conditions set forth in the Merger Agreement, as are more fully described in the enclosed Proxy Statement-Prospectus. A copy of the Merger Agreement is attached as Annex A to the accompanying Proxy Statement-Prospectus. 2. To approve an adjournment of the Special Meeting if necessary to permit further solicitation of proxies in the event that there are not sufficient votes at the time of the Special Meeting to adopt the Merger Agreement. 3. To transact such other business as may properly be brought before the Special Meeting, or any adjournments or postponements thereof. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above, or on any date or dates to which, by original or later adjournment, the Special Meeting may be adjourned, or to which the Special Meeting may be postponed. The Board of Directors has fixed the close of business on December 30, 1994 as the record date (the "Record Date") for determination of stockholders entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof. Only holders of shares of Orange common stock, par value $.10 per share ("Orange Common Stock"), of record at the close of business on the Record Date will be entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof. In the event there are not sufficient votes to approve the foregoing proposal at the time of the Special Meeting, the Special Meeting may be adjourned in order to permit further solicitation of proxies by Orange. A majority of the outstanding shares of Orange Common Stock entitled to vote must be represented at the Special Meeting, in person or by proxy, to constitute a quorum for the transaction of business. The affirmative vote of the holders of two-thirds of the shares of Orange Common Stock issued, outstanding and entitled to vote at the Special Meeting will be required to approve the Merger Agreement. Any stockholder entitled to vote at the Special Meeting shall have the right to dissent from the Merger Agreement and to receive payment equal to the "fair value" of the shares of Orange Common Stock held of record by such stockholder upon compliance with sections 85 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts, the full text of which is included as Annex C to the accompanying Proxy Statement-Prospectus. This right is explained more fully in the accompanying Proxy Statement-Prospectus in the section headed "THE MERGER--Appraisal Rights of Dissenting Stockholders." THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. By Order of the Board of Directors, ROGER W. MALLET, Clerk Orange, Massachusetts January 17, 1995 WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. ORANGE SAVINGS BANK CFX CORPORATION 30 East Main Street 102 Main Street Orange, Massachusetts 01364 Keene, New Hampshire 03431 (508) 544-6915 (603) 352-2502 PROXY STATEMENT-PROSPECTUS SPECIAL MEETING OF STOCKHOLDERS ORANGE SAVINGS BANK February 24, 1995 This Proxy Statement-Prospectus is furnished in connection with the solicitation of proxies by the Board of Directors of Orange Savings Bank ("Orange") to be used at a Special Meeting of Stockholders to be held on February 24, 1995 (the "Special Meeting"). The Board of Directors of Orange has called the Special Meeting for the purpose of considering and voting upon a proposal to approve and adopt an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") dated as of July 26, 1994, by and between Orange and CFX Corporation ("CFX"). Pursuant to the Merger Agreement, CFX will organize a new wholly-owned subsidiary, CFX Interim Trust Company, a Massachusetts chartered trust company ("Interim Bank"), which will be merged with and into Orange (the "Merger"). As a result of the Merger, Orange will become a wholly-owned subsidiary of CFX. At the Special Meeting, stockholders may also be asked to approve a proposal to adjourn the Special Meeting if necessary to permit further solicitation of proxies in the event that there are not sufficient votes at the time of the Special Meeting to adopt the Merger Agreement. The Merger Agreement is attached hereto as Annex A and is incorporated herein by reference. This Proxy Statement-Prospectus and the form of proxy are first being mailed to stockholders of Orange on or about January 17, 1995. At the effective time of the Merger, each share of Orange common stock, $.10 par value ("Orange Common Stock"), except for any dissenting shares and except for shares held by CFX or its subsidiaries or by Orange or its subsidiaries (other than in both cases shares held in a fiduciary capacity or as a result of debts previously contracted), will be converted into and exchangeable for a number of shares of CFX common stock, $1.00 par value ("CFX Common Stock"), which shall be determined by application of an exchange ratio linked to the average closing price of CFX Common Stock, subject to certain adjustments. No fractional shares of CFX Common Stock will be issued, and cash will be paid in lieu thereof. See "THE MERGER--Exchange Ratio and Other Matters" and "DESCRIPTION OF CFX CAPITAL STOCK--CFX Common Stock". Following the Merger, Orange will continue to be operated as a wholly-owned subsidiary of CFX. CFX has filed a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with the Securities and Exchange Commission (the "Commission") covering a maximum of 713,111 shares of CFX Common Stock, representing shares to be issued in connection with the Merger. This Proxy Statement-Prospectus also constitutes the Prospectus of CFX filed as a part of such Registration Statement. This Proxy Statement-Prospectus does not cover any resales of CFX Common Stock received by stockholders of Orange upon consummation of the Merger, and no person is authorized to make use of this Proxy Statement-Prospectus in connection with any such resale. All information contained in this Proxy Statement-Prospectus with respect to CFX has been supplied by CFX and all information with respect to Orange has been supplied by Orange. THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT- PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT-PROSPECTUS IN ITS ENTIRETY. THE SHARES OF CFX COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF CFX AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THE SECURITIES OF CFX OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. No person is authorized to give any information or to make any representations other than those contained herein and, if given or made, such information or representation must not be relied upon as having been authorized. This document does not constitute an offer or solicitation by anyone in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Proxy Statement-Prospectus nor any distribution of the shares of CFX Common Stock hereunder shall, under any circumstances, create any implication that there has not been any change in the affairs of CFX or Orange since the date hereof. The date of this Proxy Statement-Prospectus is January 17, 1995. TABLE OF CONTENTS Page AVAILABLE INFORMATION 3 INFORMATION INCORPORATED BY REFERENCE 4 SUMMARY OF PROXY STATEMENT-PROSPECTUS 5 SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA 13 MEETING INFORMATION 19 The Special Meeting 19 Record Date 19 Proxies; Voting and Revocation 19 Votes Required 20 Solicitation of Proxies 20 THE MERGER 20 General 20 Background of and Reasons for the Merger; Recommendation of the Board of Directors 20 Opinion of Financial Advisor 23 Management and Operations after the Merger 26 Exchange Ratio and Other Matters 26 Exchange of Certificates; Fractional Shares 27 Effective Time 27 Conduct of Business Pending the Merger 28 Conditions to the Consummation of the Merger 30 No Solicitation 32 Regulatory Matters 32 Certain Federal Income Tax Consequences 33 Accounting Treatment 35 Termination of the Merger Agreement 35 Termination Fee 36 Waiver, Amendment and Extension of the Merger Agreement 36 Effect on Employee Benefits 36 Interests of Certain Persons in the Merger 37 Beneficial Ownership of Orange Common Stock 38 Appraisal Rights of Dissenting Stockholders 38 Resale of CFX Common Stock 39 PRO FORMA COMBINED FINANCIAL DATA 41 REGULATION 48 INFORMATION ABOUT CFX 51 Description of Business 51 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CFX 53 CERTAIN STATISTICAL AND OTHER INFORMATION ABOUT CFX 74 INFORMATION ABOUT ORANGE 81 Description of Business 81 Description of Properties 81 Legal Proceedings 82 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ORANGE SAVINGS BANK 83 DESCRIPTION OF CFX CAPITAL STOCK 94 General 94 CFX Common Stock 94 Preferred Stock 95 Dividend Reinvestment and Stock Purchase Plan 96 COMPARISON OF RIGHTS OF CFX AND ORANGE STOCKHOLDERS 96 COMPARATIVE STOCK PRICES AND DIVIDENDS 104 EXPERTS 105 LEGAL OPINIONS 105 INDEPENDENT AUDITORS 105 COMPLIANCE WITH SECTION 16(a) OF SECURITIES EXCHANGE ACT OF 1934 105 INDEX TO FINANCIAL STATEMENTS 106 ANNEXES A. Amended and Restated Agreement and Plan of Merger A--1 B. Opinion of EDS Management Consulting Services, Banking Group to Orange Board of Directors B--1 C. Chapter 156B, [SECTION][SECTION]85-98 of the Massachusetts Business Corporation Law C--1 AVAILABLE INFORMATION Each of CFX and Orange is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Commission and the Federal Deposit Insurance Corporation (the "FDIC"), respectively. Proxy statements, reports and other information concerning CFX can be inspected and copied at the Commission's office at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Commission's Regional Offices in New York (Room 1400, 75 Park Place, New York, New York 10007) and Chicago (CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661), and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Proxy statements, reports and other information concerning Orange can be inspected and copied at the FDIC's office at 550 17th Street, N.W., Room F-640, Washington, DC 20429 (202/898- 8911). CFX Common Stock is listed on the American Stock Exchange. Reports, proxy materials and other information concerning CFX also may be inspected at the offices of the American Stock Exchange Inc. (the "Stock Exchange"), 86 Trinity Place, New York, New York 10006. Orange Common Stock is quoted on the Nasdaq Small-Cap Market. Reports, proxy statements and other information concerning Orange may also be inspected at the offices of the National Association of Securities Dealers, Inc. ("NASD") at 1735 K Street, N.W., Washington, D.C. 20006. This Proxy Statement-Prospectus does not contain all the information set forth in the Registration Statement and Annexes thereto which CFX has filed with the Commission under the Securities Act, which may be obtained from the Public Reference Section of the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees, and to which reference is hereby made. THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS THERETO, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT- PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO THE FOLLOWING: CFX Documents Orange Documents Mark A. Gavin Dana C. Robinson Chief Financial Officer Treasurer CFX Corporation Orange Savings Bank 102 Main Street 30 East Main Street Keene, New Hampshire 03431 Orange, Massachusetts 01364 (603) 352-2502 (508) 544-6915 IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, A REQUEST MUST BE RECEIVED NO LATER THAN FEBRUARY 16, 1995. INFORMATION INCORPORATED BY REFERENCE The following CFX documents are incorporated by reference herein: (1) CFX's Annual Report on Form 10-K for the year ended December 31, 1993; (2) CFX's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1994; (3) CFX's Current Reports on Form 8-K dated April 25, July 26, and December 19, 1994; and (4) The description of the CFX Common Stock contained in a Registration Statement filed by Cheshire Financial Corporation (now known as CFX) on Form 8-A dated November 13, 1990, and any amendment or report filed for the purpose of updating such description. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402 (a) (8) of Regulation S-K. The following Orange documents are incorporated by reference herein: (1) Orange's Annual Report on Form F-2 for the year ended December 31, 1993; (2) Orange's Quarterly Reports on Form F-4 for the quarters ended March 31, June 30, and September 30, 1994; and (3) Orange's Current Reports on Form F-3 for the months ended December 31, 1993 and July 31, 1994. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402 (a) (8) of Regulation S-K. All documents filed with the Commission and the FDIC by CFX and Orange pursuant to Sections 13, 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement-Prospectus and prior to the Special Meeting are incorporated herein by reference and such documents shall be deemed to be a part hereof from the date of filing of such documents. Any statement contained in this Proxy Statement-Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement-Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement-Prospectus. SUMMARY OF PROXY STATEMENT-PROSPECTUS The following is a brief summary, which is necessarily incomplete, of certain information contained elsewhere in this Proxy Statement-Prospectus or in documents incorporated herein by reference. Reference is made to, and this Summary is qualified in its entirety by, the more detailed information contained herein, the Annexes hereto and the documents incorporated by reference herein. Each stockholder is urged to read the Proxy Statement- Prospectus with care. The Parties CFX. CFX is a bank holding company headquartered in Keene, New Hampshire with total assets of approximately $759.0 million as of September 30, 1994. CFX's banking subsidiary is CFX Bank, headquartered in Keene, New Hampshire, which is a full service bank offering a wide range of deposit and loan programs to consumers and businesses. CFX Bank operates 19 full service offices, seven loan production offices, and 47 automated teller and remote service banking locations in New Hampshire. CFX Mortgage, Inc., CFX Bank's mortgage banking subsidiary, services approximately $712.0 million in mortgage loans for others. CFX's principal executive office is located at 102 Main Street, Keene, New Hampshire 03431, and its telephone number is (603) 352- 2502. Orange. Orange is a Massachusetts-chartered stock savings bank conducting its banking business through its main office in Orange, Massachusetts and its branch office in Athol, Massachusetts. Orange is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, business and consumer loans, and in various investment securities. At September 30, 1994, Orange and its subsidiaries had total assets of approximately $83.9 million, total deposits of $73.8 million and stockholders' equity of $8.6 million, or $11.90 per share. Orange's principal executive office is located at 30 East Main Street, Orange, Massachusetts 01364, and its telephone number is (508) 544-6915. Date, Time and Place of Special Meeting The Special Meeting will be held at the Athol-Orange Lodge of Elks, Route 2A, Orange, Massachusetts, at 12:00 noon on Friday, February 24, 1995. Purposes of Special Meeting The purposes for which the Special Meeting will be held are (i) to consider and vote upon a proposal to adopt and approve the Merger Agreement and the transactions contemplated thereby, (ii) to authorize adjournment of the Special Meeting if necessary to permit further solicitation of proxies in the event that there are not sufficient votes at the time of the Special Meeting to adopt the Merger Agreement and (iii) to conduct any other business that may properly come before the Special Meeting, or any adjournments or postponements thereof. See "MEETING INFORMATION--The Special Meeting". Votes Required The Board of Directors of Orange has fixed the close of business on December 30, 1994 as the record date (the "Record Date") for the determination of stockholders entitled to notice of and to vote at the Special Meeting. Only the holders of record of the outstanding shares of Orange Common Stock on the Record Date will be entitled to notice of, and to vote at, the Special Meeting and any adjournments or postponements thereof. At the Record Date, 724,412 shares of Orange Common Stock were outstanding and entitled to vote. The presence, in person or by proxy, of a majority of the aggregate number of shares of Orange Common Stock outstanding and entitled to vote on the Record Date is necessary to constitute a quorum at the Special Meeting. The affirmative vote of the holders of two-thirds of the shares of Orange Common Stock issued, outstanding and entitled to vote at the Special Meeting will be required to approve the Merger Agreement. The approval of the Merger Agreement by Orange's stockholders is a condition to the consummation of the Merger. Of the 724,412 shares of Orange Common Stock outstanding and entitled to vote, on the Record Date, 84,786 shares, or approximately 11.70%, were held by directors and executive officers of Orange and their respective affiliates. The affirmative vote of the holders of two-thirds of the shares of Orange Common Stock issued, outstanding and entitled to vote at the Special Meeting will be required to approve the Merger Agreement. Consequently, assuming, for illustration purposes only, that all directors and officers of Orange and their respective affiliates vote in favor of the Merger Agreement, the affirmative vote of holders of approximately 398,156 additional shares of Orange Common Stock, representing approximately 54.96% of the shares issued and outstanding on the Record Date, will be required. Approval of any proposal to adjourn the Special Meeting to permit the further solicitation of proxies would require the affirmative vote of the holders of a majority of the shares of Orange Common Stock present and voting at the Special Meeting. See "MEETING INFORMATION--Votes Required". Terms of the Merger In the Merger, each share of Orange Common Stock outstanding, except for any dissenting shares and except for shares held by CFX or its subsidiaries or by Orange or its subsidiaries (other than in both cases shares held in a fiduciary capacity or as a result of debts previously contracted), will be converted into and exchangeable for the number of shares of CFX Common Stock determined by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the denominator of which is the Average Closing Price, subject to adjustment as described in the next paragraph (the "Exchange Ratio"). The "Average Closing Price" is the average closing sale price per share of CFX Common Stock on the American Stock Exchange (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source), for the ten American Stock Exchange trading days ending on the business day before the date on which the approval of the Massachusetts Commissioner of Banks required to consummate the Merger is obtained. Notwithstanding the foregoing paragraph, if the Average Closing Price is equal to or greater than $20.00, the Exchange Ratio will be 0.7500 (the "Minimum Exchange Ratio"); and if the Average Closing Price is equal to or less than $15.2381, the Exchange Ratio will be 0.9844 (the "Maximum Exchange Ratio"); except that (a) if, before the effective time of the Merger, an announcement is made with respect to a business combination involving the acquisition of CFX or a substantial portion of its assets, the Exchange Ratio shall not be less than 0.7875, and (b) if the Average Closing Price is equal to or less than $13.3333, Orange shall have the right, waivable by it, to terminate the Merger Agreement, unless CFX shall have elected, with the approval of Orange, to adopt as the Exchange Ratio the "Adjusted Maximum Exchange Ratio", which shall be determined by dividing $13.13 by the Average Closing Price. In accordance with adjustment provisions contained in the Merger Agreement, these ratios have been adjusted from those set forth in the Merger Agreement to reflect a 5% common stock dividend declared by CFX on December 12, 1994. After January 1, 1995, Orange shall have the right to increase its regular quarterly cash dividend to an amount equal to the quarterly dividend then being paid by CFX with respect to each share of CFX Common Stock, multiplied by .8750. For the quarter ended September 30, 1994, CFX paid a dividend of $.23 with respect to each share of CFX Common Stock. The Exchange Ratio is the product of arms' length negotiations between the respective managements of CFX and Orange. In negotiating the Exchange Ratio, the management of Orange had the benefit of advice from its financial advisor, the investment banking firm of EDS Management Consulting Services, Banking Group (formerly BEI Golembe, a division of EDS) ("EDS"). See "THE MERGER--Opinion of Financial Advisor". No fractional shares of CFX Common Stock will be issued in the Merger. In lieu thereof, each holder of Orange Common Stock who otherwise would have been entitled to a fractional share of CFX Common Stock will receive cash in an amount equal to such fraction multiplied by the closing sale price of CFX Common Stock on the American Stock Exchange as reported by The Wall Street Journal for the trading day immediately preceding the date of the Effective Time. The Merger will become effective on the date and time (the "Effective Time") set forth in the Articles of Merger, which shall be filed with the Secretary of State of the Commonwealth of Massachusetts. At the Effective Time, each stock option with respect to Orange Common Stock granted by Orange under any of the 1987, 1988 or 1989 Orange Bank Stock Option Plans (the "Orange Stock Option Plans"), which is outstanding at such time, whether or not then exercisable, will be canceled in exchange for an option under CFX's 1986 Stock Option Plan (the "CFX Stock Option Plan") to purchase CFX Common Stock. The rights to CFX Common Stock to be received by holders of Orange stock options upon consummation of the Merger will be the same as the rights such optionees had under the Orange Stock Option Plans immediately prior to the Effective Time, except that (a) the number of shares of CFX Common Stock subject to such options and the exercise price of such options will be adjusted to give effect to the Exchange Ratio, (b) the options will remain exercisable regardless of whether the holder shall remain in the employ of Orange or CFX after the Effective Time, and (c) the options will be non-qualified stock options rather than incentive stock options. The information set forth in the following table is provided for illustration purposes only, and is based on certain assumptions, which are set forth in the footnotes to the table.
A B C D E F G H I Average CFX Shares Aggregate CFX Shares CFX Shares Aggregate Closing Received per Consideration Consideration Issuable to % CFX Owned Issuable to Consideration Price CFX Exchange 100 Orange Per Orange (Excluding Orange by Orange Orange (Including Stock(1) Ratio(2) Shares Share(3) Options)(4) Stockholders(5) Stockholders(6) Option Holders(7) Options)(8) $13.3333 0.9844 98.44 $13.13 $ 9,511,530 713,111 15.48% 79,785 $ 9,904,869 14.2857 0.9844 98.44 14.06 10,185,233 713,111 15.48 79,785 10,653,948 15.2381 0.9844 98.44 15.00 10,866,180 713,111 15.48 79,785 11,411,081 16.1905 0.9265 92.65 15.00 10,866,180 671,168 14.70 75,092 11,411,081 17.1429 0.8750 87.50 15.00 10,866,180 633,861 14.00 70,918 11,411,081 18.0952 0.8289 82.89 15.00 10,866,180 600,465 13.36 67,182 11,411,081 19.0476 0.7875 78.75 15.00 10,866,180 570,474 12.78 63,826 11,411,081 20.0000 0.7500 75.00 15.00 10,866,180 543,309 12.24 60,787 11,411,081 20.9524 0.7500 75.00 15.71 11,380,513 543,309 12.24 60,787 11,982,958 21.9048 0.7500 75.00 16.43 11,902,089 543,309 12.24 60,787 12,562,890 The Average Closing Prices set forth in this column are for illustration purposes only. Assuming that the Average Closing Price was calculated using the closing sale price of CFX Common Stock for the ten business days preceding January 6, 1995, the Average Closing Price would be $16.30. In accordance with adjustment provisions contained in the Merger Agreement, these ratios have been adjusted from those set forth in the Merger Agreement to reflect a 5% common stock dividend declared by CFX on December 12, 1994. Assuming that the closing sale price of CFX Common Stock on the date of consummation of the Merger is the same as the Average Closing Price, each share of Orange Common Stock, as of the Effective Time, would be converted into and exchangeable for a fraction of a share of CFX Common Stock having the market value (on the date of consummation) set forth in this column. The aggregate consideration (excluding options) was computed by multiplying each dollar amount in Column D by 724,412 (the number of shares of Orange Common Stock outstanding on January 6, 1995). The number of shares of CFX Common Stock that will be issued to the holders of Orange Common Stock following consummation of the Merger was computed by multiplying each ratio in Column B by 724,412 (the number of shares of Orange Common Stock outstanding on January 6, 1995). The percentage of CFX Common Stock that will be owned by the current holders of Orange Common Stock after consummation of the Merger was computed by dividing each number set forth in Column F by the sum of 3,893,803 (the number of outstanding shares of CFX Common Stock on January 6, 1995) and such number from Column F. The number of options that will be issued under the CFX Stock Option Plan following consummation of the Merger to the holders of currently outstanding options under the Orange Stock Option Plans was computed by multiplying each ratio in Column B by 81,049 (the number of options outstanding under the Orange Stock Option Plans on January 6, 1995). The aggregate consideration (including options) was computed by multiplying Column D by 81,049 (the number of options outstanding under the Orange Stock Option Plans on January 6, 1995), subtracting $670,834 (the aggregate exercise price of the currently outstanding options under the Orange Stock Option Plans) and adding the corresponding dollar amount from Column E to that number.
See "THE MERGER--Opinion of Financial Advisor", "--Exchange Ratio and Other Matters", "--Regulatory Matters" and "--Appraisal Rights of Dissenting Stockholders". Recommendation of the Board of Directors and Reasons for the Merger THE BOARD OF DIRECTORS OF ORANGE HAS UNANIMOUSLY ADOPTED A RESOLUTION APPROVING THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS APPROVAL AND ADOPTION OF THE MERGER AGREEMENT BY ORANGE'S STOCKHOLDERS. Orange's Board has adopted that resolution and makes that recommendation because it believes that the terms of the Merger Agreement are fair and in the best interests of Orange and its stockholders and because the Orange Board believes in its business judgment that the Exchange Ratio is fair and reasonable to the stockholders of Orange. The terms of the Merger Agreement, including the Exchange Ratio, were reached on the basis of arms' length negotiations between Orange and CFX. In the course of reaching its decision to approve the Merger Agreement, the Board of Directors of Orange consulted with Foley, Hoag & Eliot, its legal advisors, regarding the legal terms of the Merger Agreement and the Board of Directors' obligations in its consideration thereof and with EDS, its financial advisor, regarding the financial terms and fairness, from a financial point of view, of the Exchange Ratio in the proposed Merger. See "THE MERGER--Background of the Merger" and "--Recommendation of the Board of Directors and Reasons for the Merger". Opinion of Financial Advisor EDS has delivered to the Board of Directors of Orange its written opinion, as of the date of this Proxy Statement-Prospectus, that the Exchange Ratio is fair, from a financial point of view, to Orange's stockholders. The full text of the opinion of EDS dated as of the date of this Proxy Statement- Prospectus, which sets forth assumptions made, matters considered and limits on the review undertaken by EDS, is attached hereto as Annex B. Stockholders are urged to read this opinion in its entirety. EDS's opinion is directed only to the Exchange Ratio and does not constitute a recommendation to any Orange stockholder as to how such stockholder should vote at the Special Meeting. See "THE MERGER--Background of the Merger", "--Opinion of Financial Advisor" and Annex B to this Proxy Statement-Prospectus. Conditions to the Consummation of the Merger Consummation of the Merger is subject to various conditions, including the approval of Orange's stockholders solicited hereby; the effectiveness of the registration statement of which this Proxy Statement-Prospectus forms a part; approval by certain federal and Massachusetts regulatory authorities; receipt by Orange and CFX of an opinion of counsel or a ruling by the Internal Revenue Service as to the tax-free nature of the Merger for federal income tax purposes (except for cash received in lieu of fractional shares); receipt of a letter from CFX's independent accountants to the effect that the Merger qualifies to be accounted for as a pooling-of-interests; the listing, subject to notice of issuance, on the American Stock Exchange of the CFX Common Stock to be issued in the Merger; the exercise of appraisal rights by the holders of not more than 10% of Orange Common Stock; and other customary closing conditions. None of the foregoing regulatory approvals has been obtained and there is no assurance that such approvals will be obtained or as to the timing of such approvals. See "THE MERGER--Conditions to the Consummation of the Merger" and "-- Regulatory Matters". Termination of the Merger Agreement The Merger Agreement may be abandoned at any time prior to the Effective Time by the mutual consent of CFX and Orange. Subject to certain limitations in cases where the party seeking termination is in breach of the Merger Agreement, the Merger Agreement may also be terminated by either CFX or Orange, acting individually, (a) if any governmental entity shall have issued a final nonappealable order prohibiting the consummation of any of the transactions contemplated by the Merger Agreement; (b) if the Effective Time has not occurred by July 31, 1995, except that Orange may extend this date if the approval of a governmental entity that is required for the consummation of any of the transactions contemplated by the Merger Agreement has not been obtained; (c) if there is a material breach by the other party of any representation, warranty, covenant or agreement contained in the Merger Agreement which is not timely cured; or (d) if the vote of Orange's stockholders required to approve the Merger Agreement is not obtained. Orange may also terminate the Merger Agreement in the event the Average Closing Price is equal to or less than $13.3333, unless CFX elects (with the approval of Orange) to adopt the Adjusted Maximum Exchange Ratio as the Exchange Ratio. If the Merger Agreement is terminated (other than as a result of a wilful breach or gross negligence by Orange or CFX) each of Orange and CFX shall be responsible for its own costs and expenses. If the Merger Agreement is terminated as a result of a breach of a representation, warranty or covenant which is caused by the wilful conduct or gross negligence of either party, the breaching party must reimburse the other for all out-of-pocket costs and expenses, up to $250,000. If Orange is required to pay a termination fee (see "THE MERGER--Termination Fee"), the maximum expenses payable by Orange shall not exceed $150,000. See "THE MERGER--Termination of the Merger Agreement". Termination Fee Pursuant to the Merger Agreement, Orange is required to pay to CFX a termination fee of $450,000 within 20 business days of the occurrence of one of the following: the failure of Orange's stockholders to approve the affiliation of CFX and Orange after the public announcement by a person or group of persons other than CFX of a bona fide, credible offer or proposal to acquire 45% or more of Orange's Common Stock, or to acquire, merge or consolidate with Orange or to purchase all or substantially all of Orange's assets; the acquisition by any person or group of persons other than CFX of 45% or more of Orange's Common Stock (or the acquisition by any person or group of persons of the right to acquire 45% or more of Orange's Common Stock), exclusive of shares of Orange's Common Stock sold directly or indirectly to such person or group of persons by CFX; or the entry of Orange into an agreement or other understanding with a person or group of persons other than CFX for such person or group of persons to acquire, merge or consolidate with Orange or to purchase all or substantially all of Orange's assets or acquire 45% or more of the outstanding shares of Orange's Common Stock. See "THE MERGER--Termination Fee". Amendment, Extension and Waiver CFX and Orange may, to the extent legally allowable, (a) amend the Merger Agreement; (b) extend the time for the performance of any of the obligations or other acts required of the other party contained in the Merger Agreement; (c) waive any inaccuracies in the representations and warranties of the other party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement; or (d) waive compliance by the other party of any of its agreements or conditions contained in the Merger Agreement, except that after Orange's stockholder approval, no amendment shall reduce the amount or change the form of consideration to be delivered to each of Orange's stockholders pursuant to the Merger Agreement without further approval of Orange's stockholders. See "THE MERGER--Waiver, Amendment and Extension of the Merger Agreement". Regulatory Approvals Consummation of the transactions contemplated by the Merger Agreement is subject to approval by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Federal Deposit Insurance Corporation ("FDIC"), the Board of Bank Incorporation of the Commonwealth of Massachusetts (the "Massachusetts BBI") and the Commissioner of Banks of the Commonwealth of Massachusetts (the "Massachusetts Commissioner of Banks"). Assuming the approval of the Federal Reserve Board and the FDIC, the Merger may not be consummated for 30 days after the later of such approvals, during which time the United States Department of Justice may challenge the Merger on antitrust grounds. Applications seeking the appropriate approvals have been filed. The Merger will not proceed until all regulatory approvals required to consummate the Merger have been obtained, such approvals are in full force and effect and all statutory waiting periods in respect thereof have expired. There can be no assurance that the Merger will be approved by each of the required regulatory agencies. If such approvals are received, there can be no assurance as to the date of such approvals, the terms thereof, or the absence of any litigation challenging such approvals. See "THE MERGER--Regulatory Matters". Certain Federal Income Tax Consequences Consummation of the Merger is conditioned on there being delivered to each of CFX and Orange either a ruling of the Internal Revenue Service or an opinion of counsel reasonably acceptable to CFX and Orange, addressed to CFX and the stockholders of Orange, to the effect that, among other things, (a) the Merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) no gain or loss will be recognized by the stockholders of Orange upon their receipt of CFX Common Stock in exchange for their Orange Common Stock, except in respect of cash received in lieu of fractional shares; (c) the tax basis of the shares of CFX Common Stock received by the stockholders of Orange will be the same as the tax basis of the Orange Common Stock surrendered in exchange therefor, decreased by the amount of cash received and increased by the amount of any gain (and by the amount of any dividend income) recognized on the exchange; and (d) the holding period of the CFX Common Stock in the hands of the Orange stockholders will generally include the holding period of their Orange Common Stock. Stockholders should consult their own tax advisors as to the tax consequences of the Merger to them under Federal, state, local or any other applicable law. See "THE MERGER--Certain Federal Income Tax Consequences". Accounting The Merger is intended to be accounted for as a pooling-of-interests, as more fully described under "THE MERGER--Accounting Treatment". Management and Operations After the Merger Upon consummation of the Merger, Orange, as the surviving bank in the Merger with Interim Bank, will continue to operate as a separate banking subsidiary of CFX. The directors and officers of Orange immediately prior to the Effective Time shall remain the directors and officers of the surviving bank, to hold office in accordance with the charter documents and by-laws of the surviving bank until their respective successors are duly elected or appointed and qualified. Following the Effective Time, CFX intends to elect two additional directors to serve on the Board of the surviving bank. Pursuant to the Merger Agreement, CFX has agreed that, except with respect to these two additional directors (and one additional director whom CFX may elect), the Board of Directors of Orange will be kept in place for at least three years, subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of CFX's directors. Prior to or at the Effective Time, one of Orange's current directors (designated by the Orange Board of Directors, subject to the reasonable approval of CFX) will be elected to the Board of Directors of CFX. See "THE MERGER--Management and Operations After the Merger". Appraisal Rights of Dissenting Stockholders Under Massachusetts law, holders of Orange Common Stock have the right to dissent from the Merger and receive payment equal to the "fair value" of their shares upon compliance with applicable provisions of Massachusetts law, the full text of which provisions is included as Annex C to this Proxy Statement-Prospectus. See "THE MERGER--Appraisal Rights of Dissenting Stockholders". Certain Differences in the Rights of Stockholders The rights of stockholders of Orange are currently governed by the Massachusetts General Laws, Orange's Amended and Restated Charter, and Orange's by-laws. Upon consummation of the Merger, Orange's stockholders automatically become stockholders of CFX, and their rights will be governed by the New Hampshire Revised Statutes, the CFX Restated Articles of Incorporation and CFX's by-laws. See "COMPARISON OF RIGHTS OF CFX AND ORANGE STOCKHOLDERS". COMPARATIVE STOCK PRICES AND DIVIDENDS The shares of CFX Common Stock are listed and traded on the American Stock Exchange. The shares of Orange Common Stock are quoted on the Nasdaq Small-Cap Market. The table below sets forth the high and low sales prices for CFX Common Stock and the bid and asked prices for Orange Common Stock as reported on the American Stock Exchange and the Nasdaq Small-Cap Market, respectively, and the cash dividends declared, for the periods indicated, as well as certain pro forma data per share of Orange Common Stock, assuming consummation of the Merger. The high and low sale prices and cash dividends declared of CFX Common Stock have been restated to give retroactive effect to the 5% common stock dividends declared on December 12, 1994 and December 13, 1993.
Orange CFX Pro Forma CFX Orange Pro Forma Equivalent Quarter Ended High Low Dividends Bid Asked Dividends Dividends(1) Dividends(1) 1992 March 31, 1992 $11-5/8 $ 7-7/8 $.1361 $ 4-1/2 $ 6-1/2 $.04 $.1223 $.1125 June 30, 1992 11-1/4 8-1/8 .1361 4 6 .06 .1257 .1157 September 30, 1992 10-3/4 8-7/8 .1361 4-1/2 5-1/2 .04 .1222 .1125 December 31, 1992 12 8-3/4 .1361 5 6-1/2 .06 .1257 .1157 1993 March 31, 1993 14-1/8 11-3/4 .1361 5-1/2 7-1/2 .04 .1225 .1127 June 30, 1993 14-1/2 12-3/4 .1632 6 8 .04 .1457 .1340 September 30, 1993 16-1/4 14-1/8 .1632 6-3/4 8-1/2 .04 .1457 .1340 December 31, 1993 17-3/4 15-3/8 .1905 7-3/4 9-3/4 .08 .1753 .1613 1994 March 31, 1994 17-3/8 15-3/4 .20 7-1/2 9-1/2 .04 .1769 .1628 June 30, 1994 19-1/8 15-5/8 .20 7-3/4 9-3/4 .04 .1769 .1628 September 30, 1994 18-1/2 16-3/8 .2190 12-1/2 14 .04 .1932 .1778 CFX's pro forma cash dividends per share are determined by dividing the aggregate pro forma cash dividends declared by the total pro forma common shares of the combined entity assuming, for illustration purposes only, that the Average Closing Price is $16.30, the average closing price of the CFX Common Stock for the ten business days preceding January 6, 1995, with a resulting Exchange Ratio of .9202. Orange pro forma equivalent dividends per share represent CFX's pro forma cash dividends per share multiplied by the assumed Exchange Ratio of .9202. See "THE MERGER--Exchange Ratio and Other Matters". On July 25, 1994, the business day immediately preceding the public announcement of the proposed Merger, the high and low sales prices for CFX Common Stock as reported by the American Stock Exchange were $18 and $173/8 per share, respectively, and the bid and asked prices for Orange Common Stock as quoted on the Nasdaq Small-Cap Market were $81/2 and $10 per share. On January 5, 1995, the high and low sales prices for CFX Common Stock as so reported were $161/4 and $17 per share, and the bid and asked prices for Orange Common Stock as so quoted were $121/2 and $133/4 per share. See "COMPARATIVE STOCK PRICES AND DIVIDENDS". SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA COMPARATIVE PER SHARE DATA The following table sets forth for CFX Common Stock and Orange Common Stock certain historical, unaudited pro forma and unaudited pro forma equivalent per share information for the nine months ended September 30, 1994 and for each of the three years in the period ended December 31, 1993. The information herein should be read in conjunction with the pro forma combined financial information, including the notes thereto, appearing elsewhere in this Proxy Statement-Prospectus. See "PRO FORMA COMBINED FINANCIAL DATA."
Maximum Exchange Ratio Minimum Exchange Ratio Nine Months Ended Nine Months Ended September 30, Years Ended December 31, September 30, Years Ended December 31, 1994 1993 1992 1991 1994 1993 1992 1991 Income (Loss) Per Common Share before Cumulative Effect of a Change in Accounting Principle(1) CFX $ .95 $ 1.24 $ .92 $ .08 $ .95 $ 1.24 $ .92 $ .08 Orange .68 1.55 (.72) (.35) .68 1.55 (.72) (.35) CFX Pro Forma .91 1.30 .67 .01 .95 1.35 .70 .01 Orange Pro Forma Equivalent .90 1.28 .66 .01 .71 1.01 .52 .01 Dividends Declared Per Common Share(2) CFX $ .62 $ .65 $ .54 $ .64 $ .62 $ .65 $ .54 $ .64 Orange .12 .20 .20 .18 .12 .20 .20 .18 CFX Pro Forma .53 .58 .49 .56 .55 .60 .51 .59 Orange Pro Forma Equivalent .52 .57 .48 .55 .42 .45 .38 .44 Common Shareholders' Equity Per Share at Period End(3) CFX $19.01 $18.79 $18.29 $17.86 $19.01 $18.79 $18.29 $17.86 Orange 11.91 11.35 9.99 10.86 11.91 11.35 9.99 10.86 CFX Pro Forma 17.93 17.65 17.01 16.79 18.63 18.33 17.67 17.44 Orange Pro Forma Equivalent 17.65 17.37 16.74 16.53 13.97 13.75 13.25 13.08 Pro forma income per share data is calculated using historical income information for CFX and Orange divided by the average pro forma shares of the combined entity. The average pro forma shares of the combined entity have been calculated by combining CFX's historical average shares with the historical average shares of Orange as adjusted by the Maximum Exchange Ratio (.9844) or the Minimum Exchange Ratio (.7500). The actual Exchange Ratio will be based on the Average Closing Price. There can be no assurance as to whether the actual Exchange Ratio will be equal to either of the assumed ratios used in this table or elsewhere in this Proxy Statement-Prospectus. See "THE MERGER--Exchange Ratio and Other Matters." The Orange pro forma equivalent income per share amounts are computed by multiplying the CFX pro forma amounts by the above-assumed Exchange Ratios. CFX's pro forma cash dividends declared per share are determined by dividing aggregate pro forma cash dividends declared by the total pro forma common shares of the combined entity assuming the Maximum Exchange Ratio or the Minimum Exchange Ratio. Orange pro forma equivalent dividends per share represent CFX's pro forma cash dividends per share multiplied by the assumed Maximum Exchange Ratio or by the assumed Minimum Exchange Ratio. See "THE MERGER--Exchange Ratio and Other Matters." CFX's pro forma common shareholders' equity per share is based on the historical common shareholders' equity of the combined entity divided by the total pro forma common shares of the combined entity assuming the Maximum Exchange Ratio or the Minimum Exchange Ratio. Orange pro forma equivalent common shareholders' equity per share at period end represents such amounts multiplied by the Maximum Exchange Ratio or the Minimum Exchange Ratio. See "THE MERGER--Exchange Ratio and Other Matters."
CFX CORPORATION SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected consolidated historical data regarding CFX's operating results and financial position for and at the periods indicated. Results of operations, per share data, and the allowance for loan and lease losses and nonperforming assets ratios for, and as of the end of, the five years ended December 31, 1993 are derived from and should be read in conjuncton with CFX's audited consolidated financial statements and the notes thereto. The audited consolidated financial statements as of December 31, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1993, and report thereon, appear elsewhere in this Proxy Statement-Prospectus. The same data as of and for the nine-month periods ended September 30 are derived from unaudited consolidated financial statements appearing elsewhere in this Proxy Statement-Prospectus.
At or for the Nine Months At or for the Years Ended September 30, Ended December 31, 1994 1993 1993(1)(2) 1992 1991(3)(4) 1990(5) 1989 (In thousands, except per share data) Results of Operations: Interest and dividend income $ 36,195 $ 34,546 $ 46,142 $ 52,411 $ 58,563 $ 58,374 $ 52,260 Interest expense 15,580 14,835 19,685 27,089 35,661 36,693 33,613 Net interest and dividend income 20,615 19,711 26,457 25,322 22,902 21,681 18,647 Provision for loan and lease losses 50 2,970 2,970 2,911 3,830 4,005 967 Net interest income after provision for loan and lease losses 20,565 16,741 23,487 22,411 19,072 17,676 17,680 Other income (charges) 3,862 4,114 6,267 3,164 1,688 (1,125) 1,627 Other expense 18,254 15,845 23,492 19,777 19,922 15,303 12,575 Income before income taxes 6,173 5,010 6,262 5,798 838 1,248 6,732 Income tax expense (benefit), net of cumulative effect of a change in accounting principle 2,298 1,078 1,240 2,000 (1,323) 1,913 2,291 Net Income (Loss) 3,875 3,932 5,022 3,798 2,161 (665) 4,441 Preferred stock dividends 201 202 270 270 270 181 - Net Income (Loss) Available to Common Stock $ 3,674 $ 3,730 $ 4,752 $ 3,528 $ 1,891 $ (846) $ 4,441 Per Share Data:(6) Earnings (loss) per common share $ .95 $ .97 $ 1.24 $ .92 $ .50 $ (.22) $ 1.11 Common shareholders' equity per share 19.01 18.77 18.77 18.29 17.86 17.90 18.45 Cash dividends per common share .62 .46 .65 .54 .64 .90 .90 Weighted average common shares outstanding 3,856 3,821 3,826 3,805 3,795 3,905 3,987 Average Balance Sheet Data: Total assets $769,837 $650,813 $665,985 $672,119 $633,359 $592,784 $531,298 Investment securities 177,974 126,329 131,430 144,455 104,917 79,745 69,295 Loans and leases, net of unearned income 506,565 478,432 484,074 478,665 485,730 466,841 432,336 Interest bearing deposits 508,790 532,869 530,334 546,872 508,526 461,196 400,507 Other borrowed funds 11,833 12,209 19,378 11,384 - - - Advances from Federal Home Loan Bank of Boston 94,828 360 7,821 12,113 24,504 27,002 31,964 Common shareholders' equity 73,038 70,568 71,327 68,162 67,965 72,634 74,918 Selected Financial Ratios:(7) Net interest margin 4.09% 4.38% 4.33% 4.09% 3.93% 4.01% 3.75% Return (loss) on average assets .64 .77 .75 .52 .30 (.14) .84 Return (loss) on average common shareholders' equity 6.73 7.07 6.66 5.18 2.78 (1.16) 5.93 Average shareholders' equity to average assets 9.95 11.40 11.25 10.68 11.30 12.66 14.10 Core (leverage) capital ratio at period end 8.88 9.77 8.93 9.75 9.37 12.38 N/A Tier 1 risk-based capital ratio at period end 14.86 15.73 13.20 14.97 14.98 14.65 N/A Total risk-based capital ratio at period end 16.14 17.03 14.48 15.96 16.37 15.85 N/A Period-end allowance for loan and lease losses to period-end loans and leases, net of unearned income 1.33 1.73 1.58 1.66 1.45 1.05 .63 Net charge-offs to average loans and leases, net of unearned income .13 .75 .73 .48 .45 .44 .15 Period-end nonperforming assets to period-end loans and leases (net of unearned income) and foreclosed real estate 1.71 3.83 2.10 4.70 5.17 3.67 1.21
CFX CORPORATION Notes to Selected Historical Financial Data (1) During 1993, CFX merged together its three banking subsidiaries, Cheshire County Savings Bank, The Monadnock Bank and The Valley Bank. The resulting consolidated bank, Cheshire County Savings Bank, changed its name to CFX Bank on November 15, 1993. (2) On September 1, 1993, CFX, through its subsidiary, Cheshire County Savings Bank, acquired the remaining 52.4% of Colonial Mortgage, Inc. ("Colonial") (renamed CFX Mortgage, Inc.). Previously, CFX owned 47.6% of Colonial and, as a result of the purchase, Colonial became a wholly-owned subsidiary. The transaction was accounted for by the purchase method of accounting. (3) On September 7, 1991, CFX, through its subsidiary, The Valley Bank, acquired certain assets and assumed all deposits of The Family Bank and Trust. The Family Bank and Trust had been declared insolvent by the New Hampshire Bank Commissioner and placed into Federal Deposit Insurance Corporation receivership on September 6, 1991. (4) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", was adopted by CFX effective January 1, 1991. The cumulative effect of the change in accounting principle on years prior to 1991 was to increase 1991 net income available to CFX Common Stock by $1,603,000, or $.42 per share. (5) On April 30, 1990 and June 22, 1990, CFX acquired all of the outstanding capital stock of The Valley Bank and Village Savings Bank, respectively. The transactions were accounted for by the purchase method of accounting. (6) Per share data has been restated to give retroactive effect to the 5% common stock dividends declared on December 12, 1994 and December 13, 1993. (7) Interim financial percentages have been annualized, where appropriate. ORANGE SAVINGS BANK SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected consolidated historical data regarding Orange's operating results and financial position for and at the periods indicated. Results of operations, per share data, and the allowance for possible loan losses and nonperforming assets ratios for, and as of the end of, the five years ended December 31, 1993 are derived from and should be read in conjuncton with Orange's audited consolidated financial statements and the notes thereto. The audited consolidated financial statements as of December 31, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1993, and report thereon, appear elsewhere in this Proxy Statement-Prospectus. The same data as of and for the nine-month periods ended September 30 are derived from unaudited consolidated financial statements appearing elsewhere in this Proxy Statement-Prospectus.
At or for the Nine Months At or for the Ended September 30, Years Ended December 31, 1994 1993 1993(1) 1992(2)(3) 1991(4) 1990 1989 (In thousands, except per share data) Results of Operations: Interest and dividend income $ 4,259 $ 4,461 $ 5,883 $ 6,401 $ 6,689 $ 7,223 $ 7,852 Interest expense 1,853 2,034 2,667 3,412 4,340 4,903 5,673 Net interest and dividend income 2,406 2,427 3,216 2,989 2,349 2,320 2,179 Provision for possible loan losses 12 68 90 242 135 75 35 Net interest income after provision for possible loan losses 2,394 2,359 3,126 2,747 2,214 2,245 2,144 Other income (charges) 226 200 276 (778) (369) 74 208 Other expense 1,754 1,628 2,162 2,033 1,702 1,466 1,515 Income (loss) before income taxes 866 931 1,240 (64) 143 853 837 Income tax expense, net of cumulative effect of a change in accounting principle 345 372 91 415 398 406 201 Net Income (Loss) $ 521 $ 559 $ 1,149 $ (479) $ (255) $ 447 $ 636 Per Share Data: Earnings (loss) per common share $ .68 $ .76 $ 1.55 $ (0.65) $ (0.35) $ 0.59 $ 0.81 Shareholders' equity per share 11.91 10.64 11.35 9.99 10.86 11.08 10.77 Cash dividends per common share .12 .12 .20 .20 .18 .16 .16 Weighted average common and common equivalent outstanding shares 770 736 742 731 734 752 784 Average Balance Sheet Data: Total assets $83,970 $84,820 $83,147 $81,137 $73,756 $73,877 $78,028 Investment securities 8,824 6,577 6,984 8,669 8,834 9,199 8,037 Loans, net of unearned income 70,387 71,832 71,889 67,249 60,792 61,018 67,251 Interest-bearing deposits 72,429 72,244 71,807 68,795 57,030 52,558 52,073 Other borrowed funds - - - - - - - Advances from Federal Home Loan Bank of Boston - - - 1,392 7,208 12,333 17,692 Common shareholders' equity 8,479 7,656 7,666 8,209 7,948 8,044 7,518 Selected Financial Ratios:(5) Net interest margin 4.06% 4.14% 4.08% 3.93% 3.37% 3.30% 2.89% Return (loss) on average assets .83 .88 1.39 (0.59) (0.35) 0.61 0.82 Return (loss) on average common stockholders' equity 8.22 9.76 15.07 (5.84) (3.21) 5.56 8.46 Average shareholders' equity to average assets 10.10 9.03 9.22 10.12 10.78 10.89 9.64 Core (leverage) capital ratio at period end 10.15 9.11 10.02 8.63 10.20 11.40 N/A Tier 1 risk-based capital ratio at period end 19.35 17.55 18.30 16.06 16.24 16.73 N/A Total risk-based capital ratio at period end 20.65 18.80 19.00 17.17 17.03 17.26 N/A Period-end allowance for possible loan losses to period-end loans, net of unearned income .82 .81 .84 .68 .59 .42 .31 Net charge-offs to average loans, net of unearned income .06 .03 (.03) 0.19 .03 .03 .02 Period-end nonperforming assets to period-end loans (net of unearned income) and foreclosed real estate 1.08 1.90 2.74 2.94 4.11 2.61 1.10
ORANGE SAVINGS BANK Notes to Selected Historical Financial Data (1) In the fourth quarter of 1993, Orange adjusted the valuation reserve on gross deferred tax assets by $384,000 as a result of a significant improvement in 1993 pre-tax earnings. (2) In the fourth quarter of 1992, Orange wrote off $1,100,000 in the remaining balances of its real estate limited partnership investment. (3) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" was adopted by Orange, effective January 1, 1992. The cumulative effect of the change in accounting principle on years prior to 1992 was to increase 1992 net income by $50,000, or $.07 per share. (4) In the second quarter of 1991, Orange wrote off $404,000 in a real estate limited partnership investment. (5) Interim financial percentages have been annualized, where appropriate. SELECTED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth certain unaudited pro forma combined financial data for CFX after giving effect to the Merger, as if it had occurred as of the beginning of each of the periods presented, after giving effect to certain pro forma adjustments using the Maximum Exchange Ratio of .9844 and as if the Merger had been accounted for as a pooling of interests. See "THE MERGER--Accounting Treatment". This information should be read in conjunction with the historical consolidated financial statements of CFX and Orange, including the notes thereto, appearing elsewhere in this Proxy Statement-Prospectus. See "PRO FORMA COMBINED FINANCIAL DATA."
At or for the Nine Months At or for the Ended September 30, Years Ended December 31, 1994 1993 1992 1991 (In thousands, except per share data) Results of Operations: Interest and dividend income $ 40,454 $ 52,025 $ 58,812 $ 65,252 Interest expense 17,433 22,352 30,501 40,001 Net interest and dividend income 23,021 29,673 28,311 25,251 Provision for loan and lease losses 62 3,060 3,153 3,965 Net interest income after provision for loan and lease losses 22,959 26,613 25,158 21,286 Other income 4,088 6,543 2,386 1,319 Other expense 20,008 25,654 21,810 21,624 Income before income taxes and cumulative effect of a change in accounting principle 7,039 7,502 5,734 981 Income tax expense 2,643 1,331 2,465 678 Net Income Before Cumulative Effect of a Change In Accounting Principle 4,396 6,171 3,269 303 Preferred stock dividends 201 270 270 270 Net Income Available to Common Stock Before Cumulative Effect of a Change In Accounting Principle $ 4,195 $ 5,901 $ 2,999 $ 33 Per Share Data:(2) Earnings per common share before cumulative effect of a change in accounting principle $ .91 $ 1.30 $ .67 $ .01 Common shareholders' equity per share 17.93 17.65 17.01 16.79 Cash dividends per common share .53 .58 .49 .56 Weighted average common shares outstanding 4,569 4,539 4,510 4,499 Average Balance Sheet Data: Total assets $853,807 $749,132 $753,256 $707,115 Investment securities 186,798 138,414 153,124 113,751 Loans and leases, net of unearned income 576,952 555,963 545,914 546,522 Interest-bearing deposits 581,219 602,141 615,667 565,556 Other borrowed funds 11,833 19,378 11,384 - Advances from Federal Home Loan Bank of Boston 94,828 7,821 13,505 31,712 Common shareholders' equity 81,517 78,993 76,371 75,913 Selected Financial Ratios:(1) Net interest margin 4.09% 4.30% 4.07% 3.87% Return on average assets .66 .79 .40 - Return on average common shareholders' equity 6.88 7.47 3.93 - Average shareholders' equity to average assets 9.97 11.02 10.62 11.25 Core (leverage) capital ratio at period end 9.01 9.03 9.63 9.55 Tier 1 risk-based capital ratio at period end 15.30 13.62 15.15 15.14 Total risk-based capital ratio at period end 16.58 14.85 16.35 16.38 Period-end allowance for loan and lease losses to period-end loans and leases, net of unearned income 1.27 1.48 1.53 1.35 Net charge-offs to average loans and leases, net of unearned income 0.12 0.63 0.45 0.40 Period-end nonperforming assets to period-end loans and leases (net of unearned income) and foreclosed real estate 1.64 2.18 4.48 5.05 Interim financial percentages have been annualized, where appropriate. Per share data has been adjusted to reflect the declaration by CFX of 5% common stock dividends on December 12, 1994 and December 13, 1993.
MEETING INFORMATION The Special Meeting This Proxy Statement-Prospectus is being furnished in connection with the solicitation of proxies by the Board of Directors of Orange for use at the Special Meeting. The Special Meeting will be held at the Athol-Orange Lodge of Elks, Route 2A, Orange, Massachusetts, at 12:00 noon on Friday, February 24, 1995. The Special Meeting will be held for the purpose of (i) considering and voting upon a proposal to approve and adopt the Merger Agreement and the transactions contemplated thereby; (ii) approving a proposal to adjourn the Special Meeting if necessary to permit further solicitation of proxies as to the Merger Agreement; and (iii) conducting any other business that may properly come before the Special Meeting, or any adjournments or postponements thereof. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above, or on any date or dates to which, by original or later adjournment, the Special Meeting may be adjourned, or to which the Special Meeting may be postponed. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Record Date The Board of Directors has fixed the close of business on December 30, 1994 as the Record Date. Only the holders of record of the outstanding shares of Orange Common Stock on the Record Date will be entitled to notice of, and to vote at, the Special Meeting and any adjournments or postponements thereof. At the Record Date, 724,412 shares of Orange Common Stock were outstanding and entitled to vote. The presence, in person or by proxy, of a majority of the aggregate number of shares of Orange Common Stock outstanding and entitled to vote on the Record Date is necessary to constitute a quorum at the Special Meeting. Proxies; Voting and Revocation Shares represented by a properly executed proxy received prior to the vote at the Special Meeting and not revoked will be voted at the Special Meeting as directed in the proxy. IF A PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Orange intends to count shares of Orange Common Stock present in person at the Special Meeting but not voting, and shares of Orange Common Stock for which it has received proxies but with respect to which holders of shares have abstained on any matter, as present at the Special Meeting for purposes of determining the presence or absence of a quorum for the transaction of business. Since the affirmative vote of the holders of two-thirds of the outstanding shares of Orange Common Stock entitled to vote on the Merger is required to approve and adopt the Merger Agreement and the transactions contemplated thereby, the failure to vote or a vote to abstain will have the same effect as a negative vote. In addition, under the rules of the National Association of Securities Dealers, brokers who hold shares in street name for customers who are the beneficial owners of such shares are prohibited from giving a proxy to vote shares held for such customers on the approval and adoption of the Merger Agreement without specific instructions from such customers. Given that Massachusetts law requires the affirmative vote of the holders of two-thirds of the outstanding shares of Orange Common Stock entitled to vote on the Merger Agreement in order to adopt the Merger Agreement, the failure of such customers to provide specific instructions with respect to their shares of Orange Common Stock to their broker will have the same effect as a negative vote. Each share of Orange Common Stock is entitled to one vote on each matter voted upon at the Special Meeting. The persons named as proxies by a stockholder may propose and vote for one or more adjournments or postponements of the Special Meeting to permit further solicitation of proxies in favor of such proposal. A stockholder of record may revoke a proxy by filing an instrument of revocation with Roger Mallet, Clerk of Orange (30 East Main Street, Orange, Massachusetts 01364), by filing a duly executed proxy bearing a later date, or by appearing at the Special Meeting in person, notifying the Clerk, and voting by ballot at the Special Meeting. Any stockholder of record attending the Special Meeting may vote in person whether or not a proxy has been previously given, but the mere presence (without notifying the Clerk) of a stockholder at the Special Meeting will not constitute revocation of a previously given proxy. Votes Required The affirmative vote of the holders of two-thirds of the outstanding shares of Orange Common Stock is necessary to approve and adopt the Merger Agreement and the transactions contemplated thereby. At the Record Date, directors and executive officers of Orange and their respective affiliates thereof held approximately 84,786 shares, or approximately 11.70%, of the outstanding Orange Common Stock. Consequently, assuming, for illustration purposes only, that all of the directors and executive officers of Orange and their respective affiliates vote in favor of the Merger Agreement, the affirmative vote of holders of an additional 398,156 shares of Orange Common Stock, representing approximately 54.96% of the shares issued and outstanding, will be required to approve and adopt the Merger Agreement. The approval of the Merger Agreement by Orange's stockholders is a condition to the consummation of the Merger. Approval of any proposal to adjourn the Special Meeting to permit the further solicitation of proxies would require the affirmative vote of holders of a majority of the shares of Orange Common Stock present and voting at the Special Meeting. Solicitation of Proxies The cost of solicitation of proxies by Orange will be borne by Orange. In addition to the solicitation of proxies by mail, the directors, officers and employees of Orange may also solicit proxies personally or by the telephone or telegraph. Orange will also request persons, firms and corporations holding shares which are beneficially owned by others to send proxy materials to and obtain proxies from such beneficial owners. Orange will reimburse those holders for their reasonable expenses. Orange has also retained Kissel-Blake Inc., a proxy soliciting firm, to assist in the solicitation of proxies at a fee of $3,000 plus reimbursement of certain out- of-pocket expenses. THE MERGER General This section of the Proxy Statement-Prospectus describes certain aspects of the proposed Merger, including the principal provisions of the Merger Agreement. The discussion of matters contained in the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached to this Proxy Statement-Prospectus as Annex A. All stockholders of Orange are urged to read the Merger Agreement in its entirety. The Merger Agreement has been unanimously approved by the Board of Directors of Orange. The Board of Directors of Orange believes that the terms of the Merger Agreement are fair and in the best interests of Orange and its stockholders and recommends that the stockholders vote to approve and adopt the Merger Agreement. Background of and Reasons for the Merger; Recommendation of the Board of Directors During the Spring of 1994, the Orange Board of Directors was approached by a New England financial institution with respect to a possible affiliation. In response to this initial inquiry, the Board decided to explore the opportunities for strategic alternatives, including the possible sale of Orange to a larger financial institution. In April, 1994, the Executive Committee (and later the full Board) authorized management to engage EDS as its financial advisor to assist in identifying and contacting potential prospects and to advise Orange on the financial aspects of potential affiliations. During April and May of 1994, EDS contacted several community banking institutions on a confidential basis about a possible affiliation with Orange. The Board concluded that the larger regional banks had expressed little interest in the Orange market or in acquiring banks the size of Orange. At a May 31, 1994 Board meeting, at which Orange's counsel, Foley, Hoag & Eliot, was also present, EDS reported that three financial institutions, including CFX, had expressed an interest in acquiring Orange, on a stock-for- stock or a combination stock and cash basis. The Board discussed the fact that one of the three institutions (other than CFX) was a relatively small institution that did not have the depth of financial resources of CFX or the other interested party. After considerable discussion, the Board authorized EDS, working together with the Chairman and the President, to discuss further with the potentially interested parties the depth of their interest in acquiring Orange, as well as the financial ability of each acquiror to effectuate a transaction if Orange should decide to go forward. The officers of CFX made a detailed presentation to the Directors of Orange at a June 22, 1994 Board meeting describing, among other things, CFX's general plans for the future and its plans to grow Orange and use it as a basis for expansion within Massachusetts if an acquisition were to take place. One of the other interested acquirors made a presentation to the Orange Directors at their June 28, 1994 Board meeting. EDS made a presentation to the Board with respect to the third institution that had expressed an interest in an affiliation with Orange. After reviewing information that EDS had prepared providing summary data on the three institutions that had expressed an interest in Orange with respect to price, currency and structure, the Board voted at its June 28, 1994 meeting to allow CFX to perform due diligence and to authorize management to begin negotiating an agreement of merger with CFX. During the next three weeks, CFX and Orange, with the assistance of counsel and EDS, negotiated the terms of a draft agreement of merger. At the July 21, 1994 Board meeting, attorneys from Foley, Hoag & Eliot distributed and reviewed in detail with the Directors the terms of the draft Agreement and Plan of Merger. The Directors reviewed the limitations upon their right to solicit or enter into a transaction with another party and, among other things, the obligation to obtain the approval of Orange's stockholders for the transaction, and the conditions to closing. EDS reviewed the financial aspects of the contract, including in particular the "collar" arrangement, which was designed to reduce the risk to Orange stockholders of fluctuations in the market price of the CFX Common Stock prior to the completion of the Merger. At the July 26, 1994 Board meeting, the Directors voted to enter into a transaction with CFX and to approve and adopt the Agreement and Plan of Merger in substantially the form presented to the Board (the "Original Merger Agreement"). On July 26, 1994, CFX and Orange executed the Original Merger Agreement. On November 8, 1994, CFX and Orange executed the Merger Agreement, which amends and restates the Original Merger Agreement to make certain technical and other corrections to the Original Merger Agreement. In the course of reaching its decision to approve the Merger Agreement, the Board of Directors of Orange consulted with its legal advisors regarding the legal terms of the Merger Agreement and the Board of Directors' obligations in its consideration thereof; its financial advisors regarding the financial terms and fairness, from a financial point of view to the stockholders of Orange, of the Exchange Ratio in the proposed Merger; and the management of Orange. Without assigning any relative or specific weights thereto, the Board of Directors considered the factors outlined below, among others, that it believed relevant to reaching its determination. The terms of the Merger Agreement, including the Exchange Ratio, were reached on the basis of arms' length negotiations between Orange and CFX. In reaching the conclusion that the terms of the Merger Agreement are fair, the Board of Directors considered, among other things, the market value, book value, earnings per share, and dividends paid to holders of Orange Common Stock. The Board considered that the Merger provides an opportunity for the stockholders of Orange to receive consideration for their shares having a value in excess of the book value of the Orange Common Stock and an increase in dividends paid to Orange stockholders, and that the Exchange Ratio represents a substantial premium over the prices at which the Orange Common Stock has traded in the recent past and the price at which the Board reasonably anticipated the stock would be traded in the future. At September 30, 1994, the book value per share of the Orange Common Stock was $11.90. On July 25, 1994, the last trading day preceding the public announcement of the proposed Merger, the bid and asked per share prices for Orange Common Stock quoted on the Nasdaq Small-Cap Market were $8.50 and $10.00, respectively. See "COMPARATIVE STOCK PRICES AND DIVIDENDS". In reaching its conclusion, the Board of Directors took into consideration and relied in part upon the advice of EDS, Orange's financial advisor. At the July 26 Orange Board meeting, EDS indicated that, based upon information known as of that date, EDS expected to be able to render an opinion as to the fairness from a financial point of view of the consideration to be received by the Orange stockholders. That opinion was rendered in writing to the Board of Directors as of the date of this Proxy Statement- Prospectus and is attached as Annex B to this Proxy Statement-Prospectus. Orange's Board of Directors considered the analyses presented to it by EDS relating to selected financial and stock market data concerning Orange and CFX, certain financial analyses of the terms of the Merger, including a discounted cash flow analysis and a comparison to the terms of other recent acquisitions, which are described below under "THE MERGER--Opinion of Financial Advisor." The Board of Directors considered the strategic alternatives available to Orange, including the possibility of remaining independent, seeking further to solicit competing proposals, and accepting CFX's bid, before concluding for the reasons discussed in this Section that the Merger represented an opportunity to enhance stockholder value at this time and that the Exchange Ratio was fair to the stockholders. The Board of Directors considered the advantages of becoming part of a larger financial institution that has considerably greater resources and whose stock is traded on the American Stock Exchange. Orange's Board of Directors believes that the proposed affiliation with CFX could provide increased liquidity for the stockholders of Orange and could lead to competitive advantages through greater diversity in product offerings, cost-savings through integration of operations, improved access to capital and funding, and geographic expansion of operations. The Board considered the high costs of remaining independent as a small publicly-traded company in an increasingly complex competitive and regulatory environment. It also considered the process that was used to solicit indications of interest on the part of potential acquirors of Orange and believes that it was appropriate. The Board of Directors considered the historical growth in CFX's earnings per share and book value. The Board of Directors also considered the historical dividends paid on the Orange Common Stock and CFX Common Stock, respectively, and the significant increase in dividends which would be likely to result to Orange stockholders from the Merger. The Board of Directors also considered the expectation that the Merger will be a tax-free transaction to Orange stockholders, Orange and CFX, and accounted for under the "pooling of interests" method of accounting. The Board of Directors considered the fact that approval of the Merger Agreement requires the affirmative vote of two-thirds of the shares of Orange Common Stock outstanding and entitled to vote, consisting primarily of persons other than the members of management, and that the Board of Directors' decision to approve the Merger Agreement would allow the stockholders as a group to decide whether or not to accept CFX's proposal to acquire Orange. The Board of Directors considered the possible impact of the Merger on Orange's employees, customers and community. Orange's Amended and Restated Charter permits the Board of Directors to consider a variety of factors, including, without limitation, the social and economic effects of a transaction on depositors, borrowers and employees of Orange, and on the communities in which Orange operates or serves. Massachusetts law permits the Board of Directors to consider these factors, at least to the extent that there are rationally related benefits accruing to stockholders. The Board of Directors believes that the Merger, if consummated, will provide Orange with expanded services, greater ability to grow and diversify, and access to the resources of a strong financial parent. In reviewing the provisions of the Merger Agreement relating to the requirement that Orange pay to CFX a termination fee of $450,000 if, for certain specified reasons, the Merger is not consummated, the Board of Directors was aware that the existence of such provision would make it more expensive for a third party to offer a price that was in excess of CFX's proposal. The Board of Directors was aware that the provision might significantly deter a potential competing acquiror from making an offer. The Board of Directors was also aware that CFX required the provision as a condition to entering into the Merger Agreement. See "THE MERGER--Termination Fee". If the Orange stockholders do not approve and adopt the Merger Agreement or the Merger is not consummated for any other reason, the Board of Directors expects to continue to operate Orange as an ongoing business. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Opinion of Financial Advisor EDS has rendered a written opinion, dated as of the date of this Proxy Statement-Prospectus, that on and as of such date the consideration to be received by the stockholders of Orange in connection with the acquisition of Orange by CFX is fair, from a financial point of view. The full text of the opinion, which sets forth the assumptions made, matters considered, and the limits of EDS's review, is attached hereto as Annex B. EDS's opinion is directed only to the merger consideration, and does not constitute a recommendation as to how any Orange stockholder should vote at the Special Meeting. The summary of the opinion set forth in this Proxy Statement- Prospectus is qualified in its entirety by reference to the full text of the opinion. Stockholders are urged to read the opinion in its entirety. The Board of Directors retained EDS in April of 1994 to render financial advisory services to Orange with regard to the possible acquisition of Orange. EDS had not previously acted as a consultant to Orange. In arriving at its opinion, EDS reviewed and analyzed the following: (i) the Merger Agreement, (ii) this Proxy Statement-Prospectus in substantially the form to be sent to Orange stockholders, (iii) such publicly available information concerning Orange and CFX that EDS believed to be relevant to its inquiry, (iv) financial and operational information with respect to Orange and CFX, furnished by Orange and CFX, respectively, (v) market valuation, price performance and liquidity of Orange Common Stock and certain other banking institutions, (vi) Orange's historical financial results and its present financial condition compared with certain other banking institutions, and (vii) the financial terms of the Merger compared with the financial terms of certain other comparable transactions. EDS also conducted discounted cash flow analyses with respect to Orange as a stand-alone entity. EDS also considered the results of its efforts (at the direction of Orange) to solicit proposals from third parties with respect to an affiliation with Orange and its review and analysis of the terms of such proposals. In addition, EDS held discussions with the management of each of Orange and CFX concerning each entity's business, operations, assets, financial condition and prospects. EDS also undertook such other studies, analyses and investigations as it deemed appropriate. Based on its review of CFX's most recent financial statements, EDS determined that CFX's acquisition of Orange would have a minimal impact on CFX's capital ratios. Furthermore, EDS considered such financial and other factors as it deemed appropriate under the circumstances and took into account its assessment of general economic, market and financial conditions. It also relied on its experience in similar transactions and in the valuation of the securities of banking companies and its knowledge of depository institutions generally. EDS's opinions were necessarily based upon conditions as they existed and should be evaluated on the date hereof and the information made available to EDS through the date hereof. Set forth below is a discussion of the discounted cash flow analyses performed by EDS and an analysis of certain relevant aspects of recent comparable transactions. The discussion below does not purport to be a complete description of the analyses performed or the matters considered by EDS in arriving at its opinion. In order to analyze Orange's prospects as a stand-alone entity, EDS performed discounted cash flow analyses with respect to Orange's projected dividends and the projected value of its Common Stock in five and ten years. EDS discounted projected dividends on Orange Common Stock over a five and ten year horizon, using discount rates ranging from 10.4% to 15.6%, which EDS determined reflect a reasonable expectation of return by Orange stockholders. EDS derived two estimates for the projected value of Orange Common Stock by applying median price/earnings and price/book transaction multiples against Orange's five and ten year projected earnings and book value. It derived a third estimate by discounting Orange's projected future income stream into perpetuity. The first year's projections for this discounted cash flow analysis were based on the projections of Orange management. Years 2-10 earnings were set at profitability levels ranging from 0.68% to 1.02% return on assets, and growth was set at a range of 5.6% to 8.4%, to reflect expectations for a central Massachusetts savings bank. This analysis and the underlying assumptions produced a value for the Orange Common Stock in the range of $11.70 to $16.67 per share. The value of the CFX Common Stock that would be received by Orange stockholders if the Merger is consummated would be within these ranges. The results produced in the discounted cash flow analyses are not indicative of actual or expected values of Orange Common Stock, either before or after the Merger. EDS advised the Orange Board of Directors that although the discounted cash flow analysis is a widely used valuation methodology, it relies on numerous assumptions, including discount rates, terminal values, earnings and asset growth, as well as dividend payout rates. Using publicly available information, EDS examined five recent comparable mergers and acquisitions involving New England financial institutions. The median consideration for these transactions was 1.23 times book value, 1.29 times tangible book value and 10.7 times trailing four quarter earnings, with a 3.66% tangible book premium to core deposits. Based on Orange's June 30, 1994 financials, to obtain the foregoing multiples, a merger consideration ranging from $8.39 to $15.13 per share of Orange Common Stock would be required. The value of the CFX Common Stock that would be received by Orange stockholders if the Merger is consummated would be within these ranges. EDS also examined the premium over market value of certain recent transactions involving New England financial institutions. EDS determined that the market premium that would be received by Orange stockholders if the Merger is consummated would be 66.7% (assuming that the value of the CFX Common Stock received by Orange stockholders is $15.00 per share), whereas the median market premium for the transactions examined by EDS was 40.4%, based in each case on the market value of the stock of the company to be acquired one week prior to the public announcement of the transaction. In addition, EDS reviewed the reported price and trading activity for the CFX Common Stock and the Orange Common Stock individually, in relation to the movements of the Nasdaq Bank Stock Index, and relative to each other. EDS also reviewed the historical and pro forma financial statements of CFX and Orange. EDS reviewed the foregoing analyses with the Orange Board of Directors at various Board meetings. EDS also advised the Board that the multiples set forth in the discussion of comparable transactions were at a five-year high and appeared to reflect a favorable market for mergers and acquisitions of financial institutions as compared to recent years. On July 26, 1994, EDS advised the Orange Board that, on and as of that date, based upon information known as of that date, EDS expected to be able to render an opinion as to the fairness, from a financial point of view, of the consideration to be received by the Orange stockholders. EDS has rendered such a written opinion, dated as of the date of this Proxy Statement-Prospectus. In conducting its review and in arriving at its opinion (both written and oral), EDS relied upon and assumed the accuracy and completeness of the financial and other information that it reviewed, and did not attempt to independently verify the information. EDS relied upon the managements of Orange and CFX as to the reasonableness and achievability of the projections (and the assumptions and bases therefor) provided to EDS, and assumed that such projections reflected the best currently available estimates and judgments of each entity's management and that such projections would be realized in the amounts and in the time periods estimated by such management. EDS also assumed, without independent verification, that the aggregate allowance for loan losses for Orange and CFX was adequate to cover such losses. EDS did not make or obtain any evaluations or appraisals of the property of Orange or CFX nor did EDS examine any individual loan credit files. EDS assumed that for purposes of its opinion the Merger will be recorded as a pooling-of-interests under generally accepted accounting principles. EDS was retained by Orange's Board of Directors to express an opinion as to the fairness, from a financial point of view, to Orange's stockholders of the financial consideration to be received in the Merger. EDS did not address Orange's underlying business decision to proceed with the Merger and did not make any recommendation to the Board of Directors or to the stockholders of Orange with respect to any approval of the Merger. The preparation of a fairness opinion by EDS involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances; therefore, such an opinion is not readily susceptible to summary description. Furthermore, in arriving at its fairness opinion, EDS did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, EDS believes that its analyses must be considered as a whole and that considering any portions separately could create a misleading or incomplete view of the process underlying its fairness opinion. In its analyses, EDS made assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond Orange's or CFX's control. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or value, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. In addition, as described above, EDS's opinion is only one of the many factors taken into consideration by the Orange Board of Directors. EDS is an internationally recognized bank consulting company and, as part of its activities, is regularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions. The Board of Directors of Orange selected EDS because of its expertise, reputation and familiarity with the financial institution industry in general. EDS is not affiliated with either CFX or Orange. As compensation for its services in connection with the Merger, Orange has agreed to pay EDS a maximum fee of $15,000 based upon hourly professional fees plus a contingent fee payable upon consummation of the Merger based on the aggregate value of the transaction as determined by the closing price of the CFX Common Stock on July 25, 1994. Based on an assumed per share consideration of $15.00 per share, the fee amount based upon hourly professional fees plus the contingent fee payable upon consummation of the Merger would total approximately $110,000. In addition, Orange has agreed to reimburse EDS for reasonable out-of-pocket expenses incurred in connection with the Merger and to indemnify EDS against certain liabilities. EDS has been engaged from time to time by CFX (both before and after the presentation to the Orange Board of Directors on July 26, 1994) to provide services to CFX unrelated to the Merger. The total consideration paid or to be paid by CFX to EDS for these services is approximately $568,000, of which approximately $435,000 represents compensation for management consulting services associated with work flow, efficiency and revenue enhancement. Management and Operations after the Merger Upon consummation of the Merger, Orange, as the surviving bank in the Merger with Interim Bank, will continue to operate as a separate banking subsidiary of CFX. The directors and officers of Orange immediately prior to the Effective Time will remain the directors and officers of the surviving bank, to hold office in accordance with the charter documents and by-laws of the surviving bank until their respective successors are duly elected or appointed and qualified. Following the Effective Time, CFX intends to elect Mark A. Gavin, Chief Financial Officer of CFX, and Christopher V. Bean, a director of CFX, to serve on the Board of the surviving bank. Pursuant to the Merger Agreement, CFX has agreed that, except with respect to Messrs. Gavin and Bean (and one additional director whom CFX may elect), the Board of Directors of Orange will be kept in place for at least three years, subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of CFX's directors. Prior to or at the Effective Time, one of Orange's current directors (designated by the Orange Board of Directors, subject to the reasonable approval of CFX) will be elected to the Board of Directors of CFX. Following consummation of the Merger, CFX expects that Orange will offer a broader array of products and services than is currently offered by Orange. Exchange Ratio and Other Matters In the Merger, each share of Orange Common Stock outstanding, except for any dissenting shares and except for shares held by CFX or its subsidiaries or Orange or its subsidiaries (other than in both cases shares held in a fiduciary capacity or as a result of debts previously contracted), will be converted into and exchangeable for the number of shares of CFX Common Stock determined by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the denominator of which is the Average Closing Price, subject to adjustment as described in the next paragraph (the "Exchange Ratio"). The "Average Closing Price" is the average closing sale price per share of CFX Common Stock on the American Stock Exchange (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source), for the ten American Stock Exchange trading days ending on the business day before the date on which the approval of the Massachusetts Commissioner of Banks required to consummate the Merger is obtained. Notwithstanding the foregoing paragraph, if the Average Closing Price is equal to or greater than $20.00, the Exchange Ratio will be 0.7500 (the "Minimum Exchange Ratio"); and if the Average Closing Price is equal to or less than $15.2381, the Exchange Ratio will be 0.9844 (the "Maximum Exchange Ratio"); except that (a) in the event that before the Effective Time an announcement is made with respect to a business combination involving the acquisition of CFX or a substantial portion of its assets, the Exchange Ratio shall not be less than 0.7875, and (b) if the Average Closing Price is equal to or less than $13.3333, Orange shall have the right, waivable by it, to terminate the Merger Agreement, unless CFX shall have elected, with the approval of Orange, to adopt as the Exchange Ratio the "Adjusted Maximum Exchange Ratio", which shall be determined by dividing $13.13 by the Average Closing Price. The Merger Agreement provides that on or after January 1, 1995 Orange shall have the right to increase its regular quarterly cash dividend to an amount equal to the quarterly dividend then being paid by CFX with respect to each share of CFX Common Stock, multiplied by .8750. For the quarter ended September 30, 1994, CFX paid a dividend of $.23 with respect to each share of CFX Common Stock. In accordance with adjustment provisions of the Merger Agreement, the foregoing ratios have been adjusted to reflect a 5% common stock dividend declared by CFX on December 12, 1994. The Merger Agreement provides that, in the event that CFX changes the number of shares of CFX Common Stock issued and outstanding between July 26, 1994 and the Effective Time as a result of a stock split, combination, stock dividend or other distribution in CFX Common Stock or other convertible securities, the Exchange Ratio and, if applicable, the Minimum Exchange Ratio, the Maximum Exchange Ratio and the Adjusted Maximum Exchange Ratio, will be adjusted proportionately. In addition, at the Effective Time all stock options with respect to Orange Common Stock granted by Orange under the Orange Stock Option Plans which are outstanding and unexercised immediately prior thereto, whether or not then exercisable, will be converted into and will become stock options under the CFX Stock Option Plan to purchase CFX Common Stock. The rights to CFX Common Stock to be received by holders of Orange stock options upon consummation of the Merger will be the same as the rights such optionees had under the Orange Stock Option Plans immediately prior to the Effective Time, except that (a) the number of shares of CFX Common Stock subject to such options and the exercise price of such options will be adjusted to give effect to the Exchange Ratio, and (b) the options will remain exercisable regardless of whether the holder shall remain in the employ of Orange or CFX after the Effective Time, and (c) the options shall be non-qualified stock options rather than incentive stock options. The other terms of each new option, including duration, shall be the same as the original option except that all references in such option to Orange shall be deemed to be references to CFX. The options to purchase CFX Common Stock and the shares of CFX Common Stock issuable upon exercise of such options are registered pursuant to a separate registration statement on a Form S-8 filed with the Commission on September 23, 1987, as amended, and are offered by a separate prospectus. Shares of CFX capital stock (including CFX Common Stock) issued and outstanding immediately prior to the Effective Time will remain issued and outstanding immediately after the Merger. Exchange of Certificates; Fractional Shares The conversion of Orange Common Stock into CFX Common Stock will occur automatically at the Effective Time of the Merger. Within three business days after the Effective Time, transmittal forms will be furnished to Orange stockholders by Mellon Securities Trust Company (the "Exchange Agent"). The transmittal forms will contain instructions with respect to the surrender of certificates representing Orange Common Stock to be exchanged for certificates representing CFX Common Stock. ORANGE STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL AN ORANGE STOCKHOLDER HAS RECEIVED A TRANSMITTAL FORM AND SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY. Until the certificates representing Orange Common Stock are surrendered for exchange after the Effective Time of the Merger, holders of such certificates will accrue but will not be paid dividends or other distributions on the CFX Common Stock into which their shares have been converted. When such certificates are surrendered, any unpaid dividends or other distributions will be paid, without interest. No interest will be paid or accrued on the cash in lieu of fractional shares payable to holders of such certificates. For all other purposes, however, each certificate which represents outstanding shares of Orange Common Stock outstanding at the Effective Time of the Merger will be deemed to evidence ownership of the shares of CFX Common Stock into which those shares have been converted pursuant to the Merger. No fractional shares of CFX Common Stock will be issued to any Orange stockholder upon consummation of the Merger. For each fractional share that would otherwise be issued, CFX will pay cash in an amount equal to such fraction multiplied by the closing sale price of CFX Common Stock on the American Stock Exchange as reported by The Wall Street Journal for the trading day immediately preceding the date of the Effective Time. Any shares of Orange Common Stock with respect to which appraisal rights have been properly perfected will be purchased in accordance with the procedures described under "Appraisal Rights of Dissenting Stockholders" and in Annex C to this Proxy Statement-Prospectus. For a description of the differences between the rights of the holders of Orange Common Stock and CFX Common Stock, see "COMPARISON OF RIGHTS OF CFX AND ORANGE STOCKHOLDERS". For a description of the capital stock of CFX, see "DESCRIPTION OF CFX CAPITAL STOCK". Effective Time The Effective Time will be as set forth in the Articles of Merger (the "Articles of Merger") which shall be filed with the Secretary of State of the Commonwealth of Massachusetts on the Closing Date. The Closing Date will occur as soon as practicable after the last required approval for the Merger has been obtained and the last of all required waiting periods under such approvals has expired, assuming the satisfaction of the conditions set forth in Article VIII of the Merger Agreement. Orange and CFX each anticipate that the Merger will be consummated during the first quarter of 1995. However, the consummation of the Merger could be delayed as a result of delays in obtaining the necessary governmental and regulatory approvals. There can be no assurances that such approvals will be obtained or that the Merger will be completed at any time. See "THE MERGER--Conditions to the Consummation of the Merger" and "--Regulatory Matters". Conduct of Business Pending the Merger Pursuant to the Merger Agreement, prior to the Effective Time, and except with the written consent of CFX, Orange has agreed to operate its business, and to cause each of its subsidiaries to operate its business, only in the usual, regular and ordinary course of business and to use reasonable efforts to preserve intact its business organization and assets and maintain its rights and franchises. CFX and Orange have each agreed (except with the written consent of the other) to take no action which would (i) materially adversely affect the ability of CFX or Orange to obtain any necessary approvals of governmental authorities required for the transactions contemplated by the Merger Agreement or materially increase the period of time necessary to obtain such approvals, or (ii) materially adversely affect its ability to perform its covenants and agreements under the Merger Agreement. Orange and CFX have also agreed, subject to the terms and conditions of the Merger Agreement, to use all reasonable efforts to consummate the Merger and to obtain as soon as practicable all consents and approvals of any other persons necessary or desirable for the consummation of the Merger Agreement. CFX has agreed (except with the written consent of Orange) to take no action which would (i) disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code, or (ii) result in the representations and warranties of CFX contained in the Merger Agreement not being true and correct on the date of the Merger Agreement or at any future date on or prior to the Closing Date. Orange has agreed to give CFX access to all of its properties and to disclose and make available to CFX all of its books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (includ- ing the general ledger), tax records, minute books of directors' and stockholders' meetings, organizational documents, by-laws, material contracts and agreements, filings with any regulatory authority, litigation files, plans affecting employees, and any other business activities or prospects in which CFX may have a reasonable interest. In addition, except as contemplated by the Merger Agreement, Orange has agreed that, without the consent of CFX, it and its subsidiaries will not, among other things: (a) Change or waive any provision of its Amended and Restated Charter or By-laws; (b) Change the number of shares of its authorized or issued capital stock (except for the issuance of Orange Common Stock pursuant to the exercise of outstanding stock options under the Orange Stock Option Plans, as contemplated by the Merger Agreement); (c) Issue or grant any option, warrant, call, commitment, sub- scription, right to purchase or agreement of any character relating to the authorized or issued capital stock of Orange or any of its subsidiaries, or any securities convertible into shares of such stock; (d) Classify any shares of its capital stock; (e) Declare or pay any dividends except for Orange's regular $.04 per share quarterly dividend and its $.04 per share year-end special dividend (with declaration, record and payment dates that are consistent with past practice) and for dividends paid by an Orange subsidiary to Orange, provided, however, that Orange's regular quarterly cash dividend may be increased to the Increased Dividend (as defined below) per share of Orange Common Stock beginning in the first quarter of 1995, and (ii) that CFX and Orange agree (x) to consult with respect to the amount of the last Orange quarterly dividend payable prior to the Effective Time with the objective of assuring that the stockholders of Orange do not receive a shortfall based on the record and payment dates of their last dividend prior to the Merger and the record and payment dates of the first dividend of CFX following the Merger and (y) that Orange may pay a special dividend to holders of record of Orange Common Stock immediately prior to the Effective Time consistent with the objective described in clause (x) above. The quarterly "Increased Dividend" shall be determined by multiplying the quarterly dividend then being paid by CFX with respect to each share of CFX Common Stock by .8750; (f) Except as contemplated by the Merger Agreement, purchase, redeem, retire or otherwise acquire, or hypothecate, pledge or otherwise encumber, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock; (g) Enter into, amend in any material respect or terminate any contract or agreement (including without limitation any settlement agreement with respect to litigation) that is or may reasonably be expected to have a material adverse effect on Orange and its subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice; (h) Except in the ordinary course of business consistent with past practice, incur any material liabilities or material obligations, whether directly or by way of guaranty, including any obligation for borrowed money whether or not evidenced by a note, bond, debenture or similar instrument, or acquire any equity, debt, or other investment securities; (i) Make any capital expenditures other than in the ordinary course of business or as necessary to maintain existing assets in good repair; (j) Except as contemplated by the Merger Agreement, grant any increase in rates of compensation to its employees, except merit increases in accordance with past practices and general increases to employees as a class in accordance with past practice or as required by law; grant any increase in rates of compensation to its directors; adopt or amend in any material respect or terminate any employee benefit plan, pension plan or incentive plan except as required by law, or permit the vesting of any material amount of benefits under any such plan other than pursuant to the provisions thereof as in effect on the date of the Merger Agreement; or enter into any employment, severance or similar agreements or arrangements with any directors or officers; (k) Make application for the opening or closing of any, or open or close any, branches or automated banking facility; (l) Make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business consistent with customary banking practices; (m) Merge into, consolidate with, affiliate with, or be purchased or acquired by, any other person, or permit any other to be merged, consolidated or affiliated with it or be purchased or acquired by it, or, except to realize upon collateral in the ordinary course of its business, acquire a significant portion of the assets of any other person, or sell a significant portion of its assets; (n) Make any material change in its accounting methods or practices, except changes as may be required by generally accepted accounting principles or by regulatory requirements; (o) Take or cause to be taken any action which would disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code; (p) Take any action that would result in the representations and warranties of Orange contained in the Merger Agreement not being true and correct on the date of the Merger Agreement or at any future date on or prior to the Closing Date; or (q) Agree to do any of the foregoing. Conditions to the Consummation of the Merger Each party's obligation to effect the Merger is subject to various conditions, unless waived, which include, in addition to other customary closing conditions, the following: (a) The Merger Agreement and the transactions contemplated thereby shall have been approved in accordance with applicable law by the requisite vote of the stockholders of Orange; (b) None of the parties shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger; (c) All necessary approvals, authorizations and consents of all governmental bodies required to consummate the Merger and the other transactions contemplated by the Merger Agreement shall have been obtained and shall remain in full force and effect and all waiting periods relating to such approvals, authorizations or consents shall have expired; (d) The registration statement of which this Proxy Statement- Prospectus forms a part shall have become effective under the Securities Act and no stop order suspending the effectiveness of the registration statement shall have been issued, and no proceedings for that purpose shall have been initiated or threatened by the Commission; (e) The shares of CFX Common Stock to be issued in the Merger shall have been authorized for listing on the American Stock Exchange, subject to official notice of issuance; (f) Each of CFX and Orange shall have received either a ruling of the Internal Revenue Service or an opinion of counsel reasonably acceptable to CFX and Orange, addressed to CFX and the stockholders of Orange, with respect to federal tax laws or regulations, to the effect that: (i) The merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Code; (ii) No gain or loss will be recognized by CFX, Orange or Interim Bank or the surviving bank by reason of the Merger; (iii) The bases of the assets of Orange in the hands of the surviving bank will be the same as the bases of such assets in the hands of Orange immediately prior to the Merger; (iv) The holding period of the assets of Orange in the hands of the surviving bank will include the period during which such assets were held by Orange prior to the Merger; (v) No gain or loss will be recognized by the Orange stockholders on the exchange of shares of Orange Common Stock solely for shares of CFX's Common Stock; income gain or loss will be recognized, however, to each such stockholder upon the receipt of cash by such stockholders on the exchange. The determination of whether the receipt of cash by Orange stockholders will have the effect of the distribution of a dividend will be made by treating the stockholder as having received solely shares of CFX Common Stock in the reorganization exchange and then having received the cash payment from CFX in a hypothetical redemption of that number of shares of CFX Common Stock equal in value to such cash payment; (vi) The basis of the shares of CFX Common Stock to be received by Orange stock-holders will be the same as the basis of the shares of Orange Common Stock surrendered in the reorganization exchange, decreased by the amount of cash received and increased by the amount of any gain (and by the amount of any dividend income) recognized on the exchange; and (vii) The holding period of the shares of CFX Common Stock to be received by the stockholders of Orange will include the period during which they held the shares of Orange Common Stock surrendered, provided the shares of Orange Common Stock are held as a capital asset on the date of the exchange. (g) Each of the representations and warranties of each party to the Merger Agreement which is qualified as to materiality shall be true and correct and each such representation or warranty that is not so qualified shall be true and correct in all material respects, in each case as of the date of the Merger Agreement, as applicable, and (except to the extent such representations and warranties speak as of an earlier date) as of the Effective Time (such representations and warranties to be deemed to be true and correct in all material respects unless the failure or failures of such representations and warranties to be so true and correct represent, in the aggregate, a Material Adverse Effect, taken as a whole); (h) Each of Orange and CFX shall have performed in all material respects all obligations and complied in all material respects with all agreements or covenants to be performed or complied with by it at or prior to the Effective Time under the Merger Agreement; (i) Each of Orange and CFX shall have obtained any and all material permits, authorizations, consents, waivers, clearances or approvals required for the lawful consummation of the Merger, the failure of which to obtain would have a material adverse effect, taken as a whole; (j) Each of CFX and Orange shall have received an opinion of counsel, dated the Closing Date, in substantially the form of Annexes A and B, respectively, to the Merger Agreement; (k) CFX shall have received a letter from Wolf & Company, PC, addressed to CFX, to the effect that the Merger will qualify for "pooling of interests" accounting treatment; (l) The holders of not more than 10% of the Orange Common Stock outstanding immediately prior to the Effective Time shall have given notice of their intention to exercise dissenters' rights pursuant to the General Laws of Massachusetts; (m) CFX shall have received a letter from the independent certified public accountants for Orange, dated (i) the date that the registration statement, of which this Proxy Statement-Prospectus forms a part, shall have become effective and (ii) the Closing Date, in each case setting forth the statements contained in Section 8.2(g) of the Merger Agreement; (n) CFX shall have received a letter from its investment advisor, dated as of a date not later than ten (10) days after the execution of the Merger Agreement, stating its opinion that the consideration to be paid to Orange's stockholders pursuant to the Merger is fair to CFX and its stockholders, from a financial point of view; and (o) Orange shall have received a letter from its investment advisor, dated as of a date not more than five days prior to the date this Proxy Statement-Prospectus is mailed to Orange's stockholders, stating its opinion that the consideration to be paid to Orange's stockholders pursuant to the Merger is fair to such stockholders, from a financial point of view. No Solicitation Orange has agreed in the Merger Agreement that, except for actions required for a director or officer to satisfy his fiduciary obligations upon advice of counsel, neither Orange nor any of its directors, officers, employees, representatives or agents or other persons controlled by Orange shall directly or indirectly, negotiate, authorize, recommend, propose, solicit or announce an intention to authorize, recommend or propose, or enter into, any offer, agreement in principle, agreement, understanding or commitment, written or oral, with or from any third party, which relates to the acquisition of Orange by such third party or which is otherwise inconsistent with the obligations arising under the Merger Agreement. Orange has agreed to promptly communicate to CFX the terms of any proposal or offer or any inquiry or request for information which it may receive in respect of any such transaction. Regulatory Matters Federal Reserve Board. The Merger is subject to approval by the Federal Reserve Board, which considers competitive factors in determining whether to approve an application. Additionally, in reviewing an application under the applicable statutes, the Federal Reserve Board will consider the financial and managerial resources of the institutions and their subsidiary banks and the convenience and needs of the communities to be served. As part of, or in addition to, consideration of the above factors, it is anticipated that the Federal Reserve Board will consider the regulatory status of CFX and Orange, current and projected economic conditions in the New England region and the overall capital and safety and soundness standards established by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the regulations promulgated thereunder. In addition, under the Community Reinvestment Act of 1977, as amended (the "CRA"), the Federal Reserve Board must take into account the record of performance of each of CFX and Orange in meeting the credit needs of the entire community, including low and moderate income neighborhoods, served by each of such institutions. The Merger may not be consummated until 30 days after Federal Reserve Board approval (or such shorter period as the Federal Reserve Board may prescribe with the concurrence of the Attorney General, but not less than 15 days), during which time the Department of Justice may challenge the Merger on antitrust grounds. The commencement of an antitrust action by the Department of Justice would stay the effectiveness of Federal Reserve Board approval unless a court specifically orders otherwise. In reviewing the Merger, the Department of Justice could analyze the Merger's effect on competition differently than the Federal Reserve Board, and thus it is possible that the Department of Justice could reach a different conclusion than the Federal Reserve Board regarding the Merger's competitive effects. Failure of the Department of Justice to object to the Merger does not prevent the filing of antitrust actions by private persons. Massachusetts Board of Bank Incorporation and Massachusetts Commissioner of Banks. In addition, the Merger requires the approval of the Massachusetts BBI and the Massachusetts Commissioner of Banks. Each such approval is based upon the determination that such proposed acquisition does not unreasonably affect competition among Massachusetts banking institutions and that it promotes public convenience and advantage. In making such a determination, each of the Massachusetts Commissioner of Banks and the Massachusetts BBI must consider, among other things, a showing of net new benefits, including initial capital investments, job creation plans, consumer and business services and commitments to maintain and open branch offices within a bank's statutorily- delineated local community. Prior to approving the Merger, the Massachusetts BBI must receive notice from the Massachusetts Housing Partnership Fund (the "MHPF") that arrangements satisfactory to the MHPF have been made for the proposed acquiror to make 0.9% of its assets located in Massachusetts available for call by MHPF for a period of ten years for purposes of funding various affordable housing programs. Massachusetts law provides that such funds shall bear interest at rates approved by the Massachusetts Commissioner of Banks which shall be based upon the cost (not to include lost opportunity costs) incurred in making funds available to the MHPF. Pursuant to this requirement, Orange and CFX, as lender and guarantor, respectively, are entering into a Loan Agreement with the MHPF Board pursuant to which Orange agrees to make available for call by the MHPF Board the amount of $760,095. In addition, prior to approving the Merger, the Massachusetts Commissioner of Banks must receive notice from the Depositors Insurance Fund that satisfactory arrangements have been made. The approval of the Massachusetts BBI is also required to charter Interim Bank, a wholly owned subsidiary of CFX to be formed as a Massachusetts chartered trust company for the sole purpose of facilitating the acquisition of Orange by CFX. Prior to issuing a Certificate of Public Convenience and Advantage to Interim Bank, the Massachusetts BBI will consider how the public convenience and advantage will be served by the establishment of the proposed trust company. Prior to issuing a Certificate to Transact Business, the Massachusetts BBI will require evidence of deposit insurance from the FDIC. FDIC. The Merger also must be approved by the FDIC. In addition, as described in the preceding section, the FDIC must provide the Massachusetts BBI with evidence of deposit insurance for the deposits of Interim Bank. The Merger may not be consummated until 30 days after approval by the FDIC (or such shorter period as the FDIC may prescribe with the concurrence of the Attorney General, but not less than 15 days), during which time the Department of Justice may challenge the Merger on antitrust grounds. The commencement of an antitrust action by the Department of Justice would stay the effectiveness of FDIC approval unless a court specifically orders otherwise. The Merger will not proceed until all regulatory approvals required to consummate the Merger have been obtained, such approvals are in full force and effect and all statutory waiting periods in respect thereof have expired. Applications seeking the necessary approvals have been filed. There can be no assurance that the Merger will be approved by the Federal Reserve Board, the Massachusetts BBI, the Massachusetts Commissioner of Banks, or the FDIC. If such approvals are received, there can be no assurance as to the date of such approvals or the absence of any litigation challenging such approvals. CFX and Orange are not aware of any other governmental approvals or actions that are required prior to the parties' consummation of the Merger. It is currently contemplated that if any such additional governmental approvals or actions are required, such approvals or actions will be sought. There can be no assurance, however, that any such additional approvals or actions will be obtained. Certain Federal Income Tax Consequences In the opinion of Foley, Hoag & Eliot, counsel to Orange, the following summary sets forth the anticipated material federal income tax consequences of the Merger to Orange stockholders and to Orange. The treatment of each Orange stockholder will depend in part upon such stockholder's particular situation. Special tax consequences not described below may be applicable to particular classes of taxpayers, including Orange stockholders who acquired Orange Common Stock pursuant to the Orange Stock Option Plans. All stockholders should consult with their own tax advisors as to the particular tax consequences of the Merger to them, including the applicability and effect of any state, local and foreign tax laws. This summary is based on the provisions of the Internal Revenue Code, the Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date hereof. Such laws, regulations or interpretations may differ on the Effective Time, and relevant facts also may differ. The obligations of CFX and Orange to effect the Merger are conditioned upon their receipt of either rulings from the Internal Revenue Service or opinions of counsel, as set forth below. Foley, Hoag & Eliot, counsel to Orange, will deliver to Orange, and Devine, Millimet & Branch, Professional Association, counsel to CFX, will deliver to CFX, their opinions, dated as of the Effective Time. The tax opinions will not be binding on the Internal Revenue Service, and there can be no assurance that the Internal Revenue Service will not contest the conclusions expressed in the opinions. The opinion letter to be delivered to Orange by Foley, Hoag & Eliot will be based upon certain representations made to Foley, Hoag & Eliot by Orange, CFX, Interim Bank and certain Orange stockholders and upon certain factual assumptions. If any of the representations or assumptions were not correct, then each holder of Orange Common Stock would recognize gain or loss with respect to each share of Orange Common Stock surrendered equal to the difference between (i) such stockholder's basis in the share and (ii) the fair market value of the CFX Common Stock received in exchange for the share. In such event, the stockholder's aggregate basis in the shares of CFX Common Stock received in the exchange would equal the fair market value of such shares, and the stockholder's holding period for such shares of CFX Common Stock would not include the period during which the stockholder held the Orange shares exchanged therefor. While the accuracy of each representation made to Foley, Hoag & Eliot is essential to the opinions set forth below, Orange stockholders should particularly note that dispositions of CFX Common Stock received by Orange stockholders in the Merger may cause the Merger to become retroactively taxable to each Orange stockholder, even those who do not make such dispositions. In particular, Orange stockholders must not, pursuant to a plan or intent existing prior to the Effective Time, dispose of an amount of CFX Common Stock to be received in the Merger (including, under certain circumstances, pre-merger dispositions of Orange Common Stock) such that the Orange stockholders do not retain a meaningful continuing equity ownership in CFX. Generally, so long as the Orange stockholders have no plan or intention to dispose of CFX Common Stock to be received in the Merger that would result in their retention, in the aggregate, of a continuing interest through stock ownership in CFX that is equal in value, as of the Effective Time, to less than 50 percent of the value of all of the formerly outstanding Orange Common Stock as of the same time, this requirement will be satisfied. The opinion letter delivered to Orange by Foley, Hoag & Eliot will state that Foley, Hoag & Eliot is of opinion, as of the Effective Time and under existing law, for United States federal income tax purposes, as follows: a. The Merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Code; b. Orange will be a "party to the reorganization" within the meaning of Code section 368(b); c. No gain or loss will be recognized by Orange as a result of the Merger; d. Except to the extent of cash received in lieu of fractional shares, as described below, no gain or loss will be recognized by the stockholders of Orange upon the receipt in the Merger of CFX Common Stock in exchange for their shares of Orange Common Stock; e. Cash received in lieu of a fractional share of CFX Common Stock will be treated as full payment in exchange for the Orange Common Stock for which it is exchanged, and will result in the recognition of gain or loss, if any, measured by the difference between the portion of the basis of the Orange Common Stock allocable to such shares and the cash received therefor. If such shares are capital assets in the hands of the Orange stockholder, such gain or loss will be a capital gain or loss; f. The aggregate basis of the CFX Common Stock received by an Orange stockholder in the Merger will be the same as the aggregate basis of the Orange Common Stock surrendered in exchange therefor; g. The holding period for each share of CFX Common Stock received by each Orange stockholder in exchange for Orange Common Stock will include the period for which such stockholder held such Orange Common Stock, provided that the stockholder's Orange Common Stock is held as a capital asset at the Effective Time; and h. An Orange stockholder who does not vote in favor of the Merger, who exercises dissenters' rights as to all such holder's shares of Orange Common Stock and who is not deemed to be an owner of any shares of Orange Common Stock held by others will recognize gain or loss measured by the difference between the basis of such stockholder's dissenting shares and the cash received in exchange therefor. Such gain or loss will be capital, provided that the holder's dissenting shares are held as a capital asset at the Effective Time. The opinion to be rendered to CFX by Devine, Millimet & Branch, Professional Association, will also be based on certain factual representations, warranties and assumptions and will rely as to certain legal matters on the foregoing opinion of Foley, Hoag and Eliot. Devine, Millimet and Branch, Professional Association, will opine that for federal income tax purposes: (i) CFX and Interim Bank will each be a "party to the reorganization" within the meaning of Code Section 368(b); (ii) No gain or loss will be recognized by CFX, Interim Bank or the surviving bank by reason of the Merger; (iii) The bases of the assets of Orange in the hands of the surviving bank will be the same as the bases of such assets in the hands of Orange immediately prior to the Merger; and (iv) The holding period of the assets of Orange in the hands of the surviving bank will include the period during which such assets were held by Orange prior to the Merger. Accounting Treatment It is anticipated that the Merger will be accounted for as a "pooling- of-interests" transaction under generally accepted accounting principles. Under such method of accounting, holders of Orange Common Stock will be deemed to have combined their existing voting common stock interest with that of holders of CFX Common Stock by exchanging their shares for shares of CFX Common Stock. Accordingly, the book value of the assets, liabilities and stockholders' equity of Orange, as reported on its consolidated balance sheet, will be carried over to the consolidated balance sheet of CFX and no goodwill will be created. CFX will be able to include in its consolidated statement of income the consolidated income of Orange for the entire fiscal year in which the Merger occurs and for all periods reported; however, certain expenses incurred to effect the Merger must be treated by CFX as current charges against income rather than adjustments to its balance sheet. In order for the Merger to qualify for pooling-of-interests accounting treatment, among other criteria, substantially all (90% or more) of the outstanding Orange Common Stock must be exchanged for CFX Common Stock. It is a condition to consummation of the Merger that CFX shall have received a letter from Wolf & Company, PC, to the effect that the Merger qualifies for pooling-of-interests accounting treatment. The pro forma financial information presented in this Proxy Statement- Prospectus has been prepared using the pooling-of-interests method of accounting to account for the Merger. See "PRO FORMA COMBINED FINANCIAL DATA." Termination of the Merger Agreement The Merger Agreement provides that the Merger may be terminated at any time prior to the Effective Time (whether before or after stockholder approval) by mutual consent of CFX and Orange. Subject to certain limitations in cases where the party seeking termination is in breach of the Merger Agreement, the Merger Agreement may also be terminated by CFX or Orange, acting individually, (a) if any governmental entity shall have issued a final nonappealable order prohibiting the consummation of any of the transactions contemplated by the Merger Agreement; (b) if the Effective Time has not occurred by July 31, 1995, except that Orange may extend this date if the approval of a governmental entity that is required for the consummation of any of the transactions contemplated by the Merger Agreement has not been obtained; (c) if there is a material breach by the other party of any representation, warranty, covenant or agreement contained in the Merger Agreement which is not timely cured; or (d) if the vote of Orange's stockholders required to approve the Merger Agreement is not obtained. Orange may also terminate the Merger Agreement in the event the Average Closing Price is equal to or less than $13.3333, unless CFX elects (with the approval of Orange) to adopt the Adjusted Maximum Exchange Ratio as the Exchange Ratio. If the Merger Agreement is terminated (other than as a result of a wilful breach or gross negligence by Orange or CFX) each of Orange and CFX shall be responsible for its own costs and expenses. If the Merger Agreement is terminated as a result of a breach of a representation, warranty or covenant which is caused by the wilful conduct or gross negligence of either party, the breaching party, must reimburse the other for all out-of-pocket costs and expenses, up to $250,000. If Orange is required to pay a termination fee (see "--Termination Fee"), the maximum expenses payable by Orange shall not exceed $150,000. Termination Fee Pursuant to the Merger Agreement, Orange shall pay to CFX a termination fee of $450,000 within 20 business days of the occurrence of one of the following: the failure of Orange's stockholders to approve the affiliation of CFX and Orange after the public announcement by a person or group of persons other than CFX of a bona fide, credible offer or proposal to acquire 45% or more of Orange's Common Stock, or to acquire, merge or consolidate with Orange or to purchase all or substantially all of Orange's assets; the acquisition by any person or group of persons other than CFX of 45% or more of Orange's Common Stock (or the acquisition by any person or group of persons of the right to acquire 45% or more of Orange's Common Stock), exclusive of shares of Orange's Common Stock sold directly or indirectly to such person or group of persons by CFX; or the entry of Orange into an agreement or other understanding with a person or group of persons other than CFX for such person or group of persons to acquire, merge or consolidate with Orange or to purchase all or substantially all of Orange's assets or acquire 45% or more of the outstanding shares of Orange's Common Stock. Waiver, Amendment and Extension of the Merger Agreement CFX and Orange may, to the extent legally allowable, (a) amend the Merger Agreement; (b) extend the time for the performance of any of the obligations or other acts required of the other party contained in the Merger Agreement; (c) waive any inaccuracies in the representations and warranties of the other party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement; or (d) waive compliance by the other party of any of its agreements or conditions contained in the Merger Agreement, except that after Orange's stockholder approval, no amendment shall reduce the amount or change the form of consideration to be delivered to each of Orange's stockholders pursuant to the Merger Agreement without further approval of Orange's stockholders. Effect on Employee Benefits Although the Merger Agreement does not require CFX to offer employment to any employee of Orange or its subsidiaries, the Merger Agreement provides that CFX will use its best efforts to retain all persons employed by Orange at the Effective Time. The Merger Agreement also provides that, after the Merger, CFX will provide Orange employees with employee benefits no less favorable overall than those available to employees of CFX, subject to the terms and conditions under which those employee benefits are made available to employees of CFX (except that the terms providing or substituting pension benefits shall be determined after consultation among the Savings Bank Employees Retirement Association, Orange and CFX). For purposes of determining eligibility for vesting of such employee benefits (but not for determining the amount of benefits payable under defined benefit pension plans), service with Orange by persons who were employees of Orange at the Effective Time shall be treated as service with an "employer" to the same extent as if such persons had been employees of CFX during the period such persons were employed by Orange. In addition, CFX has agreed that, at the Effective Time, all options held by optionees under the Orange Stock Option Plans which are outstanding at the Effective Time will be converted into and become options under the CFX Stock Option Plan on the same terms and conditions as the Orange Stock Option Plans, except that (a) the number of shares of CFX Common Stock subject to such options and the exercise price of such options will be adjusted to give effect to the Exchange Ratio, (b) the options will remain exercisable regardless of whether the holder shall remain in the employ of Orange or CFX after the Effective Time, and (c) the options will be non-qualified stock options rather than incentive stock options. The Merger Agreement provides that, after the Effective Time, CFX shall indemnify and hold harmless, as and to the fullest extent permitted by applicable law, each person who was at the date of the Merger Agreement, or has been at any time prior to the date of the Merger Agreement, or who becomes prior to the Effective Time, a director, officer or employee of Orange or any of its subsidiaries (the "Indemnified Parties") against any losses, claims, damages, liabilities and fines, and amounts paid in connection with any threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time), whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which each such Indemnified Party is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to the Merger Agreement or any of the transactions contemplated thereby. In connection with any such claim, action, suit, proceeding or investigation, CFX has agreed to pay expenses (including without limitation reasonable attorney fees) in advance of the final disposition of any such claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by applicable law upon receipt of any undertaking required by applicable law and to use all reasonable efforts to assist in the vigorous defense of any such matter. CFX has also agreed that all rights to indemnification existing in favor of the Indemnified Parties as provided in Orange's Amended and Restated Charter and By-laws or similar governing documents of any Orange subsidiary, as in effect on July 26, 1994, will survive the Merger and continue in full force and effect for a period of not less than six years from the Effective Time with respect to claims or liabilities arising from facts or events existing or occurring prior to the Effective Time. All rights to indemnification in respect of any claim asserted or made within such period shall continue until the final disposition of such claim. CFX has also agreed to maintain in effect for at least six years after the Effective Time the policies for directors' and officers' liability insurance currently maintained by Orange or to substitute policies having at least the same coverage and containing terms and conditions no less favorable to directors and officers of Orange than the present policies of Orange, provided that CFX shall be required to maintain only such coverage as is commercially available. Interests of Certain Persons in the Merger In connection with the Merger, CFX has agreed to provide certain benefits to the employees of Orange and its subsidiaries. See "--Effect on Employee Benefits". CFX has also agreed to continue the rights to indemnification of officers, directors and employees of Orange or its subsidiaries and to continue in effect for a period of time the directors' and officers' liability insurance currently maintained by Orange. See "--Effect on Employee Benefits". As discussed in "--Effect on Employee Benefits", at the Effective Time, all options held by optionees under the Orange Stock Option Plans which are outstanding at the Effective Time will be converted into and become options under the CFX Stock Option Plan. As of December 30, 1994, the Record Date, the officers and directors as a group held options to purchase an aggregate of 42,660 shares of the Orange Common Stock. Assuming, for illustration purposes only, that the Exchange Ratio is .9844 and that the number of shares of Orange Common Stock issuable at the Effective Time upon the exercise of outstanding options granted to officers and directors pursuant to the Orange Stock Option Plans remains unchanged from the Record Date, options to acquire 42,660 shares of Orange Common Stock would be converted into options to acquire 41,995 shares of CFX Common Stock, at various exercise prices, adjusted to give effect to the Exchange Ratio. The directors and officers of Orange immediately prior to the Effective Time shall remain the directors and officers of the surviving bank, to hold office in accordance with the charter documents and by-laws of the surviving bank until their respective successors are duly elected or appointed and qualified. Following the Effective Time, CFX intends to elect Mark A. Gavin, Chief Financial Officer of CFX, and Christopher V. Bean, a director of CFX, to serve on the Board of the surviving bank. Pursuant to the Merger Agreement, CFX has agreed that, except with respect to Messrs. Gavin and Bean (and one additional director whom CFX may elect), the Board of Directors of Orange will be kept in place for at least three years, subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of CFX's directors. Prior to or at the Effective Time, one of Orange's current directors (designated by the Orange Board of Directors, subject to the reasonable approval of CFX) will be elected to the Board of Directors of CFX. CFX has entered into an agreement with Richard F. Astrella, President and Chief Executive Officer of Orange, which primarily provides protection to Mr. Astrella in the event that his employment with Orange is terminated within 18 months of consummation of the Merger. In such event, Mr. Astrella would be entitled to receive the base compensation set forth in the agreement and certain benefits for the remainder of the 18-month period. Beneficial Ownership of Orange Common Stock The following table sets forth certain information as of December 1, 1994 regarding (i) holders of more than 5% of Orange's Common Stock, (ii) each director of Orange and (iii) all directors and principal officers of Orange as a group. Except as otherwise noted in the footnotes to the table, the beneficial owners have sole voting and investment power as to all shares beneficially owned by them.
Amount and Nature Percent of Beneficial of Name Ownership Class Richard F. Astrella 43,933(1) 5.81 30 East Main Street Orange, Massachusetts 01364 Paul A. Larocque 25,300 3.49 Paul R. Robichaud 20,047(2) 2.77 Elwyn C. Hayden 11,250(3) 1.55 Roger W. Mallet 5,625(3) .78 Robert G. Allen 1,125(3) .16 Andrea L. Shaughnessy 950 .13 Thomas S. Mann, III 500 .07 John B. Stevenson 450(3) .06 Arlan D. Willard 450(3) .06 All Directors and principal officers as a group (14 persons) 127,446(4) 16.61 Mr. Astrella beneficially owns 12,829 shares jointly with his spouse and 31,104 shares obtainable pursuant to currently exercisable options. Includes 14,549 shares held individually by Mr. Robichaud and 5,498 shares held individually by his spouse, as to which Mr. Robichaud disclaims beneficial ownership. Shares held jointly with spouse. Includes 42,660 shares obtainable by exercise of currently exercisable options.
Appraisal Rights of Dissenting Stockholders Pursuant to Massachusetts law, stockholders of record on the Record Date have the right to dissent from the Merger and, if the Merger is consummated, to receive compensation equal to the "fair value" of their shares of Orange's stock. Any stockholders desiring to exercise such statutory appraisal rights will have the rights and duties and must follow the procedures set forth in sections 85 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts in order to perfect such rights. A brief summary of sections 85 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts is set forth below. The following summary does not purport to be a complete statement of the procedures to be followed by stockholders desiring to exercise their statutory appraisal rights and is qualified in its entirety by express reference to those sections, the full text of which is included in Annex C attached hereto. Stockholders are urged to read Annex C in its entirety since failure to comply with the procedures set forth therein may result in the loss of statutory appraisal rights. To exercise appraisal rights under Massachusetts law, a stockholder must (i) deliver to Orange, before the stockholder vote on the action giving rise to such appraisal rights, a written objection to such action stating that such stockholder intends to demand payment for his or her shares through the exercise of his or her statutory appraisal rights, (ii) not vote in favor of or consent to such action and (iii) within twenty days after the date of mailing to such stockholder of a written notice that the action giving rise to such rights has been consummated or become effective, make written demand upon Orange for payment of his or her shares and an appraisal of the value thereof. In order to satisfy the requirements described in clause (ii) above, a stockholder must either vote in person or by proxy against the proposal or proposals to which such stockholder objects or abstain from voting on such proposals. The written objection described in clause (i) above may be sent to Orange at 30 East Main Street, Orange, Massachusetts 01364, Attention: Mr. Richard F. Astrella. After a stockholder makes a written demand for payment of his or her shares as provided above, such stockholder ceases to be entitled to notice of stockholders' meetings, the right to vote and the right to receive dividends and other distributions of Orange, except in certain limited circumstances. Section 96 of chapter 156B of the General Laws of Massachusetts provides that, after a written demand for payment is made by a dissenting stockholder, such stockholder shall not be entitled to such rights unless (i) a bill to determine the fair value of such stockholder's shares is not timely filed as described below, (ii) a bill to determine the fair value of the shares is dismissed with respect to such stockholder, or (iii) such stockholder, with the approval of Orange, withdraws his or her objections and accepts Orange's action. Once a written demand for payment is made as described above, if the dissenting stockholder and Orange reach agreement on the fair value of such stockholder's shares, Orange will pay to such stockholder the fair value of such shares within thirty days after the expiration of the period during which the demand may be made. If, within such thirty-day period, the parties fail to agree as to the fair value of such shares, Orange or the stockholder may have the fair value of the stock of all dissenting stockholders determined by judicial proceedings by filing a bill in equity in the Massachusetts Superior Court for Franklin County within four months after the thirty-day period expires. For the purposes of the Superior Court determination, the value of the shares is to be determined as of the day preceding the date of the vote of the stockholders approving the actions giving rise to the appraisal rights, and shall be exclusive of any element of value arising from the expectation or accomplishment of such actions. Failure to satisfy all of the conditions described above and set forth in sections 85 through 98, inclusive, of chapter 156B of the General Laws of Massachusetts will preclude a stockholder's claim of statutory appraisal rights under Massachusetts law. However, a stockholder who fails to perfect his or her statutory appraisal rights will nevertheless remain a stockholder of Orange entitled to all the rights and benefits appurtenant thereto. Under section 98 of chapter 156B of the General Laws of Massachusetts, the enforcement by a dissenting stockholder of such stockholder's right to receive payment for his or her shares in the manner provided by sections 85 through 98, inclusive, of chapter 156B of the General Laws of Massachusetts is stated to be the exclusive remedy of a stockholder objecting to the Merger, except upon the grounds that consummation of the Merger would be or is illegal or fraudulent as to that stockholder. Resale of CFX Common Stock The CFX Common Stock issued pursuant to the Merger will be freely transferable under the Securities Act, except for shares issued to any Orange stockholder who may be deemed to be an affiliate (an "Affiliate") of Orange for purposes of Rule 145 under the Securities Act. Affiliates are generally defined as persons (generally executive officers and directors) who control, are controlled by, or are under common control with (a) CFX or Orange at the time of the Special Meeting or (b) CFX at or after the Effective Time. Rules 144 and 145 promulgated by the Commission under the Securities Act impose certain restrictions on the sale of CFX Common Stock received in the Merger by Affiliates and certain of their family members and related interests. Generally speaking, during the two years following the Effective Time, Affiliates of Orange, provided they are not Affiliates of CFX, may publicly resell the CFX Common Stock received by them in the Merger, subject to certain limitations as to the amount of CFX Common Stock sold by them in any three-month period and as to the manner of sale. After the two-year period, such Affiliates of Orange who are not Affiliates of CFX may resell their shares without such restrictions so long as there is adequate current public information with respect to CFX as required by Rule 144. Persons who become Affiliates of CFX prior to, at or after the Effective Time may publicly resell the CFX Common Stock received by them in the Merger subject to similar limitations and subject to certain filing requirements specified in Rule 144. The ability of Affiliates to resell shares of CFX Common Stock received in the Merger under Rule 144 or 145 as summarized herein generally will be subject to CFX's having satisfied its Exchange Act reporting requirements for specified periods prior to the time of sale. Affiliates also would be permitted to resell CFX Common Stock received in the Merger pursuant to an effective registration statement under the Securities Act or another available exemption from the Securities Act registration requirements. This Proxy Statement-Prospectus does not cover any resales of CFX Common Stock received by persons who may be deemed to be Affiliates of CFX or Orange. The Merger Agreement provides that each of CFX and Orange shall use all reasonable efforts to cause each Affiliate of CFX or Orange to deliver prior to the date of the Special Meeting an agreement providing that such Affiliate will not sell, pledge, transfer or otherwise dispose of any CFX Common Stock or Orange Common Stock held by such Affiliate or, in the case of Affiliates of Orange, to be received in the Merger, except (i) in compliance with the Securities Act or (ii) during the period commencing 30 days prior to the consummation of the Merger and ending at the time of publication of financial results covering at least 30 days of combined operations of CFX and Orange after the Merger. PRO FORMA COMBINED FINANCIAL DATA The following unaudited pro forma combined condensed financial statements have been prepared to reflect the Merger on a pooling-of-interests basis. Under pooling-of-interests accounting treatment for the Merger, the recorded assets and liabilities of CFX and Orange are carried forward to the combined company at their recorded amounts. See "THE MERGER--Accounting Treatment." The following pro forma financial statements reflect the exchange of Orange Common Stock for CFX Common Stock in connection with the Merger at the maximum Exchange Ratio of .9844. Common share and per share data have been restated to reflect a 5% common stock dividend declared by CFX on December 12, 1994. This unaudited pro forma combined financial data should be read in conjunction with the consolidated historical financial statements of Orange and CFX, including the respective notes thereto, which are included in this Proxy Statement- Prospectus. See "INDEX TO FINANCIAL STATEMENTS." The pro forma combined financial data is not necessarily indicative of the results of future operations of the combined entity or the actual results that would have been achieved had the Merger been consummated at the dates indicated. Moreover, the pro forma combined condensed balance sheet reflects preliminary pro forma adjustments made to combine Orange with CFX utilizing pooling-of-interests accounting treatment. The actual adjustments to the surviving corporation's accounts will be made as of the Effective Time of the Merger and may differ from those reflected in the pro forma financial statements. CFX CORPORATION--ORANGE SAVINGS BANK PRO FORMA COMBINED CONDENSED BALANCE SHEET September 30, 1994 (UNAUDITED)
CFX Orange Pro Forma CFX (In thousands, except per share data) (Historical) (Historical) Adjustments Pro Forma Assets Cash and cash equivalents $ 16,727 $ 6,032 $ 22,759 Interest bearing deposits with other banks 1,815 488 2,303 Federal Home Loan Bank of Boston stock 6,471 917 7,388 Trading securities 37,971 - 37,971 Securities available for sale 3,320 3,250 6,570 Securities held to maturity 117,601 2,016 119,617 Mortgage loans held for sale 15,478 - 15,478 Loans and leases, net 513,740 69,714 583,454 Premises and equipment 13,499 464 13,963 Mortgage servicing rights 4,336 - 4,336 Goodwill and deposit base intangibles 10,570 95 10,665 Foreclosed real estate 2,179 311 2,490 Other assets 15,324 662 15,986 $759,031 $83,949 $ 0 $842,980 Liabilities and Shareholders' Equity Deposits $542,330 $73,845 $616,175 Advances from Federal Home Loan Bank of Boston 88,937 - 88,937 Other borrowed funds 24,084 - 24,084 Due to broker 20,047 - 20,047 Other liabilities 6,596 1,485 8,081 Total Liabilities 681,994 75,330 0 757,324 Shareholders' Equity Preferred stock(1) 193 - 193 Common stock(2)(3)(4) 4,257 72 641 4,970 Paid-in capital 59,865 2,974 (641) 62,198 Retained earnings 20,425 5,576 26,001 Net unrealized losses on securities available for sale, after tax effects (505) (3) (508) Cost of 577,265 shares of common stock in treasury (7,198) - (7,198) Total Shareholders' Equity 77,037 8,619 0 85,656 $759,031 $83,949 $ 0 $842,980 Number of common shares outstanding 3,864 724 4,577 Common shareholders' equity per share(5) $ 19.01 $ 11.91 $ 17.93 Core (leverage) capital ratio 8.88% 10.15% 9.01% Tier 1 risk-based capital ratio 14.86 19.35 15.30 Total risk-based capital ratio 16.14 20.65 16.58
CFX CORPORATION--ORANGE SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Nine Months Ended September 30, 1994 (UNAUDITED)
CFX Orange CFX (In thousands, except per share data) (Historical) (Historical) Pro Forma Interest income: Interest on loans and leases $29,183 $3,935 $33,118 Interest and dividends on securities 6,562 232 6,794 Other interest income 450 92 542 Total Interest and Dividend Income 36,195 4,259 40,454 Interest expense: Interest on deposi 12,320 1,853 14,173 Interest on borrowings 3,260 - 3,260 Total Interest Expense 15,580 1,853 17,433 Net Interest and Dividend Income 20,615 2,406 23,021 Provision for loan and lease losses 50 12 62 Net Interest and Dividend Income After Provision for Loan and Lease Losses 20,565 2,394 22,959 Other income 3,862 226 4,088 Other expense 18,254 1,754 20,008 Income Before Income Taxes 6,173 866 7,039 Income taxes 2,298 345 2,643 Net Income 3,875 521 4,396 Preferred stock dividends 201 - 201 Net Income Available to Common Stock $ 3,674 $ 521 $ 4,195 Weighted average common shares outstanding 3,856 770 4,569 Earnings per common share(6) $ .95 $ .68 $ .91
CFX CORPORATION--ORANGE SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Year Ended December 31, 1993 (UNAUDITED)
CFX Orange CFX (In thousands, except per share data) (Historical) (Historical) Pro Forma Interest income: Interest on loans and leases $39,496 $5,560 $45,056 Interest and dividends on securities 6,019 225 6,244 Other interest income 627 98 725 Total Interest and Dividend Income 46,142 5,883 52,025 Interest expense: Interest on deposits 18,965 2,667 21,632 Interest on borrowings 720 - 720 Total Interest Expense 19,685 2,667 22,352 Net Interest and Dividend Income 26,457 3,216 29,673 Provision for loan and lease losses 2,970 90 3,060 Net Interest and Dividend Income After Provision for Loan and Lease Losses 23,487 3,126 26,613 Other income 6,267 276 6,543 Other expense 23,492 2,162 25,654 Income Before Income Taxes 6,262 1,240 7,502 Income taxes 1,240 91 1,331 Net Income 5,022 1,149 6,171 Preferred stock dividends 270 - 270 Net Income Available to Common Stock $ 4,752 $1,149 $ 5,901 Weighted average common shares outstanding 3,826 742 4,539 Earnings per common share(6) $ 1.24 $ 1.55 $ 1.30
CFX CORPORATION--ORANGE SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Year Ended December 31, 1992 (UNAUDITED)
CFX Orange CFX (In thousands, except per share data) (Historical) (Historical) Pro Forma Interest income: Interest on loans and leases $43,989 $ 5,972 $49,961 Interest and dividends on securities 7,519 275 7,794 Other interest income 903 154 1,057 Total Interest and Dividend Income 52,411 6,401 58,812 Interest expense: Interest on deposits 25,976 3,301 29,277 Interest on borrowings 1,113 111 1,224 Total Interest Expense 27,089 3,412 30,501 Net Interest and Dividend Income 25,322 2,989 28,311 Provision for loan and lease losses 2,911 242 3,153 Net Interest and Dividend Income After Provision for Loan and Lease Losses 22,411 2,747 25,158 Other income (loss) 3,164 (778) 2,386 Other expense 19,777 2,033 21,810 Income (Loss) Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 5,798 (64) 5,734 Income taxes 2,000 465 2,465 Net Income (Loss) Before Cumulative Effect of a Change in Accounting Principle 3,798 (529) 3,269 Preferred stock dividends 270 - 270 Net Income (Loss) Available to Common Stock Before Cumulative Effect of a Change in Accounting Principle $ 3,528 $ (529) $ 2,999 Weighted average common shares outstanding 3,805 731 4,510 Earnings per common share before cumulative effect of a change in accounting principle(6) $ .92 $ (.72) $ .67
CFX CORPORATION--ORANGE SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT For the Year Ended December 31, 1991 (UNAUDITED)
CFX Orange CFX (In thousands, except per share data) (Historical) (Historical) Pro Forma Interest income: Interest on loans and leases $51,123 $6,117 $57,240 Interest and dividends on securities 5,981 281 6,262 Other interest income 1,459 291 1,750 Total Interest and Dividend Income 58,563 6,689 65,252 Interest expense: Interest on deposits 33,676 3,707 37,383 Interest on borrowings 1,985 633 2,618 Total Interest Expense 35,661 4,340 40,001 Net Interest and Dividend Income 22,902 2,349 25,251 Provision for loan and lease losses 3,830 135 3,965 Net Interest and Dividend Income After Provision for Loan and Lease Losses 19,072 2,214 21,286 Other income (loss) 1,688 (369) 1,319 Other expense 19,922 1,702 21,624 Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 838 143 981 Income taxes 280 398 678 Net Income (Loss) Before Cumulative Effect of a Change in Accounting Principle 558 (255) 303 Preferred stock dividends 270 - 270 Net Income (Loss) Available to Common Stock Before Cumulative Effect of a Change in Accounting Principle $ 288 $ (255) $ 33 Weighted average common shares outstanding 3,795 734 4,499 Earnings per common share before cumulative effect of a change in accounting principle(6) $ .08 $ (.35) $ .01
CFX CORPORATION--ORANGE SAVINGS BANK Notes to Pro Forma Combined Condensed Financial Statements (1) Preferred Stock at September 30, 1994: CFX, $1.00 par value, 4,000,000 authorized shares, of which 193,053 shares of 7.5% Series A Cumulative Convertible Preferred Stock are issued and outstanding. Orange, $.10 par value, 200,000 authorized shares, none of which are issued or outstanding. (2) Common Stock at September 30, 1994: CFX, $1.00 par value, 15,000,000 authorized shares, of which 4,441,152 shares have been issued and of which 3,863,887 shares are outstanding. Orange, $.10 par value, 1,300,000 authorized shares, of which 724,412 shares are issued and outstanding. (3) Subject to the approval of the shareholders of Orange and the regulatory authorities and subject to the other conditions specified in the Merger Agreement, a newly formed subsidiary of CFX will merge into Orange. The pro forma financial statements reflect the exchange of Orange Common Stock for CFX Common Stock in connection with the Merger at the Maximum Exchange Ratio of .9844. As required by generally accepted accounting principles, this transaction has been reflected in the pro forma financial statements using the pooling-of-interests method of accounting. In combining the companies, a pro forma adjustment at September 30, 1994 was made to reflect the issuance of 713,111 shares of CFX Common Stock in exchange for the outstanding shares of Orange Common Stock. (4) The Merger Agreement provides that each holder of Orange Common Stock, who would otherwise have been entitled to a fraction of a share of CFX Common Stock, will be paid the cash value of such fraction. Such cash payments have not been reflected in the pro forma information. (5) Pro forma common shareholders' equity per share was computed by dividing combined historical common shareholders' equity by the sum of the common shares outstanding at period end, adjusted to give effect to the Merger, assuming the Maximum Exchange Ratio. (6) Pro forma weighted average common shares outstanding represent the weighted average common shares outstanding of CFX for each of the respective periods plus the pro forma issuance of 713,111 shares in 1993 and 704,451 shares in 1992 and 1991 of CFX Common Stock in exchange for the outstanding shares of Orange Common Stock. The pro forma effect of stock options outstanding after the Merger is not dilutive and therefore not included in the calculation of earnings per share. REGULATION As a bank holding company, CFX is subject to regulation by the Federal Reserve Board. CFX's bank subsidiary, CFX Bank, is a state-chartered bank; as such, it is subject to regulation by bank regulators in New Hampshire. The deposits of CFX Bank are insured by the FDIC, and therefore, CFX Bank is subject to FDIC supervision and regulation. CFX is also subject to the reporting and other requirements of the Exchange Act. CFX and CFX Bank's non- bank subsidiaries are subject to limitations on the scope of their activities and to continuing regulation, supervision and examination by the Federal Reserve Board under the BHCA and related federal statutes. As a New Hampshire corporation, CFX must comply with the general corporation law of New Hampshire. As a Massachusetts-chartered, FDIC-insured savings bank, Orange is subject to regulation, examination and supervision by the FDIC and by the Massachusetts Commissioner of Banks. As a state-chartered bank, Orange must comply with Massachusetts banking statutes. Orange is also subject to the reporting and other requirements of the Exchange Act. Although the Northeast is gradually recovering from the severe recession of the late 1980's and early 1990's, the banking environment continues to be affected by a slow recovery of commercial real estate values and substantial increases in regulatory requirements implemented as a result of the failure of numerous banking and thrift institutions. In addition to CFX's own monitoring activities, the credit quality of the assets held by CFX Bank is subject to periodic review by the state and federal bank regulatory agencies noted above. While CFX believes its present allowance for loan and lease losses is adequate in light of prevailing economic conditions and the current regulatory environment, there can be no assurance that CFX Bank will not be required to make certain adjustments to its allowance for loan and lease losses and charge-off policies in response to changing economic conditions or regulatory examinations. Neither CFX nor any of its subsidiaries has entered into formal written agreements with state or federal regulators. CFX and its subsidiaries continue to evaluate and refine oversight and reporting systems and procedures to enhance the ability of such companies to respond to current economic conditions. In addition to extensive existing government regulation, Federal and state statutes and regulations are subject to changes that may have significant impact on the way in which banks may conduct business. The likelihood and potential effects of any such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and nonbanking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In addition, the enactment of banking legislation such as the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") have affected the banking industry by, among other things, broadening the regulatory powers of the federal banking agencies in a number of areas and restricting the power of state-chartered banks. The following summary is qualified in its entirety by the text of the relevant statutes and regulations. As a result of the enactment of FIRREA, any or all of CFX's subsidiary banks can be held liable for any loss incurred by, or reasonably expected to be incurred by the FDIC in connection with (a) the default of any other of CFX's subsidiary banks or (b) any assistance provided by the FDIC to any other of CFX's subsidiary banks in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur without regulatory assistance. FDICIA provides for, among other things, increased funding for the Bank Insurance Fund (the "BIF") of the FDIC and expanded regulation of depository institutions and their affiliates, including parent holding companies. A summary of certain provisions of FDICIA and its implementing regulations is provided below. Risk Based Deposit Insurance Assessments. A significant portion of the additional funding to BIF is in the form of borrowings to be repaid by insurance premiums assessed on BIF members. In addition, FDICIA provides for an increase in the ratio of the reserves to insured deposits of the BIF to 1.25% by the end of the 15-year period that began with the semi-annual assessment period ending December 31, 1991, also to be financed by insurance premiums. The result of these provisions could be a significant increase in the assessment rate on deposits of BIF members during the balance of this 15- year period. FDICIA also provides authority for special assessments against insured deposits and for the development of a general risk-based assessment system. FDIC has set assessment rates for BIF-insured institutions ranging from 0.23% to 0.31%, based on a risk assessment of the institution. Each financial institution is assigned to one of three capital groups--"well capitalized", "adequately capitalized" or "undercapitalized"--and further assigned to one of three subgroups within each capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. For purposes of the risk-based assessment system, a well- capitalized institution is one that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized institution has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more, and a leverage ratio of 4% or more. An undercapitalized institution is one that does not meet either of the foregoing definitions. The actual assessment rate applicable to a particular institution, therefore, depends in part upon the risk assessment classification so assigned to the institution by the FDIC. Prompt Corrective Action. FDICIA also provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions, depending upon a particular institution's level of capital. FDICIA establishes five tiers of capital measurement for regulatory purposes ranging from "well-capitalized" to "critically undercapitalized." Under prompt corrective action regulations adopted by the federal banking agencies, a depository institution is (a) "well-capitalized" if it has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more, a leverage ratio of 5% or more and is not subject to any written agreement, order or capital directive or prompt corrective action directive issued by its primary regulator to meet and maintain a specific capital measure; (b) "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage ratio of 4% or more (3% if the bank is rated composite I under the CAMEL rating system in its most recent examination and is not experiencing or anticipating significant growth) and does not qualify as "well- capitalized"; (c) "undercapitalized" if it has a total risk based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio that is less than 4% (3% if the bank is rated composite I under the CAMEL rating system in its most recent examination and is not experiencing or anticipating significant growth); (d) "significantly undercapitalized" if the bank has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (e) "critically undercapitalized" if the depository institution has a ratio of tangible equity to total assets that is equal to or less than 2% of total assets, or otherwise fails to meet certain established critical capital levels. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position under certain circumstances. At September 30, 1994, both CFX Bank and Orange were classified as "well-capitalized" under the prompt corrective action regulations described above. Any depository institution that is undercapitalized and which fails to meet regulatory capital requirements specified in FDICIA must submit a capital restoration plan guaranteed by the bank holding company controlling such institution, and the regulatory agencies may place limits on the asset growth and restrict activities of the institution (including transactions with affiliates), require the institution to raise additional capital, dispose of subsidiaries or assets or be acquired and, ultimately, require the appointment of a receiver. The guarantee of a controlling bank holding company under FDICIA of performance of a capital restoration plan is limited to the lower of 5% of an undercapitalized banking subsidiary's assets or the amount required for the bank to be classified as adequately capitalized. Federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan within the time required (generally 45 days after receiving notice that the institution is undercapitalized, significantly undercapitalized or critically undercapitalized), it is treated as if it were significantly undercapitalized. If the controlling bank holding company fails to fulfill its guaranty obligations under FDICIA and files (or has filed against it) a petition under the federal Bankruptcy Code, the applicable regulatory agency would have a claim as a general creditor of the bank holding company and, if the capital restoration plan were deemed to be a commitment to maintain capital under the federal Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy proceeding over unsecured third party creditors of the bank holding company. In addition to the requirement of mandatory submission of a capital restoration plan, under FDICIA, an undercapitalized institution may not pay management fees to any person having control of the institution nor may an institution, except under certain circumstances and with prior regulatory approval, make any capital distribution if, after making such payment or distribution, the institution would be undercapitalized. Further, undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. Undercapitalized and significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. In addition, significantly undercapitalized depository institutions also are prohibited from awarding bonuses or increasing compensation of senior executive officers until approval of a capital restoration plan. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Brokered Deposits and Pass-Through Deposit Insurance Limitation. Under FDICIA, a depository institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits "significantly higher" than the prevailing rate in its market. A depository institution that is adequately capitalized may accept brokered deposits if it obtains the prior approval of the FDIC. Effective in November 1993, the FDIC modified the definitions of "well-capitalized" and "adequately capitalized" to conform to the definitions described above for prompt corrective action. In addition, "pass-through" insurance coverage may not be available for certain employee benefit accounts. In CFX's opinion, these limitations do not have a material effect on CFX. Safety and Soundness Standards. The Federal Deposit Insurance Act, as amended by FDICIA and as further amended by the Riegle Community Development and Regulatory Improvement Act of 1994, directs each federal banking agency to prescribe standards for insured depository institutions relating to asset quality, earnings and stock valuation. The ultimate cumulative effect of these standards cannot currently be forecast. FDICIA also contains a variety of other provisions that may affect CFX's and Orange's respective operations, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. Many of the provisions in FDICIA have recently been or will be implemented through the adoption of regulations by the various federal banking agencies and, therefore, the precise impact on CFX cannot be assessed at this time. Capital Guidelines. The Federal Reserve Board and the FDIC have issued risk-based capital guidelines for bank holding companies, state-chartered member banks and state-chartered non-member banks. Under these guidelines, the minimum ratio of total capital to risk-adjusted assets (including certain off- balance sheet items, such as standby letters of credit) is 8%. At least half of the total capital is to be comprised of common equity, retained earnings, minority interests in the equity accounts of consolidated subsidiaries and a limited amount of perpetual preferred stock, less goodwill ("Tier 1 capital"). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of loan loss reserves (supplementary capital). In addition, the Federal Reserve Board and the FDIC have adopted a leverage ratio (Tier 1 capital to total assets, net of goodwill) of 3% for bank holding companies and banks that meet certain specified criteria, including that they have the highest regulatory rating. The rule indicates that the minimum leverage ratio should be 1% to 2% higher for holding companies and banks undertaking major expansion programs or that do not have the highest regulatory rating. As of September 30, 1994, CFX's and Orange's capital ratios on a historical basis exceeded all minimum regulatory capital requirements. Under FIRREA and FDICIA, failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC and seizure of the institution. Under the policies of the Federal Reserve Board, CFX is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank in circumstances where it might not do so absent such policy. In addition, any subordinated loans by CFX to any of its subsidiary banks would also be subordinate in right of payment to deposits and obligations to general creditors of such subsidiary bank. There are various statutory and regulatory limitations on the extent to which banking subsidiaries of CFX can finance or otherwise transfer funds to CFX or its nonbanking subsidiaries, whether in the form of loans, extensions of credit, investments or asset purchases. Such transfers by any subsidiary bank to CFX or any nonbanking subsidiary are limited in amount to 10% of the subsidiary bank's capital stock and surplus and the aggregate of all transfers of all such nonbanking subsidiaries is limited to 20% of the subsidiary bank's capital stock and surplus. Furthermore, federal regulations require that loans and extensions of credit from a bank to its holding company or non-bank subsidiary of the holding company must be secured in specified amounts and must be on terms and conditions consistent with safe and sound banking practices. Under applicable banking statutes, at September 30, 1994, CFX's bank subsidiary could have declared additional dividends of approximately $3,113,000. Federal and state regulatory agencies also have the authority to limit further the payment of dividends by CFX's banking subsidiaries based on other factors, such as the maintenance of adequate capital for such subsidiary bank. INFORMATION ABOUT CFX Description of Business CFX (formerly Cheshire Financial Corporation) is a New Hampshire corporation chartered in August 1986 for the purpose of becoming the bank holding company parent of Cheshire County Savings Bank ("Cheshire"), a New Hampshire state-chartered savings bank with its principal place of business in Keene, New Hampshire. Cheshire was organized under the laws of New Hampshire in 1897. CFX acquired 100% of the stock of Cheshire upon completion of its conversion from a New Hampshire-chartered mutual savings bank in February 1987 (the "Conversion"). Upon completion of the Conversion, CFX's assets initially consisted of 100% of the stock of Cheshire and approximately 70% of the net proceeds of the sale of CFX's common stock in a subscription offering made in connection with the Conversion. CFX issued a total of 4,000,000 shares of its common stock in connection with the Conversion. The net proceeds to CFX from the subscription offering were $56,646,000. From the net proceeds, $16,994,000 was transferred to Cheshire to purchase all of the capital stock issued by Cheshire in the Conversion. The funds were added to Cheshire's working capital and continued to be used for general business purposes. Subsequent to the conversion, CFX acquired The Monadnock Bank ("Monadnock"), a New Hampshire trust company headquartered in Jaffrey, New Hampshire on May 31, 1988. On April 30, 1990, CFX acquired all of the outstanding capital stock of The Valley Bank ("Valley"), a state-chartered commercial bank headquartered in Hillsborough, New Hampshire. On June 22, 1990, CFX acquired all of the outstanding capital stock of Village Savings Bank ("Village"), a state-chartered guaranty savings bank headquartered in Greenville, New Hampshire. On October 18, 1990, Village was merged into Monadnock in order to eliminate an overlap of market areas between these two banking affiliates. On September 6, 1991, Valley acquired certain assets and assumed all deposits of Family Bank and Trust ("Family"), a state-chartered trust company headquartered in Allenstown, New Hampshire which had been declared insolvent by the New Hampshire Bank Commissioner and placed into receivership with the Federal Deposit Insurance Corporation. On July 12, 1993, CFX merged Monadnock into Cheshire to eliminate an overlap of market areas between these two banking affiliates. On November 15, 1993, CFX merged Valley into Cheshire to create a single united bank with a greater array of products and services to better serve central and southwestern New Hampshire. The resulting entity was renamed CFX Bank. These mergers resulted in greater controls and operating efficiencies through the consolidation of administrative and operational functions. On September 1, 1993, Cheshire acquired the remaining 52.4% of the outstanding shares of Colonial Mortgage, Inc., a mortgage banking company headquartered in Amherst, New Hampshire, for $5,187,000, including $80,000 in acquisition costs. Cheshire had previously owned 47.6% of this corporation, which is now known as CFX Mortgage, Inc. ("CFX Mortgage"). On December 9, 1993, CFX began operating a new subsidiary, CFX Funding L.L.C., ("Funding") specializing in small-ticket lease financing and securitization. Funding is owned 51% by CFX Financial Services, Inc., (a wholly-owned subsidiary of CFX Bank), and owned 49% by Novel Leasing Limited. The objective of Funding is to provide a lease financing and securitization program specializing in small-ticket lease portfolios generated by a select group of independent lessors located throughout the country. In order to accumulate lease receivables for securitization, CFX Bank provides short-term warehousing lines of credit to the leasing companies. The strategy is designed to increase the availability of credit to a select group of lessors while controlling the risks inherent in lease portfolios through credit enhancements. The warehouse lines of credit are planned to be paid down every 90 to 180 days through securitization of various lease portfolios. The operating results of Funding are not anticipated to materially affect, positively or negatively, the operating results of CFX in 1994. CFX's primary retail banking markets are Cheshire County, western Hillsborough County and southern Merrimack County in New Hampshire. CFX Mortgage has loan production offices in four locations throughout central and southern New Hampshire attracting loan applications from throughout New Hampshire, Maine, Vermont and northern Massachusetts. CFX's principal business is to serve as a financial intermediary, attracting deposits from, and making loans to, consumers and small-to-mid sized businesses. CFX Bank uses customer deposits and loan payments to fund first mortgage loans on residential real estate. In addition to originating mortgage loans, CFX Bank also makes commercial, consumer and other term and installment loans. Other traditional services available at CFX Bank include: a wide range of deposit programs designed to attract both short-term and long-term deposits from the general public, businesses and local government; safe deposit boxes; travelers checks and money orders; a Mastercard credit card; and many other similar services. To further CFX Bank's goals of providing a broad range of retail services and to generate additional fee income, CFX Bank has remote service units located at various business locations in its service area. In addition, CFX Bank is a subscriber to INVEST(TM) Financial Corporation which enables customers to buy and sell securities and obtain investment advice at CFX Bank. A full line of trust and investment management services are also available to the customer, on premise, through an affiliation with a local trust company. CFX Mortgage originates and purchases residential and construction mortgage loans and sells these loans to CFX Bank and the secondary market, while retaining the servicing of these loans. CFX Mortgage is an approved seller and servicer of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Department of Housing and Urban Development ("HUD"), Veteran's Administration ("VA"), and New Hampshire Housing Financing Authority loans. CFX Mortgage also services loans owned by private investors. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CFX Nine Months Ended September 30, 1994 and Three Years Ended December 31, 1993 General All information within this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Proxy Statement-Prospectus and the tables appearing throughout the discussion and analysis. All references in the discussion to financial condition and to results of operations are to the consolidated position and results of CFX Corporation and its subsidiaries, taken as a whole. CFX is a bank holding company incorporated under the laws of the State of New Hampshire. CFX's wholly-owned subsidiary is CFX Bank, headquartered in Keene, New Hampshire. CFX Bank is the new name of the unified bank resulting from the 1993 merger of CFX's three wholly-owned subsidiary banks (Cheshire County Savings Bank, The Monadnock Bank and The Valley Bank). CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX Capital Systems, Inc. ("CFX Capital") and CFX Financial Services, Inc. ("CFX Financial"). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. ("CFX Mortgage"), previously named Colonial Mortgage, Inc. ("Colonial"), which engages in mortgage banking. Prior to September 1, 1993, CFX Capital owned 47.6% of Colonial, and as a result of the acquisition of the remaining 52.4%, Colonial became a wholly-owned subsidiary of CFX. The transaction was accounted for by the purchase method of accounting. CFX Financial owns 51% of CFX Funding L.L.C., which engages in the facilitation of lease financing and securitization. (See Note B of the Notes to the CFX Consolidated Financial Statements for more detail on CFX's mergers and acquisitions.) The operating results of CFX 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. CFX's results of operations are also affected by the provision for loan and lease losses, resulting from CFX's assessment of the adequacy of the allowance for loan and lease losses; the level of its other operating income, including gains and losses on the sale of loans and securities, and loan and other fees; operating expenses; and income tax expenses and benefits. Financial Condition Loans. The table below sets forth the composition of CFX's loan portfolio at the dates indicated:
September 30, 1994 December 31, 1993 December 31, 1992 % of % of % of (Dollars in thousands) Balances Portfolio Balances Portfolio Balances Portfolio Real estate: Residential $341,062 65.50% $305,599 65.71% $328,984 68.90% Construction 9,636 1.85 9,292 2.00 10,920 2.29 Commercial 78,406 15.06 76,955 16.55 56,027 11.73 Commercial, financial, and agricultural 48,319 9.28 42,835 9.21 54,788 11.48 Warehouse lines of credit to leasing companies 11,141 2.14 5,428 1.17 1,497 .31 Consumer and other 32,111 6.17 24,934 5.36 25,268 5.29 520,675 100.00% 465,043 100.00% 477,484 100.00% Less: Allowance for loan and lease losses 6,935 7,357 7,909 Net loans $513,740 $457,686 $469,575
To conform to the 1993 presentation, in the above 1992 table, home equity loans were reclassified from consumer to residential real estate loans and leases were reclassified from commercial to a separate category. September 30, 1994 Compared to December 31, 1993. Total loans and leases were $520,675,000, or 69% of total assets, at September 30, 1994, compared with $465,043,000, or 63% of total assets, at December 31, 1993. Total loans and leases have increased by $55,632,000 since December 31, 1993, primarily due to residential real estate loans generated by CFX Mortgage. In addition, increased capacity in commercial lending and increased focus on consumer finance activities has contributed to new growth for CFX. Moreover, CFX's new lease financing and securitization company, CFX Funding, has also increased CFX's lending volumes. For the first nine months of 1994, CFX Funding facilitated one major lease portfolio sale and several smaller portfolio sales to private investors. Total lease receivables through September 1994 were approximately $10,981,000, with outstanding loan balances of approximately $9,229,000. In October 1994, CFX completed an additional lease portfolio sale to a private investor totaling approximately $2,851,000 in lease receivables with approximately $2,049,000 in outstanding loan balances. In addition, CFX anticipates the facilitation of its first lease portfolio securitization in the first quarter of 1995. December 31, 1993 Compared to December 31, 1992. Total loans were $465,043,000, or 63% of total assets, at December 31, 1993, compared with $477,484,000, or 72% of total assets, at December 31, 1992. As part of an overall restructuring of CFX's balance sheet during the fourth quarter of 1993, CFX sold $25,115,000 of performing adjustable rate mortgages and $2,768,000 in nonperforming loans. In addition, CFX transferred $3,887,000 of loans into foreclosed real estate and in-substance foreclosures and charged- off $3,904,000 of loans during 1993. Notwithstanding the sale, the transfer, and loans charged-off, total loans actually increased by $23,233,000 during 1993. Contributing to this increase in loans was the loan production generated by CFX Mortgage since September 1, 1993 (the acquisition date), and an increase in commercial real estate loan activity and in lease financing activity. Risk Elements. When management determines that significant doubt exists as to the collectibility of principal or interest on a loan, the loan is placed on nonaccrual status. In addition, loans past due 90 days or more as to principal or interest are placed on nonaccrual status except those loans which, in management's judgement, are fully secured and in the process of collection (through legal action, or in appropriate circumstances through collection efforts reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future). In the third quarter of 1993, management changed its policy regarding nonaccrual loans, such that all loans past due 90 days or more as to principal and interest are placed on nonaccrual status. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current operations. Interest on nonaccrual loans is recognized only when received. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. In addition to loans 90 days or more past due, and nonaccrual loans, management classifies as nonperforming "potential problem loans" which are current as to principal and interest payments under original or restructured agreements, but are expected to have insufficient future cash flows to service the loan in accordance with the original or restructured provisions. The following table provides information with respect to CFX's nonperforming loans and assets at the dates indicated:
September 30, December 31, (Dollars in thousands) 1994 1993 1992 Loans 90 days or more past due, still accruing $ - $ - $ 3,443 Nonaccrual loans 6,769 6,472 6,104 Potential problem loans - - 1,535 Total nonperforming loans 6,769 6,472 11,082 Foreclosed real estate 1,076 1,868 7,006 In-substance foreclosures 1,443 1,869 5,230 Valuation allowance (340) (384) (307) Total nonperforming assets $8,948 $9,825 $23,011 Nonperforming loans as a percent of total loans 1.30% 1.39% 2.32% Nonperforming assets as a percent of total assets 1.18% 1.34% 3.48%
The following table provides the composition of CFX's nonperforming loans and assets at the dates indicated:
September 30, December 31, 1994 1993 1992 % of % of % of (Dollars in thousands) Balances Portfolio Balances Portfolio Balances Portfolio Nonperforming loans: Real estate: Residential $1,982 29.3% $2,088 32.3% $ 4,387 39.5% Construction - - - - 230 2.1 Commercial 3,940 58.2 3,737 57.7 3,676 33.2 Commercial, financial, and agricultural 758 11.2 460 7.1 2,462 22.2 Consumer and other 89 1.3 187 2.9 327 3.0 6,769 100.0% 6,472 100.0% 11,082 100.0% Foreclosed real estate and in-substance foreclosures: Residential 1,371 62.9% 2,471 73.7% 7,434 62.3% Construction 349 16.0 352 10.5 623 5.2 Commercial 799 36.7 914 27.3 4,179 35.0 Valuation allowance (340) (15.6) (384) (11.5) (307) (2.5) 2,179 100.0% 3,353 100.0% 11,929 100.0% Total nonperforming assets $8,948 $9,825 $23,011
A total of $2,238,000 in commercial, financial, and agricultural loans have been reclassified to commercial real estate loans for the December 31, 1993 period to conform to the September 30, 1994 period. The following table provides a rollforward of CFX's foreclosed real estate and in-substance foreclosures for the periods indicated:
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 Balance at beginning of period $3,353 $11,929 $11,929 $12,224 Additions 875 2,882 3,887 6,066 Deletions: Write-downs - - - (914) Provision for losses (192) (920) (673) (307) Pay-offs/sales/other (1,857) (4,503) (11,790) (5,140) (2,049) (5,423) (12,463) (6,361) Balance at end of period $2,179 $ 9,388 $ 3,353 $11,929
During the fourth quarter of 1993, CFX sold $6,600,000 in nonperforming assets to a private investor. This bulk sale of nonperforming assets, along with other efforts to reduce nonperforming assets, yielded a $13,186,000 (57%) reduction in nonperforming assets during 1993. 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. CFX's management determines the level of the allowance for loan and lease losses based upon a review of CFX'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:
Nine Months Ended Years Ended September 30, December 31, (Dollars in thousands) 1994 1993 1993 1992 1991 Balance at beginning of period $7,357 $7,909 $7,909 $6,957 $5,122 Allowance of acquired subsidiaries - 13 13 - - Allowance required through regulatory-assisted transactions - - - 350 167 Provision for loan and lease losses 50 2,970 2,970 2,911 3,830 Loans charged-off (783) (2,949) (3,904) (2,523) (2,247) Recoveries of loans previously charged-off 311 259 369 214 85 Balance at end of period $6,935 $8,202 $7,357 $7,909 $6,957 Allowance for loan and lease losses as a percent of total loans 1.33% 1.73% 1.58% 1.66% 1.45% Allowance for loan and lease losses as a percent of total nonperforming loans 102.45% 89.46% 113.67% 71.37% 52.77%
Management considers the allowance for loan and lease losses to be adequate in view of its evaluation of CFX's loan and lease portfolio, the level of nonperforming loans and leases, current economic conditions and historical experience with loan and lease losses. Trading and Investment Securities. Effective December 31, 1993, CFX adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." (See Notes A and E of the Notes to the CFX Consolidated Financial Statements for more information on the new accounting standard for investment securities.) SFAS No. 115 establishes standards for all debt securities and for equity securities that have readily determinable fair values. As required under SFAS No. 115, prior year financial statements have not been restated. SFAS No. 115 requires that investments in debt securities that management has the positive intent and ability to hold to maturity be classified as "held to maturity" and reflected at amortized cost. Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and reflected on the balance sheet at fair value, with unrealized gains and losses included in earnings. Investments not classified as either of the above are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity net of related income tax effects. The cumulative effect of the change in accounting principle at December 31, 1993 is to decrease shareholders' equity by $187,000. There was no effect on net income for the year ended December 31, 1993 relating to the adoption of SFAS No. 115. Prior to December 31, 1993, debt securities that management had the intent and ability to hold until maturity were reflected at amortized cost. Marketable equity securities held for trading were stated at the lower of aggregate cost or fair value. Other marketable equity securities and securities held for sale were stated at the lower of aggregate cost or fair value. Net unrealized losses applicable to other marketable equity securities were reflected as a charge to shareholders' equity while write-downs applicable to securities held for sale were reflected in the statement of income. Trading securities and investment securities consist of the following at the dates indicated:
September 30, December 31, (In thousands) 1994 1993 1992 Trading Securities $ 37,971 $ 61,999 $ 12,811 Investment Securities: Securities available for sale, at fair value 3,320 21,695 - Securities held to maturity, at amortized cost 117,601 96,044 - Securities held for sale, at lower of cost or fair value - - 43,513 Securities held for investment (debt securities at amortized cost; marketable equity securities at lower of cost or fair value) - - 54,126 Total Investment Securities 120,921 117,739 97,639 Total Trading and Investment Securities $158,892 $179,738 $110,450
As of September 1, 1994, approximately $16,575,000 of securities were reclassified from securities available for sale to securities held to maturity. Included within the trading portfolio, as of September 30, 1994 and December 31, 1993, was CFX's wholesale leverage program. CFX began this program in October 1993, and authorized $100 million to be invested in the program. The objective of this program was to enhance CFX's earnings and return on equity (ROE) through leveraging the balance sheet. However, as a result of significant loan growth experienced in 1994, and anticipated loan growth over the next six to nine months, management decided to liquidate this program. In addition, management does not anticipate using this program in the foreseeable future. As of October 31, 1994, the wholesale leverage program was completely liquidated. This program involved the purchasing of federal agency mortgage-backed securities, investment grade asset-backed securities, and investment grade short-term commercial paper. The funding of these purchases was from short- term repurchase agreements and Federal Home Loan Bank of Boston advances. The intent of this program was to take advantage of market mispricing, primarily based on option adjusted spread differentials. Fundamental to the conduct of the activities was the minimization of credit risk and interest rate risk. Credit risk was controlled by purchasing federal agency mortgage- backed securities, investment grade asset-backed securities, and investment grade short-term commercial paper. Interest rate risk was controlled through the use of hedging instruments. The leverage program activities, along with the related hedging instruments, were considered trading, and therefore, all securities were carried at fair value. As a result, both gain or loss on sales and adjustments to fair value were recorded in the consolidated statements of income as a net gain (loss) on trading activities. To determine the success of these activities, CFX calculated a total return consisting of interest income and fair value changes of the investments and hedge instruments net of interest expense incurred in funding the activities. Hedge instruments, primarily including futures and options contracts and interest rate swap agreements, were used to produce a net asset duration of six months or less. Settled positions were funded with borrowings of similar duration to the net asset duration. The following table illustrates the results of this program for the periods indicated:
Nine Months Ended Year Ended September 30, December 31, (Dollars in thousands) 1994 1993 Interest income $ 1,719 $ 332 Interest expense 1,149 176 Net interest income 570 156 Fair value change (587) (83) Total return $ (17) $ 73 Average investment $63,956 $36,253 Percentage return on average investment (.04)% 0.60%
Deposits. The following table shows the various components of average deposits and the respective rates paid on such deposits for the periods indicated:
Nine Months Ended Years Ended September 30, December 31, (Dollars in thousands) 1994 1993 1992 Amount Rates Amount Rates Amount Rates Noninterest bearing demand deposits $ 33,062 - $ 27,920 - $ 24,491 - Regular savings deposits 114,947 2.61% 116,475 2.81% 110,078 3.98% NOW & money market deposits 185,848 2.24 188,733 2.61 172,984 3.72 Time deposits 207,995 4.48 225,126 4.79 263,810 5.75 Total $541,852 3.04% $558,254 3.40% $571,363 4.55%
September 30, 1994 Compared to December 31, 1993. During the first nine months of 1994, CFX experienced a $16,402,000 decline in average deposits. This decline was principally in time deposits as CFX continued to experience the migration of individual depositors to alternative investment instruments (stock/bond market, annuities, and mutual funds). The migration of depositors to alternative investment instruments was the result of the low interest rate environment and the growing spread between market rates and deposit rates. However, the recent concern over the instability of alternative investment instruments in a rising interest rate environment has allowed deposits to stabilize. The significant increase in loan demand and taxable securities for the first nine months of 1994, along with the above deposit loss, caused CFX's average wholesale funding (short-term borrowed funds and advances from the Federal Home Loan Bank of Boston) to increase by $94,092,000. The resurgence in loan growth will also cause CFX to begin raising deposit rates more aggressively in future quarters. December 31, 1993 Compared to December 31, 1992. The shift in deposit mix from longer-term fixed rate time deposits to shorter-term variable rate deposits (savings, NOW and money market accounts) indicates that CFX's deposit customers became sensitive to the low interest rate environment and were unwilling to commit long term. In addition, as a result of the low interest rate environment in 1993, CFX experienced the migration of individual depositors to alternative investment instruments (stock/bond market, annuities, and mutual funds). Shareholders' Equity. The following table summarizes shareholders' equity at the dates indicated:
September 30, December 31, (In thousands, except per share data) 1994 1993 1992 Amount Shares Amount Shares Amount Shares Common shareholders' equity $73,465 3,864 $72,193 3,843 $69,710 3,813 Preferred shareholders' equity 3,572 213 3,591 214 3,598 214 Total shareholders' equity $77,037 4,077 $75,784 4,057 $73,308 4,027 Common shareholders' equity per share $ 19.01 $ 18.79 $ 18.28 Preferred shareholders' equity per share $ 16.77 $ 16.78 $ 16.81 Shareholders' equity per share, assuming conversion of all preferred shares to common $ 18.90 $ 18.68 $ 18.20 Note: Shares and per share data have been restated to reflect CFX's 5% common stock dividends declared on December 12, 1994, and December 13, 1993.
September 30, 1994 Compared to December 31, 1993. Shareholders' equity increased by $1,253,000 as of September 30, 1994 from $75,784,000 at December 31, 1993 to $77,037,000 at September 30, 1994. The increase was due to $3,875,000 in net income, issuance of $109,000 in common stock under the employee stock purchase plan, and issuance of $163,000 in common stock under the stock option plan, offset by a $304,000 increase in net unrealized losses on securities available for sale and $2,389,000 and $201,000 in common and preferred cash dividends, respectively. December 31, 1993 Compared to December 31, 1992. Shareholders' equity increased by $2,476,000 during 1993 from $73,308,000 at December 31, 1992 to $75,784,000 at December 31, 1993. The increase resulted from net income of $5,022,000, from issuance of $271,000 in common stock under the stock option plan, from issuance of $88,000 in common stock under the employee stock purchase plan, and a $63,000 reduction in net unrealized losses on marketable equity securities, and was partially offset by a $187,000 change in method of accounting for investment securities (see Note A of Notes to the CFX Consolidated Financial Statements for more detail on this accounting change), the declaration of $2,500,000 in common cash dividends, and $270,000 in preferred cash dividends. Results of Operations General. CFX's involvement in mergers and acquisitions from 1991 through 1993 has impacted CFX's financial statements for the past three years. All references to merger and acquisition activity should be read in conjunction with Note B of the Notes to the CFX Consolidated Financial Statements. The following table sets forth comparisons of average interest earning assets and interest bearing liabilities, and interest income and interest expense expressed as a percentage of the related asset or liability. In order to reflect the economic impact of CFX's investments in state and municipal securities and to present data on a comparative basis, the income from yields on these securities has been restated to a tax-equivalent basis (using a 38.62% and 38.84% tax rate for the nine months ended September 30, 1994 and 1993, respectively, a 38.79% tax rate for the year ended December 31, 1993, and a 34% tax rate for the years ended December 31, 1992 and 1991). The tax- equivalent adjustments are $337,000 and $118,000, for the nine months ended September 30, 1994 and 1993, respectively, and $185,000, $156,000 and $293,000 for the years ended December 31, 1993, 1992, and 1991, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
Nine Months Ended September 30, 1994 1993 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets Interest earning assets: Loans and leases (1) $506,565 $29,183 7.70% $478,432 $29,753 8.31% Taxable securities (2) 149,549 6,026 5.39 104,166 4,115 5.28 Tax-exempt securities (3) 18,163 873 6.43 5,102 303 7.94 Federal funds sold and other earning assets 10,262 450 5.86 17,061 493 3.86 Total interest earning assets 684,539 36,532 7.13 604,761 34,664 7.66 Noninterest earning assets 85,298 46,052 Total $769,837 $650,813 Liabilities & Shareholders' Equity Interest bearing liabilities: Savings deposits $300,795 5,347 2.38 $304,751 6,314 2.77 Time deposits 207,995 6,973 4.48 228,118 8,280 4.85 Advances from Federal Home Loan Bank of Boston 94,828 3,008 4.24 360 11 4.09 Other borrowed funds 11,833 252 2.85 12,209 230 2.52 Total interest bearing liabilitie 615,451 15,580 3.38 545,438 14,835 3.64 Noninterest bearing liabilities: Demand deposits 33,062 26,380 Other 44,704 4,831 Shareholders' equity 76,620 74,164 Total $769,837 $650,813 Net interest income $20,952 $19,829 Interest rate spread 3.75% 4.02% Net interest margin 4.09% 4.38% For the purpose of these computations, nonaccrual loans are included in loans. Taxable securities include trading securities and investment securities. Tax-exempt securities are included within investment securities.
Years Ended December 31, 1993 1992 1991 Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Interest and dividend earning assets: Loans and leases (1) $484,074 $39,496 8.16% $478,665 $43,989 9.19% $485,730 $51,123 10.52% Taxable securities (2) 108,898 5,729 5.26 115,984 7,215 6.22 72,061 5,412 7.51 Tax-exempt securities (3) 6,630 475 7.16 6,474 460 7.11 8,478 861 10.16 Other 15,902 627 3.94 21,997 903 4.11 24,378 1,459 5.98 Total interest earning assets 615,504 46,327 7.53 623,120 52,567 8.44 590,647 58,855 9.96 Noninterest earning assets 50,481 48,999 42,712 Total $665,985 $672,119 $633,359 Liabilities & Shareholders' Equity Interest bearing liabilities: Savings deposits $305,208 8,191 2.68 $283,062 10,820 3.82 $199,770 10,970 5.49 Time deposits 225,126 10,774 4.79 263,810 15,156 5.75 308,756 22,706 7.35 Advances from Federal Home Loan Bank of Boston 7,821 246 3.15 12,113 830 6.85 24,504 1,985 8.10 Borrowed funds 19,378 474 2.45 11,384 283 2.49 - - - Total interest bearing liabilities 557,533 19,685 3.53 570,369 27,089 4.75 533,030 35,661 6.69 Noninterest bearing liabilities: Demand deposits 27,920 24,491 23,701 Other 5,609 5,499 5,053 Shareholders' equity 74,923 71,760 71,575 Total $665,985 $672,119 $633,359 Net interest and dividend income $26,642 $25,478 $23,194 Interest rate spread 4.00% 3.69% 3.27% Net interest margin 4.33% 4.09% 3.93% For the purpose of these computations, nonaccrual loans are included in loans. Taxable securities include trading securities and investment securities. Tax-exempt securities are included within investment securities.
The following tables present changes in interest and dividend income, interest expense, and net interest income which are attributable to changes in the average amounts of interest earning assets and interest bearing liabilities and/or changes in rates earned or paid thereon. The net changes attributable to both volume and rate have been allocated proportionately.
For the Nine Months Ended September 30, 1994 vs 1993 Increase (Decrease) Due to (In thousands) Volume Rate Net Interest and dividends earned on: Loans and leases $1,846 $(2,416) $ (570) Investments 2,497 (16) 2,481 Other (315) 272 (43) Total interest and dividend income 4,028 (2,160) 1,868 Interest paid on: Savings & time deposits (776) (1,498) (2,274) Other borrowed funds 2,985 34 3,019 Total interest expense 2,209 (1,464) 745 Change in net interest and dividend income $1,819 $ (696) $1,123
Years Ended December 31, 1993 vs 1992 1992 vs 1991 Increase (Decrease) Due to Increase (Decrease) Due to (In thousands) Volume Rate Net Volume Rate Net Interest and dividends earned on: Loans and leases $492 $(4,985) $(4,493) $ (734) $ (6,400) $(7,134) Investments (417) (1,054) (1,471) 2,801 (1,399) 1,402 Other (241) (35) (276) (132) (424) (556) Total interest and dividend income (166) (6,074) (6,240) 1,935 (8,223) (6,288) Interest paid on: Savings & time deposits (767) (6,244) (7,011) 2,385 (10,085) (7,700) Borrowed funds 155 (548) (393) (79) (793) (872) Total interest expense (612) (6,792) (7,404) 2,306 (10,878) (8,572) Change in net interest and dividend income $446 $ 718 $ 1,164 $ (371) $ 2,655 $ 2,284
Comparison Of Nine Months Ended September 30, 1994 and September 30, 1993.Net income for the nine months ended September 30, 1994 was $3,875,000, compared with $3,932,000 for the corresponding period a year ago. Net income available to common stock for the nine months ended September 30, 1994 was $3,674,000, or $.95 per share, compared with $3,730,000, or $.97 per share, for the corresponding period a year ago. Income taxes for the prior year periods were reduced (and thus earnings increased) through the recognition of several special tax adjustments in connection with Statement of Financial Accounting Standards No. 109. Without these tax adjustments, net income available to common stock would have been $2,941,000, or $.77 per share, for the nine months ended September 30, 1993. Excluding recognition of prior year special tax adjustments, earnings per common share for the nine months ended September 30, 1994 increased by 23% from the comparable period in 1993. Net Interest Income. Taxable-equivalent net interest income was $20,952,000 for the nine months ended September 30, 1994, compared to $19,829,000 for the same period a year ago. The increase in net interest income in the 1994 period was principally due to higher average interest earning assets and lower nonaccrual loans carried on CFX's balance sheet, offset by lower interest rate spreads in the 1994 period compared to the 1993 period. The increase in average interest earning assets resulted from an increase in taxable securities (see "--Financial Condition--Trading and Investment Securities") and loans and leases (see "--Financial Condition-- Loans"). The interest rate spread and net interest margin in 1994 declined from the 1993 levels principally as a result of CFX's wholesale leverage program (trading securities and related borrowings) which earns a considerably lower interest rate spread than CFX's retail banking activities. Excluding the wholesale leverage trading securities and related borrowings, CFX's interest rate spread and net interest margin for the nine months ended September 30, 1994 was 4.22%. The remaining decline in the interest rate spread and net interest margin was due to increases in the interest cost of borrowed funds and the relatively low interest rates (teaser rates) offered on newly originated adjustable rate mortgage loans. Rising short-term interest rates are having, and are anticipated over the near term to continue to have, a favorable impact on CFX's interest rate spread and net interest margin due to interest earning assets repricing more rapidly than interest bearing liabilities. This expectation is based on the fact that short-term interest rates have risen substantially during 1994 and that CFX's portfolio of residential mortgages consists predominantly of adjustable rate mortgages (most of which bear interest at rates based on one- year Treasury securities with the balance at rates based on three and five- year Treasury securities). However, there can be no assurance that this favorable impact will continue. Moreover, if short-term interest rates move significantly higher over the next twelve months, the 200 basis point annual adjustment caps contained in CFX's adjustable rate mortgages, coupled with the absence of similar limitations on the repricing of liabilities, could cause CFX's interest rate spread and net interest margin to contract. Provision for Loan and Lease Losses. The amount of provision for loan and lease losses is determined by management through its regular review of the Bank's loan and lease portfolio. This review includes an assessment of problem loans and potential unknown losses based on current economic conditions, the regulatory environment and historical experience. The provision for loan and lease losses for the nine months ended September 30, 1994, was $50,000, compared to $2,970,000 provided for the same period a year ago. The lower provision for loan and lease losses in 1994 is the result of asset quality significantly improving since September 30, 1993. A combination of an improving economy, increased efforts to resolve problem assets, and a $6.6 million bulk sale of nonperforming assets in the fourth quarter of 1993 allowed CFX to significantly reduce nonperforming assets. At September 30, 1994, nonperforming loans stood at $6,769,000, or 1.30% of total loans and leases, compared to $9,168,000, or 1.93% of total loans and leases, as of September 30, 1993. The allowance for loan and lease losses as a percentage of nonperforming loans as of September 30, 1994 and 1993 amounted to 102.45% and 89.46%, respectively. Net charge-offs for the nine months ended September 30, 1994 amounted to $472,000, compared to $2,690,000 for the same period a year ago. Other Income. Other income for the nine months ended September 30, 1994 totaled $3,862,000 compared to $4,114,000, for the same period a year ago. The net gains (losses) on trading securities between the 1994 and 1993 periods are summarized as follows:
Nine Months Ended September 30, (In thousands) 1994 1993 Wholesale leverage program $(587) $ - Other trading activities 206 342 $(381) $342
For a discussion of CFX's wholesale leverage program, see "--Financial Condition--Trading and Investment Securities." Income from investment securities transactions was significantly higher during the 1993 period compared to the 1994 period as a result of restructuring the securities portfolios during 1993 to better manage CFX's interest rate risk exposure, particularly in a rising interest rate environment. The increases in loan servicing fees, net gains on sale of loans and other income are from CFX Mortgage, which was acquired as of September 1, 1993. CFX Mortgage's operations are included in CFX's Consolidated Statements of Income for the full nine months of 1994, compared to one month for the same period a year ago. In December 1994, CFX sold mortgage servicing rights with respect to $58.9 million in principal amount of residential first mortgages. Such sale resulted in a pre-tax gain of approximately $677,000. Other Expense. Other expense for the nine months ended September 30, 1994 totaled $18,254,000, compared to $15,845,000 for the same period a year ago. The increase in other expenses was primarily attributable to the inclusion of CFX Mortgage's (acquired September 1, 1993) and CFX Funding's (commenced operations December 7, 1993) operations for the full nine months of 1994. Also contributing to higher other expense in 1994 were increased salary costs, higher medical costs, and increased costs associated with changing the names of CFX and its subsidiaries. Offsetting these expenses for the nine months ended September 30, 1994, was a reduction of $1,386,000 in costs associated with the operation of foreclosed real estate. This decrease is the result of a reduction in holdings of foreclosed real estate in 1994 compared to 1993. Income Taxes. Income taxes for the nine months ended September 30, 1994 were 37.23% of pretax income, compared to 21.52% of pretax income for the same period a year earlier. The effective tax rate was lower during the 1993 period because of the realization of several special tax adjustments in connection with Statement of Financial Accounting Standards No. 109. The special tax adjustments related to the recognition of a deferred tax asset for New Hampshire Business Profits Taxes and the realization of previously unrecognized deferred tax benefits applicable to capital loss transactions. Comparison Of Years Ended December 31, 1993 And December 31, 1992. In 1993 CFX earned $4,752,000, or $1.24 per share, compared to earnings of $3,528,000, or $.92 per share, for the prior year. The factors contributing to the higher level of earnings in 1993 were stronger core earnings (net interest and dividend income and other income, excluding securities gains), a lower effective tax rate and securities gains. Offsetting these positive factors were increased costs associated with the operation and sale of foreclosed real estate, several non-recurring charges, and higher operating costs due to the acquisition of CFX Mortgage as of September 1, 1993. Net Interest Income. Taxable-equivalent net interest income was $26,642,000 in 1993, up 4.6% from $25,478,000 in 1992. The $1,164,000 increase was due to both CFX's interest rate spread growing from 3.69% in 1992 to 4.00% in 1993, and the decrease in average interest bearing liabilities being greater than the decrease in average interest earning assets during 1993. Total average interest earning assets decreased by $7,616,000 in 1993 from $623,120,000 in 1992 to $615,504,000 in 1993. The decline in average interest earning assets is reflected by a decline in taxable securities, federal funds sold and other interest earning assets and is attributable principally to the decline in deposit liabilities. The yield on interest earning assets decreased by .91% to 7.53% for the year ended December 31, 1993, down from 8.44% in 1992. Due primarily to a decline in time deposits during 1993, average interest bearing liabilities decreased by $12,836,000 from $570,369,000 in 1992 to $557,533,000 in 1993. The average rate paid on interest bearing liabilities decreased by 1.22% to 3.53% for the year ended December 31, 1993, from 4.75% in 1992. The net interest margin was 4.33% for 1993, compared to 4.09% for 1992. The increase in net interest margin in 1993 is reflective of the significant increase in interest rate spread, a higher volume of interest earning assets net of interest bearing liabilities, and a significant decline in nonperforming assets. The increase in interest rate spread in 1993 was attributable to both a more conservative deposit pricing strategy employed in 1993 and a steeper U.S. treasury yield curve. Provision for Loan and Lease Losses. The provision for loan and lease losses is determined by management through its regular review of CFX's loan and lease portfolio. This review includes an assessment of problem loans and leases and potential unknown losses based on current economic conditions, the regulatory environment and historical experience. The provision for loan and lease losses was $2,970,000 in 1993, compared to $2,911,000 in 1992. The following schedule presents, in summary, the quarterly trends in nonperforming assets and charge-offs that correlate with the quarterly provisions for loan and lease losses in 1993 and the last quarter of 1992:
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 (Dollars in thousands) 1993 1993 1993 1993 1992 Nonperforming loans $6,472 $ 9,168 $13,297 $13,197 $11,082 Foreclosed real estate 3,353 9,388 10,383 11,117 11,929 Nonperforming assets $9,825 $18,556 $23,680 $24,314 $23,011 Net charge-offs $ 845 $ 1,324 $ 534 $ 832 $ 849 Provision for loan and lease losses $ - $ 750 $ 900 $ 1,320 $ 986 Allowance for loan and lease losses $7,357 $ 8,202 $ 8,630 $ 8,264 $ 7,909 Allowance for loan and lease losses as a percent of nonperforming loans 113.67% 89.46% 64.90% 62.62% 71.37%
An increase in nonperforming loans and higher net charge-offs in the first quarter of 1993 warranted a higher provision for loan and lease losses. As either nonperforming loans or charge-offs decreased in subsequent 1993 quarters, the provision for loan and lease losses declined. The significant decline in nonperforming assets in the fourth quarter of 1993 was due to the $6,600,000 bulk sale of nonperforming assets, and accordingly, no additional loan and lease loss provision was deemed necessary in the fourth quarter. Other Income. Other income increased by $3,103,000, from $3,164,000 in 1992 to $6,267,000 in 1993. This increase was primarily from additional deposit account service charge income from both a larger base and increased fees, gains on securities, loan servicing fees and gains on sale of loans generated by CFX Mortgage from September 1, 1993 (acquisition date). Included in the net gains on sale of loans was a gain of $879,000 recognized on the $25,115,000 performing loan sale and a loss of $1,078,000 recognized on the $2,768,000 nonperforming loan sale. During 1993, in an effort to restructure CFX's securities portfolios in preparation for the adoption of SFAS No. 115 as of December 31, 1993 (see Note A of the Notes to the CFX Consolidated Financial Statements), CFX made several transfers into its held for sale portfolio and then sold substantially all of its held for sale securities; this activity generated net gains of $2,624,000. Other Expense. Other expense increased by $3,715,000, from $19,777,000 in 1992 to $23,492,000 in 1993. The increase is primarily due to four months (September 1, 1993 through December 31, 1993) of operating expenses, amounting to $1,357,000, associated with CFX Mortgage; a $683,000 increase in the operation of foreclosed real estate including the $1,395,000 loss on the bulk sale of foreclosed real estate and in-substance foreclosures in the fourth quarter (see Note J of the Notes to the CFX Consolidated Financial Statements for the components of the operation of foreclosed real estate); $637,000 in non-recurring charges associated with the write-down of a bank building disposition; the performing and nonperforming asset disposition; changing the discount rate on CFX's pension plan (from 8.25% to 7.00%); a severance accrual; and the cost of changing the names of CFX's subsidiaries. The remaining increase in other expense is principally due to increased salary costs, higher medical costs and increased profit sharing in 1993. Income Taxes. Income taxes for the year ended December 31, 1993 and 1992 were 19.8% and 34.5% of pretax income, respectively. The effective tax rate was lower during 1993 because of the recognition of a $436,000 net deferred tax asset for New Hampshire Business Profits Taxes and the reversal of a $387,000 valuation allowance relating to capital loss carryforwards. SFAS No. 109 (see Note A of the Notes to the CFX Consolidated Financial Statements) requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Prior to 1993, CFX believed that some uncertainty existed with respect to future realization of capital loss carryforwards. Therefore CFX had established a valuation allowance relating to capital loss carryforwards of $387,000 as of December 31, 1992. The valuation allowance was reversed in 1993 as a result of the recognition of $1,266,000 in capital gains and the implementation of tax planning strategies that will continue to utilize the capital loss carryforwards. CFX's capital loss carryforwards and other temporary differences that will result in capital loss (income) treatment when recognized for tax purposes, along with the corresponding valuation allowance, are summarized as follows:
December 31 (In thousands) 1993 1992 Amount @ 39% Amount @ 34% Tax capital loss carryforwards $1,522 $594 $2,466 $838 Other temporary differences that will result in capital loss (income): Stock write downs 36 14 387 132 Net unrealized losses on marketable equity securities 24 9 122 41 Book over tax basis from investment in CFX Mortgage - - (697) (237) 1,582 617 2,278 774 Valuation allowance - - (1,139) (387) $1,582 $617 $1,139 $387
The capital loss carryforwards expire as of December 31, 1996. The following schedule illustrates the anticipated future capital gains over the next three years based on implementation of the present tax planning strategies:
(In thousands) Total 1994 1995 1996 U.S. Treasury based mutual funds $1,800 $600 $600 $600 Sale of appreciated securities 300 200 100 - $2,100 $800 $700 $600
Based upon the fact that CFX's capital gains plan significantly exceeds CFX's capital loss carryforwards, no valuation allowance was required as of December 31, 1993. Prior to 1993, CFX was not obligated to pay New Hampshire Business Profits Tax (NHBPT) because a significant portion of its income was derived from state tax free sources and because a credit was allowed for New Hampshire Franchise Tax paid. Therefore, prior to 1993, no deferred taxes were recognized for NHBPT purposes. During 1993, as a result of the Franchise Tax being repealed by the New Hampshire State legislature and CFX's significant reduction in income derived from state tax free sources, CFX began to pay NHBPT. This obligation to pay allowed CFX to fully recognize deferred taxes for NHBPT in 1993. Comparison Of Years Ended December 31, 1992 And December 31, 1991. In 1992 CFX earned $3,528,000, or $.92 per share, compared to earnings of $1,891,000, or $.50 per share, for the prior year. Included in the prior year earnings was a $1,603,000, or $.44 per share, adjustment from the adoption of a new accounting standard for income taxes, Statement of Financial Accounting Standards (SFAS) No. 109. The adjustment was in the form of a cumulative effect change in accounting principle as of January 1, 1991. See Note A of the Notes to the CFX Consolidated Financial Statements for more detail on this accounting change. The increase in earnings in 1992 is primarily attributable to record high core earnings (net interest and dividend income and other income, excluding trading and investment securities gains/losses), a decrease in the provision for loan and lease losses and a decrease in expenses associated with the operation of foreclosed real estate. Net Interest Income. Taxable-equivalent net interest income was $25,478,000 in 1992, up 9.8% from $23,194,000 in 1991. The $2,284,000 increase was due to CFX's net interest rate spread growing from 3.27% in 1991 to 3.69% in 1992. A portion of the increase in net interest spread was offset by a decline in volume (the increase in average interest bearing liabilities was greater than the increase in average interest bearing assets) during 1992. Total average earning assets increased by $32,473,000 in 1992 from $590,647,000 in 1991 to $623,120,000 in 1992. The growth in average earnings assets in 1992 was mainly attributable to the 1991 acquisition of Family Bank and Trust (Family). The yield on earning assets decreased by 1.52% to 8.44% for the year ended December 31, 1992, down from 9.96% in 1991. Due primarily to the Family acquisition, average interest bearing liabilities increased by $37,339,000 in 1992 from $533,030,000 in 1991 to $570,369,000 in 1992. The average rate paid on interest bearing liabilities decreased by 1.94% to 4.75% for the year ended December 31, 1992, from 6.69% in 1991. The net interest margin was 4.09% for 1992, compared to 3.93% for 1991. The increase in net interest margin in 1992 is reflective of the significant increase in the interest rate spread in 1992. Provision for Loan and Lease Losses. The amount of provision for loan and lease losses is determined by management through its regular review of CFX's loan and lease portfolio. This review includes an assessment of problem loans and leases and potential unknown losses based on current economic conditions, the regulatory environment and historical experience. The provision for loan and lease losses decreased by $919,000 in 1992, from $3,830,000 in 1991 to $2,911,000 in 1992. The following schedule presents, in summary, the quarterly trends in nonperforming assets and charge-offs that correlate with the quarterly provisions for loan losses in 1992 and the last quarter of 1991:
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 (In thousands) 1992 1992 1992 1992 1991 Nonperforming loans $11,082 $11,389 $11,553 $11,097 $13,184 Foreclosed real estate 11,929 13,170 14,645 12,862 12,224 Nonperforming assets $23,011 $24,559 $26,198 $23,959 $25,408 Net charge-offs $ 849 $ 281 $ 762 $ 417 $ 707 Provision for loan and lease losses $ 986 $ 515 $ 759 $ 651 $ 1,410 Allowance for loan and lease losses $ 7,909 $ 7,422 $ 7,188 $ 7,191 $ 6,957 Allowance for loan and lease losses as a percent of nonperforming loans 71.37% 65.17% 62.22% 64.80% 52.77%
As net charge-offs increased in the second and fourth quarters of 1992, CFX increased its provision for loan and lease losses accordingly. The increase in net charge-offs in these quarters was due to an increase in residential mortgages moving into foreclosed real estate (including loans transferred to in-substance foreclosure status). Other Income. Other income increased by $1,476,000, from $1,688,000 in 1991 to $3,164,000 in 1992. This increase was primarily from additional service charge income from both a larger base and increased fees, gains on investment securities, a $291,000 gain from the sale of bank premises, and a $398,000 increase in the profits from CFX's investment in Colonial Mortgage, Inc. Other Expense. Other expense decreased by $145,000, from $19,922,000 in 1991 to $19,777,000 in 1992. The decline in other expense is primarily attributable to a $947,000 decline in the operation of foreclosed real estate. See Note J of the Notes to the CFX Consolidated Financial Statements for the components of the operation of foreclosed real estate. The increase in other expense categories is due to higher salary and benefit costs in 1992 compared to 1991 and the inclusion of Family's operations for the full 1992 year. Income Taxes. Income taxes for the year ended December 31, 1992 and 1991 were 34.5% and 33.4% of pretax income, respectively. SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Assessing the need for and amount of a valuation allowance for deferred tax assets requires careful judgment and an evaluation of all available evidence, both positive and negative. The valuation allowance is assessed quarterly for the purpose of evaluating the realizability of deferred tax assets. All of CFX's deferred tax assets, with the exception of capital loss carryforwards, can be realized through carrybacks and the reversals of existing taxable temporary differences. However, CFX's capital loss carryforwards can only be realized through the generation of future capital gains. After the implementation of tax planning strategies for the generation of future capital gains, CFX believes that some uncertainty exists with respect to future realization of capital loss carryforwards. Therefore, CFX established a valuation allowance relating to capital loss carryforwards of $387,000 and $532,000 as of December 31, 1992 and 1991, respectively. CFX's capital loss carryforwards and other temporary differences that will result in capital loss (income) treatment when recognized for tax purposes, along with the corresponding valuation allowance, are summarized as follows:
December 31 (In thousands) 1992 1991 Amount @ 34% Amount @ 34% Tax capital loss carryforwards $2,466 $838 $2,452 $ 834 Other temporary differences that will result in capital loss (income): Stock writedowns 387 132 526 179 Net unrealized losses on marketable equity securities 122 41 451 153 Book over tax basis from investment in Colonial Mortgage, Inc. (697) (237) (299) (102) 2,278 774 3,130 1,064 Valuation allowance (1,139) (387) (1,565) (532) $1,139 $387 $1,565 $ 532
The majority of the aforementioned capital loss carryforwards were primarily incurred in 1990 as a result of a substantial decline in the value of New England bank stocks. With the exception of $7,003,000 in money market preferred stocks, CFX had only $1,790,000 in marketable equity securities as of December 31, 1992. The unrealized loss on the total $8,793,000 in marketable equity securities as of December 31, 1992 was $93,000. The amount of future capital gains that must be attained before each capital loss expiration date as of December 31, 1992 is summarized as follows:
December 31 (In thousands) Amount 1995 $ 894 1996 1,558 1997 14 $2,466
Capital Resources Federal regulation requires CFX and CFX Bank to maintain minimum capital standards. Tier 1 capital is composed primarily of common stock, retained earnings and perpetual preferred stock in limited amounts less certain intangibles. The minimum requirements include a 3% Tier 1 leverage capital ratio for the most highly-rated institutions; all other institutions are required to meet a minimum leverage ratio that is at least 1% to 2% above the 3% minimum. In addition, CFX and CFX Bank are required to satisfy certain capital adequacy guidelines relating to the risk nature of an institution's assets. These guidelines established by the Federal Reserve Board and the FDIC are applicable to bank holding companies and state chartered non-member banks, respectively. Under the "risk-based" capital rules, banks and bank holding companies are required to have a level of Tier 1 capital equal to 4% of total risk-weighted assets, as defined. Banks and bank holding companies are also required to have total capital (composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter being composed primarily of allowances for loan and lease losses, perpetual preferred stock in excess of the amount included in Tier 1 capital, and certain "hybrid capital instruments" including mandatory convertible debt) equal to 8% of total risk-weighted assets. As of September 30, 1994, CFX's Tier 1 leverage capital ratio was 8.88%. In addition, CFX's Tier 1 risk-based capital ratio and total risk-based capital ratio were 14.86% and 16.14%, respectively. As of December 31, 1993, CFX's Tier 1 leverage capital ratio was 8.93%. In addition, CFX's Tier 1 risk-based capital ratio and total risk-based capital ratio were 13.20% and 14.48%, respectively. Asset/Liability Management CFX's primary objective regarding asset/liability management is to position CFX so that changes in interest rates do not have a materially adverse impact upon forecasted net income and the net fair value of CFX. CFX's primary strategy for accomplishing its asset/liability management objective is achieved by matching the weighted average maturities of assets, liabilities, and off-balance-sheet items (duration matching). To measure the impact of interest rate changes, CFX utilizes a comprehensive financial planning model that recalculates the fair value of CFX assuming both instantaneous, permanent parallel shifts in the yield curve of both up and down 100 and 200 basis points, or four separate calculations. Larger increases or decreases in forecasted net income and the net market value of CFX as a result of these interest rate changes represent greater interest rate risk than do smaller increases or decreases in net fair value. In connection with these recalculations, CFX makes assumptions regarding probable changes in cash flows of its assets, liabilities, and off-balance- sheet positions that would be expected in those various interest rate environments. Accordingly, CFX adjusts the pro forma net income and net fair values as it believes appropriate on the basis of historical experience and prudent business judgment. CFX 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 CFX's projections in this regard will be achieved. Management believes that the above method of measuring and managing interest rate risk is consistent with the FDIC regulation regarding an interest rate risk component of regulatory capital. The following tables summarize the timing of CFX's anticipated maturities or repricing of interest earning assets and interest bearing liabilities as of September 30, 1994 and December 31, 1993. These tables have been generated using certain assumptions which CFX believes fairly and accurately represent repricing volumes in a dynamic interest rate environment. Specifically, contractual maturities are used on all time deposits and investments other than asset-backed securities. For asset-backed securities and loans, contractual maturities, repricing and prepayment assumptions are used. The prepayment assumptions are based on current experience and industry statistics. The gap maturity categories for savings deposits (including NOW, savings, and money market accounts) are based on management's philosophy of repricing core deposits in reaction to changes in the interest rate environment. Repricing frequencies will vary at different points in the interest cycle and as supply and demand for credit change.
(In thousands) 0-3 4-12 1-5 5-10 Over 10 September 30, 1994 Months Months Years Years Years Total Interest earning assets: Interest bearing deposits with other banks $ 1,720 $ - $ 95 $ - $ - $ 1,815 Federal Home Loan Bank of Boston stock - - - 6,471 - 6,471 Trading securities 37,971 - - - - 37,971 Investment securities 10,005 24,169 74,981 11,693 73 120,921 Loans 179,487 191,627 97,720 20,443 46,876 536,153 Total interest earning assets 229,183 215,796 172,796 38,607 46,949 703,331 Interest bearing liabilities: Savings and time deposits 152,847 207,337 128,049 10,532 5,419 504,294 Advances from FHLB of Boston 88,736 - - 201 - 88,937 Short-term borrowed funds 24,084 - - - - 24,084 Total interest bearing liabilities 265,777 207,337 128,049 10,733 5,419 617,315 Off-balance sheet instruments 17,455 (42,455) 25,000 - - - Periodic gap $(19,139) $(33,996) $ 69,747 $27,874 $41,530 $ 86,016 Cumulative gap $(19,139) $(53,135) $ 16,612 $44,486 $86,016 $ -
(In thousands) 0-3 4-12 1-5 5-10 Over 10 December 31, 1993 Months Months Years Years Years Total Interest earning assets: Interest bearing deposits with other banks $ 10,385 $ - $ 95 $ - $ - $ 10,480 Federal Home Loan Bank of Boston stock - - - 3,590 - 3,590 Trading securities 3,772 10,151 31,179 9,903 6,994 61,999 Investment securities 10,834 17,330 63,210 20,116 6,249 117,739 Loans 157,287 209,339 118,552 1,895 2,126 489,199 Total interest earning assets 182,278 236,820 213,036 35,504 15,369 683,007 Interest bearing liabilities: Savings and time deposits 160,936 151,067 206,038 950 - 518,991 Advances from FHLB of Boston 46,600 - - 201 - 46,801 Short-term borrowed funds 20,882 - - - - 20,882 Total rate sensitive liabilities 228,418 151,067 206,038 1,151 - 586,674 Off-balance sheet instruments 58,227 (35,151) (6,179) (9,903) (6,994) - Periodic gap $ 12,087 $ 50,602 $ 819 $24,450 $ 8,375 $ 96,333 Cumulative gap $ 12,087 $ 62,689 $ 63,508 $87,958 $96,333 $ -
The ability to assess interest rate risk using gap analysis is limited. Gap analysis does not capture the impact of cash flow or balance sheet mix changes over a forecasted future period and it does not measure the amount of price change expected to occur in the various asset and liability categories. Thus, management does not use gap analysis exclusively in its assessment of interest risk. CFX's interest rate risk exposure is also measured by the forecasted net income and discounted cash flow market value sensitivities referred to above. Liquidity CFX maintains numerous sources of liquidity in the form of marketable assets and borrowing capacity. Interest bearing deposits with other banks, trading and available for sale securities, regular cash flows from loan and securities portfolios and Federal Home Loan Bank of Boston borrowings are the primary sources of asset liquidity. At September 30, 1994 and December 31, 1993, interest bearing deposits with other banks totaled $1,815,000 and $10,480,000, respectively, and trading and available for sale securities totaled $41,291,000 and $83,694,000, respectively. Because CFX's subsidiary, CFX Bank, maintains a large residential mortgage portfolio, a substantial capability exists to borrow funds from the Federal Home Loan Bank of Boston. Additionally, investment portfolios are predominantly made up of securities which can be readily borrowed against through the repurchase agreement market. Relationships with deposit brokers and correspondent banks are also maintained to facilitate possible borrowing needs. Impact of Inflation The consolidated financial statements and related consolidated financial data herein have been presented in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Inflation can affect CFX in a number of ways, including increased operating costs and interest rate volatility. Management attempts to minimize the effects of inflation by maintaining an approximate match between interest rate sensitive assets and interest rate sensitive liabilities and, where practical, by adjusting service fees to reflect changing costs. Recent Accounting Developments In May, 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires a change in accounting method for most financial institutions, commencing with fiscal years beginning after December 15, 1994, with early adoption permissible. In addition, in October 1994, FASB amended SFAS No. 114 through SFAS No. 118, to allow a creditor to use existing methods for recognizing interest income on impaired loans. Under these new statements, impaired loans would be measured using any of the following three methods on a loan-by-loan basis. * The present value of expected future cash flows (principal and interest related to the loan) discounted at the loan's effective interest rate. * The loan's obtainable market price. * The fair value of the collateral if the loan is collateral dependent. SFAS No. 114 and SFAS No. 118 are applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (i.e., residential mortgage, credit card and consumer installment loans), loans that are measured at fair value or at the lower of cost or fair value (i.e., loans in a trading or held for sale portfolio), leases, and convertible or nonconvertible debentures and bond and other debt securities. Management does not expect that adopting the provisions of SFAS No. 114 and SFAS No. 118 will have a material impact on CFX's financial statements. CERTAIN STATISTICAL AND OTHER INFORMATION Set forth below is certain statistical and other information relating to CFX. This information should be used in conjunction with the information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations of CFX" and the consolidated financial statements of CFX included herein, where similar information pertaining to the nine months ended September 30, 1994 and 1993 is presented. Investment Portfolio The following table sets forth the book value of securities available for sale and securities held to maturity by CFX at the dates indicated. The book value of securities available for sale in 1993 is fair value. The book value of securities held for sale in 1992 is the lower of cost or fair value. The book value of debt securities held to maturity or held for investment is amortized cost, while the book value of marketable equity securities held for investment is the lower of cost or fair value.
December 31, 1993 1992 1991 Available for Sale Held for Sale Held for Sale (In thousands) U. S. Treasury securities $ - $30,430 $ - U. S. Treasury money market fund 675 13,083 - Collateralized mortgage obligations (CMOs) 17,772 - - Other marketable equity securities 3,248 - - $21,695 $43,513 $ -
Held to Held for Held for Maturity Investment Investment U.S. Treasury securities and obligations of other U.S. Government agencies $ - $24,104 $ 45,117 U.S. Treasury money market fund - - 40,288 State and municipal 10,591 1,274 3,396 Corporate securities 7,992 12,679 15,497 Mortgage-backed securities 76,841 15,225 9,929 Asset-backed securities 620 - - Marketable equity securities - 844 2,296 $96,044 $54,126 $116,523
The following table sets forth an analysis of the maturity distributions and the weighted average yields of all debt securities of CFX at December 31, 1993:
Maturing After One After Five Within But Within But Within One Year Five Years Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollar amounts in thousands) State and municipal (1) $290 4.28% $ 3,427 3.81% $6,798 4.41% $ 76 4.52% Corporate securities (2) - - 7,859 6.90 133 6.00 - - Mortgage-backed securities and CMO's (3) - - 7,726 4.89 - - 86,887 6.71 Asset-backed securities (3) - - 620 4.85 - - - - Total debt securities $290 4.28% $19,632 5.50% $6,931 4.44% $86,963 6.70% Yields on tax-exempt investment securities are stated on a taxable- equivalent basis (using a 38.95% tax rate). Includes corporate and public utility obligations. The majority of these obligations contain put and call provisions. Included in table based on contractual maturities.
Loan Portfolio The following table shows CFX's loan distribution at the dates indicated:
December 31, 1993 1992 1991 1990 1989 (In thousands) Real estate: Residential $305,599 $328,984 $320,615 $323,430 $286,740 Construction 9,292 10,920 16,010 21,455 27,695 Commercial 76,955 56,027 56,451 55,981 44,098 Commercial, financial, and agricultural 42,835 54,788 59,318 56,323 51,483 Leases 5,428 1,497 - - - Consumer and other 24,934 25,268 26,506 29,555 29,557 Total loans and leases $465,043 $477,484 $478,900 $486,744 $439,573
The following table shows the maturity of loans of CFX (excluding residential mortgages of 1-4 family residences and consumer/other loans) outstanding at December 31, 1993. Also provided are the amounts due after one year, classified according to sensitivity to change in interest rates.
Maturing After One Within But Within After Five One Year Five Years Years Total (In thousands) Commercial, financial, and agricultural $5,396 $19,818 $17,621 $ 42,835 Real estate--construction 1,582 243 7,467 9,292 Real estate--commercial 3,007 10,751 63,197 76,955 Total $9,985 $30,812 $88,285 $129,082 Loans maturing after one year with: Fixed interest rates $13,467 $19,116 Variable interest rates 17,345 69,169 Total $30,812 $88,285
Nonaccrual, Past Due, Restructured, And Potential Problem Loans The following table summarizes CFX's nonaccrual, past due, restructured and potential problem loans:
December 31, 1993 1992 1991 1990 1989 (Dollar amounts in thousands) Nonaccrual loans:(1) Real estate (2) $3,587 $ 3,893 $ 1,494 $1,682 $ - Commercial, financial, and agricultural 2,698 2,002 1,768 1,019 1,535 Consumer and other 187 209 261 123 385 Total 6,472 6,104 3,523 2,824 1,920 Accruing loans past due 90 days or more: Real estate (2) - 2,916 7,892 4,410 1,884 Commercial, financial, and agricultural - 409 777 818 204 Consumer and other - 118 29 723 154 Total - 3,443 8,698 5,951 2,242 Potential problem loans (3) - 1,535 963 337 - Total nonperforming loans 6,472 11,082 13,184 9,112 4,162 Restructured loans 1,887 - - - - Total nonperforming and restuctured loans $8,359 $11,082 $13,184 $9,112 $4,162 Percentage of total loans 1.8% 2.3% 2.8% 1.9% 0.9% Percentage of total assets 1.1% 1.7% 2.0% 1.5% 0.8% When management determines that significant doubt exists as to the collectibility of principal or interest on a loan, the loan is placed on nonaccrual status. In addition, loans past due 90 days or more as to principal or interest are placed on nonaccrual status except those loans which, in management's judgment, are fully secured and in the process of collection (through legal action, or in appropriate circumstances through collection efforts reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future). In the third quarter of 1993, management changed its policy regarding nonaccrual loans, such that all loans past due 90 days or more as to principal and interest are placed on nonaccrual status. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current operations. Interest on nonaccrual loans is recognized only when received. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. Includes residential, construction and commercial real estate loans. In addition to loans 90 days or more past due, and nonaccrual loans, management classifies as nonperforming "potential problem loans" which are current as to principal and interest payments under original or restructured agreements, but are expected to have insufficient future cash flows to service the loan in accordance with the original or restructured provisions.
For the year ended December 31, 1993, approximately $173,000 of interest income would have been recorded on loans accounted for on a nonaccrual basis if such loans had been current in accordance with their original terms. Approximately $483,000 of interest income was received on nonaccrual loans and is included in interest income for the period. At December 31, 1993, CFX had $7,419,000 in commercial and commercial real estate loans for which payments were current and future cash flows appeared to be sufficient to service the loan, but the borrowers were experiencing financial difficulties. These loans, while not severe enough to be classified as potential problem loans, are subject to ongoing management attention and their classification is reviewed quarterly. While CFX considers the allowance for loan and lease losses to be adequate at December 31, 1993, it is uncertain to what extent an economic recovery will materialize in the region. Therefore, given this uncertainty, CFX can give no assurance that it will not experience an increase in nonperforming assets in the future. Summary Of Loan And Lease Loss Experience This table summarizes CFX's loan and lease loss experience for the years ended December 31, 1993, 1992, 1991, 1990 and 1989.
Year Ended December 31, 1993 1992 1991 1990 1989 (Dollar amounts in thousands) Allowance for loan and lease losses, beginning of year $7,909 $6,957 $5,122 $2,787 $2,454 Allowance of acquired subsidiaries 13 - - 393 - Allowance acquired through regulatory-assisted transactions - 350 167 - - Loans charged-off: Real estate (1) 1,810 1,499 1,174 1,227 285 Commercial, financial and agricultural 1,758 678 660 171 166 Consumer and other 336 346 413 715 274 Total loans charged-off 3,904 2,523 2,247 2,113 725 Recoveries on amounts previously charged-off: Real estate (1) 209 84 35 - 12 Commercial, financial and agricultural 78 47 4 - 16 Consumer and other 82 83 46 50 63 Total recoveries 369 214 85 50 91 Net loans charged-off 3,535 2,309 2,162 2,063 634 Provision for loan and lease losses (2) 2,970 2,911 3,830 4,005 967 Allowance for loan and lease losses, end of year $7,357 $7,909 $6,957 $5,122 $2,787 Net loans charged-off to average loans outstanding 0.7% 0.5% 0.4% 0.4% 0.2% Includes residential, construction and commercial real estate loans. The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, and management's estimation of future potential losses.
Allowance For Loan And Lease Loss Allocation This table shows an allocation of CFX's allowance for loan and lease losses as of December 31, 1993, 1992, 1991 and 1990. The allocation of the allowance for loan and lease losses as of December 31, 1989 is not available.
December 31, 1993 1992 1991 1990 Percent Percent Percent Percent of Loans of Loans of Loans of Loans in Each in Each in Each in Each Category Category Category Categoy to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans (Dollar amounts in thousands) Real estate $2,963 84.26% $1,706 82.92% $1,602 82.08% $ 625 82.36% Commercial, financial, agricultural 2,035 9.21 2,679 11.47 1,612 12.39 1,725 11.57 Consumer and other 274 6.53 306 5.61 435 5.53 511 6.07 Unallocated 2,085 3,218 3,308 2,261 $7,357 100.00% $7,909 100.00% $6,957 100.00% $5,122 100.00%
Deposits The average daily amount of deposits and of rates paid on such deposits is summarized for the periods indicated in the following table:
Year Ended December 31, 1993 1992 1991 Amount Rate Amount Rate Amount Rate (Dollar amounts in thousands) Noninterest bearing demand deposits $ 27,920 -% $ 24,491 -% $ 23,701 -% Regular savings deposits 116,475 2.81 110,078 3.98 70,722 5.61 NOW & money market deposits 188,733 2.61 172,984 3.72 129,048 5.43 Time deposits 225,126 4.79 263,810 5.75 308,756 7.35 Total $558,254 3.40% $571,363 4.55% $532,227 6.62%
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 1993, are summarized as follows:
Time Other Certificates Time of Deposits(1) Deposits Total (In thousands) 3 months or less $5,624 $ 7,019 $12,643 Over 3 through 6 months 1,357 2,738 4,095 Over 6 through 12 months 600 4,358 4,958 Over 12 months - 11,134 11,134 Total $7,581 $25,249 $32,830 Time deposits with a minimum required balance of $100,000.
Return On Equity And Assets The following table shows consolidated operating and capital ratios of CFX for the periods indicated:
Year Ended December 31, 1993 1992 1991 Return on: Average total assets 0.71% 0.52% 0.30% Average total shareholders' equity 6.34 4.92 2.64 Average common shareholders' equity 6.66 5.18 2.78 Average total shareholders' equity to average total assets ratio 11.25 10.68 11.30 Common dividend payout ratio (1) 52.42 58.70 124.00 The common dividend payout ratios have been restated to reflect 5% common stock dividends declared by CFX on December 12, 1994 and December 13, 1993.
INFORMATION ABOUT ORANGE Description of Business Orange has operated as a Massachusetts-chartered savings bank since 1871 and is located in Orange, Massachusetts. Orange has been insured by the FDIC since February 1985. In February 1987, Orange completed its conversion from mutual to stock form of organization. In September 1991, Orange purchased the deposits of the Athol branch of Peoples Savings Bank of Worcester and opened its first branch office. Orange has a wholly-owned subsidiary, Orange Corporation. Orange is engaged in the business of attracting deposits from the general public, making residential and commercial real estate loans, business and consumer loans and making investments in securities. Orange's earnings primarily depend on the spread between the income it receives from its loan and investment securities portfolios and the interest cost it pays for money in the form of deposits. Orange conducts its business in the north central area of Massachusetts, which has an economic base comprised of industrial and manufacturing companies, financial service institutions and agricultural production. Orange's main office is located at 30 East Main Street, Orange, Massachusetts. Orange also has a branch office located at 378 Main Street, Athol, Massachusetts. At September 30, 1994, Orange had 26 full-time and 5 part-time employees. Orange has historically been an active loan originator with fixed and adjustable rate mortgage loans comprising approximately 89.7% of Orange's total loan portfolio at September 30, 1994. The balance of Orange's loan portfolio consists of home equity loans (7.1%) and consumer loans (3.2%). In recent years, Orange has expanded its adjustable rate mortgage home lending, and such loans accounted for 74.6% of the total loans at September 30, 1994. Orange believes that the shorter terms and repricing intervals of its adjustable rate mortgage loans are helpful in maintaining a profitable spread between Orange's average loan yield and its cost of funds. Orange is subject to extensive competition from other savings banks, as well as cooperative banks and credit unions, in both attracting and retaining deposits. Additionally, significant competition for deposits comes from money market mutual funds and government securities. Competition for real estate loans is experienced principally from mortgage companies, other savings banks, co-operative banks, credit unions and commercial banks. Consumer loan competition is principally from commercial banks, finance companies and credit unions. The principal methods used by competing institutions to attract deposits include the offering of a variety of services and premiums, convenience of office location and offering of attractive interest rates. The primary factors in competing for loans are interest rates, loan fee charges and quality of service to the borrower. Orange's staff is actively involved in community organizations and service groups which results in many successful business relationships. Deposits maintained with Orange are insured by the Bank Insurance Fund of the FDIC up to FDIC limits (generally $100,000 per depositor) and by the Depositors Insurance Fund for the portion of deposits in excess of the amounts insured by the FDIC. As a Massachusetts-chartered savings bank, Orange is subject to regulation, examination and supervision by the Massachusetts Commissioner of Banks and the FDIC. Massachusetts legislation enacted in 1982 expanded the authority of savings banks so as to be substantially identical with the powers of state-chartered commercial banks (known as trust companies) which historically have had the broadest powers available to depository institutions operating under Massachusetts law. Description of Properties Orange's main office has been located at 30 East Main Street, Orange, Massachusetts since 1976. Orange has owned this building since 1976. The building has office space of 7,370 square feet. The aggregate net book value at December 31, 1993 of the land, building and equipment was $444,000. In February 1990, Orange purchased the property adjacent to its main office for possible future expansion. Orange opened a branch office located at 378 Main Street, Athol, Massachusetts in September 1991, following the purchase of deposits in the branch from Peoples Savings Bank of Worcester. The branch occupies 4,580 square feet of first floor and basement space which is leased by Orange. The lease agreement expires in August 1997 and contains an option to extend the lease for an additional two years. In October 1994, Orange purchased property in Athol for possible relocation of the branch office. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Orange or its subsidiary is a party or of which any of their property is the subject. By letter dated December 27, 1994, the Columbians of Orange, Inc. and the Knights of Columbus, Orange Council, Number 2135 (collectively, the "Knights") have alleged that Orange orally agreed to make certain loans to the Knights in the aggregate amount of not more than $610,000 and failed to fulfill that oral commitment. The letter also alleged that in reliance on representations by Orange, the Knights have expended certain sums of money and suffered certain damages in the aggregate amount of $50,000. The letter threatens litigation under the provisions of Massachusetts General Laws Chapter 93A, pursuant to which a court has authority to award a prevailing plaintiff double or treble damages. Orange denies that it has any obligation to make these loans and if litigation is brought, intends to contest it vigorously. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ORANGE SAVINGS BANK Nine Months Ended September 30, 1994 Financial Condition At September 30, 1994 Orange had total assets of $83.9 million, an increase of $2.0 million from $81.9 million at December 31, 1993. The increase in assets is primarily reflected in increases in cash and cash equivalents of $1.9 million and total investments of $900,000, offset by a decrease in total loans outstanding of $747,000. Other real estate owned (OREO) decreased during the period by $146,000 and consists of properties acquired by foreclosure, deed in lieu of foreclosure or substantively repossessed. The increase in total assets has been primarily funded through an increase in total deposits of approximately $1.5 million. Stockholders' equity at September 30, 1994 was $8.6 million, an increase of $396,000 during the nine month period. This increase is composed of net income of $521,000 offset by a net decrease in the unrealized gain on investment securities available-for-sale of $38,000 and cash dividends paid to stockholders of $87,000. During the nine month period ended September 30, 1994, the asset quality of Orange's loan portfolio continued to improve. The aggregate amount of non- accrual loans and other loans past due 90 days and still accruing totaled $454,000 at September 30, 1994, a decrease of approximately $1.0 million from $1.5 million as of December 31, 1993. Non-performing loans as a percent of total assets at September 30, 1994 was 0.54% as compared to 1.79% at December 31, 1993. Substantially all of the non-accrual loans and loans overdue 90 days or more and still accruing at September 30, 1994 were originally made as first mortgage real estate loans on owner occupied properties. Management is not aware of any other loans where there are serious doubts regarding compliance with loan repayment terms. The following table illustrates the excess (or deficiency) of interest- bearing assets over interest-bearing liabilities at September 30, 1994.
Time Interval from September 30, 1994 1--3 4--12 1--2 2--3 over 3 (Dollars in thousands) months months years years years Total Interest sensitive assets: Loans $ 15,679 $36,974 $ 3,021 $ 1,068 $12,972 $69,714 Investments 3,274 1,171 3,184 504 - 8,133 Total 18,953 38,145 6,205 1,572 12,972 77,847 Interest sensitive liabilities: Transaction deposits 41,278 - - - - 41,278 Time deposits 4,020 20,161 3,427 2,805 - 30,413 Total 45,298 20,161 3,427 2,805 0 71,691 Actual excess (deficiency) $(26,345) $17,984 $ 2,778 $(1,233) $12,972 $ 6,156 Cumulative excess (deficiency) of interest sensitive assets over interest sensitive liabilities ("GAP") $(26,345) $(8,361) $(5,583) $(6,816) $ 6,156 Cumulative GAP as % of total assets (31.38%) (9.96%) (6.65%) (8.22%) 7.33%
Results of Operations Net interest and dividend income for the nine months ended September 30, 1994 was $2,394,000 as compared to $2,359,000 for the nine months ended September 30, 1993, a difference of $35,000. Despite the recent increases in interest rates, net interest and dividend income and Orange's net interest margin remained relatively consistent due in large part to the significant concentration of adjustable-rate loans in Orange's loan portfolio. Net income for the nine months ended September 30, 1994 was $521,000 or $0.68 per share, as compared to $559,000 or $0.76 per share in the comparable period in 1993. This decrease of $38,000 reflects lower net interest and dividend income as well as higher non-interest expenses during the current period than was experienced during the 1993 period. Total interest and dividend income for the nine months ended September 30, 1994 was $4.3 million, a decrease of $202,000 from $4.5 million in 1993. The largest portion of this decrease was reflected in interest earned on loans which declined $291,000 to $3.9 million from $4.2 million in 1993. The decrease in loan income is primarily the result of repricing of Orange's variable rate mortgage portfolio and to a lesser extent on the lower balances of total loans. Smaller decreases of $17,000 and $2,000 were experienced in dividends and interest received on certificates of deposit, respectively. Offsetting these decreases were increases in interest on investments (U.S. Treasury and Federal Agency bonds), which increased to $151,000 during the current period from $61,000 in 1993, principally due to a higher volume of investments. Interest on Federal funds sold also increased during the current period to $70,000 from $52,000 as a result of both higher balances and higher rates. Total interest expense was $1.8 million for the nine months ended September 30, 1994. This represents a decrease of $181,000 from $2.0 million in 1993. This decrease is primarily due to the repricing of certificates of deposit, as the rates on all other types of savings products remained virtually unchanged during the comparable periods. For the nine month period ended September 30, 1994, Orange added $12,000 to its provision for possible loan losses. This compares with a provision of $68,000 during the same period in 1993. The lower provision directly reflects the continuing improvement in the asset quality of Orange's loan portfolio. This as well as other factors influenced the decision to reduce the amount of the provision during the current period. However, Orange continues to monitor the quality of its loan portfolio as there can be no assurance that the current favorable trends in delinquency will continue or that declines in collateral value will not necessitate future writedowns, increases in the provision for possible loan losses or charge-offs. Orange's non-interest income for the nine months ended September 30, 1994 was $226,000, an increase of $26,000 from $200,000 in the 1993 period. Commissions, fees and other income increased by $33,000 during the current period and included higher service charges on deposit accounts and insurance commissions. This was offset in part by a decrease in gains on the sale of mortgages of $13,000 which is reflective of the decreased activity in the secondary market during the current period. Non-interest expense for the nine months ended September 30, 1994 was $1.8 million as compared to $1.6 million during the same period in 1993, an increase of $126,000. Contributing to the increase in non-interest expense was an increase in salaries and benefits of $72,000 and an increase in legal fees of $69,000. The increase in salaries and employee benefits consists of normal salary adjustments, related payroll taxes and higher board of directors fees. The increase in legal fees during the period ended September 30, 1994 is related to the pending acquisition of Orange by CFX. Legal costs associated with this acquisition are expected to continue to adversely affect earnings. EDP processing fees also increased during this period, primarily due to the higher volume of transactions being processed through Orange's ATMs. These increases were offset in part by a reduction in other expenses of $39,000, primarily in advertising expenses and in reduced expenses associated with foreclosures and OREO properties. Income taxes for the nine months ended September 30, 1994 were $345,000, a decrease of $27,000 from $372,000 in the 1993 period. The decrease is directly proportional to lower pre-tax income in the 1994 period as compared to 1993. Liquidity and Capital Resources Orange's principal sources of liquidity are loan amortization, loan prepayments and increases in deposits. Orange is also a member of the Federal Home Loan Bank of Boston and as such is generally entitled to borrow up to 30% of its total assets. Cash from these sources is used to fund loan originations, security investments and deposit maturities. During the nine month period ended September 30, 1994, deposits have increased approximately $1.5 million. This compares to deposit growth during the same period in 1993 of $841,000. In light of the competition for deposit funds among non-banking entities, Orange is pleased with the level of deposit growth in the present low interest rate environment. Orange's activity in the secondary mortgage market has declined substantially in the 1994 period as compared to 1993 as rates have become less attractive. For the nine month period in 1994, Orange has sold mortgages totaling $1.9 million. This compares with sales during the 1993 period of $8.1 million. Orange continues to service all of the loans it sells to maintain a strong local banking relationship with its customers. Orange continues to exceed all minimum capital requirements currently in effect under the guidelines of the FDIC. At September 30, 1994, Orange's Tier 1 and total risk-based capital ratios were 19.35% and 20.65%, respectively. In addition, Orange's leverage capital ratio was 10.15%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ORANGE SAVINGS BANK, Three Years Ended December 31, 1993--Liquidity and Capital Resources." Recent Accounting Developments In May, 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires a change in accounting method for most financial institutions, commencing with fiscal years beginning after December 15, 1994, with early adoption permissible. In addition, in October 1994, the FASB amended SFAS No. 114 through SFAS No. 118, to allow a creditor to use existing methods for recognizing interest income on impaired loans. Under these statements, impaired loans would be measured using any of the following three methods on a loan-by-loan basis. * The present value of expected future cash flows (principal and interest related to the loan) discounted at the loan's effective interest rate. * The loan's obtainable market price. * The fair value of the collateral if the loan is collateral dependent. SFAS No. 114 and SFAS No. 118 are applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (i.e., residential mortgage, credit card and consumer installment loans), loans that are measured at fair value or at the lower of cost or fair value (i.e., loans in a trading or held for sale portfolio), leases, and convertible or nonconvertible debentures and bond and other debt securities. Management does not expect that adopting the provisions of SFAS No. 114 and SFAS No. 118 will have a material impact on Orange's financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ORANGE SAVINGS BANK Three Years Ended December 31, 1993 Financial Condition Total assets of Orange at December 31, 1993, were $81.9 million, an increase of $733,000 from $81.2 million at December 31, 1992. The increase in assets is primarily the result of Orange's 1993 earnings. During the year, Orange made an effort to improve its liquidity through the investment in U.S. Treasury and Federal agency securities which increased by $2.0 million. These investments were offset in part by decreases in cash due from banks and other real estate owned of $755,000 and $461,000 respectively. Orange's loan port- folio declined slightly from year end 1992 primarily due to the increased activity in the secondary market during 1993. Liquidity and Capital Resources Deposits are a traditional source of funds for Orange. During 1993, deposits increased only $44,000, as deposit growth declined sharply from previous years. Deposits increased $8.4 million in 1992. During 1993, many institutions experienced significant declines in deposits, as depositors sought higher returns on their money through non-banking instruments. Management was pleased that in light of this trend, Orange was able to maintain its deposit base at roughly the same level as year end 1992. Loan activity in 1993 remained strong as borrowers continued to take advantage of the low interest rate environment. Activity in the secondary market increased as well during the year as borrowers took advantage of the low rates. Loans sold in the secondary market during 1993 totaled approximately $10.7 million as compared to 1992 when loan sales were approximately $1.3 million. All loans sold continue to be serviced locally in order to allow Orange to market other banking services to these customers. The increased activity in the secondary market is the primary reason for the slight decline in outstanding loans. During 1993, Orange increased its investments in U.S. Treasury and Federal Agency securities by $2.0 million. The purchase of these investments has greatly enhanced Orange's liquidity position. At year end 1993, these investments totaled $3.8 million, as compared to $1.5 million at year end 1992. Orange remains a member of the Federal Home Loan Bank of Boston (FHLBB) and as such is generally able to borrow up to 30% of its assets. These borrowings can assist in funding mortgages on 1-4 family residential properties. Orange presently has no borrowings outstanding and has no plans to borrow in the near future. Orange is subject to regulation by the FDIC, which has adopted certain risk-based capital guidelines. The guidelines, which establish a risk-adjusted ratio relating capital to different categories of balance sheet assets and off-balance sheet obligations, require Orange to maintain a minimum risk-based capital ratio. The guidelines define two categories of capital: Tier 1 or core capital (primarily, common stock, retained earnings and a limited amount of perpetual preferred stock, less goodwill) and Tier 2 or supplementary capital (primarily, a limited amount of loan loss reserves, perpetual preferred stock in excess of the amounts included in Tier 1 capital and certain "hybrid instruments," including mandatory convertible debt). Qualifying (or total) capital is the sum of Tier 1 and Tier 2 capital. According to the guidelines, Tier 1 capital must represent at least 50% of qualifying total capital. Risk- based capital ratio guidelines assign both balance sheet assets and off- balance sheet obligations to one of four risk categories. At December 31, 1993 and 1992, the minimum total and Tier 1 risk-based capital ratios required were 8% and 4%, respectively. Orange's total risk-based capital ratios at December 31, 1993 and 1992 were 19.00% and 17.17%, respectively, and its Tier 1 risk- based capital ratios 18.30% and 16.06%, respectively. To complement risk-based guidelines, the FDIC adopted a Tier 1 leverage capital ratio of 3% for the most highly rated banks and up to 5% for other banks which would represent the minimum capital to total assets standard for banks. The leverage ratios are used in tandem with the risk-based capital requirements as the minimum capital standards for banks. Orange's Tier 1 leverage capital ratios were 10.02% and 8.63% at December 31, 1993 and 1992, respectively. Asset Quality The aggregate amount of non-accrual loans and other loans past due 90 days and still accruing totaled $1.5 million or 2.07% of loans outstanding at the end of 1993, compared to $1.2 million or 1.75% at the end of 1992 and $2.5 million or 4.02% at the end of 1991. At the same time, other real estate owned decreased to $457,000 at year end 1993 from $918,000 at year end 1992. Non- performing assets as a percent of total assets decreased to 1.69% at December 31, 1993 from 2.20% at December 31, 1992. Substantially all of the non-accrual loans and loans overdue 90 days or more and still accruing at year end 1993 were originally made as first mortgage real estate loans on owner occupied properties. Management is not aware of any other loans where there are serious doubts regarding compliance with loan repayment terms. It is management's policy to discontinue the accrual of interest on a loan when there is reasonable doubt as to its collectibility. The accrual of some loans, however, may continue even though they are more than 90 days past due if the loans are well secured and in the process of collection and if management deems it appropriate. Because of the continuing uncertain economic conditions, there can be no assurance that non-performing loans will not increase again or that declines in collateral value will not necessitate additional write-downs, increases in the allowance for possible loan losses or charge-offs in the future. Asset/Liability Management The primary objective of Orange's asset/liability program is to protect Orange from the adverse impact of volatile rates. Orange attempts to match variable rate assets with variable rate liabilities so that the changes in the level of interest rates will have a limited impact on net income. As part of this strategy, Orange has continued to emphasize the origination of interest sensitive loans, comprised of mainly one-year adjustable rate mortgages and equity lines of credit. These types of adjustable rate loans equalled 80.2% of total loans in Orange's portfolio as of December 31, 1993. Orange's GAP position as a whole has become generally negative over the past few years. However, Orange remains comfortable with this negative GAP due to the relatively high level of passbook savings accounts that are included in the calculation. The following table illustrates the excess (or deficiency) of interest- bearing assets over interest-bearing liabilities at December 31, 1993.
Time Interval from December 31, 1993 1--3 4--12 1--2 2--3 over 3 (Dollars in thousands) months months years years years Total Interest sensitive assets: Loans $12,382 $39,272 $ 3,373 $ 2,004 $14,045 $71,076 Investments 2,750 1,945 1,549 499 - 6,743 Total 15,132 41,217 4,922 2,503 14,045 77,819 Interest sensitive liabilities: Transaction deposits 41,333 - - - - 41,333 Time deposits 7,483 13,432 6,318 2,129 - 29,362 Total 48,816 13,432 6,318 2,129 0 70,695 Actual excess (deficiency) $(33,684) $27,785 $(1,396) $ 374 $14,045 $ 7,124 Cumulative excess (deficiency) of interest sensitive assets over interest sensitive liabilities ("GAP") $(33,684) $(5,899) $(7,295) $(6,921) $ 7,124 Cumulative GAP as % of total assets (41.10%) (7.20%) (8.90%) (8.45%) 8.69%
Average Balance Sheet Changes Orange increased its weighted average interest rate spread and its net yield on average earning assets in 1993 for the fourth consecutive year. The weighted average interest rate spread increased to 3.75% from 3.57% and the net yield on average earning assets to 4.08% from 3.93%. The amount of average interest earning assets increased by $3.0 million to $78.9 million in 1993 from $75.9 million in 1992. Total average loans contributed to virtually all of the increase in average interest earning assets and is indicative of the increased loan activity during the year which resulted from the low interest rate environment. Average interest earning assets increased from 1991 to 1992 for much the same reasons as outlined above. Net loans averaged $71.9 million in 1993, an increase of $4.6 million from $67.2 million in 1992. The increase is reflective of the mortgage activity generated as a result of the generally low interest rate environment that prevailed throughout the year. At December 31, 1993 the loan portfolio was comprised of real estate mortgages (primarily 1-4 family), 89.5%; home equity loans, 7.2%; and consumer loans, 3.4%. Average balances on all other categories of interest earning assets declined during 1993. These decreases included investments of $161,000, FHLBB stock of $26,000, certificates of deposit of $106,000 and federal funds sold of $1.4 million. The average balance of investments in 1992 exceeded the year- end balance by a significant amount, as investments declined during the year from higher 1991 levels. The decrease in federal funds is representative of the generally lower balances throughout the year as compared to 1992. As of December 31, 1993, all of the debt securities in Orange's investment portfolio had maturities of three years or less, with 53.2% maturing within one year. Average deposits increased in 1993 to $71.8 million from $68.8 million in 1992. This compares to an increase of $11.8 million from 1991 to 1992. The increase in average deposits reflects the slowing of the growth rate of deposits which Orange experienced during 1993 as customers looked towards other types of investments, other than bank instruments, to yield a higher return on their funds. Average borrowings during 1993 were zero, reflecting the payoff of the last remaining borrowings in 1992. The following table sets forth Orange's average balance sheets and an analysis of the net interest income and net yields for the periods indicated. Non-accrual loan balances have been included in the calculation of the average interest earning assets, which reduces the calculated yield.
Years Ended December 31, 1993 1992 1991 (Dollars in thousands) Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets: Loans $71,889 $5,560 7.73% $67,249 $ 5,972 8.88% $60,792 $6,117 10.06% Investments 3,282 138 4.20 3,443 185 5.37 3,391 173 5.10 Federal Home Loan Bank stock 1,124 87 7.74 1,150 90 7.83 1,150 108 9.39 Certificates of deposit 484 32 6.61 590 39 6.61 751 59 7.86 Federal funds sold 2,094 66 3.15 3,486 115 3.30 3,542 232 6.55 Total interest earning assets 78,873 5,883 7.46 75,918 6,401 8.43 69,626 6,689 9.61 Non-interest earning assets: Allowance for loan loss (525) (383) (276) Cash and due from banks 3,598 3,175 1,987 Fixed assets 427 463 435 Other assets 774 1,964 1,984 Total assets $83,147 $81,137 $73,756 Liabilities: Deposits: Now accounts $ 8,303 176 2.12 $ 7,824 273 3.49 $ 5,410 278 5.14 Regular savings 19,398 622 3.21 17,074 728 4.26 13,490 752 5.58 Money market fund 14,485 493 3.40 14,278 622 4.36 10,131 596 5.88 Time deposits 29,621 1,376 4.65 29,619 1,678 5.67 27,999 2,081 7.43 71,807 2,667 3.71 68,795 3,301 4.80 57,030 3,707 6.50 Borrowed funds - - 1,392 111 7.97 7,208 633 8.78 Total interest bearing liabilities 71,807 2,667 3.71 70,187 3,412 4.86 64,238 4,340 6.76 Demand deposits 1,745 1,077 239 Other liabilities 1,929 1,664 1,331 Equity: 7,666 8,209 7,948 Total liabilities and equity $83,147 $81,137 $73,756 Net interest income $3,216 $2,989 $2,349 Weighted average interest rate spread 3.75% 3.57% 2.85% Net yield on average earning assets 4.08% 3.93% 3.37%
Rate/Volume Analysis The following table shows the effects that changes in rates and changes in the volume of interest earning assets and interest bearing liabilities have upon the net interest income of Orange.
1993 Compared to 1992 1992 Compared to 1991 Increase (Decrease) Increase (Decrease) Variance Variance due to (1) due to (1) Total Total (In thousands) Change Rate Volume Change Rate Volume Income from interest earning assets: Loans $(412) $(799) $387 $(145) $ (756) $611 Investment securities (47) (39) (8) 12 9 3 Federal Home Loan Bank stock (3) (1) (2) (18) (18) - Certificates of deposit (7) - (7) (20) (8) (12) Federal funds sold (49) (4) (45) (117) (114) (3) Total interest income (518) (843) 325 (288) (887) 599 Expense on interest bearing liabilities: Deposits (634) (762) 128 (406) (1,070) 664 Borrowed funds (111) (55) (56) (522) (35) (487) Total interest expense (745) (817) (72) (928) (1,105) 177 Net interest income $ 227 $ (26) $253 $ 640 $ 218 $422 Rate-volume variances have been allocated proportionately to rate and volume changes, respectively.
Return on Equity and Assets The following table shows consolidated operating and capital ratios of Orange for the periods indicated:
Year Ended December 31, 1993 1992 1991 Return (loss) on average assets 1.39% (0.59)% (0.35)% Return (loss) on average common shareholders' equity 15.07 (5.84) (3.21) Average shareholders' equity to average assets 9.22 10.12 10.78 Dividend payout ratio 12.82 * * * Not meaningful.
Results Of Operations--Comparison of Years Ended December 31, 1993 And December 31, 1992 General. Orange's results of operations depend to a large extent on its net interest and dividend income from earning assets and interest expense on deposits and borrowings. Interest and dividend income from loans and investments is primarily a function of the average balance of loans and investments outstanding during each period and the average rate earned on those assets. Orange's interest expense is a function of the average balances of outstanding deposits and borrowings during the period and the interest rates paid on such deposits and borrowings. Net income is also affected by the level of other operating income items such as fees, service charges and commissions, as well as gains and losses on investment securities and loans, operating expenses and income taxes. The results of operations for the year ended December 31, 1993 reflect a net income of $1,149,000 or $1.55 per share. This compares to a net loss of $479,000 or $0.65 per share for the year ended December 31, 1992. The results for the current period reflect higher net interest and dividend income as well as lower income taxes. The loss in 1992 was primarily related to the write- down to zero of the limited partnership investments of Orange's subsidiary, Orange Corporation, which totaled $1.1 million. Net Interest and Dividend Income. Net interest and dividend income for 1993 increased $227,000 over 1992 and compares to an increase of $640,000 from 1991 to 1992. The increase in net interest and dividend income in both periods is primarily related to the elimination of borrowings and the reduction in interest rates paid on deposit accounts. Interest on average earning assets decreased to $5.9 million in 1993 from $6.4 million in 1992 or $518,000. This represents a decline of 8%. The decreased interest income is primarily due to lower rates earned on all types of interest earning assets during the year, particularly loans as they repriced throughout the year. The yield on average earning assets decreased in 1993 to 7.46% from 8.43% in 1992 or 0.97%. Interest expense also decreased in 1993 by $745,000 to $2.7 million from $3.4 million in 1992. The decrease in interest expense is the result of lower interest rates being paid on all types of deposit accounts during 1993. In addition, there were no borrowings outstanding during 1993, which reduced interest expenses by $111,000. As a result of these interest rate reductions and the elimination of borrowed funds, the cost of interest bearing liabilities decreased to 3.71% in 1993 from 4.86% in 1992. Provision for Possible Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to operations. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated losses inherent in the loan portfolio after weighing various factors. Among the factors management may consider are, generally, the level of non-accruing loans, current economic conditions, trends in delinquencies and charge-offs and collateral values of the underlying security. Ultimate losses may vary significantly from current estimates. The provisions charged against operations in 1993 and 1992 were $90,000 and $242,000, respectively. Charge-offs were $18,000 and $129,000 in 1993 and 1992, respectively. Included in the charge-offs in 1992 was $87,000 of specific reserves set aside for loans reclassified as insubstance foreclosure. During 1993, Orange realized recoveries of previously charged-off amounts totaling $40,000. For additional information regarding the provision for loan losses and non-accrual loans see Note 4 of Orange's Notes to Consolidated Financial Statements. Non-interest Income and Non-interest Expense. Orange's non-interest income is comprised of service charges on deposit accounts, service fees and gains and losses on the sale or disposition of investments and loans. Non- interest income increased by $1.1 million in 1993 when compared to 1992 results. The primary factor in this increase was the absence, in 1993, of losses on limited partnership investments. These losses were the primary reason for the negative non-interest income in 1992. In 1993, Orange experienced a net loss on the sale or writedown of investments totaling $21,000 which is primarily related to the writedown of an equity security whose decline in value was determined to be other than temporary. This compares to a net gain on the sale or writedown of securities in 1992 of $91,000. In 1993, Orange realized gains of $27,000 on loans sold in the secondary market as compared to a gain of $2,000 in 1992. These gains in 1993 are reflective of the increased volume of loans sold. Commissions, fees and other income increased by $21,000 in 1993 to $270,000 from $249,000 in 1992. The largest part of this increase was from service charges on NOW and demand deposit accounts. Non-interest expense for the year 1993 was $2.2 million, an increase of $129,000 over 1992. Employee salaries and benefits were $943,000 in 1993, an increase of $82,000 from $861,000 in 1992. This increase is composed of higher salaries totaling $51,000 and payroll taxes of $30,000. The salary increase includes the cost of additional personnel as well as regular increases to other employees. The increase in payroll taxes is due in part to the additional staff as well as the absence of a refund due to overpayment of taxes that was received in 1992. Building and equipment expenses increased to $250,000 from $219,000 in 1992, primarily due to higher costs for maintenance contracts and depreciation. EDP processing fees and legal fees increased by $23,000 and $18,000, respectively, and consisted of normal costs associated with doing business. Other expenses for 1993 were $661,000, a decrease of $25,000 from 1992. Contributing to this decrease were lower Federal Reserve charges and miscellaneous expenses. Income Taxes. Income tax expense decreased by $374,000 in 1993 to $91,000. The effective tax rate for 1993 was only 7.0%. The principal reason for this low effective rate is a reduction in the valuation allowance on gross deferred tax assets. This reduction is appropriate based in the significant improvement in pre-tax earnings in 1993 as compared to the pre-tax loss in 1992. Impact of Inflation. The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are directly affected by inflation. In today's interest rate environment adequate liquidity and the mix and maturity structure of Orange's assets and liabilities are important to the maintenance of acceptable performance levels. Results Of Operations--Comparison Of Years Ended December 31, 1992 And December 31, 1991 General. The results of operations for the year ended December 31, 1992 reflect a net loss of $479,000 or $0.65 per share. This compares to a net loss of $255,000 or $0.35 per share for the same period in 1991. The losses in both 1992 and 1991 were primarily related to the write-down of investments in limited partnerships by Orange's subsidiary, Orange Corporation. Net Interest and Dividend Income. Net interest and dividend income for 1992 increased by $640,000 over 1991. The increase in net interest income is directly related to the elimination of borrowings and the reduction of rates paid on deposit accounts. Interest income decreased in 1992 by $288,000 to $6.4 million from $6.7 million in 1991 or 4.31%. The decrease is primarily related to the lower interest rates being earned on all types of interest earning assets as they have repriced. The lower interest rates were partially offset by an increased volume of loans outstanding during the period. The net yield on average earning assets decreased to 8.43% in 1992 from 9.16% in 1992 or 0.73%. Interest expense for 1992 also decreased to $3.4 million from $4.3 million in 1991 a total of $928,000. This decrease is the result of lower interest rates being paid on all types of deposit accounts and lower outstanding balances of borrowed funds. As a result of these interest rate reductions the cost of average interest bearing liabilities decreased to 4.86% from 6.76%, a change of 1.90%. Provision for Possible Loan Losses. The provisions charged against operations in 1992 and 1991 were $242,000 and $135,000, respectively. Charge- offs were $129,000 and $16,000, respectively, in 1992 and 1991. The total charge-offs in 1992 included $87,000 of specific reserves set aside for loans reclassified as insubstance foreclosures. Non-Interest Income and Expense. Orange's non-interest income is composed of service charges on deposit accounts, service fees and gains or losses on the sale or other disposition of investments and loans. Non-interest income decreased in 1992 by $409,000 when compared to 1991. The primary factor in this decline was the charge-off of $1.1 million on the remaining investments in limited partnerships by Orange's subsidiary, Orange Corporation. Included in this charge-off was a contingent liability for amounts that may become due in the future totaling $332,000. These charge-offs were in addition to the $404,000 charged-off in 1991 and bring the book value of these investments to zero. Non-interest expenses increased by $331,000 in 1992 to $2.0 million from $1.7 million in 1991. Many of the increases in 1992 are directly related to the first full year of operation of Orange's branch office in Athol, as compared to four months of operations in 1991. Increases in non-interest expense included salaries and benefits of $204,000 ($118,000 directly related to the branch operation), building and equipment of $57,000, EDP processing fees of $43,000 and other expenses of $47,000. Legal fees decreased in 1992 by $20,000. Income Taxes. Effective January 1, 1992, Orange adopted FASB Statement No. 109 "Accounting for Income Taxes". This changed Orange's method of accounting for income taxes from the deferred method to the asset liability method. The cumulative effect of this change in accounting principle was $50,000 or $0.07 per share. Income tax expense for the year 1992 was $465,000, an increase of $67,000 from $398,000 in 1991. The increase in income tax expense is generally related to Orange's higher net interest income during the year. The losses on the limited partnership investments had little effect on Orange's tax liability in 1992 as the tax benefits had been largely realized in previous periods. In contrast, in 1991, the limited partnership loss resulted in the recapture of tax credits previously taken. DESCRIPTION OF CFX CAPITAL STOCK The following summary does not purport to be complete and is subject in all respects to the applicable provisions of the New Hampshire Business Corporation Act ("New Hampshire law") and the CFX Articles of Incorporation (the "CFX Articles") and CFX's by-laws (the "CFX By-laws"). General The CFX Articles currently authorize the issuance of 3,000,000 shares of Preferred Stock, $1.00 par value ("Preferred Stock"), issuable in one or more series from time to time by action of the Board of Directors, and 15,000,000 shares of CFX Common Stock. At January 6, 1995, 4,471,068 shares of CFX Common Stock were issued, of which 3,893,803 shares were outstanding and 577,265 shares were held in CFX's treasury; and one series of Preferred Stock was established by the CFX Board of Directors, of which 192,769 shares of Series A Preferred Stock (the "Series A Preferred Stock") were issued and outstanding. The authorized but unissued and unreserved shares and treasury-held shares of CFX Common Stock are available for general corporate purposes including but not limited to, possible issuance as stock dividends or stock splits, in future mergers or acquisitions, under a cash dividend reinvestment and stock purchase plan, in a future underwritten or other public offering, or under employee stock purchase plans and stock option plans. The authorized but unissued shares of Preferred Stock would similarly be available for issuance in future mergers or acquisitions, in a future public offering or private placement or for other general corporate purposes. Except as described above or as otherwise required to approve the transaction in which the additional authorized shares of CFX Common Stock or authorized shares of Preferred Stock would be issued, no stockholder approval would be required for the issuance of these shares. Accordingly, the Board of Directors of CFX, without stockholder approval, may issue Preferred Stock with voting and conversion rights which would adversely affect the voting power of the holders of CFX Common Stock. CFX Common Stock General. Holders of the CFX Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of any funds legally available, and are entitled upon liquidation, after claims of creditors and preferences of the Series A Preferred Stock, and any other series of Preferred Stock at the time outstanding, to receive pro rata the net assets of CFX. Dividends are paid on the CFX Common Stock only if all dividends on the outstanding classes or series of Series A Preferred Stock for the then-current period and all prior periods have been paid or provided for. The Series A Preferred Stock has preference over the CFX Common Stock with respect to the payment of dividends and the distribution of assets in the event of liquidation or dissolution of CFX. The holders of the CFX Common Stock are entitled to one vote for each share held and are vested with all of the voting power except as the Board of Directors has provided with respect to the Series A Preferred Stock or may provide, in the future, with respect to any other series of Preferred Stock which it may hereafter authorize. See "Preferred Stock" below. Shares of CFX Common Stock are not redeemable and have no subscription, conversion or preemptive rights. The CFX Common Stock is listed on the American Stock Exchange. The outstanding shares of CFX Common Stock are, and the shares to be issued to Orange stockholders upon consummation of the Merger will be, validly issued, fully paid and non-assessable and the holders thereof are not, and will not be, subject to any liability as stockholders. Restrictions on Ownership. The BHCA requires any "bank holding company", as such term is defined therein, to obtain the approval of the Federal Reserve Board prior to the acquisition of 5% or more of a class of voting stock of CFX. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve Board to acquire 10% or more of the CFX voting stock under the Change in Bank Control Act (the "CBCA"). Any holder of 25% or more of the CFX voting stock (or a holder of 5% or more if such holder otherwise exercises a "controlling influence" over CFX) is subject to regulation as a bank holding company under the BHCA. Transfer Agent and Registrar. The Transfer Agent and Registrar for the CFX Common Stock is Mellon Securities Transfer Services, Inc., New York. Preferred Stock The Board of Directors is authorized to issue Preferred Stock and to fix and state voting powers, designation(s), preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof. The Preferred Stock may rank prior to the CFX Common Stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of the holders of the CFX Common Stock, and which could result in or impede a change in control. As of the date of this Proxy Statement-Prospectus, CFX has one series of Preferred Stock outstanding, the Series A Preferred Stock, which was designated in connection with the acquisition of The Valley Bank (now part of CFX Bank) by CFX in 1989. CFX Series A Preferred Stock. The Series A Preferred Stock will automatically convert into CFX Common Stock on April 30, 1995 and, prior thereto, is convertible into shares of CFX Common Stock by the holders of the Series A Preferred Stock at the option of the holders at the conversion rate described below. The holders of the Series A Preferred Stock are entitled to receive cumulative cash dividends, when, as and if declared by the Board of Directors of CFX out of the assets of CFX which are by law legally available for the payment of dividends, from the date of issuance of the Series A Preferred Stock, and in each case quarterly on the first day of January, April, July and October of each year, unless such day is a non-business day, in which event, on the next business day, at the fixed annual rate of $1.3875 per share. In addition, in the event of any voluntary or involuntary dissolution, liquidation or winding up of the affairs of CFX, after payment or provision for payment of any debts and other liabilities of CFX and of the liquidation preference of any other shares of capital stock of CFX other than CFX Common Stock or other shares of capital stock specifically identified as not having preference over the Series A Preferred Stock, the holders of the Series A Preferred Stock shall be entitled to a liquidation preference per share in the amount of $18.50 out of the net assets of CFX and before any distribution shall be made to holders of CFX Common Stock. The holders of the Series A Preferred Stock have the right, voting as a single class with the holders of the CFX Common Stock, to vote on all matters presented for a shareholder vote. Shares of Series A Preferred Stock were initially convertible into shares of CFX Common Stock on a one-for-one basis. As a result of the 5% common stock dividends declared on December 12, 1994 and December 13, 1993, this conversion ratio has been adjusted in accordance with the adjustment procedure described below to 1.1025 shares of CFX Common Stock for each share of Series A Preferred Stock. Cash is paid in lieu of fractional shares at the average trading price of shares of CFX Common Stock on the day of the conversion. The conversion ratio referred to above shall be adjusted from time to time as follows: (a) In the event that CFX: (i) pays a stock dividend in shares of CFX Common Stock; (ii) subdivides the outstanding shares of CFX Common Stock; (iii) combines the outstanding shares of CFX Common Stock into a smaller number of shares; or (iv) issues by reclassification of shares of CFX Common Stock, any shares of its capital stock; the conversion privilege and conversion ratio in effect immediately prior thereto shall be adjusted so that the holder of each share of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of CFX Common Stock or other property which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to the record date for such dividend or the effective date of such other event, as the case may be. (b) In the event that CFX: (i) consolidates with one or more other corporations; (ii) merges into another corporation; (iii) sells, conveys, leases, exchanges or transfers all or substantially all of the property or assets of CFX to another corporation; or (iv) reclassifies or changes the outstanding shares of Common Stock; the holder of each share of the Series A Preferred Stock then outstanding shall have the right to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock into which such share might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Dividend Reinvestment and Stock Purchase Plan CFX has a Dividend Reinvestment and Stock Purchase Plan under which holders of shares of CFX Common Stock may automatically reinvest their dividends. Stockholders who elect to make dividend reinvestments under the plan may make additional investments by making optional payments in any amount up to an aggregate of $5,000, but not less than $25, per dividend cycle. Participation in this plan is offered only by means of a separate prospectus available upon request from CFX. COMPARISON OF RIGHTS OF CFX AND ORANGE STOCKHOLDERS General CFX and Orange are incorporated under the laws of the State of New Hampshire and the Commonwealth of Massachusetts, respectively. Stockholders of Orange, whose rights as stockholders are currently governed by the Massachusetts banking law ("Massachusetts law"), Orange's Amended and Restated Charter, (the "Orange Charter"), and Orange's by-laws (the "Orange By-laws") will, upon consummation of the Merger, automatically become stockholders of CFX, and their rights will be governed by New Hampshire law, the CFX Articles and CFX By-laws. Although it is impractical to note all of the differences, the following is a summary of certain significant differences between the rights of holders of CFX Common Stock and those of Orange Common Stock. The following does not purport to be a complete description of the differences between the rights of CFX and Orange stockholders. Such differences may be determined in full by reference to New Hampshire law, Massachusetts law, the CFX Articles and the CFX By-laws, and the Orange Charter and the Orange By- laws. Approval of Merger or Consolidation; Anti-Takeover Provisions New Hampshire law requires that an agreement of merger or consolidation be approved by the vote of a majority of the outstanding shares of each class of stock of the corporation entitled to vote, unless the corporation's articles of organization provide for a greater vote. Pursuant to New Hampshire law, unless the corporate charter provides otherwise, no vote of the stockholders of a surviving corporation is required to approve a merger if: (a) the agreement of merger does not amend, in any respect, the corporation's charter; (b) each share of the corporation's stock outstanding immediately prior to the effective date of the merger is to be an identical outstanding or treasury share of the surviving corporation after the effective date of the merger; and (c) either no shares of common stock of the surviving corporation and no shares, securities or obligations convertible into such stock are issued in the merger or the number of authorized, but unissued shares or treasury stock of the surviving corporation's common stock to be issued in the merger plus the number of shares of common stock into which any other securities to be issued in the merger are initially convertible does not exceed 20% of the surviving corporation's common stock outstanding immediately prior to the effective date of the merger. Massachusetts law requires that an agreement of merger or consolidation be approved by the vote of two-thirds of the outstanding shares entitled to vote of each class of stock of each constituent corporation (except as set forth in the following paragraph), unless the corporation's articles of organization provide for a lesser vote, but not less than a majority of the shares outstanding and entitled to vote. Pursuant to Massachusetts law, unless required by a corporation's articles of organization, an agreement of merger need not be submitted to the stockholders of a corporation surviving the merger, but may be approved by vote of its directors if: (a) the agreement of merger does not change the name, the amount of shares authorized of any class of stock or other provisions of the articles of organization of such corporation; (b) the authorized unissued shares or shares held in the treasury of such corporation of any class of stock of such corporation to be issued or delivered pursuant to the agreement of merger do not exceed 15% of the shares of such corporation of the same class outstanding immediately prior to the effective date of the merger; and (c) the issue by vote of the directors of any unissued stock to be issued pursuant to the agreement of merger has been authorized in accordance with applicable law. The following discussion is a general summary of certain provisions of the CFX Articles and CFX By-laws which may be deemed to have "anti-takeover" effects, together with a description of comparable provisions of the Orange Charter and Orange By-laws. These and other provisions affect stockholders' rights and should be given careful attention. The following description of certain of these provisions is necessarily general and reference should be made in each case to the CFX Articles and CFX By-laws and the Orange Charter and Orange By-laws, respectively. For information on how to obtain a copy of these documents, see "AVAILABLE INFORMATION." Business Combinations Involving CFX. The CFX Articles require the approval by holders of at least 80% of the outstanding shares of CFX's voting stock for any merger, consolidation, sale of substantially all the assets or similar business combination, unless the consideration to be received by the stockholders of CFX is of the same value and form as the highest consideration paid by the acquiring entity in acquiring stock already owned by it (except to the extent a stockholder elects a different form of consideration in exchange for all or part of the shares which he or she owns). Assuming the foregoing fair price provisions are complied with, approval by holders of at least 75% of the outstanding shares of CFX's voting stock is required to approve a business combination unless the transaction is approved by at least two-thirds of the directors not affiliated with the acquiring entity. In the event such director approval is obtained, the business combination would require only the vote, if any, as required by New Hampshire law. New Hampshire law generally requires the favorable vote of a majority of the outstanding shares of stock to authorize a merger or sale of all or substantially all of the assets not in the regular course of business, unless the particular corporation's articles of incorporation provide for a greater vote. The CFX Articles allow the Board of Directors, in evaluating a business combination or a tender or exchange offer, to consider, in addition to the adequacy of the amount to be paid in connection with any such transaction, certain specified factors and any other factors the Board deems relevant. Among the factors the Board may consider are: the social and economic effects of the transaction on CFX, its employees, depositors, loan and other customers, creditors and other elements of the communities in which CFX operates or is located; the business and financial condition and earnings prospects of the acquiring party or parties; and the competence, experience, and integrity of the acquiring party or parties and its or their management. These provisions were included in the CFX Articles in an effort to maintain the financial and business integrity of CFX. Banks and bank holding companies occupy positions of special trust in the communities they serve. They also provide opportunities for abuse by those who are not of sufficient experience or competence or financial means to act professionally and responsibly with respect to management of a financial institution. It is intended that CFX be managed in the interest of the communities that it serves and that it and its subsidiaries maintain their integrity as institutions. CFX's Board of Directors believes that these increased vote and fair price provisions with respect to business combinations will help increase the likelihood that any such proposed transaction will be on terms fair to all of the stockholders of CFX, particularly if the transaction is proposed by a dominant stockholder who might be able to obtain approval by a simple majority primarily on the basis of its own holdings, even if the transaction were not in the best interests of or were opposed by a majority of the remaining stockholders. On the other hand, the increased vote requirement may in effect grant a minority of the stockholders a veto over a transaction favored by a majority of the stockholders, even if it were also favored by all or a majority of the Board of Directors of CFX. Additional CFX Anti-Takeover Provisions. It should be noted that the foregoing provisions are not the only provisions having an anti-takeover effect. For example, the CFX Articles also provide that Preferred Stock may be issued by the Board of Directors upon terms, including terms relating to voting rights, determined by the Board. In the event that a hostile acquisition of CFX were threatened, the Board of Directors could determine to issue voting Preferred Stock in an effort to thwart a takeover attempt. If voting Preferred Stock were issued for such a purpose, it could result in or impede a change in control of CFX, especially if the shares were issued in a private placement to a party or parties sympathetic to management and opposed to any attempt to gain control of CFX. The issuance of Preferred Stock with preferential voting rights could adversely affect the voting rights of the holders of CFX Common Stock. The CFX Articles provide that the number of directors of CFX shall not be less than nine nor more than 21. The power to determine the number of directors within these numerical limitations is vested in CFX's Board of Directors. Vacancies on CFX's Board of Directors resulting from any cause, including removal from office, but excluding vacancies resulting from an increase in the number of directors, are filled by a majority vote of the directors in office though less than a quorum, and directors so chosen serve for the remainder of the full term of the class in which the vacancy occurred rather than until the next annual meeting of the stockholders. Newly created directorships resulting from any increase in the authorized number of directors are to be filled by the Board of Directors for a term of office continuing only until the next election of directors by stockholders. The overall effect of such provisions may be to prevent a person or entity from immediately acquiring control of CFX through an increase in the number of CFX's directors and election of his or its nominees to fill the newly created vacancies. The CFX Articles also provide that any stockholder desiring to make a nomination for the election of directors at a meeting of stockholders must submit written notice to CFX no less than 30 nor more than 60 days in advance of the meeting. Management believes that it is in the best interest of CFX and its stockholders to provide sufficient time to enable management to disclose information about a dissident slate of nominees for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominees should management determine that doing so is in the best interest of stockholders generally. Generally, the vote of the holders of two-thirds of the outstanding shares of CFX's stock entitled to vote is required to amend the CFX Articles or CFX By-laws, provided the notice of such a meeting sets forth the text of any proposed amendments. In addition, the vote of 80% of all voting shares is required to amend the provisions in the CFX Articles dealing with business combinations. The cumulative effect of the provisions in the CFX Articles and the CFX By-laws described above could discourage an acquisition of CFX, or stock purchases looking toward an acquisition, and would, accordingly, under certain circumstances, discourage transactions which might otherwise have a favorable effect on the price of CFX Common Stock. In addition, these provisions might also make it possible for incumbent officers and directors to retain their position (at least until their terms expire) even though a majority of stockholders desires a change. Acquisitions of shares of CFX by a person or entity intending to acquire control may be subject to the Change in Bank Control Act or the Bank Holding Company Act, including the prior notice and approval requirements of those Acts. Business Combinations Involving Orange. The Orange Charter contains a so-called "fair price" provision pursuant to which a business combination (as defined therein) involving Orange and an Interested Shareholder (as defined below), or which would increase the proportionate share of the outstanding shares of any class or series of stock owned by any Interested Shareholder or Affiliate (as defined therein) thereof, would require the affirmative vote of the holders of at least two-thirds of the shares entitled to vote thereon. The fair price provision of Orange's Charter provides that only a majority vote is required if the business combination is approved by a majority of the Disinterested Directors (as defined below), or if certain conditions relating to minimum price and consideration for stock have been met. In the case of common stock, a two-thirds stockholder vote is not required if the consideration for the stock is at least equal to the higher of two items, one of which is the "fair market value" per share of common stock. In the case of stock other than common stock, a two-thirds stockholder vote is not required if the consideration for the stock is at least equal to the highest of three items, one of which is the fair market value per share of such class or services of stock. "Fair market value" is defined as the higher of the fair market value on the announcement date of the business combination or the fair market value on the date on which the Interested Shareholder became an Interested Shareholder. An "Interested Shareholder" is generally defined in Orange's Charter as the beneficial owner of more than 10% of the combined voting power of the then outstanding shares of voting stock. A "Disinterested Director" is generally defined as any member of the Board who is unaffiliated with and not a nominee of an Interested Shareholder and who was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder. The Orange Charter does not specify the stockholder vote required to approve a merger or similar transaction with a party other than an Interested Shareholder, such as the acquisition of Orange by CFX. Therefore, the two-thirds vote specified by Massachusetts law applies to this transaction. The Orange Charter permits its Board of Directors to consider a variety of factors in evaluating a tender offer, merger or acquisition, including, without limitation, the social and economic effects of a transaction on depositors, borrowers and employees of Orange, and on the communities in which Orange operates or serves. Massachusetts law permits the Board of Directors to consider these factors, at least to the extent that there are rationally related benefits accruing to stockholders. Charter and By-law Amendments To authorize an amendment to the CFX Articles, New Hampshire law generally requires the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon. New Hampshire law also provides for any class of stock to vote as a class on the proposed amendment if the amendment would change the number or par value of the aggregate authorized shares of a class, or alter or modify the powers, preferences or special rights of the shares of such class or affect such class adversely. New Hampshire law generally provides that the by-laws of a corporation may be amended by the vote of a majority of the board of directors. The board of directors' authority to adopt, amend or repeal the by-laws of a corporation does not divest or limit the power of stockholders to adopt, amend or repeal by-laws. Any amendment by the board of directors to the by-laws may be subsequently changed by the affirmative vote of holders of a majority of the shares entitled to vote thereon. New Hampshire law authorizes corporations to provide for increased vote requirements for charter and by-law amendments, and the CFX Articles provide that the vote of the holders of two-thirds of the outstanding shares of CFX's stock entitled to vote is required to amend the CFX Articles; the notice of a meeting to amend the CFX Articles must set forth the text of the proposed amendments. The CFX Articles further provide that any amendment, alteration, change or repeal of provisions in the CFX Articles relating to business combinations requires the affirmative vote of 80% or more of the outstanding shares of capital stock entitled to vote generally in the election of directors. The CFX By-laws may be amended by the affirmative vote of a majority of the entire CFX Board of Directors, subject to repeal, change or adoption of any contravening or inconsistent provision by vote of the holders of at least two-thirds of the shares entitled to vote on the merits at a meeting expressly called for that purpose. The Orange Charter provides that any amendment, addition, alteration, change or repeal of the Orange Charter must be proposed by Orange's Board and approved by the affirmative vote of a majority of the votes eligible to be cast at a legal meeting of the stockholders. Any amendment to the provisions in the Orange Charter relating to business combinations may be amended only by the vote of the holders of two-thirds of the shares entitled to vote thereon, unless the amendment is approved by a majority of the Disinterested Directors, in which case the provision may be amended by the holders of a majority of the shares entitled to vote thereon. The Orange Charter provides that the Orange By-laws may be adopted, amended, altered or repealed by the affirmative vote of at least two-thirds of (a) Orange's directors at a duly constituted meeting of the Board of Directors called expressly for such purpose; or (b) the total votes eligible to be cast by stockholders at a duly constituted meeting of stockholders called expressly for such purpose. Special Meetings; Corporate Action Without a Meeting Special Meetings. New Hampshire law and the CFX Articles permit a special meeting of stockholders to be called by the president, board of directors or by the holders of 10% or more of the shares entitled to vote at such meeting, or such other officers or persons specified in the charter or by-laws. For a further discussion of provisions relating to voting by stockholders in the CFX Articles, see "--Approval of Merger or Consolidation; Anti-takeover Provisions." The Orange By-laws provide that special meetings of the stockholders for any purpose or purposes may be called at any time only by the Chairman of the Board, the President or a majority of the Directors then in office (provided that if there is an Interested Shareholder, any such call by the Board of Directors also requires the affirmative vote of a majority of the Disinterested Directors then in office). The Orange Charter further provides that special meetings of stockholders relating to changes in control of Orange or amendments to the Orange Charter may be called only upon direction of a majority of the Board of Directors. Corporate Action Without a Meeting. New Hampshire law permits corporate action to be taken without a shareholder meeting if the articles of incorporation authorize such action and the shareholders consenting to such action would be entitled to cast, at a meeting at which all stockholders entitled to vote thereon were present, at least the minimum number of votes which would be required to take such action. Prompt notice of the taking of action without a meeting by less than unanimous written consent must be given to all stockholders who have not consented in writing. The Orange By-laws permit corporate action without a meeting of stockholders only if the written consent of the holders of all of the shares entitled to vote thereon is obtained. Dividends Under New Hampshire law, the board of directors has the power to declare and pay dividends in cash, property or securities of the corporation unless (a) such corporation is, or would be thereby made, insolvent or (b) the declaration and payment of such dividend would be contrary to any restrictions contained in the charter. New Hampshire law further provides that no distribution may be made (i) if the corporation is or would become unable to pay its debts as they become due in the usual course of business or (ii) unless the fair value of the net assets of the corporation remaining after the distribution is at least equal to the aggregate preferential amount payable to holders of stock with preferential rights in the event of involuntary liquidation. For regulatory restrictions on the payment of dividends, see "REGULATION." CFX is a legal entity separate and distinct from its subsidiaries. The only funds available to CFX for the payment of dividends are cash and cash equivalents held at the holding company level, dividends paid by CFX Bank and CFX's other subsidiaries, and borrowings. The ability of holders of debt and equity securities of CFX, including Orange stockholders who will become holders of CFX Common Stock upon consummation of the Merger, to benefit from the distribution of assets of a subsidiary upon the liquidation or reorganization of such subsidiary is subordinate to prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries) except to the extent that a claim of CFX as a creditor may be recognized. Under Massachusetts law, Massachusetts stock savings banks such as Orange generally may pay dividends only out of net profits without impairing their capital stock and statutory surplus accounts, and such dividend payments are subject to a number of additional statutory limitations. The Board of Directors of Orange may from time to time declare, and Orange may pay, dividends on outstanding shares of its capital stock. Preferred Stock The CFX Articles provide that the holders of the Series A Preferred Stock are entitled to vote together with the CFX Common Stock as one class on all matters submitted to a vote of CFX stockholders. For a description of the CFX Preferred Stock, See "DESCRIPTION OF CFX CAPITAL STOCK--Preferred Stock." The Orange Charter authorizes the Board of Directors to issue preferred stock in series and to fix the powers, designations, preferences and other rights of the shares of each such series and the qualifications, limitations, and restrictions of such shares. The issuance of such preferred stock would be subject to approval by the Massachusetts Commissioner of Banks. Liquidation Pursuant to both New Hampshire and Massachusetts law, upon the winding up, dissolution or liquidation of a corporation, the stockholders of such corporation are entitled to share in any of the assets distributable to the holders of the respective corporation's stock upon such liquidation, dissolution or winding up in accordance with their respective rights and interests. The CFX Articles provide that the holders of the Series A Preferred Stock are entitled to a preference, prior to any payment to the holders of CFX Common Stock upon the liquidation, dissolution or winding up of the corporation. See "DESCRIPTION OF CFX CAPITAL STOCK--Preferred Stock." Appraisal Rights Under New Hampshire law, appraisal rights are available only in connection with (a) a statutory merger or consolidation (unless the corporation is to be the surviving corporation and no vote of its stockholders is required to approve the merger); (b) acquisitions which require shareholder approval; and (c) sales or exchanges of all or substantially all of the property and assets of a corporation in a transaction requiring stockholder approval. In connection with the Merger, no stockholder vote by CFX stockholders is required, and CFX stockholders will not be entitled to appraisal rights. Under Massachusetts law, stockholder appraisal rights are available with respect to a corporation (i) which has voted to sell, lease or exchange all or substantially all of its property and assets, or (ii) which has adopted any amendment of its articles of organization which adversely affects the rights of such stockholder, or (iii) which has voted to consolidate or merge with another corporation. See "THE MERGER--Appraisal Rights of Dissenting Stockholders." Provisions Relating to Directors and Officers Number of Directors. Under New Hampshire law a corporation must have a board of directors consisting of at least one director. The CFX Articles provide that the Board of Directors shall consist of between 9 and 21 members, as determined from time to time by a vote of the Board of Directors. Pursuant to such an adopted resolution, the number of directors that may serve is currently fixed at 11. Massachusetts law and the Orange Charter and the Orange By-laws require a Board of Directors consisting of between seven and 25 persons, as may be fixed from time to time by the Board of Directors. The Board of Directors of Orange currently consists of 10 persons. Three-fourths of the directors of Orange must be citizens of the Commonwealth of Massachusetts and reside therein. Classification. New Hampshire law permits classification of the board of directors if the corporate charter so provides. The CFX Articles and the CFX By-laws provide for classification of the board into three classes as nearly equal in number as possible, with one class being elected annually. The directors in each class will serve for terms of three years. Each director serves until his or her successor is elected and qualified. The Orange By-laws contain similar board classification provisions. A classified Board of Directors could make it more difficult for stockholders, including those holding a majority of the outstanding shares, to force an immediate change in the composition of a majority of the Board of Directors, even when the reason for a proposed removal is poor performance. Since the terms of only one-third of the incumbent directors expire each year, it requires at least two annual elections for the stockholders to change a majority, whereas a majority of a non-classified board may be changed in one year. In the absence of the provisions of the Articles of Incorporation classifying the Board, all of the directors would be elected each year. Staggered terms guarantee that in the ordinary course approximately two- thirds of the directors, or more, at any one time have had at least one year's experience as directors of CFX, and moderate the pace of changes in the Board of Directors by extending the minimum time required to elect a majority of directors from one to two years. Cumulative Voting. New Hampshire law permits cumulative voting for the election of directors, if the corporate charter provides for cumulative voting. The CFX Articles do not permit cumulative voting in the election of directors. Accordingly, the holders of a majority of the outstanding shares entitled to vote for the election of directors can elect all of the directors then being elected at any annual meeting of CFX's stockholders. The Orange Charter also does not provide for cumulative voting. Class Voting. Under New Hampshire law, a corporation's charter may confer upon holders of any class or series of stock the right to elect one or more directors to serve for such term and to have such voting powers as may be specified therein. The terms of office and voting powers of directors elected in the manner so provided in the charter may be either greater or less than those of any other director or class of directors. Neither the CFX Articles nor the Orange Charter contains such provisions. Stockholder Nominations and Proposals. The holders of CFX Common Stock may nominate individuals for election to the Board of Directors of CFX. The procedure pursuant to which such nomination must occur is set forth in the CFX By-laws. See "--Approval of Merger or Consolidation; Anti-takeover Provisions." The Orange By-laws set forth certain advance notice and information requirements and time limitations on any director nomination by stockholders or any new business which a stockholder wishes to propose for consideration at an annual meeting of stockholders. Any such new business or nomination must be stated in writing and filed with the Clerk of Orange, together with additional information with respect to the supporters of the new business or the Director nominee, as the case may be, at least 60 (but not more than 150) days before the date of the meeting. The Board of Directors of Orange may reject any such nomination or new business proposal not timely made or supported by insufficient information, except that if at the time there is an Interested Shareholder, any determination by the Board of Directors shall also require the concurrence of a majority of the Disinterested Directors then in office. Removal. Under New Hampshire Law, any director or the entire Board of Directors of a corporation may be removed with or without cause, by the holders of a majority of the shares then entitled to elect directors, unless a greater vote is required by the articles of incorporation. For a discussion of provisions regarding the removal of directors in the CFX Articles, see "-- Approval of Merger or Consolidation; Anti-Takeover Provisions." Directors may be removed without cause only by a vote of 75% of the outstanding shares of CFX's voting stock or for cause by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote. "Cause" is defined to mean an adjudication by a court of competent jurisdiction that the director to be removed (i) is liable for negligence or misconduct in the performance of his duty, (ii) is guilty of a felony or (iii) has acted in a manner which is in derogation of the director's duties. This provision may, under certain circumstances, impede the removal of a director of CFX. The Orange By-laws provide that any Director may be removed from office, with or without cause, by an affirmative vote of not less than two-thirds of the total votes eligible to be cast by stockholders at a duly constituted meeting of stockholders called expressly for such purpose. Written notice must be sent to the Director whose removal will be considered at the meeting at least 30 days prior to such meeting of stockholders. Vacancies. For a discussion of provisions in the CFX Articles regarding vacancies of directors, see ("-- Approval of Merger or Consolidation; Anti-Takeover Provisions"). The Orange By-laws provide that any vacancy occurring on the Board of Directors (including a vacancy created by enlargement of the Board) may be filled by the affirmative vote of a majority of the Directors then in office unless at the time there is an Interested Shareholder, in which case a majority vote of the Disinterested Directors then in office is instead required. The person so appointed would serve only until the next election of Directors by the stockholders. Derivative Suits Under New Hampshire law, stockholders may bring suits on behalf of the corporation to enforce the rights of a corporation, only if such person was a stockholder at the time of the transaction which is the subject of the suit. Upon final judgment and a finding that the commencement of a derivative action by a stockholder was without reasonable cause or for an improper purpose, a court may require the plaintiff(s) to pay to the parties named as defendant(s) the reasonable expenses including legal fees incurred by them in defense of such action. Liability of Officers and Directors As permitted by New Hampshire law, the CFX Articles contain provisions for limiting the liability of officers and directors. These provisions provide that no person who serves the corporation as a director, an officer or both, shall have any personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as such director, officer, or both, except with respect to: (i) breaches of the duty or loyalty to the corporation; (ii) acts or omissions which are not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) unlawful distributions to shareholders; or (iv) transactions from which the involved directors or officers derive an improper personal benefit. Conflict of Interest Transactions New Hampshire law provides that contracts or other transactions between a corporation and one or more of its directors or officers or between a corporation and any other corporation or other entity with respect to which any of the corporation's directors or officers are directors, officers or financially interested persons, are permitted if: (a) the material facts as to the contract or transaction and the director's relationship or interest are disclosed to the board of directors or committee and the board of directors or committee authorizes the contract in good faith by the affirmative vote of a majority of disinterested directors (even though less than a quorum); (b) the material facts as to the contract or transaction and the director's relationship or interest are disclosed to the stockholders entitled to vote thereon and it is approved in good faith by vote of the stockholders, or (c) the contract or transaction is fair and reasonable as to the corporation as of the time it is approved by the board of directors, a committee, or the stockholders. Neither the CFX Articles nor the CFX By-Laws contain additional provisions governing transactions involving interested directors. State Anti-Takeover Statutes New Hampshire law does not contain provisions relating to business combinations with interested stockholders where the acquiring company or the target is a bank holding company. The Massachusetts anti-takeover statute would generally prohibit Orange from engaging in a broad range of transactions (defined as "business combinations") with a holder of 5% or more of its voting stock (defined as an "interested stockholder"). The statute provides that Orange may not engage in those transactions within three years after the date the stockholder became an "interested stockholder" unless (a) the Board of Directors approved the business combination or the transaction which resulted in the stockholder becoming an interested stockholder prior to that date, (b) upon consummation of the transaction, the stockholder owns at least 90% of the voting power of Orange, excluding shares owned by officers or employee directors and certain employee stock plans, or (c) on or after the date of the stockholder's investment, the business combination is approved by the Board of Directors and at least two-thirds of the stockholders voting at a meeting, excluding shares owned by the interested stockholder. COMPARATIVE STOCK PRICES AND DIVIDENDS The shares of CFX Common Stock are listed and traded on the American Stock Exchange. The shares of Orange Common Stock are quoted on the Nasdaq Small-Cap Market. The table below sets forth the high and low sales prices for CFX Common Stock and the bid and asked prices for Orange Common Stock as reported on the American Stock Exchange and the Nasdaq Small-Cap Market, respectively, and the cash dividends declared, for the periods indicated, as well as certain pro forma data per share of Orange Common Stock, assuming consummation of the Merger. The high and low sale prices and cash dividends declared of CFX Common Stock have been restated to give retroactive effect to the 5% stock dividends declared on December 12, 1994 and December 13, 1993.
Orange CFX Pro Forma CFX Orange Pro Forma Equivalent Quarter Ended High Low Dividends Bid Asked Dividends Dividends(1) Dividends(1) 1992 March 31, 1992 $11-5/8 $ 7-7/8 $.1361 $ 4-1/2 $ 6-1/2 $.04 $.1223 $.1125 June 30, 1992 11-1/4 8-1/8 .1361 4 6 .06 .1257 .1157 September 30, 1992 10-3/4 8-7/8 .1361 4-1/2 5-1/2 .04 .1222 .1125 December 31, 1992 12 8-3/4 .1361 5 6-1/2 .06 .1257 .1157 1993 March 31, 1993 14-1/8 11-3/4 .1361 5-1/2 7-1/2 .04 .1225 .1127 June 30, 1993 14-1/2 12-3/4 .1632 6 8 .04 .1457 .1340 September 30, 1993 16-1/4 14-1/8 .1632 6-3/4 8-1/2 .04 .1457 .1340 December 31, 1993 17-3/4 15-3/8 .1905 7-3/4 9-3/4 .08 .1753 .1613 1994 March 31, 1994 17-3/8 15-3/4 .20 7-1/2 9-1/2 .04 .1769 .1628 June 30, 1994 19-1/8 15-5/8 .20 7-3/4 9-3/4 .04 .1769 .1628 September 30, 1994 18-1/2 16-3/8 .2190 12-1/2 14 .04 .1932 .1778 CFX's pro forma cash dividends per share are determined by dividing the aggregate pro forma cash dividends declared by the total pro forma common shares of the combined entity assuming, for illustration purposes only, that the Average Closing Price is $16.30, the average closing price of the CFX Common Stock for the ten business days preceding January 6, 1995, with a resulting Exchange Ratio of .9202. Orange pro forma equivalent dividends per share represent CFX's pro forma cash dividends per share multiplied by the assumed Exchange Ratio of .9202. See "THE MERGER--Exchange Ratio and Other Matters".
On July 25, 1994, the business day immediately preceding the public announcement of the proposed Merger, the high and low sales prices for CFX Common Stock as reported by the American Stock Exchange were $18 and $173/8 per share, respectively, and the bid and asked prices for Orange Common Stock as quoted on the Nasdaq Small-Cap Market were $81/2 and $10 per share. On January 5, 1995, the high and low sales prices for CFX Common Stock as so reported were $161/4 and $17 per share, and the bid and asked prices for Orange Common Stock as so quoted were $121/2 and $133/4 per share. EXPERTS The consolidated financial statements of CFX as of December 31, 1993, and for the year then ended, included in this Proxy Statement-Prospectus have been audited by Wolf & Company, P.C., independent certified public accountants, and at December 31, 1992, and for each of the two years in the period ended December 31, 1992, by Ernst & Young LLP, independent auditors, as set forth in their respective reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. The consolidated financial statements of Orange for the three years ended December 31, 1993 included herein have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. KPMG Peat Marwick LLP served as independent auditors for Orange through the year ended December 31, 1993. The report of KPMG Peat Marwick LLP refers to a change in accounting for certain investments in debt and equity securities. LEGAL OPINIONS The legality of the shares of CFX Common Stock to be issued to the Orange stockholders pursuant to the Merger, certain tax consequences to CFX of the Merger, and certain other legal matters in connection with the Merger, will be passed upon by Devine, Millimet & Branch, Professional Association, Manchester, New Hampshire. Foley, Hoag & Eliot, Boston, Massachusetts, will render an opinion as to certain tax consequences of the Merger to the stockholders of Orange and as to certain other legal matters in connection with the Merger. INDEPENDENT AUDITORS Deloitte & Touche serves as independent auditors for Orange. A representative of Deloitte & Touche will be present at the Orange Special Meeting, will be given the opportunity to make a statement if he or she so desires, and will be available to respond to appropriate questions. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires Orange's officers and directors, and persons who own more than 10% of a registered class of Orange's equity securities, to file reports of ownership and changes in ownership with the FDIC. Officers, directors and greater-than-10% shareholders are required by FDIC regulations to furnish Orange with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to Orange, or written representations that no Forms F-8A were required, Orange believes that during 1994 all Section 16(a) filing requirements applicable to its officers, directors and greater-than-10% beneficial owners were complied with, except that the Form F-8 required to be filed by Paul A. Larocque to report the purchase of shares of Orange Common Stock on September 28, 1994 was not filed on a timely basis. INDEX TO FINANCIAL STATEMENTS CFX Corporation Page Independent Auditors' Reports 107 Consolidated Balance Sheets 109 Consolidated Statements of Income 110 Consolidated Statements of Shareholders' Equity 111 Consolidated Statements of Cash Flows 112 Notes to Consolidated Financial Statements 113 A. Significant Accounting Policies 113 B. Mergers and Acquisitions 120 C. Restrictions on Cash and Due from Bank Accounts 121 D. Trading Securities 121 E. Investment Securities 121 F. Mortgage Loans Held for Sale 124 G. Loans and Leases 124 H. Allowance for Loan and Lease Losses 125 I. Premises and Equipment 126 J. Foreclosed Real Estate 126 K. Deposits 127 L. Short-Term Borrowed Funds 128 M. Advances from Federal Home Loan Bank of Boston 128 N. Due to Broker 129 O. Preferred Stock 129 P. Income Taxes 130 Q. Pension and 401(k) Plans 134 R. Stock Option Plan 135 S. Employee Stock Purchase Plan 136 T. Restrictions on Subsidiary Dividends, Loans and Advances 136 U. Loans to Related Parties 136 V. Financial Instruments 137 W. Financial Instruments with Off-Balance-Sheet Risk 139 X. Segment Information 141 Y. Subsequent Events 142 Z. CFX Corporation (Parent-Company-Only) Condensed Financial Statements 143 AA. Quarterly Results of Operations (Unaudited) 145 Orange Savings Bank Independent Auditors' Report 147 Consolidated Balance Sheets 148 Consolidated Statements of Operations 149 Consolidated Statements of Shareholders' Equity 150 Consolidated Statements of Cash Flows 151 Notes to Consolidated Financial Statements 152 1. Summary of Significant Accounting Policies 152 2. Certificates of Deposit 156 3. Investment Securities 156 4. Loans 157 5. Land, Buildings and Equipment 159 6. Deposits 159 7. Borrowed Funds 160 8. Income Taxes 161 9. Employee Benefits 163 10. Commitments and Contingencies 165 11. Shareholders' Equity 165 12. Acquisition 166 13. Quarterly Results 166 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of CFX Corporation We have audited the accompanying consolidated balance sheet of CFX Corporation (formerly Cheshire Financial Corporation) and subsidiaries as of December 31, 1993, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CFX Corporation and subsidiaries at December 31, 1993, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company has elected to adopt Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective December 31, 1993. WOLF & COMPANY, P.C. Boston, Massachusetts January 20, 1994, except for Note Y as to which the date is December 12, 1994 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Cheshire Financial Corporation We have audited the accompanying consolidated balance sheet of Cheshire Financial Corporation and subsidiaries as of December 31, 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cheshire Financial Corporation and subsidiaries at December 31, 1992 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. ERNST & YOUNG Manchester, New Hampshire January 19, 1993 CFX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, (In thousands) 1994 1993 1992 (unaudited) Assets Cash and due from banks $ 16,727 $ 16,676 $ 22,432 Federal funds sold - - 1,550 Cash and Cash Equivalents 16,727 16,676 23,982 Interest bearing deposits with other banks 1,815 10,480 10,715 Federal Home Loan Bank of Boston stock 6,471 3,590 2,496 Trading securities 37,971 61,999 12,811 Securities available for sale 3,320 21,695 - Securities held to maturity 117,601 96,044 - Securities held for sale - - 43,513 Investment securities - - 54,126 Mortgage loans held for sale 15,478 24,156 - Loans and leases 520,675 465,043 477,484 Less allowance for loan and lease losses 6,935 7,357 7,909 Net Loans and Leases 513,740 457,686 469,575 Premises and equipment 13,499 11,398 9,188 Mortgage servicing rights 4,336 4,557 - Goodwill and deposit base intangibles 10,570 11,121 9,781 Foreclosed real estate 2,179 3,353 11,929 Other assets 15,324 12,366 13,033 $759,031 $735,121 $661,149 Liabilities and Shareholders' Equity Deposits: Interest bearing $504,294 $518,991 $544,210 Noninterest bearing 38,036 32,214 31,307 Total Deposits 542,330 551,205 575,517 Short-term borrowed funds 24,084 20,882 6,107 Advances from Federal Home Loan Bank of Boston 88,937 46,801 - Due to broker 20,047 33,254 1,024 Other liabilities 6,596 7,195 5,193 Total Liabilities 681,994 659,337 587,841 Shareholders' Equity Preferred stock, 7.5% Series A Cumulative Convertible, par value $1.00 per share--issued and outstanding 193,053 shares in 1994 (unaudited), 194,074 shares in 1993 and 194,482 shares in 1992 193 194 194 Common stock, par value $1.00 per share--authorized 15,000,000 shares, issued 4,257,157 shares in 1994 (unaudited), 4,236,876 shares in 1993 and 4,035,623 shares in 1992 4,257 4,237 4,036 Paid-in capital 59,865 59,612 56,328 Retained earnings 20,425 19,140 20,025 Net unrealized losses on marketable equity securities, after tax effects - - (77) Net unrealized losses on securities available for sale, after tax effects (505) (201) - Cost of 577,265 shares of common stock in treasury (7,198) (7,198) (7,198) Total Shareholders' Equity 77,037 75,784 73,308 $759,031 $735,121 $661,149
See notes to consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Years Ended September 30, December 31, (In thousands, except per share data) 1994 1993 1993 1992 1991 (Unaudited) Interest and dividend income: Interest on loans $29,183 $29,753 $39,496 $43,989 $51,123 Interest on investment securities: Taxable 4,171 3,966 5,261 6,914 5,149 Tax-exempt 536 185 290 304 568 4,707 4,151 5,551 7,218 5,717 Interest and dividends on trading securities 1,722 133 468 133 - Dividends on marketable equity securities 133 16 - 168 264 Other 450 493 627 903 1,459 Total Interest and Dividend Income 36,195 34,546 46,142 52,411 58,563 Interest expense: Interest on deposits 12,320 14,594 18,965 25,976 33,676 Interest on borrowings: Short-term 3,252 234 711 283 - Long-term 8 7 9 830 1,985 Total Interest Expense 15,580 14,835 19,685 27,089 35,661 Net Interest and Dividend Income 20,615 19,711 26,457 25,322 22,902 Provision for loan and lease losses 50 2,970 2,970 2,911 3,830 Net Interest and Dividend Income After Provision for Loan and Lease Losses 20,565 16,741 23,487 22,411 19,072 Other income: Service charges on deposit accounts 1,097 1,074 1,433 1,388 1,222 Loan servicing fees 1,263 118 323 - - Net gains (losses) on trading securities (381) 342 316 (8) (93) Net gains on investment securities 85 1,733 2,624 238 3 Net gains on sales of loans 440 108 371 - - Other 1,358 739 1,200 1,546 556 3,862 4,114 6,267 3,164 1,688 Other expense: Salaries and employee benefits 9,092 7,076 10,084 8,662 7,868 Occupancy expense 1,286 1,019 1,393 1,216 1,130 Equipment expense 1,290 1,029 1,439 1,421 1,360 Operation of foreclosed real estate 111 1,497 3,011 2,328 3,274 FDIC deposit insurance 920 1,008 1,341 1,296 1,090 Goodwill and deposit base intangible amortization 550 500 684 692 630 Other 5,005 3,716 5,540 4,162 4,570 18,254 15,845 23,492 19,777 19,922 Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 6,173 5,010 6,262 5,798 838 Income taxes 2,298 1,078 1,240 2,000 280 Net Income before Cumulative Effect of a Change in Accounting Principle 3,875 3,932 5,022 3,798 558 Cumulative effect on years prior to 1991 of a change in accounting for income taxes - - - - 1,603 Net Income 3,875 3,932 5,022 3,798 2,161 Preferred stock dividends 201 202 270 270 270 Net Income Available to Common Stock $ 3,674 $ 3,730 $ 4,752 $ 3,528 $ 1,891 Weighted average common shares outstanding 3,856 3,821 3,826 3,805 3,795 Common per share amounts: Income before cumulative effect of a change in accounting principle (net of preferred dividends) $.95 $.97 $1.24 $.92 $.08 Cumulative effect on years prior to 1991 of a change in accounting for income taxes - - - - .42 Earnings per common share $.95 $.97 $1.24 $.92 $.50
See notes to consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Net Net Unrealized Unrealized Losses on Losses on Marketable Securities Preferred Common Paid-in Retained Equity Available Treasury (In thousands, except per share data) Stock Stock Capital Earnings Securities for Sale Stock Total Balance at December 31, 1990 $195 $4,017 $56,219 $19,085 $(849) $ - $(7,198) $71,469 Net income - - - 2,161 - - - 2,161 Common cash dividends declared- $.67 per share - - - (2,409) - - - (2,409) Preferred cash dividends declared- $1.3875 per share - - - (270) - - - (270) Issuance of common stock under employee stock purchase plan - 8 48 - - - - 56 Decrease in net unrealized losses on marketable equity securities - - - - 475 - - 475 Preferred stock converted to common stock (1) 1 - - - - - - Balance at December 31, 1991 194 4,026 56,267 18,567 (374) - (7,198) 71,482 Net income - - - 3,798 - - - 3,798 Common cash dividends declared- $.57 per share - - - (2,070) - - - (2,070) Preferred cash dividends declared- $1.3875 per share - - - (270) - - - (270) Issuance of common stock under employee stock purchase plan - 10 61 - - - - 71 Decrease in net unrealized losses on marketable equity securities - - - - 297 - - 297 Balance at December 31, 1992 194 4,036 56,328 20,025 (77) - (7,198) 73,308 Net income - - - 5,022 - - - 5,022 Common cash dividends declared- $.69 per share - - - (2,500) - - - (2,500) Preferred cash dividends declared- $1.3875 per share - - - (270) - - - (270) Issuance of common stock under stock option plan - 20 251 - - - - 271 Issuance of common stock under employee stock purchase plan - 7 81 - - - - 88 5% common stock dividend - 174 2,952 (3,137) - - - (11) Decrease in net unrealized losses on marketable equity securities - - - - 63 - - 63 Change in method of accounting for investment securities - - - - 14 (201) - (187) Balance at December 31, 1993 194 4,237 59,612 19,140 - (201) (7,198) 75,784 Net income (unaudited) - - - 3,875 - - - 3,875 Common cash dividends declared- $.65 per share (unaudited) - - - (2,389) - - - (2,389) Preferred cash dividends declared- $1.040625 per share (unaudited) - - - (201) - - - (201) Issuance of common stock under stock option plan (unaudited) - 12 151 - - - - 163 Issuance of common stock under employee stock purchase plan (unaudited) - 7 102 - - - - 109 Increase in net unrealized losses on securities available for sale (unaudited) - - - - - (304) - (304) Preferred stock converted to common stock (unaudited) (1) 1 - - - - - - Balance at September 30, 1994 (unaudited) $193 $4,257 $59,865 $20,425 $ - $(505) $(7,198) $77,037
See notes to consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 1991 (unaudited) Operating Activities Net income $ 3,875 $ 3,932 $ 5,022 $ 3,798 $ 2,161 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,106 1,474 2,306 1,872 1,743 Provision for loan and lease losses 50 2,970 2,970 2,911 3,830 Provision for foreclosed real estate losses 192 920 673 307 - Write-down of foreclosed real estate - - - 914 2,310 Loans originated and acquired for sale (105,882) (17,244) (76,804) - - Principal balance of loans sold 114,120 12,024 64,708 - - Net loss on sale of portfolio loans - - 199 - - Net loss (gain) on sale of foreclosed real estate and in-substance foreclosures (220) (203) 1,338 (348) (41) Deferred income tax (benefit) 19 (542) (322) (401) (989) Net decrease (increase) in trading securities 13,049 (3,049) (28,861) (12,554) 843 Net gains on investment securities (85) (1,733) (2,624) (238) (3) Loss on disposal of equipment - - - - 158 Gain on sale of bank premises - - - (371) - Gain deferred on sale/leaseback of bank premises - - - 79 - Other (2,255) (5,441) 1,079 (2,120) (153) Net Cash Provided (Used) by Operating Activities 24,969 (6,892) (30,316) (6,151) 9,859 Investing Activities Purchase of certain assets and liabilities of The Family Bank & Trust, including cash and cash equivalents acquired - - - - 31,493 Purchase of Colonial Mortgage, Inc., net of cash and cash equivalents acquired - (4,831) (4,831) - - Proceeds from sale and maturities of securities available for sale 22,478 - - - - Purchases of securities available for sale (23,276) - - - - Proceeds from maturities of securities held to maturity 15,861 - - - - Purchases of securities held to maturity (22,172) - - - - Purchases of investment securities - (65,392) (134,636) (73,874) (118,563) Proceeds from the sale of investment securities - 3,610 17,064 66,181 65,773 Proceeds from the maturity of investment securities - 10,991 26,571 26,006 - Proceeds from the sale and maturity of securities held for sale - 44,041 84,528 - - Proceeds from the sale of, or payments on, foreclosed real estate 801 1,734 7,282 1,630 806 Proceeds from the sale of portfolio loans - - 27,228 - - Purchase of Federal Home Loan Bank of Boston stock (2,881) - (1,106) - - Proceeds from the sale of Federal Home Loan Bank of Boston stock - - 12 - 53 Net decrease (increase) in interest bearing deposits with other banks 8,664 8,056 235 1,973 (118) Net decrease (increase) in loans and leases (55,434) 708 (27,883) (1,377) 4,650 Proceeds from the sale of premises and equipment - - - 593 - Purchases of premises and equipment (3,207) (2,655) (3,171) (1,346) (2,088) Net Cash Provided (Used) by Investing Activities (59,166) (3,738) (8,707) 19,786 (17,994) Financing Activities Net increase (decrease) in noninterest bearing deposits and savings accounts 3,771 (1,137) 1,192 77,018 51,346 Net decrease in time certificates of deposit (12,646) (19,660) (25,504) (65,439) (40,713) Net increase in short-term borrowings 3,202 16,975 11,426 5,756 350 Net increase in short-term advances from the Federal Home Loan Bank of Boston 42,136 2,305 46,600 - - Proceeds of long-term advances from the Federal Home Loan Bank of Boston - 201 201 - - Repayment of long-term advances from the Federal Home Loan Bank of Boston - - - (19,000) (7,000) Common cash dividends paid (2,286) (1,662) (2,287) (2,069) (2,757) Preferred cash dividends paid (201) (202) (270) (274) (261) Proceeds from the issuance of common stock under employee stock purchase plan 109 66 88 71 56 Proceeds from the issuance of common stock under stock option plan 163 100 271 - - Net Cash Provided (Used) by Financing Activities 34,248 (3,014) 31,717 (3,937) 1,021 Increase (Decrease) in Cash and Cash Equivalents 51 (13,644) (7,306) 9,698 (7,114) Cash and cash equivalents at beginning of period 16,676 23,982 23,982 14,284 21,398 Cash and Cash Equivalents at End of Period $ 16,727 $ 10,338 $ 16,676 $ 23,982 $ 14,284 Supplementary information Interest paid on deposit accounts $ 12,380 $ 14,756 $ 19,092 $ 26,368 $ 33,533 Interest paid on borrowed funds 3,142 219 609 1,223 2,075 Income taxes paid 1,190 2,285 2,527 1,905 2,108 Transfers from loans to foreclosed real estate 814 2,600 3,887 6,066 8,339 Net increase (decrease) in due to broker (13,207) 472 32,230 1,024 - Net decrease (increase) in due from broker (699) 1,918 - - -
See notes to consolidated financial statements. CFX CORPORATION AND SUBSIDARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A--Significant Accounting Policies The principal accounting policies of CFX Corporation (CFX) and its wholly-owned subsidiaries, which provide banking services primarily in New Hampshire, are as follows: Principles of Presentation and Consolidation The consolidated financial statements include the accounts of CFX Corporation and its wholly-owned subsidiary, CFX Bank and CFX Bank's wholly- owned subsidiaries, CFX Capital Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX Financial). Also included are the accounts of CFX Capital's wholly-owned subsidiary, CFX Mortgage, Inc., which engages in mortgage banking, and CFX Financial's 51% ownership of CFX Funding L.L.C., which engages in the facilitation of lease financing and securitization. Upon consolidation, all significant intercompany accounts and transactions are eliminated. (See Note B--Mergers and Acquisitions.) The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the period. Actual results could differ significantly from these estimates. Interim Financial Information The accompanying consolidated financial statements at September 30, 1994 and for the nine months ended September 30, 1994 and 1993 are unaudited and, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, which are necessary to fairly present the financial position of CFX and Subsidiaries as of September 30, 1994 and the results of operations, changes in stockholders' equity and changes in cash flows for the periods ended September 30, 1994 and 1993. The results of operations for the interim period ended September 30, 1994 are not necessarily indicative of the results for the entire year. Cash Flow Information Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Accounting Policy Changes Investment Securities: Effective December 31, 1993, CFX adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." (See Note E--Investment Securities.) The Statement establishes standards for all debt securities and for equity securities that have readily determinable fair values. As required under SFAS No. 115, prior year financial statements have not been restated. SFAS No. 115 requires that investments in debt securities, that management has the positive intent and ability to hold to maturity, be classified as "held to maturity" and reflected at amortized cost. Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and reflected on the balance sheet at fair value, with unrealized gains and losses included in earnings. Investments not classified as either of the above are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of share-holders' equity. The cumulative effect of the change in accounting principle at December 31, 1993 was to decrease shareholders' equity by $187,000 net of related income tax effects. There was no effect on net income for the year ended December 31, 1993 relating to the adoption of SFAS No. 115. Prior to December 31, 1993, debt securities that management had the intent and ability to hold until maturity were reflected at amortized cost. Marketable equity securities and securities held for sale were stated at the lower of aggregate cost or fair value. Net unrealized losses applicable to marketable equity securities were reflected as a charge to shareholders' equity, net of tax effects, while write-downs applicable to securities held for sale were reflected in earnings. For all periods presented, purchase premiums and discounts are amortized to earnings by a method which approximates the interest method over the terms of the investments. Declines in the value of investments that are deemed to be other than temporary are reflected in earnings when identified. Gains and losses on disposition of investments are computed by the specific identification method. Income Taxes: Effective January 1, 1991, CFX changed its method of accounting for income taxes from the deferred to the liability method required by SFAS No. 109, "Accounting for Income Taxes." (See Note P--Income Taxes.) SFAS No. 109 establishes financial accounting and reporting standards for the effects of income taxes that result from CFX's activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting for income taxes. This Statement superseded SFAS No. 96, "Accounting for Income Taxes," and amended or superseded several other accounting pronouncements. The cumulative effect of the change in accounting principle on years prior to 1991 was to increase 1991 net income available to common stock by $1,603,000, or $.42 per share. The effect of this accounting change on 1991 was to increase income before the cumulative effect of the change in accounting principle by $508,000, or $.13 per share of common stock. In addition, a $144,000 deferred tax benefit was established for net unrealized losses on marketable equity securities (included in the shareholders' equity section of the consolidated balance sheet) as of January 1, 1991. The Statement also requires that deferred taxes be recorded for the tax effects of differences between assigned values and the tax basis of assets acquired and liabilities assumed in a business acquisition. Previously, acquired assets and liabilities were recorded net of such tax effects. The new method of accounting increased the values assigned to net tangible assets and intangible assets in prior year acquisitions by $538,000 with a corresponding increase in deferred income taxes payable. For regulatory capital purposes, the recognition of deferred tax assets, when realization of such is dependent on an institution's future taxable income, is limited to the amount that can be realized within one year or 10% of core capital, whichever is less. Reclassifications and Restatements Certain amounts have been reclassified in the 1992 and 1991 consolidated financial statements to conform to the 1993 presentation. Prior period common share and per share data have been restated to reflect CFX's 5% common stock dividend declared on December 13, 1993. See Note Y for a description of CFX's stock dividend declaration subsequent to 1993. Trading Securities Trading securities consist of marketable equity securities and debt securities which CFX intends to trade in the future.Trading positions are taken to benefit from short-term movements in market prices.Trading securities are stated at fair value. Prior to the adoption of SFAS No. 115, marketable equity securities held for trading were stated at the lower of aggregate cost or fair value. Changes in fair value are reflected in trading gains and losses within the consolidated statements of income. Gains and losses on trading securities sold are computed by the specific identification method. Financial Instruments Interest Rate Exchange Agreements: Interest rate exchange agreements (swaps) designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities are accounted for on the same basis as the underlying asset or liability. Accordingly, interest rate swaps designated as hedges against floating rate loan portfolios (carried at historical cost) are reflected at cost. Interest rate swaps which hedge CFX's trading securities portfolio (carried at fair value) are marked to fair value through the consolidated statement of income. Financial Futures Contracts: Interest rate futures contracts are entered into by CFX as hedges against interest rate risk in its trading securities portfolio. These instruments are marked to fair value with changes in value recorded through the consolidated statement of income. Financial Option Contracts: Option premiums paid or received, designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities, are accounted for on the same basis as the underlying asset or liability. Accordingly, option contracts designated as hedges against mortgage loans held for sale are carried at the lower of cost or estimated fair value in the aggregate. Option contracts which hedge CFX's trading securities portfolio (carried at fair value) are marked to fair value through the consolidated statement of income. Mortgage Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to the consolidated statement of income. Loans and Leases Interest on loans and leases (loans) is accrued and credited to income based upon the principal amount outstanding. When management determines that significant doubt exists as to the collectibility of principal or interest on a loan, the loan is placed on nonaccrual status. In addition, loans past due 90 days or more as to principal or interest are placed on nonaccrual status except those loans which, in management's judgment, are fully secured and in the process of collection (through legal action or, in appropriate circumstances, through collection efforts reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future). In the third quarter of 1993, management changed its policy regarding nonaccrual loans, such that all loans past due 90 days or more as to principal and interest are placed on nonaccrual status. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized only when received. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. Loans considered to be uncollectible are charged against the allowance for loan and lease losses. The allowance is increased by charges to current income in amounts sufficient to maintain the adequacy of the allowance. The adequacy is determined by management's evaluation of the extent of existing risk in the loan portfolio and prevailing economic conditions. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan's yield using the interest method. CFX is generally amortizing these amounts over the contractual life of the related loans. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to income as incurred and the costs of major additions and improvements are capitalized. The provision for depreciation and amortization is computed on the straight-line method based on the estimated useful lives of assets or the terms of the leases, if shorter. Mortgage Servicing Rights The cost of mortgage servicing rights acquired is amortized in proportion to, and over the period of, estimated net servicing revenues. When participating interests in loans sold have an average contractual interest rate, adjusted for normal servicing fees, that differs from the agreed yield to the purchaser, gains or losses are recognized equal to the present value of such differential over the estimated remaining life of such loans. The resulting "excess servicing fees receivable" is amortized over the estimated life using a method approximating the level-yield method. The cost of loan servicing rights purchased, the excess servicing fees receivable, and the amortization thereon, is periodically evaluated in relation to estimated future net servicing revenues. CFX evaluates the carrying value of the servicing portfolio by estimating the future net servicing income of the portfolio based on management's best estimate of remaining loan lives. Intangible Assets Deposit base intangibles, which represent the value attributable to the capacity of deposit accounts of purchased bank subsidiaries to generate future income, are included in other assets and are being amortized on a straight- line basis over a period of five years. The excess of the cost of purchased subsidiaries over the fair value of tangible and intangible net assets acquired has been allocated to goodwill and is being amortized on a straight- line basis over 25 years for bank subsidiaries and 15 years for the mortgage banking subsidiary. (See Note B--Mergers and Acquisitions.) The accumulated amortizations of deposit base intangibles and goodwill were $1,392,000 and $2,427,000, respectively, as of September 30, 1994 (unaudited) and $957,000 and $2,312,000, respectively, as of December 31, 1993. Foreclosed Real Estate Foreclosed real estate consists of properties that CFX has formally received title for partial or total satisfaction of loans. In-substance foreclosures consist of properties that CFX has substantively repossessed collateral for partial or total satisfaction of loans. CFX takes this action when there is an indication that a borrower has little or no equity in the collateral, repayment of the loan can only come from the operation or sale of the collateral, and it is doubtful that the equity will be rebuilt in the forseeable future. Loan losses arising from the write-down of properties to fair value at the time CFX formally receives title or substantively repossesses the collateral are charged against the allowance for loan and lease losses. On April 28, 1992, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 92-3, "Accounting for Foreclosed Assets." This SOP required application in annual financial statements for periods ending on or after December 15, 1992, with earlier application permitted. CFX adopted this SOP effective October 1, 1992. SOP No. 92-3 requires that after foreclosure, foreclosed assets held for sale, on an individual asset basis, be carried at the lower of (a) fair value minus the cost to sell, or (b) cost. In addition, after in-substance foreclosure, an in-substance foreclosed asset should be accounted for in a manner similar to foreclosed assets held for sale. If the fair value of the asset minus the estimated costs to sell the asset is less than the cost of the asset, the deficiency is recognized as a valuation allowance. Increases or decreases in the valuation allowance are charged or credited to income. Prior to October 1, 1993, any subsequent write- downs of the carrying value to fair value were charged to current period income. Operating expenses and gains and losses upon disposition are reflected in current income. Pension and 401-K Plans CFX and its subsidiaries have a defined benefit pension plan which covers substantially all full-time employees. The benefits are based on years of service and the employee's compensation during the years immediately preceding retirement. CFX's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. CFX maintains a Section 401(k) savings plan for employees of CFX and its subsidiaries. Under the plan, CFX makes a matching contribution of one-third of the amount contributed by each participating employee, up to 6% of the employee's yearly salary. CFX's contributions are paid out of current or retained earnings. The plan also allows for supplementary profit sharing contributions by CFX, at its discretion, for the benefit of participating employees. Income Taxes CFX and its subsidiaries file a consolidated income tax return. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Parent-Company-Only Condensed Financial Statements In the parent-company-only condensed financial statements, CFX's investment in consolidated subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries. Earnings Per Share Earnings per share are based on the weighted average number of common shares outstanding during the period. The dilutive effect of common stock equivalents attributable to outstanding stock options is not material. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates would not be realized in immediate settlement of the instruments. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of CFX. The following methods and assumptions were used by CFX in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values. Interest Bearing Deposits with Other Banks: The carrying values of interest bearing deposits with other banks approximate fair values. Federal Home Loan Bank of Boston stock: The carrying value of Federal Home Loan Bank of Boston stock approximates fair value. Trading Securities: Fair values for trading portfolio securities (including off-balance-sheet instruments), which also are the amounts recognized in the consolidated balance sheet, are based on quoted market prices. Investment Securities: Fair values of investment securities are based on quoted market prices, when available. Loans and Leases (Loans): Fair values of variable-rate loans that reprice frequently and have no significant change in credit risk, are based on carrying values. Fair values for mortgage loans held for sale are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans are estimated using discounted cash flow analyses which use interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Deposit Liabilities: Fair values disclosed for demand deposits (non- interest bearing deposits, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-Term Borrowings: The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Long-Term Borrowings: Fair values of CFX's long-term borrowings are estimated using discounted cash flow analyses based on CFX's current incremental borrowing rates for similar types of borrowing arrangements. Accrued Interest: The carrying amount of accrued interest approximates fair value. Off-Balance-Sheet Instruments: Fair values for futures, options and swaps are based on quoted market prices. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Recent Accounting Pronouncements In May, 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires a change in accounting method for most financial institutions, commencing with fiscal years beginning after December 15, 1994, with early adoption permissible. SFAS No. 114 is applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (i.e.. residential mortgage, credit card and consumer installment loans), loans that are measured at fair value or at the lower of cost or fair value (i.e., loans in a trading or held for sale portfolio), leases, and convertible or nonconvertible debentures and bond and other debt securities. Management does not expect that adopting the provisions of SFAS No. 114 will have a material impact on CFX's financial statements. Note B--Mergers and Acquisitions During 1993, CFX merged together its three banking subsidiaries, Cheshire County Savings Bank, The Monadnock Bank, and The Valley Bank. The resulting consolidated bank, Cheshire County Savings Bank, changed its name to CFX Bank on November 15, 1993. On September 1, 1993, CFX, through its bank subsidiary, Cheshire County Savings Bank, purchased the remaining 52.4% of Colonial Mortgage, Inc. (Colonial), a mortgage banking company headquartered in Amherst, New Hampshire, for $5,187,000, including $80,000 in acquisition costs. CFX previously owned 47.6% and as a result of the purchase Colonial became a wholly-owned subsidiary. The transaction was accounted for by the purchase method of accounting, and, accordingly, the results of operations of Colonial from September 1, 1993 to December 31, 1993 have been included in CFX's consolidated statement of income. Prior to the acquisition on September 1, 1993, 47.6% of the results of operations of Colonial was included in CFX's consolidated statements of income through the equity method of accounting. Accordingly, at December 31, 1992, other assets included CFX Bank's equity interest in Colonial of $847,000. In connection with the acquisition, the excess ($2,023,000) of the purchase price over 52.4% of the fair value of the net assets acquired has been allocated to goodwill and is being amortized over 15 years on a straight-line basis. The fair value of the assets (including goodwill) and liabilities acquired amounted to $11,151,000 and $5,964,000, respectively. On November 15, 1993, Colonial was renamed CFX Mortgage, Inc. On September 7, 1991, CFX, through its bank subsidiary, The Valley Bank (Valley), acquired certain assets and assumed all deposits of The Family Bank and Trust (Family), a state-chartered trust company headquartered in Allenstown, New Hampshire. Family was declared insolvent by the New Hampshire Bank Commissioner and placed into Federal Deposit Insurance Corporation (FDIC) receivership on September 6, 1991. Valley's acquisition included a $250,000 deposit base intangible for the $44,412,000 in deposits, and a $95,000 discount and a $167,000 allowance for loan and lease losses for the $6,302,000 in loans purchased. In addition, Valley received $38,000,000 in cash and investments from the FDIC, representing the excess of deposits assumed over the loans acquired. The following summarized pro forma information (unaudited) presents the results of CFX's operations assuming the purchase of Colonial Mortgage, Inc. occurred on January 1, 1991:
Years Ended December 31, (In thousands, except per share data) 1993 1992 1991 (unaudited) Total income $55,208 $59,640 $62,279 Net income 4,962 3,725 1,584 Preferred dividend 270 270 270 Net income available to common stock 4,692 3,455 1,314 Net income per common share 1.23 .90 .34
The above pro forma information does not purport to be indicative of the results that actually would have been obtained if the operations were combined at January 1, 1991, and is not intended to be a projection of future results or trends. Note C--Restrictions on Cash and Due From Bank Accounts The Federal Reserve Bank requires CFX Bank to maintain average reserve balances. The average amount of these reserve balances for the nine months ended September 30, 1994 (unaudited) and the year ended December 31, 1993 was approximately $12,550,000 and $10,942,000, respectively. Note D--Trading Securities The following table reflects the fair value of trading securities:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) U.S. Government and federal agency obligations $ 115 $ 115 $ 2,992 Federal agency mortgage pass-through securities 21,669 61,097 1,962 Hedge instruments 208 669 - Money market funds 273 118 - Marketable equity securities 15,706 - 7,857 $37,971 $61,999 $12,811
During the nine months ended September 30, 1994 and 1993 (unaudited) and the year ended December 31, 1993, the change in net unrealized holding gain or loss on trading securities included in the consolidated statement of income amounted to a loss of $341,000, a gain of $259,000, and a gain of $126,000, respectively. Hedge instruments included above, along with certain off-balance-sheet commitments, are designed to minimize potential fair value fluctuations in the trading portfolio primarily derived from mortgage-backed securities. CFX's current intent is to maintain an effective duration of six months or less in its trading securities portfolio. Note E--Investment Securities Investment securities consist of the following at September 30, 1994 and December 31, 1993 and 1992, and reflect the change in accounting principle as disclosed in Note A--Significant Accounting Policies:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Securities available for sale, at fair value $ 3,320 $ 21,695 $ - Securities held to maturity, at amortized cost 117,601 96,044 - Securities held for sale, at lower of cost or fair value - - 43,513 Securities held for investment (debt securities at amortized cost; marketable equity securities at lower of cost or fair value) - - 54,126 $120,921 $117,739 $97,639
The amortized cost and estimated fair value of investment securities at September 30, 1994, with gross unrealized gains and losses, follows:
(In thousands) September 30, 1994 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Unaudited) Securities Available for Sale: U.S. Government money market fund $ 19 $ - $ - $ 19 Other marketable equity securities 3,369 - 68 3,301 Total securities available for sale $ 3,388 $ - $ 68 $ 3,320 Securities Held to Maturity: Debt securities: State and municipal $ 30,791 $ - $ 532 $ 30,259 Corporate 5,955 - 48 5,907 Asset-backed 277 - 1 276 Federal agency mortgage pass-through securities 81,343 - 5,084 76,259 Total securities held to maturity 118,366 $ - $5,665 $112,701 Unamortized net unrealized loss on securities transferred from available for sale (765) Total securities held to maturity $117,601
At September 30, 1994 (unaudited), CFX has pledged debt securities with an amortized cost of $47,094,000, and a fair value of $43,340,000 as collateral to secure public funds, repurchase agreements (See Note L--Short- Term Borrowed Funds) and for other purposes. The amortized cost and estimated fair value of investment securities at December 31, 1993, with gross unrealized gains and losses, follows:
December 31, 1993 Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value Securities Available for Sale: Collateralized mortgage obligations (CMO's) $18,082 $ 4 $314 $17,772 U.S. Government money market fund 675 - - 675 Other marketable equity securities 3,272 - 24 3,248 Total securities available for sale $22,029 $ 4 $338 $21,695 Securities Held to Maturity: Debt securities: State and municipal $10,591 $ 77 $ 52 $10,616 Corporate 7,992 242 8 8,226 Asset-backed 620 2 - 622 Federal agency mortgage pass-through securities 76,841 79 249 76,671 Total securities held to maturity $96,044 $400 $309 $96,135
At December 31, 1993, CFX has pledged debt securities with an amortized cost of $24,471,000, and a fair value of $24,350,000 as collateral to secure public funds, repurchase agreements (See Note L--Short-Term Borrowed Funds) and for other purposes. The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 1994 and December 31, 1993 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 1994 December 31, 1993 Held to Maturity Available for Sale Held to Maturity Amortized Amortized Amortized (In thousands) Cost Fair Value Cost Fair Value Cost Fair Value (Unaudited) Within one year $ 17,722 $ 17,712 $ - $ - $ 290 $ 290 After one year through five years 19,228 18,657 - - 11,906 12,113 After five years through ten years 73 73 - - 6,931 6,985 After ten years through twenty years - - - - 76 76 37,023 36,442 - - 19,203 19,464 Pass-through securities and CMO's 81,343 76,259 18,082 17,772 76,841 76,671 $118,366 $112,701 $18,082 $17,772 $96,044 $96,135
The amortized cost and estimated fair value of securities held for sale and investment securities at December 31, 1992, with gross unrealized gains and losses, follows:
December 31, 1992 Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value Securities Held for Sale: U.S. Government obligations $30,430 $1,251 $ 15 $31,666 U.S. Government money market fund 13,083 - - 13,083 Total securities held for sale $43,513 $1,251 $ 15 $44,749 Investment Securities: Debt securities: U.S. Government and federal agency $24,104 $ 419 $ 55 $24,468 State and municipal 1,274 31 1 1,304 Corporate 12,679 146 226 12,599 Pass-through securities and CMO's 15,225 203 90 15,338 Total debt securities 53,282 799 372 53,709 Marketable equity securities 936 7 99 844 Total investment securities 54,218 $ 806 $471 $54,553 Valuation allowance for unrealized losses on marketable equity securities (92) $54,126
Proceeds from the sale of securities available for sale during the nine months ended September 30, 1994 (unaudited) were $20,246,000. Gross gains of $85,000 and no gross losses were recognized on such sales. In addition, securities available for sale with an amortized cost of $16,575,000 were transferred to securities held to maturity at their value of $15,810,000 resulting in a net unrealized loss of $765,000 at the date of transfer. Proceeds from the sale of debt securities during the years ended December 31, 1993, 1992, and 1991 were $89,184,000, $32,741,000, and $13,777,000, respectively. Gross gains of $3,212,000, $598,000, and $289,000, were realized during the years ended December 31, 1993, 1992, and 1991, respectively. Gross losses of $588,000, $57,000, and $129,000 were realized during the years ended December 31, 1993, 1992, and 1991, respectively. Note F--Mortgage Loans Held for Sale CFX's mortgage banking subsidiary, CFX Mortgage, Inc. (formerly Colonial) engages in originating, selling and servicing real estate loans, primarily residential. As discussed in Note B--Mergers and Acquisitions, Colonial became a wholly-owned subsidiary as of September 1, 1993. Mortgage loans totaling $15,478,000 and $24,156,000 were held for sale by CFX Mortgage as of September 30, 1994 (unaudited) and December 31, 1993, respectively. At September 30, 1994 (unaudited) and December 31, 1993, the estimated fair value of mortgage loans held for sale was $15,572,000 and $24,160,000, respectively. Note G--Loans and Leases Loans and leases consist of the following:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Real estate: Residential $341,062 $305,599 $328,984 Construction 9,636 9,292 10,920 Commercial 78,406 76,955 56,027 Commercial, financial and agricultural 48,319 42,835 54,788 Leases 11,141 5,428 1,497 Consumer and other 32,111 24,934 25,268 $520,675 $465,043 $477,484
At September 30, 1994 (unaudited) and December 31, 1993 and 1992, the estimated fair value of total loans and leases was $512,363,000, $462,912,000 and $481,222,000, respectively. Nonaccrual loans and restructured loans totaled $6,769,000 and $2,499,000, respectively, at September 30, 1994 (unaudited), $6,472,000 and $837,000, respectively, at December 31, 1993, and $6,104,000 and $963,000, respectively, at December 31, 1992. Interest income that would have been recorded under the original terms of such nonaccrual and restructured loans and the interest income actually recognized are as follows:
Nine Months Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Interest income that would have been recorded $549 $922 $656 $721 $481 Interest income recognized 348 538 483 372 263 Interest income foregone $201 $384 $173 $349 $218
CFX is not committed to lend additional funds to borrowers whose loans have been modified in connection with troubled debt restructurings. The primary geographic concentration of credit risk for residential mortgages, commercial business loans, commercial and mortgage construction loans, and consumer loans originated by CFX Bank is the State of New Hampshire. Substantially all of the total loan portfolio is concentrated within the state. The remainder of the portfolio is distributed principally throughout the other New England states. Note H--Allowance for Loan and Lease Losses Changes in the allowance for loan and lease losses are as follows:
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Balance at beginning of period $7,357 $7,909 $7,909 $6,957 $5,122 Allowance of acquired subsidiaries - 13 13 - - Allowance acquired through regulatory-assisted transactions - - - 350 167 Provision for loan and lease losses 50 2,970 2,970 2,911 3,830 Loans charged-off (783) (2,949) (3,904) (2,523) (2,247) Recoveries of loans previously charged-off 311 259 369 214 85 Balance at end of period $6,935 $8,202 $7,357 $7,909 $6,957
Note I--Premises and Equipment The following is a summary of premises and equipment:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Land $ 2,032 $ 1,792 $ 1,275 Buildings and leasehold improvements 11,210 9,959 7,854 Furniture and equipment 7,486 6,485 4,991 20,728 18,236 14,120 Less accumulated depreciation and amortization (7,229) (6,838) (4,932) $13,499 $11,398 $ 9,188
Depreciation and amortization expense was $1,144,000, $886,000, $1,244,000, $1,181,000, and $1,085,000 for the nine months ended September 30, 1994 and 1993 (unaudited), and the years ended December 31, 1993, 1992, and 1991, respectively. Note J--Foreclosed Real Estate Foreclosed real estate is presented net of a valuation allowance as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Foreclosed real estate $1,056 $1,868 $ 7,006 In-substance foreclosures 1,443 1,869 5,230 2,499 3,737 12,236 Less allowance for losses (320) (384) (307) $2,179 $3,353 $11,929
An analysis of the allowance for losses on foreclosed real estate and in-substance foreclosures follows:
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 (Unaudited) Balance at beginning of period $384 $307 $307 $ - Provision for losses 192 920 673 307 Charge-offs, net of recoveries (256) (410) (596) - Balance at end of period $320 $817 $384 $307
The following table presents the components of the operation of foreclosed real estate for the periods indicated:
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Operating expenses, net of rental income $139 $ 780 $1,000 $1,455 $1,005 Write-downs to net realizable value - - - 914 2,310 Provision for losses 192 920 673 307 - Net loss (gain) on sales of real estate (220) (203) 1,338 (348) (41) $111 $1,497 $3,011 $2,328 $3,274
Note K--Deposits Total deposits consist of the following:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Noninterest bearing $ 38,036 $ 32,214 $ 31,307 Savings: Regular savings 115,066 111,155 112,622 NOW accounts 77,411 77,274 73,194 Money market accounts 107,655 113,754 116,082 Total savings 300,132 302,183 301,898 Time certificates of deposit 204,162 216,808 242,312 Total deposits $542,330 $551,205 $575,517
Time deposits with a minimum balance of $100,000 at September 30, 1994 (unaudited), and December 31, 1993 and 1992 totaled approximately $24,865,000, $32,830,000 and $37,439,000, respectively. A summary of term certificates, by maturity, is as follows:
September 30, December 31, 1994 1993 1992 Weighted Weighted Weighted Average Average Average (In thousands) Amount Rate Amount Rate Amount Rate (Unaudited) Within one year $125,678 4.22% $143,048 4.22% $164,089 4.55% After one year through three years 51,558 4.85 66,341 5.02 76,653 6.04 After three years through five years 26,926 5.53 7,419 4.90 1,570 5.81 $204,162 4.55% $216,808 4.49% $242,312 5.03%
At September 30, 1994 (unaudited) and December 31, 1993 and 1992, the estimated fair value of total deposits was $541,147,000, $555,700,000 and $578,950,000, respectively. Note L--Short-Term Borrowed Funds The following summarizes short-term borrowed funds:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Securities sold under agreement to repurchase: Retail $ 8,855 $ 6,238 $5,471 Wholesale--3.55% (fixed rate) due January 14, 1994 - 14,644 - Wholesale--5.15% (fixed rate) due October 25, 1994 15,229 - - Total securities sold under agreement to repurchase 24,084 20,882 5,471 Treasury tax and loan demand notes - - 636 Total short-term borrowed funds $24,084 $20,882 $6,107
Retail securities sold under agreement to repurchase at September 30, 1994 (unaudited) were due to mature by October 14, 1994 at a weighted average interest rate of 1.40%. At December 31, 1993, such agreements were due to mature by January 17, 1994 at a weighted average interest rate of 2.02%. Note M--Advances from Federal Home Loan Bank of Boston Advances from the Federal Home Loan Bank of Boston (FHLBB) consist of the following:
September 30, December 31, (In thousands) 1994 1993 (Unaudited) Short-Term: 3.480% (fixed rate) due January 24, 1994 $ - $10,000 3.540% (variable rate) due January 31, 1994 - 10,000 3.375% (fixed rate) due March 14, 1994 - 26,600 5.03% (fixed rate) due October 11, 1994 10,000 - 4.90% (fixed rate) due October 19, 1994 10,000 - 5.05% (fixed rate) due October 24, 1994 20,000 - 4.92% (fixed rate) due October 25, 1994 10,000 - 5.23% (fixed rate) due November 10, 1994 15,000 - 5.27% (fixed rate) due November 23, 1994 10,000 - 5.45% (fixed rate) due December 28, 1994 5,000 - Line of Credit -5.0875% (variable rate) 8,736 - 88,736 46,600 Long-Term: 5.00% (fixed rate) due January 9, 2003 201 201 $88,937 $46,801
There were no outstanding advances from the FHLBB as of December 31, 1992. CFX Bank has an available line of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of CFX Bank's total assets. All borrowings from the FHLBB are secured by a blanket lien on certain qualified collateral, defined principally as 90% of the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of first mortgage loans on owner-occupied residential property. Note N--Due to Broker CFX records the purchase and sale of trading and investment securities as of the trade date. Purchase transactions that have not yet settled as of period end are recorded as due to broker. Due to broker amounts at September 30, 1994 and December 31, 1993 and 1992 are as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Trading securities $20,047 $20,327 $ - Investment securities - 12,927 1,024 $20,047 $33,254 $1,024
Note O--Preferred Stock At September 30, 1994 (unaudited), December 31, 1993 and December 31, 1992, CFX had outstanding 193,053, 194,074 and 194,482 shares, respectively, of 7.5% Series A Cumulative Convertible Preferred Stock. The preferred stock was issued as of April 30, 1990 in connection with the acquisition of The Valley Bank. The preferred stock is convertible on a one-to-one basis (adjusted for CFX's 5% common stock dividend declared on December 13, 1993; see Note Y for a description of CFX's common stock dividend declaration subsequent to 1993) at the option of the shareholder at any time until the mandatory conversion date, April 30, 1995. The shareholders of the preferred stock are entitled to receive cumulative cash dividends and have the right, voting as a single class with the shareholders of CFX's common stock, to vote on all matters presented for a shareholder vote. Each shareholder of the preferred stock is entitled to one vote for each share held. Note P--Income Taxes The components of the provision for income taxes are as follows:
Nine Months Years Ended Ended September 30, December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Current tax provision (benefit): Federal $1,931 $1,586 $1,501 $2,401 $1,368 State 348 34 61 - (99) Total current 2,279 1,620 1,562 2,401 1,269 Deferred tax provision (benefit): Federal 5 10 479 (401) (989) State 2 53 22 - - Total deferred 7 63 501 (401) (989) Effect of tax law change 12 (218) (436) - - Effect of change in valuation reserve - (387) (387) - - Provision for income taxes $2,298 $1,078 $1,240 $2,000 $ 280
The components of the net deferred tax assets included in other assets are as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Deferred tax assets: Federal $3,837 $3,822 $4,377 State 523 537 - 4,360 4,359 4,377 Valuation allowance for deferred tax assets - - (387) Total deferred tax assets 4,360 4,359 3,990 Deferred tax liabilities: Federal (1,860) (1,993) (983) State (252) (290) - Total deferred tax liabilities (2,112) (2,283) (983) Net deferred tax assets $2,248 $2,076 $3,007
A summary of the change in the net deferred tax assets is as follows:
Nine Months Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Balance at beginning of period $2,076 $3,007 $3,007 $2,667 $ 536 Cumulative effect of a change in accounting principle - - - - 1,603 Deferred tax benefit (provision) (19) 542 322 401 989 Change in accounting principle effect on prior year purchase accounting adjustments - - - - (538) Purchase accounting effects of Colonial Mortgage, Inc. acquisition - (1,371) (1,371) - - Tax effects of net unrealized losses on investment securities reflected in shareholders' equity 191 15 118 (61) 77 Balance at end of period $2,248 $2,193 $2,076 $3,007 $2,667
The tax effects of each type of income and expense item that give rise to deferred tax assets and liabilities are as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Deferred tax assets: Allowance for loan and lease losses $2,678 $2,866 $2,444 Capital loss carryforwards 571 594 838 Stock write-downs 14 14 132 Net unrealized losses on trading and investment securities 390 132 41 Foreclosed real estate write-downs 10 92 299 Deferred point income 92 214 150 Book reserves 428 385 355 Other 177 62 118 Subtotal 4,360 4,359 4,377 Valuation allowance for deferred tax assets - - (387) Total deferred tax assets 4,360 4,359 3,990 Deferred tax liabilities: Depreciation (566) (576) (607) Mortgage servicing rights (1,062) (1,215) - Cash to accrual recapture (124) (167) - Deferred gains (184) (169) - Book over tax basis from investment in Colonial Mortgage, Inc. - - (237) Other (176) (156) (139) Total deferred tax liabilities (2,112) (2,283) (983) Net deferred tax assets $2,248 $2,076 $3,007
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Prior to 1993, CFX believed that some uncertainty existed with respect to future realization of capital loss carryforwards. Therefore CFX had established a valuation allowance relating to capital loss carryforwards of $387,000 as of December 31, 1992. The valuation allowance was reversed in 1993 as a result of the recognition of $1,266,000 in capital gains in 1993 and the development of tax planning strategies that will utilize the capital loss carryforwards. A summary of capital loss carryforwards and other temporary differences that will result in capital loss (income) treatment when recognized for tax purposes, along with the corresponding valuation allowance, is summarized as follows:
September 30, December 31, 1994 1993 1992 (In thousands) Amount @39% Amount @ 39% Amount @ 34% (Unaudited) Tax capital loss carryforwards $1,465 $571 $1,522 $594 $2,466 $838 Other temporary differences that will result in capital loss (income): Stock write-downs 36 14 36 14 387 132 Net unrealized losses on marketable equity securities - - 24 9 122 41 Book over tax basis from investment in Colonial Mortgage, Inc. - - - - (697) (237) 1,501 585 1,582 617 2,278 774 Valuation allowance - - - - (1,139) (387) $1,501 $585 $1,582 $617 $1,139 $387
The capital loss carryforwards expire as of December 31, 1996. Prior to 1993, CFX was not obligated to pay New Hampshire Business Profits Tax (NHBPT) as a result of significant income derived from state tax- free sources and a credit allowed for New Hampshire Franchise Tax. Therefore, prior to 1993 no deferred taxes had been recognized for NHBPT purposes. During 1993, as a result of the Franchise Tax being repealed by the New Hampshire State legislature and CFX's significant reduction in income derived from tax-free sources, CFX began to pay NHBPT. As a result of becoming obligated to pay NHBPT in 1993, CFX fully recognized deferred taxes for NHBPT in 1993. CFX Bank qualifies under provisions of the Internal Revenue Code to deduct from taxable income, if any, a provision for loan and lease losses based on a percentage of taxable income before such deduction (PTI method). Under the Tax Reform Act of 1986, the loan loss deduction allowable is limited to 8% of taxable income. At December 31, 1993, retained earnings include a tax loan loss reserve of approximately $5,700,000 for which no provision for income taxes has been made. If, in the future, such amounts are used for any purpose other than to absorb loan losses, or if CFX Bank ceases to qualify to utilize the PTI method under the Internal Revenue Code, CFX Bank will incur a tax liability at the current applicable income tax rates. CFX anticipates that it will continue to meet the qualifying asset test and that the $5,700,000 of retained earnings will not be used for any purpose that would result in the payment of income taxes. The unrecognized deferred tax liability on the $5,700,000 as of December 31, 1993 is $2,200,000. The following is a reconciliation of the statutory federal income tax rate, applied to pre-tax accounting income, with the income tax provisions in the consolidated statements of income:
Nine months ended September 30, (Dollars in thousands) 1994 1993 Amount Percent Amount Percent (Unaudited) Income tax expense at the statutory rate $2,098 34% $1,703 34% Increase (decrease) resulting from: Dividends received deduction (32) (1) (20) - Tax-exempt interest income (182) (3) (65) (1) Goodwill and deposit base intangible amortization 174 3 157 3 Reversal of book over tax basis from investment in Colonial Mortgage, Inc. - - (214) (4) State income taxes, net of federal income tax benefit 243 4 (150) (3) Other, net (3) - 39 1 Change in valuation allowance - - (372) (8) Income tax expense $2,298 37% $1,078 22%
Years ended December 31, (Dollars in thousands) 1993 1992 1991 Amount Percent Amount Percent Amount Percent Income tax expense at the statutory rate $2,129 34% $1,971 34% $285 34% Increase (decrease) resulting from: Dividends received deduction (29) - (35) (1) (60) (7) Tax-exempt interest income (91) (2) (93) (2) (155) (19) Goodwill and deposit base intangible amortization 215 3 218 4 218 26 Reversal of book over tax basis from investment in Colonial Mortgage, Inc. (273) (4) - - - - State income taxes, net of federal income tax benefit (381) (6) - - (65) (8) Other, net 42 1 23 - 26 3 Change in valuation allowance (372) (6) (84) (1) 31 4 Income tax expense $1,240 20% $2,000 34% $280 33%
CFX's defined benefit pension plan and 401(k) savings plan are summarized in the following tables: Pension Plan The following table sets forth the plan's funded status and amounts recognized in CFX's consolidated balance sheets:
December 31, (In thousands) 1993 1992 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,631,000 in 1993 and $2,114,000 in 1992 $(2,689) $(2,164) Projected benefit obligation for service rendered to date $(3,221) $(2,660) Plan assets at fair value, primarily invested in bank money market accounts, equities, and group annuity contracts 3,076 3,108 Plan assets in excess of (less than) projected benefit obligation (145) 448 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (656) (1,023) Prior service cost not yet recognized in net periodic pension cost 136 147 Unrecognized net asset at end of year (10) (11) Accrued pension cost included in other liabilities $ (675) $ (439)
Net pension expense includes the following components:
Years Ended December 31, (In thousands) 1993 1992 1991 Service cost--benefits earned during the period $268 $196 $221 Interest cost on projected benefit obligation 221 208 200 Actual return on plan assets (136) (267) (251) Net amortization and deferral (117) 12 44 Net pension expense $236 $149 $214
Pension expense for the nine months ended September 30, 1994 and 1993 (unaudited) amounted to $245,000 and $95,000, respectively. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.00% and 5.50%, respectively, in 1993 and 8.25% and 5.50%, respectively, in 1992 and 1991. The expected long-term rate of return on plan assets was 7.5% for the years ended December 31, 1993, 1992, and 1991. 401(k) Plan The following table sets forth CFX's 401(k) plan expense recognized:
Nine Nonths Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Matching contribution $ 88 $ 61 $ 82 $ 76 $ 70 Supplemental profit sharing contribution 236 312 328 106 101 $324 $373 $410 $182 $171
Note R--Stock Option Plan CFX has a stock option plan (the Option Plan) whereby options may be granted to certain key employees and directors of CFX and its subsidiaries to purchase shares of common stock of CFX at a price not less than fair value at the date of grant. Both incentive stock options and nonqualified stock options may be granted pursuant to the Option Plan. A total of 248,000 shares of authorized but unissued common stock of CFX has been reserved for issuance pursuant to incentive stock options granted under the Option Plan and 193,000 shares of authorized but unissued common stock have been reserved for issuance pursuant to nonqualified stock options granted. The options are exercisable over a period not to exceed ten years from the date of grant. Changes in the status of options are summarized as follows:
Incentive Stock Options Nonqualified Stock Options (In thousands, except price September 30, December 31, September 30, December 31, per share data) 1994 1993 1993 1992 1991 1994 1993 1993 1992 1991 (Unaudited) (Unaudited) Outstanding at beginning of period 237 193 193 191 218 30 47 47 47 47 Granted - 61 61 9 - 63 - - - - Exercised @ $ 8.39 - (3) (3) - - - - - - - @ $12.87 (4) - - - - - - - - - @ $13.04 (7) - (9) - - (1) (5) (12) - - Cancelled (1) (6) (5) (7) (27) - (5) (5) - - Outstanding at end of period 225 245 237 193 191 92 37 30 47 47 Exercisable at end of period 225 245 237 193 191 92 37 30 47 47 Price range of options $ 8.39 $ 8.39 $ 8.39 $ 8.39 $ 8.39 $13.04 $13.04 - - - outstanding $15.88 $15.88 $15.88 $13.04 $13.04 $14.74 $12.84 $13.04 $13.04 $13.04 Average price of options outstanding $13.30 $13.99 $13.30 $12.62 $12.77 $14.20 $13.04 $13.04 $13.04 $13.04
As provided for in the 1986 Stock Option Plan, all option information has been restated for CFX's 5% common stock dividend declared on December 13, 1993. See Note Y for a description of CFX's common stock dividend declaration subsequent to 1993. Note S--Employee Stock Purchase Plan CFX has an employee stock purchase plan (the Stock Purchase Plan) whereby employees of CFX and its subsidiaries with more than one-half year of continuous service, except for certain employees with substantial stock interests in CFX or with substantial rights to purchase common stock, may purchase up to an aggregate of 110,000 shares of CFX's common stock. Eligible employees have the right to purchase common stock by authorizing payroll deductions of up to seven percent of their base salary. The Stock Purchase Plan provides for twenty quarterly offerings of 5,513 shares each, at a purchase price which would not be less than the lesser of (1) 90% of the fair value per share on the offering date or (2) 90% of the fair value per share on the date of exercise. The Board of Directors of CFX may change the option price for subsequent offerings by increasing the percentage of fair value to a percentage not greater than 100% or decreasing the percentage of fair value to a percentage not less than 85%. Eligible employees purchased 7,624, 7,889, and 10,662 shares of common stock at an exercise price of $14.30 (average), $11.15 (average), and $6.63 per share during the nine months ended September 30, 1994 (unaudited) and during the years ended December 31, 1993 and 1992, respectively. As provided for in the 1992 employee stock purchase plan, all information has been restated for CFX's 5% common stock dividend declared on December 13, 1993. See Note Y for a description of CFX's common stock dividend declaration subsequent to 1993. Note T--Restrictions on Subsidiary Dividends, Loans and Advances Certain restrictions exist regarding the ability of CFX Bank to transfer funds to CFX in the form of cash dividends, loans and advances. Applicable rules prohibit the payment of a cash dividend by CFX Bank if the effect thereof would cause the net worth of CFX Bank to be reduced below applicable net worth requirements. Federal banking regulators require that CFX (on a consolidated basis) and CFX Bank meet certain Tier 1 leverage capital and risk-based capital ratio requirements. Generally, all but the most financially sound institutions are required to maintain a minimum Tier 1 leverage capital ratio of not less than 4% and a risk-based capital ratio of not less than 8.00%. CFX and CFX Bank exceeded all minimum regulatory requirements at September 30, 1994 (unaudited) and December 31, 1993 and 1992. Under Federal Reserve regulations, CFX Bank is also limited as to the amount it may loan to CFX, unless such loans are collateralized by specified obligations. At September 30, 1994 (unaudited) and December 31, 1993, the maximum amount available for transfer from CFX Bank to CFX in the form of loans approximated 8.71% and 8.87%, respectively of consolidated net assets. Note U--Loans to Related Parties In the ordinary course of business, CFX Bank makes loans to CFX's and CFX Bank's subsidiary affiliates, directors and officers and their associates and affiliated companies (related parties) at substantially the same terms, including interest rates and collateral, as those prevailing at the time of origination for comparable transactions with other borrowers. The amounts due from directors, officers and their associates were $5,978,000, $8,534,000 and $12,624,000 at September 30, 1994 (unaudited) and December 31, 1993 and 1992, respectively. During the nine months ended September 30, 1994 (unaudited), new loans totaling $2,774,000 were made and repayments received totaled $5,330,000. During the year ended December 31, 1993, new loans totaling $5,966,000 were made, repayments received totaled $2,494,000, and reductions in related party loans totaled $7,562,000. The reduction in related party loans in 1993 was due to a decrease in the number of directors as a result of merging CFX's three bank affiliates and the resignation of certain directors during 1993. At December 31, 1992, loans to CFX Bank's unconsolidated subsidiary, Colonial, totaled $3,944,000. These loans were secured by real estate loans held for sale and a blanket security interest on all of Colonial's other assets. Interest on loans to Colonial was based upon a major Boston bank's prime rate plus one-half to one and one-half percent. Note V--Financial Instruments CFX uses certain financial instruments in managing the interest rate risk included in the consolidated balance sheet. Futures and options contracts are used explicitly for hedge purposes and are not undertaken for speculation. CFX's intent and general practice is to liquidate (offset) futures and options contract obligations before stated exercise or delivery dates through established market transactions. CFX does not generally intend to deliver or receive the securities underlying its futures and options contracts, but may execute delivery or receipt if it is financially prudent to do so. The detail on the specific financial instruments used, follows: Interest Rate Exchange Agreements During 1993, CFX entered into agreements to exchange interest rate cash flows with approved counterparties. Swap agreements outstanding at September 30, 1994 and December 31, 1993 are as follows:
September 30, 1994 (unaudited) (Dollars in thousands) Notional Maturity Unrealized Assets Hedged Interest Received Interest Paid Amount Date Loss Mortgage loans held in portfolio Fixed-4.37% Variable-6 mo. LIBOR $25,000 11/23/96 $(936) (Rate of 4.9375%)
December 31, 1993 (Dollars in thousands) Notional Maturity Unrealized Assets Hedged Interest Received Interest Paid Amount Date Loss Mortgage loans held in portfolio Fixed-4.37% Variable-6 mo. LIBOR $25,000 11/23/96 $(52) Trading securities Variable-3 mo. LIBOR Fixed-4.55% 7,500 11/18/96 - Trading securities Variable-3 mo. LIBOR Fixed-5.13% 9,500 11/18/98 - Trading securities Variable-3 mo. LIBOR N/A 10,000 10/18/97 - with cap (1) $52,000 $(52) To be received only if and by the amount such rate exceeds 4.5%.
The effect of the $25 million swap agreement is to lengthen the repricing period of certain variable-rate mortgage loans. The $7.5 and $9.5 million agreements effectively shorten the repricing period of certain fixed- rate mortgage-backed securities held in the trading portfolio. The $10 million agreement, known as an interest rate cap contract, is intended to protect against declining fair values of trading securities should interest rates move significantly higher. Financial Futures Contracts CFX uses financial futures contracts to hedge interest rate exposure generally on certain mortgage-backed securities held in the trading portfolio. At September 30, 1994 (unaudited), CFX held short futures positions in 5 year Treasury contracts totaling $9 million extending through December 1994. The cost of U.S. Treasury bills pledged as collateral for initial margin on open futures contracts was $115,000 at September 30, 1994 (unaudited). At December 31, 1993, CFX held short futures positions in euro-dollar contracts totaling $120 million extending through March of 1995. The cost of U.S. Treasury bills pledged as collateral for initial margin on open futures contracts was $114,000 at December 31, 1993. Financial Option Contracts CFX uses financial options to hedge interest rate exposure generally on certain mortgage-backed securities held in the trading portfolio as well as secondary mortgage market operations. At September 30, 1994 (unaudited), CFX held put options (the option to sell securities at a stated price within a specified term) on euro-dollar obligations totaling $300 million extending through September of 1995 for the trading portfolio and on 30-year Treasuries totaling $3 million extending through December 1994 for mortgage loans held for sale. At December 31, 1993, CFX held put options on U.S. Treasury bonds totaling $9 million extending through March of 1994 and on euro-dollar obligations totaling $325 million extending through December of 1994. CFX also held call options (the option to buy securities at a stated price within a specified term) on U.S. Treasury bonds totaling $2 million extending through March of 1994. The following table provides a rollforward of the notional amounts on each type of financial instrument used by CFX to manage interest rate risk for the period indicated:
Interest Financial Financial Rate Futures Option Exchange Contracts Contracts (In thousands) Agreements (Short Position) (Long Position) Balance at December 31, 1993 $52,000 $(120,000) $336,000 Contracts: New - 849,000 950,800 Terminated (27,000) (738,000) (960,800) Expired - - (23,000) Balance at September 30, 1994 (unaudited) $25,000 $ (9,000) $303,000
As mortgage-backed securities are purchased for the trading portfolio, CFX assesses the price volatility under varying interest rates. A hedge using a combination of interest rate exchange agreements, financial futures contracts and financial option contracts is constructed to closely resemble the volatility of the underlying security. On an ongoing basis, CFX monitors the effectiveness of the hedge position to ensure appropriate matching of price volatility. Derivative instruments are monitored regularly to assess market price changes. On at least a monthly basis, rate change analyses are done in order to assess potential market risk in changing interest rate environments. When the price volatility of derivative instruments varies from the price volatility of assets being hedged, positions are adjusted to maintain an appropriate match. CFX includes all off-balance sheet and derivative positions in its analysis of interest rate risk. Increases and decreases of both 100 and 200 basis points are analyzed in order to determine expected changes in earnings and market values. Volatility in these analyses is maintained within policy guidelines. Note W--Financial Instruments with Off-Balance-Sheet Risk CFX is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, option contracts, standby letters of credit, interest-rate caps and floors, interest-rate swaps, and futures contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The off-balance-sheet contract or notional amounts of these instruments reflect the extent of CFX's involvement in particular classes of financial instruments. CFX's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these specific instruments. CFX uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments. For interest-rate cap, floor and swap transactions; futures contracts; and options contracts, the contract or notional amounts do not represent CFX's exposure to credit loss. Rather, the credit loss exposure relates to the net fair value to be received if such contracts were to be offset in the marketplace. CFX controls the credit risk of its interest-rate swap agreements and futures and options contracts through credit approvals, limits, and monitoring procedures. Unless noted otherwise, CFX does not require collateral or other security to support financial instruments with credit risk. At September 30, 1994 and December 31, 1993 and 1992, the following instruments were outstanding:
Contract or Estimated Notional Amount Fair Value(1) September 30, December 31, September 30, December 31, (In thousands) 1994 1993 1992 1994 1993 1992 (Unaudited) (Unaudited) Financial instruments whose contract amounts represent credit risk: Commitments to grant loans $83,970 $ 29,283 $17,579 $(284) $(169) $ (58) Unadvanced funds on lines of credit 42,801 36,822 38,896 (295) (245) (228) Standby letters of credit 1,087 738 1,050 (11) (7) (19) Financial instruments whose contract or notional amounts exceed the amount of credit risk: Outstanding forward delivery contracts 52,028 142,697 - - - - Futures contracts (short position) 9,000 120,000 - 31 - - Interest-rate swap agreements (including caps and floors) 25,000 52,000 - (936) (52) - Financial options contracts (long position) 303,000 336,000 - 208 - - Excludes instruments in the trading portfolio which are carried at fair value.
A commitment to extend credit is an agreement to provide financing to a customer contingent upon compliance with all conditions established in the contract. A commitment generally has a fixed expiration date or other termination clause and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. CFX evaluates each customer's credit worthiness on an individual basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's evaluation of the counterparty. The collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and residential real estate. Standby letters of credit are conditional commitments issued by CFX to guarantee the performance of a customer to a third party. These commitments are primarily issued to support private borrowing arrangements on a short-term basis. The credit risk involved in issuing secured letters of credit is essentially the same as that involved in extending loan facilities to customers. Forward delivery contracts are contracts for delayed delivery of mortgage loans or mortgage backed securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Credit risk to CFX arises from the possible inability of counterparties to meet the terms of their contracts. In the event of nonacceptance by the counterparty, CFX would be subject to the credit risk of the loans retained. These loans would have been originated in the ordinary course of business complying with CFX's standard credit evaluation and collateral requirements. Failure to fulfill delivery requirements for these contracts may result in payment of fees to certain investors. Futures contracts are contracts for delayed delivery of securities or money-market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. CFX enters into a variety of interest-rate contracts including interest-rate caps and floors, interest-rate options, and interest-rate swap agreements, in its trading portfolio, in its mortgage banking activity, and in managing CFX's overall interest-rate exposure. Interest-rate options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price within a specified period of time. For most futures and options transactions, CFX uses recognized and centralized exchanges for execution. These exchanges act as the counterparty to all transactions, thereby minimizing the credit risk of market participants. Interest-rate swap transactions generally involve the exchange of fixed and floating-rate interest-payment obligations without the exchange of the underlying principal amounts. CFX typically becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to loss should one of the parties default. CFX minimizes this risk by performing normal credit reviews on its swap counterparties. Entering into interest-rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest-rate risk associated with an unmatched position. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Note X-- Segment Information On September 1, 1993, CFX purchased the remaining 52.4% of Colonial. CFX previously owned 47.6% and, as a result of the purchase, Colonial became a wholly-owned subsidiary. On November 15, 1993, Colonial was renamed CFX Mortgage, Inc. The transaction was accounted for by the purchase method of accounting, and accordingly, the results of operations of CFX Mortgage for the nine months ended September 30, 1994 (unaudited) and from September 1, 1993 to December 31, 1993, have been included in CFX's consolidated statement of income. (See Note B--Mergers and Acquisitions.) The summarized data for CFX's mortgage banking operations is as follows:
Nine Months Period from ended September 1, 1993 to (In thousands) September 30, 1994 December 31, 1993 (Unaudited) Net interest and dividend income $ 649 $ 191 Loan servicing fees 1,727 323 Net gain on sale of loans 440 595 Other income 300 160 Total income 3,116 1,269 Depreciation expense 99 53 Other expense 2,786 1,304 Income (loss) before income tax expense (benefit) 231 (88) Income tax expense (benefit) 121 (30) Net income (loss) $ 110 $ (58) Total assets $ 32,800 $ 36,000 Total loans serviced for others $712,000 $705,000 Additions to property, plant and equipment $ 226 $ 1,502
Substantially all loans serviced for others were sold without recourse provisions. The following is an analysis of the changes in mortgage servicing rights (acquired and excess servicing fees receivable):
Period from Nine Months ended September 1, 1993 (In thousands) September 30, 1994 to December 31, 1993 Balance at beginning of period $4,557 $1,473 Purchase accounting adjustment - 3,463 Adjusted balance 4,557 4,936 Additions 312 112 Amortizations (533) (491) Balance at end of period $4,336 $4,557
Note Y--Subsequent Event On July 26, 1994, CFX signed a definitive agreement to acquire all of the outstanding capital stock of Orange Savings Bank (Orange), a Massachusetts-chartered savings bank, headquartered in Orange, Massachusetts. The acquisition is anticipated to be accounted for as a pooling-of-interests. Pursuant to the definitive agreement, each of Orange's 724,412 outstanding shares of common stock (except for any dissenting shares and shares beneficially held by CFX or Orange) will be converted into and exchangeable for the number of shares of CFX Common Stock determined by multiplying .8750 by a fraction, the numerator of which is $17.1429 and the denominator of which is the average closing sale price per share of CFX Common Stock on the American Stock Exchange for the ten trading days ending on the business day before the date on which the required approval of the Massachusetts Commissioner of Banks is obtained. This exchange ratio is subject to adjustment in the event that (i) such average closing price is above $20.00 or below $15.2381, (ii) CFX is a party to certain business combinations or (iii) CFX issues shares of stock in certain transactions, including, without limitation, stock splits and stock dividends. The proposed transaction is subject to regulatory approval and approval of Orange's shareholders. The transaction has already been approved by the Board of Directors of CFX and Orange. At September 30, 1994 (unaudited), Orange had assets of $83,949,000, deposits of $73,845,000, and stockholders' equity of $8,619,000. On December 12, 1994, CFX declared a 5% common stock dividend to shareholders of record on December 23, 1994. All prior period common share and per share data have been restated to reflect this stock dividend. In addition, this stock dividend results in adjustments in the terms relating to the number of shares of CFX Common Stock to be issued in exchange for shares of Orange Common Stock. The description in the second preceding paragraph reflects these adjustments. Note Z--CFX Corporation (Parent-Company-Only) Condensed Financial Statements Balance Sheets
September 30, December 31, (In thousands) 1994 1993 1992 (Unaudited) Assets Cash and due from banks $ 101 $ 111 $ 11 Interest bearing deposits with bank subsidiaries 8,581 7,756 3,716 Trading securities - - 11 Securities available for sale 32 - - Securities held to maturity 3,056 886 - Investment securities - - 718 Investment in bank subsidiaries 66,422 66,338 68,254 Other assets 2,832 2,441 1,933 $81,024 $77,532 $74,643 Liabilities $ 3,987 $ 1,748 $ 1,335 Shareholders' Equity 77,037 75,784 73,308 $81,024 $77,532 $74,643
Statements of Income
Nine Months Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Interest and dividend income $ 197 $ 94 $ 126 $ 231 $ 386 Dividends from subsidiaries 3,600 2,250 7,750 2,000 1,705 Trading securities gains (losses) - 9 9 1 (87) Investment securities gains - - - - 1 3,797 2,353 7,885 2,232 2,005 General and administrative expenses 489 731 919 710 503 Income before income taxes and equity in undistributed net income (loss) of subsidiaries 3,308 1,622 6,966 1,522 1,502 Income tax benefit (172) (492) (597) (264) (40) Income before equity in undistributed net income (loss) of subsidiaries 3,480 2,114 7,563 1,786 1,542 Equity in undistributed net income (loss) of subsidiaries 395 1,818 (2,541) 2,012 425 Income Before Cumulative Effect of a Change in Accounting Principle 3,875 3,932 5,022 3,798 1,967 Cumulative effect on years prior to 1991 of a change in accounting for income taxes - - - - 194 Net Income $3,875 $3,932 $5,022 $3,798 $2,161
Note Z--CFX Corporation (Parent-Company-Only) Condensed Financial Statements (Continued) Statements of Cash Flows
Nine Months Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1993 1992 1991 (Unaudited) Operating Activities Net income $3,875 $3,932 $5,022 $3,798 $2,161 Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax benefit (97) (282) (311) (83) (243) Net decrease in trading securities - - 11 29 381 Equity in undistributed net (income) loss of subsidiaries (395) (1,818) 2,541 (2,012) (425) Other 1,846 643 (15) 322 689 Net Cash Provided by Operating Activities 5,229 2,475 7,248 2,054 2,563 Investing Activities Capital contribution to subsidiary - (750) (750) (750) (500) Net decrease (increase) in interest bearing deposits (825) 1,057 (4,040) 390 (1,814) Proceeds from sales and maturities of investment securities 803 1,337 2,695 4,638 6,034 Purchases of investment securities (3,002) (2,321) (2,855) (4,131) (3,322) Net Cash Provided (Used) by Investing Activities (3,024) (677) (4,950) 147 398 Financing Activities Common cash dividends paid (2,286) (1,662) (2,287) (2,069) (2,757) Preferred cash dividends paid (201) (202) (270) (274) (261) Proceeds from issuance of common stock under stock option plan 163 100 271 - - Proceeds from issuance of common stock under employee stock purchase plan 109 66 88 70 57 Net Cash Used by Financing Activities (2,215) (1,698) (2,198) (2,273) (2,961) Increase (Decrease) in Cash and Cash Equivalents (10) 100 100 (72) - Cash and cash equivalents at beginning of period 111 11 11 83 83 Cash and Cash Equivalents at End of Period $ 101 $ 111 $ 111 $ 11 $ 83
Note AA--Quarterly Results of Operations (Unaudited) The following is a summary of the quarterly results of operations for the nine months ended September 30, 1994 and the years ended December 31, 1993 and 1992:
Three Months Ended March 31, June 30, Sept. 30, (In thousands, except per share data) 1994 Interest and dividend income $11,925 $11,845 $12,425 Interest expense 4,940 5,118 5,522 Net interest and dividend income 6,985 6,727 6,903 Provision for loan and lease losses 0 0 50 Trading securities gains (losses) (440) 49 11 Investment securities gains 327 187 11 Other income 1,076 1,267 1,375 Other expense 6,120 5,979 6,156 Income before income taxes 1,828 2,251 2,094 Income taxes 715 859 724 Net income 1,113 1,392 1,370 Preferred stock dividend 67 68 66 Net income available to common stock $ 1,046 $ 1,324 $ 1,304 Earnings per common share $ .28 $ .34 $ .33
Three Months Ended March 31, June 30, Sept. 30,(1) Dec. 31,(1) (In thousands, except per share data) 1993 Interest and dividend income $11,640 $11,690 $11,216 $11,596 Interest expense 5,150 4,907 4,778 4,850 Net interest and dividend income 6,490 6,783 6,438 6,746 Provision for loan and lease losses (2) 1,320 900 750 - Trading securities gains (losses) 154 44 144 (26) Investment securities gains 725 439 569 891 Other income 546 592 901 1,288 Other expense 5,235 5,082 5,528 7,647 Income before income taxes 1,360 1,876 1,774 1,252 Income taxes 469 384 225 162 Net income 891 1,492 1,549 1,090 Preferred stock dividend 67 68 67 68 Net income available to common stock $ 824 $ 1,424 $ 1,482 $ 1,022 Earnings per common share (3) $ .22 $ .37 $ .38 $ .27
Note AA--Quarterly Results of Operations (Unaudited) (Continued)
Three Months Ended March 31, June 30, Sept. 30,(1) Dec. 31,(1) (In thousands, except per share data) 1992 Interest and dividend income $13,612 $13,410 $12,868 $12,521 Interest expense 7,833 7,069 6,416 5,771 Net interest and dividend income 5,779 6,341 6,452 6,750 Provision for loan and lease losses 651 759 515 986 Trading securities gains (losses) (8) 7 94 (101) Investment securities gains (losses) (4) 125 59 86 (32) Other income 623 617 680 1,014 Other expense 4,725 4,879 5,266 4,907 Income before income taxes 1,143 1,386 1,531 1,738 Income taxes 442 447 504 607 Net income 701 939 1,027 1,131 Preferred stock dividend 68 67 67 68 Net income available to common stock $ 633 $ 872 $ 960 $ 1,063 Earnings per common share (3) $ .16 $ .23 $ .26 $ .28 Reflects the results of operations of CFX Mortgage, Inc. commencing September 1, 1993 versus 47.6% of such results previously recognized on the equity method. No provision in the fourth quarter reflects the significant reduction of nonperforming loans. Common per share earnings have been restated to reflect the 5% common stock dividend declared on December 13, 1993. See Note Y for CFX's common stock dividend declaration subsequent to 1993. Included in investment securities losses for the quarter ended December 31, 1992 is $351,000 related to the write-down of certain marketable equity securities held at December 31, 1992.
INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Orange Savings Bank: We have audited the accompanying consolidated balance sheets of Orange Savings Bank and subsidiary as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orange Savings Bank and subsidiary at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 1, effective December 31, 1993 the Bank adopted Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities." KPMG Peat Marwick LLP Boston, Massachusetts February 4, 1994 ORANGE SAVINGS BANK AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands except per share data)
September 30, December 31, 1994 1993 1992 (unaudited) ASSETS Cash and due from banks $ 3,107 $ 1,674 $ 2,429 Federal funds sold 2,925 2,502 2,277 Total cash and cash equivalents 6,032 4,176 4,706 Certificates of deposit (Note 2) 488 484 484 Investment securities available for sale, (amortized cost $3,262 at September 30, 1994, $579 at December 31, 1993 and a market value of $897 at December 31, 1992) (Notes 3 and 7) 3,250 614 872 Investment securities (market value of $1,971 at September 30, 1994, $3,758 and $1,487 at December 31, 1993 and 1992, respectively)(Notes 3 and 7) 2,016 3,757 1,487 Loans, net of allowance for possible loan losses of $576 at September 30, 1994, $595 and $483 at December 31, 1993 and 1992, respectively (Notes 4 and 7) 69,714 70,461 70,541 Stock in Federal Home Loan Bank of Boston, at cost (Note 7) 917 917 1,150 Land, building and equipment, net (Note 5) 464 444 442 Accrued income receivable 307 247 257 Deferred tax asset (Note 8) 109 55 - Other real estate owned 311 457 918 Other assets 341 337 359 Total assets $83,949 $81,949 $81,216 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (Note 6) $73,845 $72,394 $72,350 Advance payments from mortgagors 694 540 588 Accrued interest payable 2 3 7 Accrued and deferred income taxes (Note 8) 226 147 519 Other liabilities 563 642 605 Total liabilities 75,330 73,726 74,069 Commitments and contingencies (Note 10) - - - Shareholders' equity (Notes 8, 9 and 11) Serial preferred stock, par value $0.10 per share; 200,000 shares authorized, none issued or outstanding - - - Common stock, par value $0.10 per share; authorized 1,300,000 shares; 724,412 at September 30, 1994 (unaudited), 724,412 and 715,633 shares issued and outstanding at December 31, 1993 and 1992, respectively 72 72 71 Additional paid-in capital 2,974 2,974 2,940 Unrealized (loss) gain on investment securities available for sale, net (Note 3) (3) 35 - Retained earnings 5,576 5,142 4,136 Total shareholders' equity 8,619 8,223 7,147 Total liabilities and shareholders' equity $83,949 $81,949 $81,216
See accompanying notes to consolidated financial statements. ORANGE SAVINGS BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Periods Ended September 30, 1994 and 1993 Years ended December 31, 1993, 1992 and 1991 (In thousands except per share data)
Nine Months Years Ended September 30, Ended December 31, 1994 1993 1993 1992 1991 (unaudited) Interest and dividend income: Loans $ 3,935 $ 4,226 $ 5,560 $ 5,972 $ 6,117 Federal funds sold 70 52 66 115 232 Certificates of deposit 22 24 32 39 59 Investments 151 61 94 128 111 Dividends 81 98 131 147 170 Total interest and dividend income 4,259 4,461 5,883 6,401 6,689 Interest expense: Deposits 1,853 2,034 2,667 3,301 3,707 Borrowed funds - - - 111 633 Total interest expense 1,853 2,034 2,667 3,412 4,340 Net interest and dividend income 2,406 2,427 3,216 2,989 2,349 Provision for possible loan losses (Note 4) 12 68 90 242 135 Net interest and dividend income after provision for possible loan losses 2,394 2,359 3,126 2,747 2,214 Non-interest income: Net gain (loss) from sale or writedown of investments 1 (5) (21) 91 (180) Net gain from sales of loans 4 17 27 2 1 Net loss on investment in limited partnership - - - (1,120) (404) Commissions, fees and other income 221 188 270 249 214 Net non-interest income 226 200 276 (778) (369) Net interest, dividend and other income 2,620 2,559 3,402 1,969 1,845 Non-interest, expense: Salaries and employee benefits (Note 9) 770 698 943 861 657 Building and equipment expenses 192 193 250 219 162 EDP processing fees 211 186 251 228 185 Legal fees 113 44 57 39 59 Other expenses 468 507 661 686 639 Total non-interest expenses 1,754 1,628 2,162 2,033 1,702 Income (loss) before income taxes and cumulative effect of a change in accounting principle 866 931 1,240 (64) 143 Income taxes (Note 8) 345 372 91 465 398 Net income (loss) before cumulative effect of a change in accounting principle - - 1,149 (529) (255) Cumulative effect to January 1, 1992 of a change in accounting for income taxes (Note 8) - - - 50 - Net income, (loss) $ 521 $ 559 $ 1,149 $ (479) $ (255) Average common and common equivalent shares outstanding 769,703 736,005 742,446 731,286 734,318 Earnings (loss) per share before cumulative effect of change in accounting principle $ 0.68 $ 0.76 $ 1.55 $ (0.72) $ (0.35) Earnings per share from cumulative effect of change in accounting principle - - - $ 0.07 - Earnings (loss) per share $ 0.68 $ 0.76 $ 1.55 $ (0.65) $ (0.35) Cash dividends declared $ 0.12 $ 0.12 $ 0.20 $ 0.20 $ 0.18
See accompanying notes to consolidated financial statements. ORANGE SAVINGS BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Nine Months Ended September 30, 1994 Years ended December 31, 1993, 1992 and 1991 (In thousands except per share data)
Unrealized Gain (loss) on Additional Securites Common Paid-in Retained Available Stock Capital Earnings for Sale Total Balance December 31, 1990 $71 $2,940 $5,127 $(208) $7,930 Cash dividends declared, $0.18 per share - - (114) - (114) Net loss - - (255) - (255) Increase in net unrealized loss on marketable equity securities - - - 208 208 Balance December 31, 1991 71 2,940 4,758 - 7,769 Cash dividends declared, $0.20 per share - - (143) - (143) Net loss - - (479) - (479) Balance December 31, 1992 71 2,940 4,136 - 7,147 Cash dividends declared, $0.20 per share - - (143) - (143) Stock options exercised 1 34 - - 35 Unrealized gains on marketable securities available for sale, net - - - 35 35 Net income - - 1,149 - 1,149 Balance December 31, 1993 72 2,974 5,142 35 8,223 Cash dividends declared on Common stock $0.12 per share (unaudited) - - (87) - (87) Change in unrealized gains on marketable securities available for sale, net (unaudited) - - - (38) (38) Net income for nine months ended September 30, 1994 (unaudited) - - 521 - 521 Balance September 30, 1994 (unaudited) $72 $2,974 $5,576 $ (3) $8,619
See accompanying notes to consolidated financial statements. ORANGE SAVINGS BANK AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1994 and 1993 Years ended December 31, 1993, 1992 and 1991 (In thousands)
Nine Months Ended September 30, Years Ended December 31, 1994 1993 1993 1992 1991 (unaudited) Operating activities: Net income (loss) $ 521 $ 559 $1,149 $ (479) $ (255) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 71 69 92 80 58 Provision for possible loan losses 12 68 90 242 135 Net amortization of premiums and discounts 8 11 (9) 34 11 Amortization of deferred loan income 3 (3) 3 13 12 (Gain) loss on sale or writedown of investment securities (1) 5 21 (91) 180 Gain on sale of loans 5 17 27 2 1 Loss on investment in limited partnership - - - 1,120 404 Increase (decrease) in accrued income receivable (60) (46) 10 108 14 (Decrease) increase in other real estate owned 146 498 461 (818) (100) Increase (decrease) in deferred tax assets (54) - (55) - - (Increase) decrease in other assets (58) (30) 22 38 (13) Decrease in accrued interest payable (1) (5) (4) (17) (48) Increase (decrease) in accrued and deferred income taxes 79 (54) (372) 92 93 (Decrease) increase in other liabilities (25) 12 37 338 91 Net cash provided by operations 636 1,067 1,418 658 581 Investing activities: Investment securities purchased (2,736) (3,070) (3,807) (3,493) (8,858) Proceeds from sale of investment securities 56 382 388 3,855 5,654 Proceeds from maturity of investment securities 1,750 680 1,430 1,750 1,250 Certificates of deposit purchased (99) - - (195) (774) Proceeds from matured certificates of deposit 95 - - 285 876 Net decrease (increase) in loans 723 (144) 49 (8,288) (2,701) Proceeds from redemption of FHLB stock - - 233 - - Purchase of land, buildings and equipment (87) (43) (94) (38) (114) Investment in real estate partnerships - - - - (124) Net cash used by investing activities (298) (2,195) (1,801) (6,124) (4,791) Financing activities: Net increase in deposits 1,451 841 44 8,345 4,053 Acquisition of deposits - - - - 8,358 Increase (decrease) in mortgage escrow accounts 154 148 (48) (7) 138 Proceeds from borrowings - - - - 6,000 Repayment of borrowings - - - (1,500) (13,500) Proceeds from the issuance of common stock under stock option plan - 4 Cash dividends paid (87) (86) (143) (143) (114) Net cash provided (used) by financing activities 1,518 907 (147) 6,695 4,935 Increase (decrease) in cash and cash equivalents 1,856 (221) (530) 1,229 725 Cash and cash equivalents at beginning of year 4,176 4,706 4,706 3,477 2,752 Cash and cash equivalents at end of year $6,032 $4,485 $4,176 $ 4,706 $ 3,477 Supplemental disclosure of cash flow information: Cash paid for: Interest $1,854 $2,039 $2,671 $ 3,429 $ 4,388 Income taxes $ 320 $ 430 $ 490 $ 396 $ 344 Non-cash transactions: Real estate acquired through foreclosure or substantively repossessed $ 311 $ 420 $ 375 $ 919 $ 112 Stock options exercised $ 35 - -
See accompanying notes to consolidated financial statements. ORANGE SAVINGS BANK AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--Summary of Significant Accounting Policies The financial statements have been prepared in conformity with generally accepted accounting principles and to general practices within the banking community. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, valuation of other real estate owned and valuation allowance on deferred tax assets. In connection with the determination of the allowance for loan losses and the valuation of other real estate owned, management obtains independent appraisals for significant properties. A substantial portion of Orange's loans are secured by real estate in the Orange, Massachusetts area which has generally been affected by the depressed economic environment in the northeastern United States. Accordingly, the ultimate collectibility of a substantial portion of Orange's loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in market conditions in these markets. Basis of presentation The consolidated financial statements include the accounts of Orange and its wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the 1992 and 1991 financial statements have been reclassified to conform to the 1993 presentation without effect on shareholders' equity or net income. The accompanying consolidated financial statements for the nine months ended September 30, 1994 are unaudited and, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, which are necessary to fairly present the financial position of Orange Savings Bank and Subsidiary as of September 30, 1994 and the results of operations, changes in stockholders' equity and changes in cash flows for the periods ended September 30, 1994 and 1993. The results of operations for the interim period ended September 30, 1994 are not necessarily indicative of the results for the entire year. Statement of cash flows Cash and cash equivalents include cash, due from banks and federal funds sold. Certificates of deposit Certificates of deposit are carried at cost, which approximates market value. All certificates mature within two years. Investment securities Effective December 31, 1993, Orange adopted Financial Accounting Standards Board ("FASB") Statement of Accounting Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Under FASB No. 115, debt securities that Orange has the positive intent to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading and reported at fair value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of estimated income taxes. FASB No. 115 does not apply to unsecuritized loans. However, after mortgage loans are converted to mortgage backed securities, they are subject to its provisions. Upon adoption, Orange classified its investment securities into two categories: held-to- maturity and available-for-sale; Orange has no securities held for trading. As a result of adoption, shareholders' equity was increased by approximately $35,000, representing the net unrealized gain on equity securities available for sale, less applicable income taxes. In 1992 and prior periods, investment securities intended to be held-to- maturity were carried at amortized cost and marketable equity securities were carried at the lower of aggregate cost or market value. Premiums and discounts on investment securities are amortized or accreted into income using the straight-line basis, the result of which approximates the level yield method. If a decline in value below the amortized cost basis of an investment security is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included as a charge against earnings. Gains and losses on the sale of investment securities are recognized at the time of sale on a specific identification basis. Loans Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due 90 days with respect to interest or principal. The accrual of some loans, however, may continue even though they are more than 90 days past due if management deems it appropriate, provided that the loans are well secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectable as to both principal and interest. Loan origination fees, net of certain direct loan origination costs, are considered adjustments of interest rate yield and amortized into interest income over the loan term. Loans held for sale Loans held for sale are carried at the lower of aggregate cost or market value. Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to operations and is maintained at a level considered adequate by management. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated losses inherent in the loan portfolio after weighing various factors. Among the factors management may consider are, generally, the level of non-accruing loans, current economic conditions, trends in delinquencies and charge-offs and collateral values of the underlying security. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. Ultimate loan losses may vary significantly from current estimates. Management believes that the allowance for loan losses is adequate; however, future adjustments to the allowance may become necessary if future economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies periodically review Orange's allowance for loan losses. Such agencies may require Orange to recognize additions to the allowance based on judgments different from those of management. Stock in The Federal Home Loan Bank of Boston Stock in the Federal Home Loan Bank of Boston (FHLBB) represents stock purchased under the requirements of the FHLBB. As and when such stock is redeemed, Orange will receive an amount equal to the par value of the stock. The stock is carried at cost. Land, building and equipment Land is stated at cost. Buildings and equipment are stated at cost, less allowances for depreciation computed on a straight-line method over the estimated useful lives of the respective assets. The cost of maintenance and repairs is charged to earnings when incurred. Major expenditures for betterments are capitalized and depreciated. Other real estate owned Other real estate owned is comprised of properties acquired through foreclosure proceedings, acceptance of a deed in lieu of foreclosure or substantively repossessed. When there is an indication that a borrower no longer has equity in property collateralizing a loan and it is doubtful that the equity will be rebuilt in the foreseeable future or foreclosure proceedings are imminent, the property is considered repossessed in substance. Both in-substance foreclosures and real estate formally acquired in settlement of loans are recorded at the lower of the carrying value of the loan or the market value less selling cost of the property constructively or actually received. Losses arising from the acquisition of such properties or from the write-downs to fair value of loans substantively repossessed are charged against the allowance for loan losses. Cost relating to the development and improvement of property are capitalized, whereas operating expenses and any subsequent provisions to reduce the carrying value to fair value minus cost to sell are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. Income taxes Effective January 1, 1992, Orange adopted Financial Accounting Standards Board (FASB) Statement No. 109 "Accounting for Income Taxes". Statement 109 changed Orange's method of accounting for income taxes from the deferred method required under APB 11 to the asset and liability method. The cumulative effect of this accounting change totaling $50,000 has been reported separately in the 1992 consolidated statement of operations. Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of Orange's assets and liabilities at the legislated tax rates which are expected to be in effect when the temporary differences reverse. Orange's tax assets and liabilities are reviewed regularly and adjustments are recognized as deferred income tax expense or benefit based on management's judgment regarding its realizability. Pursuant to the deferred method which was applied in 1991 and prior years, deferred income taxes were recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable in the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates. Earnings per share Earnings per share is computed by dividing earnings by the average number of common stock and common stock equivalents outstanding during the year. Common stock equivalents include stock options outstanding when dilutive. Recent Accounting Developments In May, 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires a change in accounting method for most financial institutions, commencing with fiscal years beginning after December 15, 1994, with early adoption permissible. SFAS No. 114 is applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (i.e., residential mortgage, credit card and consumer installment loans), loans that are measured at fair value or at the lower of cost or fair value (i.e., loans in a trading or held for sale portfolio), leases, and convertible or nonconvertible debentures and bond and other debt securities. Management does not expect that adopting the provisions of SFAS No. 114 will have a material impact on Orange's financial statements. NOTE 2--Certificates of Deposit (dollars in thousands) Certificates of deposit at September 30, 1994 and December 31, 1993 and 1992, are summarized as follows:
September 30, December 31, 1994 1993 1992 Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (unaudited) Original maturities within: 6 to 12 months $294 6.22% $194 6.87% $ - - one to two years 194 6.35% 290 6.18% 194 6.87% two to three years - - - - 290 6.18% $488 6.27% $484 6.46% $484 6.46%
NOTE 3--Investment Securities A summary of investment securities classified as available for sale and held to maturity at September 30, 1994 and December 31, 1993 is as follows:
September 30, 1994 December 31, 1993 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value Cost Gains Losses Value (unaudited) Available for Sale United States Treasury and agency obligations $2,739 $ - $42 $2,697 $ - $ - $ - $ - Marketable equity securities 523 68 38 553 579 49 14 614 $3,262 $68 $80 $3,250 $ 579 $49 $14 $ 614 Held to Maturity United States Treasury and agency obligations $2,016 $ 0 $45 $1,971 $3,757 $ 4 $ 3 $3,758
A summary of investment securities at December 31, 1992, prior to the adoption of FASB 115 is as follows:
December 31, 1992 Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value United States Treasury and Agency Obligations $1,487 $ - $ - $1,487 Marketable equity securities 872 94 67 897 $2,359 $94 $67 $2,384
A schedule of the maturity distribution of bonds and obligations at September 30, 1994 and December 31, 1993 and 1992, is as follows:
September 30, December 31, 1994 1993 1992 Weighted Weighted Weighted Average Average Average (Dollars in thousands) Amount Rate Amount Rate Amount Rate (unaudited) Within 1 year $1,251 4.25% $1,999 3.70% $ 981 3.40% Over 1 year to 5 years 3,469 5.58 1,758 4.11 506 5.10 Over 5 years to 10 years - - - - - - After 10 years - - - - - - $4,720 5.53% $3,757 3.89% $1,487 3.97%
Realized gains on the sales of equity securities were $1,000, $25,000, $73,000 and $116,000 for the nine months ended September 30, 1994 and years ended December 31, 1993, 1992 and 1991, respectively. Realized losses on the sales of equity securities were $0, $7,000, $25,000, $131,000 for the nine months ended September 30, 1994 and years ended December 31, 1993, 1992 and 1991, respectively. Write-downs for impairment amounted to $39,000 and $165,000 in 1993 and 1991, respectively. There were no write-downs for the nine months ended September 30, 1994 and the year ended December 31, 1992. NOTE 4--Loans The composition of the balances of loans is as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (unaudited) Mortgage Loans: Conventional--adjustable rate $52,041 $51,398 $48,755 Conventional--fixed rate 10,255 10,995 14,227 F.H.A. and V.A 522 608 715 Total principal balances 62,818 63,001 63,697 Less: Due to borrowers on uncompleted loans (203) (384) (250) Deferred loan fees (25) (28) (31) Total mortgage loans 62,590 62,589 63,416 Other loans: Equity line of credit 5,001 5,086 5,727 Auto 1,232 853 473 Education 434 548 476 Home Improvement 159 145 105 Secured 472 489 442 Personal 363 327 292 Total principal balances 7,661 7,448 7,515 Add: Deferred loan costs 8 8 7 Total other loans 7,669 7,456 7,522 Add: Loans in process 31 1,011 86 Less: Allowance for loan losses (576) (595) (483) $69,714 $70,461 $70,541
Orange's lending activities are conducted principally in Orange, Massachusetts and the surrounding area. Orange makes single family and multi- family residential loans and a variety of consumer loans. In addition, Orange makes loans for the construction of residential homes. Most loans made by Orange are collateralized either by real estate or personal property. The ability of the single family residential and consumer borrower to honor repayment commitments is generally affected by the level of overall economic activity within the borrowers' geographic areas, on real estate values and on the general economy. In the ordinary course of business, Orange makes loans to directors and executive officers, including their immediate families and companies with whom they are affiliated. Such loans of $60,000 or more in the aggregate, which are substantially on the same terms as those existing at the time of origination for comparable transactions with other borrowers, amounted to $389,000, $207,000 and $287,000 at September 30, 1994 (unaudited) and December 31, 1993 and 1992, respectively. Loans serviced for others were $14,259,000, $13,461,000 and $5,640,000 at September 30, 1994 (unaudited) and December 31, 1993 and 1992, respectively. At September 30, 1994 (unaudited) and December 31, 1993 and 1992, loans overdue 90 days and still accruing were $44,000, $448,000 and $379,000, respectively. In addition, Orange had non-accrual loans during the same periods of $410,000, $1,015,000 and $852,000, respectively. Forgone interest on non-accrual loans amounted to approximately $25,000, $45,000 and $76,000 for the nine months ended September 30, 1994 (unaudited) and years ended December 31, 1993 and 1992, respectively. Changes in the allowance for loan losses were as follows:
Nine Months Ended September 30, Years Ended December 31, (In thousands) 1994 1993 1992 1991 (unaudited) Balance at beginning of period $595 $483 $ 370 $251 Provision charged to operations 12 90 242 135 Net realized losses charged to allowance (45) (18) (129) (16) Charge-offs recovered 14 40 - - Balance at end of period $576 $595 $ 483 $370 Allocated as follows: Mortgage loans $541 $551 $ 442 $327 Consumer loans 35 44 41 43 $576 $595 $ 483 $370
NOTE 5--Land, Buildings and Equipment A summary of these assets is presented in the following tabulation:
Nine Months Ended Years Ended September 30, December 31, (In thousands) 1994 1993 1992 Useful Lives (unaudited) Land $ 47 $ 47 $ 47 Land improvements 27 27 27 10 years Building and improvements 534 534 534 32-40 years Furniture and equipment 931 840 743 1-5 years 1,539 1,448 1,351 Less: Accumulated depreciation 1,075 1,004 909 $ 464 $ 444 $ 442
Orange leases its branch office under an operating lease which expires in 1997. The lease contains an option to extend the lease for an additional two years. The lease stipulates that Orange pay one third of the real estate taxes, insurance and maintenance costs. The annual rental expense under the lease is $18,000 per year. NOTE 6--Deposits A summary of deposit balances, by type, is as follows:
Nine Months Ended September 30, Years Ended December 31, 1994 1993 1992 Weighted Weighted Weighted Average Average Average (Dollars in thousands) Balance Rate Balance Rate Balance Rate (unaudited) NOW accounts $ 8,412 1.88% $ 8,011 2.12% $ 8,221 3.49% Savings accounts 18,977 2.97% 18,865 3.21% 17,703 4.26% Money market deposit accounts 13,889 3.22% 14,457 3.40% 15,058 4.36% Demand deposit accounts 2,154 - 1,699 - 1,877 - Total non-certificate accounts 43,432 2.84% 43,032 3.12% 42,859 3.79% Term deposit certificates 13,043 5.07% 12,938 5.05% 10,306 6.19% Money market certificates 17,370 3.26% 16,424 4.40% 19,185 5.42% Total certificate accounts 30,413 4.28% 29,362 4.65% 29,491 5.67% Total deposits $73,845 3.41% $72,394 3.71% $72,350 4.80%
A summary of certificate accounts by maturity at September 30, 1994 and December 31, 1993 is as follows:
September 30, 1994 December 31, 1993 In Denominations In Denominations (Dollars in thousands) Under $100 Over $100 Total Under $100 Over $100 Total (unaudited) 3 months or less $ 3,589 $ 431 $ 4,020 $ 7,166 $ 366 $ 7,532 3-6 months 6,647 432 7,079 6,052 365 6,417 6-12 months 12,228 862 13,090 6,234 732 6,966 12 months or more 5,904 328 6,232 7,412 1,035 8,447 $28,368 $2,053 $30,421 $26,864 $2,498 $29,362
Interest expense on deposits of $100,000 or more was $70,000, $110,000, $131,000 and $107,000 for the nine months ended September 30, 1994 (unaudited) and the years ended December 31, 1993, 1992 and 1991, respectively. Orange had no brokered certificates of deposit at September 30, 1994 and December 31, 1993 or 1992. NOTE 7--Borrowed Funds Orange is a member of the Federal Home Loan Bank of Boston. As a member, Orange is generally entitled to borrow up to 30% of its total assets. Borrowings from the Federal Home Loan Bank of Boston are secured by a blanket lien on residential first mortgage loans, investment securities and all stock in the Federal Home Loan Bank of Boston equal in value to the amount of borrowings outstanding. Additional information regarding these borrowings is as follows:
Nine Months Ended Years Ended September 30, December 31, (Dollars in thousands) 1994 1993 1992 (unaudited) Average amount outstanding for the year - - $1,392 Weighted average interest rate thereon - - 7.97% Maximum amount outstanding during the year - - $1,500
NOTE 8--Income Taxes Effective January 1, 1992, Orange adopted Statement of Accounting Standards No. 109, "Accounting for Income Taxes" which changed the method of accounting for income taxes from the deferred method to the asset and liability method. The cumulative effect of this accounting change of $50,000 was determined as of January 1, 1992 and is reported separately in the Consolidated Statement of Operations for the year ended December 31, 1992. Prior period financial statements have not been restated. The components of income tax expense were as follows:
September 30, December 31, (In thousands) 1994 1993 1993 1992 1991 (unaudited) Current tax expense (benefit) Federal $295 $298 $ 133 $328 $196 State 104 137 134 144 126 Total current tax expense (benefit) 399 435 267 472 322 Deferred tax expense (benefit) Federal (39) (43) 222 (7) 76 State (15) (20) (14) - - Total deferred expense (benefit) (54) (63) 208 (7) 76 Change in valuation reserve - - (384) - - Total income tax expense (benefit) $345 $372 $ 91 $465 $398
The difference between total expected income tax expense (benefit) computed by applying the statutory Federal income tax rate of 34% to income (loss) before income taxes and cumulative effect of accounting change and the reported income tax expense (benefit) for the periods indicated is analyzed as follows:
September 30, December 31, 1994 1993 1993 1992 1991 (unaudited) Federal income tax statutory rate 34% 34% 34% 34% 34% State income taxes net of Federal benefit 8 8 6 95 58 Bad debt deduction - - - - 30 Loss on investment in real estate limited partnerships - - - 603 120 Capital loss for which no current benefit is available - - - 28 36 Change in valuation reserve - - (31) - - Other (2) (2) (2) 22 - Effective income tax rate 40% 40% 7% 782% 278% The tax effects of temporary differences (the differences between the financial statement carrying amounts existing assets and liabilities and their respective tax bases) that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
September 30, December 31, (In thousands) 1994 1993 1992 (unaudited) Deferred tax assets: Accrued pension costs $ 103 $ 76 $ 55 Other 58 37 110 Allowance for loan loss 206 202 175 Premium on deposits 17 17 - Security write-downs 90 89 79 State net operating loss 48 48 52 Capital loss carryforward 58 43 118 Gross deferred tax asset 580 512 589 Valuation reserve (195) (180) (564) 385 332 25 Deferred tax liabilities: Banking premises and equipment 22 23 25 Real estate partnership losses 254 254 121 276 277 146 $109 $ 55 ($121)
Based on Orange's historical and current pretax earnings, management believes it is more likely than not that Orange will realize the net deferred tax asset existing at December 31, 1993. Further, management believes the existing net deductible temporary differences will reverse during periods in which Orange generates net taxable income. At December 31, 1993, recoverable income taxes, plus estimated taxes for 1994, exceeded the amount of the net deferred tax asset. There can be no assurance, however, that Orange will generate any earnings or any specific level of continuing earnings. Orange's subsidiary, Orange Corporation, has state net operating loss carryforwards of approximately $500,000 which expire within five years of December 31, 1994. At December 31, 1993, retained earnings include a tax loan loss reserve of approximately $1,400,000 for which no provision for income taxes has been made. If, in the future, such amounts are used for any purpose other than to absorb loan losses, or if Orange ceases to qualify to utilize the PTI method under the Internal Revenue Code, Orange will incur a tax liability at the current applicable income tax rates. Orange anticipates that it will continue to meet the qualifying assets test and that the $1,400,000 of retained earnings will not be used for any purpose that would result in the payment of income taxes. The unrecognized deferred tax liability on the $1,400,000 as of December 31, 1993 is $575,000. NOTE 9--Employee Benefits Orange has a qualified defined benefit plan providing for pension benefits through membership in the Savings Bank Employees Retirement Association. All full-time employees who have reached age 21 and have completed one year of service are automatically eligible to participate. All participants become fully vested in the plan after three years or at age 62. The following table sets forth the plan's funded status and amounts recognized in Orange's consolidated financial statements, as of October 31, 1993 the most recent date for which such information is available:
1993 1992 (In thousands) Plan assets at fair value $ 568 $ 487 Actuarial present value of benefit obligations: Vested benefits 407 344 Non-vested benefits 3 1 Accumulated benefit obligation 410 345 Effect of projected future salary increases 421 339 Projected benefit obligation for past service 831 684 Plan assets less than projected benefit obligations (263) (197) Unrecognized liability being recognized over 26 years commencing November 1, 1986 (63) (67) Accrued pension cost $(200) $(130)
Net pension expense for the years ended December 31 includes the following components:
1993 1992 1991 (in thousands) Service costs earned during the year $ 64 $ 48 $ 33 Interests costs on projected benefit obligation 58 40 34 Actual return on plan assets (40) (36) (74) Net amortization and deferral 2 12 46 Net periodic pension cost $ 84 $ 64 $ 39
The weighted average discount rates used in determining the projected benefit obligation were 7.00% in 1993, 7.00% in 1992 and 6.75% in 1991. The expected long-term return on plan assets was 7.00% in 1993, 6.75% in 1992 and 7.75% in 1991. The rate of increase in future compensation levels used in determining projected benefit obligations was 6%. Stock Option Plans Orange has adopted Stock Option Plans which provide for the granting of options to purchase shares of Orange's common stock to eligible employees to provide incentives and encourage their continued employment. The term of each plan is ten years. Each stock option will terminate no later than ten years from the date of grant. Orange has reserved 285,922 shares of common stock for issuance pursuant to the plans. Options may be granted from time to time at a purchase price per share of 100% of the fair market value per share of stock on the date of the grant. At December 31, 1993, 81,049 shares were exercisable under the plans. Transactions involving the Stock Option Plans are as follows:
Number Price Range of Per Shares Share 1987 Plan Granted upon conversion 71,388 $ 4.44 Options exercised (17,762) 4.44 Options canceled (37,066) Options outstanding from 1987 Plan at December 31, 1993 16,560 4.44 1988 Plan Options granted 69,958 6.00 Options exercised (1,621) 6.00 Options canceled (36,822) Options outstanding from 1988 Plan at December 31, 1993 31,515 6.00 1989 Plan Options granted 37,005 12.38 Options exercised - Options canceled (4,031) Options outstanding from 1989 Plan at December 31, 1993 32,974 12.38 Total options outstanding at December 31, 1993 81,049 $ 4.44 to $12.38
NOTE 10--Commitments and Contingencies Orange is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the needs of its customers. These financial instruments include commitments to originate loans and fund unadvanced amounts on lines of credit. The instruments involve, to various degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Commitments to fund loans amounted to $1,060,000 and $1,905,000 and unadvanced lines of credit were approximately $4,807,000 and $4,946,000, respectively, at December 31, 1993 and 1992. At September 30, 1994 (unaudited), Orange had firm commitments of $278,500 to make loans which are not reflected on the consolidated balance sheet. In addition, the unused portions of home equity loans outstanding amounted to $4,469,000. There were no loans held for sale at September 30, 1994. Orange's exposure to credit loss in the event of nonperformance by the other party to financial instruments for loan commitments and unadvanced equity lines is represented by the contractual amounts of those instruments. Orange evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. Orange is subject to certain litigation which is incurred in the ordinary course of business. After consultation with counsel, management is of the opinion that the aggregate liability, if any, resulting from such litigation will not be material to Orange's consolidated financial position. NOTE 11--Shareholders' Equity Upon completion of its conversion to stock ownership in 1987, Orange was required to establish a "Liquidation Account" in the amount equal to the shareholders' equity of Orange at September 30, 1986 totalling $2,372,000 for the benefit of eligible account holders who continue to maintain their accounts with Orange after conversion. The "Liquidation Account" amounted to approximately $617,000 (unaudited) at December 31, 1993 and will be reduced in proportion to reduction in the balances of an eligible holder's interest in his or her liquidation sub-account. Eligible account holders would be entitled, in the event of a complete liquidation of Orange and only in such event, to receive liquidating distributions of any assets remaining after payment of all applicable taxes and creditors claims (including the claims of all depositors to the withdrawal values of their deposit accounts), but before any distributions are made to Orange's capital shareholders, equal to their interests at that time in the Liquidation Account. Orange may not declare or pay any cash dividend on its common stock if the effect thereof would cause the net worth of Orange to be reduced below the amount required to be maintained for the Liquidation Account. Orange is required to comply with Federal regulatory requirements. These require the most highly rated banks to maintain a core or Tier 1 (see definition below) leverage capital ratio of at least 3% and other banks to maintain a Tier 1 leverage capital ratio of 4% to 5%. Risk-based capital guidelines also apply. The guidelines establish a risk-adjusted ratio relating capital to different categories of balance sheet assets and off-balance sheet obligations, which are assigned to one of four risk-weighted categories. Two categories of capital are defined: Tier 1 or core capital (primarily, common stock, retained earnings and a limited amount of perpetual preferred stock, less goodwill) and Tier 2 or supplementary capital (primarily, a limited amount of loan loss reserves, perpetual preferred stock in excess of the amounts included in Tier 1 capital and certain "hybrid instruments", including mandatory convertible debt). Total capital is the sum of Tier 1 and Tier 2 capital. The minimum total risk-based capital ratio required was 8% at December 31, 1993 and 1992. At September 30, 1994 (unaudited) and December 31, 1993, Orange's capital ratios exceeded all regulatory capital requirements. NOTE 12--Acquisition In August 1991, Orange acquired the Athol branch of Peoples Savings Bank of Worcester, purchasing $8.4 million of deposits and its operations. The premium paid in connection with this acquisition amounted to $170,000. The transaction was accounted for as a purchase. At September 30, 1994 (unaudited) and December 31, 1993, the unamortized premium was $95,000 and $113,000, respectively, and is included in other assets in the accompanying consolidated balance sheets. NOTE 13--Quarterly results
1994 Quarters (Dollars in thousands, except per share data) Third Second First (unaudited) Interest income $1,469 $1,415 $1,375 Interest expense 626 618 609 Net interest income 843 797 766 Provision for possible loan losses 0 0 12 Other income 73 96 57 Other expense 619 565 574 Income before income taxes 297 328 237 Income taxes 119 131 95 Net income $ 178 $ 197 $ 142 Weighted average shares outstanding 769,703 742,474 741,699 Earnings per share $0.23 $0.27 $0.19 Cash dividend per share $0.04 $0.04 $0.04
1993 Quarters 1992 Quarters (In thousands except per share data) Fourth Third Second First Fourth Third Second First (unaudited) (unaudited) Interest income $1,422 $1,460 $1,502 $1,499 $1,580 $1,630 $1,601 $1,590 Interest expense 633 658 670 706 772 852 875 913 Net interest income 789 802 832 793 808 778 726 677 Provision for possible loan losses (22) (23) (22) (23) (125) (69) (22) (26) Other income 76 55 82 63 (760) 106 (219) 95 Other expenses (534) (549) (562) (517) (626) (468) (511) (428) Income before income taxes 309 285 330 316 (703) 347 (26) 318 Effect of accounting change - - - - - - - 50 Income taxes (281) 114 132 126 95 148 105 117 Net income $ 590 $ 171 $ 198 $ 190 $ (798) $ 199 $ (131) $ 251 Weighted average shares outstanding 742,446 736,005 732,273 742,567 731,286 728,799 724,763 729,799 Earnings per share $ 0.79 $ 0.23 $ 0.27 $ 0.26 $(1.09) $ 0.27 $(0.18) $ 0.35 Cash dividend per share $ 0.08 $ 0.04 $ 0.04 $ 0.04 $ 0.06 $ 0.04 $ 0.06 $ 0.04
In the fourth quarter of 1992, Orange wrote off the balance of its limited partnership investments. In the fourth quarter of 1993, Orange adjusted its tax valuation reserve. Annex A EXECUTION COPY Amended and Restated Agreement and Plan of Merger between CFX Corporation and Orange Savings Bank July 26, 1994 TABLE OF CONTENTS ARTICLE I THE MERGER 1.1 The Merger A-7 1.2 Effective Time A-7 1.3 Charter and By-laws A-7 1.4 Directors of Surviving Bank and Buyer A-7 1.5 Officers of Surviving Bank A-8 1.6 Additional Actions A-8 ARTICLE II CONVERSION OF SHARES 2.1 Conversion of Orange Common Stock A-8 2.2 Procedures for Exchange of Orange Common Stock for Merger Consideration A-9 (a) Buyer to Make Shares Available A-9 (b) Exchange of Certificates A-9 (c) Rights of Certificate Holders after the Effective Time A-9 (d) Fractional Shares A-10 (e) Surrender by Persons Other than Record Holders A-10 (f) Closing of Transfer Books A-10 (g) Return of Exchange Fund A-10 2.3 Buyer Sub Common Stock A-10 2.4 Dissenters' Rights A-10 2.5 Stock Options A-11 2.6 Effects of the Merger; Liquidation Account A-11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ORANGE 3.1 Corporate Organization A-12 3.2 Capitalization A-12 3.3 Authority A-13 3.4 No Violation A-13 3.5 Consents and Approvals A-13 3.6 Regulatory Approval A-13 3.7 Financial Statements A-14 3.8 Reports A-14 3.9 Absence of Certain Changes or Events A-14 3.10 Legal Proceedings A-15 3.11 Taxes and Tax Returns A-15 3.12 Properties A-15 3.13 Certain Contracts A-16 3.14 Certain Defaults A-16 3.15 Insurance A-16 3.16 Employee Benefit Plans A-16 3.17 Compliance with Applicable Law; Regulatory Examinations A-17 3.18 Broker's Fees A-17 3.19 Orange Information A-18 3.20 Environmental Issues A-18 3.21 Material Interest of Certain Persons A-18 3.22 Certain Transactions A-18 3.23 Regulatory Agreements A-18 3.24 Status as a Limited Partner A-18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 Corporate Organization A-19 4.2 Capitalization A-19 4.3 Authority A-19 4.4 No Violation A-19 4.5 Consents and Approvals A-20 4.6 Regulatory Approval A-20 4.7 Financial Statements A-20 4.8 SEC Reports A-21 4.9 Absence of Certain Changes or Events A-21 4.10 Legal Proceedings A-21 4.11 Fairness Opinion A-21 4.12 Buyer Information A-21 4.13 Capital A-22 4.14 Regulatory Agreements A-22 ARTICLE V COVENANTS OF ORANGE 5.1 Conduct of Business A-22 (a) Affirmative Covenants A-22 (b) Negative Covenants A-22 5.2 No Solicitation A-24 5.3 Current Information A-24 5.4 Access to Properties and Records A-24 5.5 Financial and Other Statements A-24 5.6 Approval of Orange's Stockholders A-24 5.7 Disclosure Supplements A-25 5.8 Failure to Fulfill Conditions A-25 5.9 Consents and Approvals of Third Parties A-25 5.10 All Reasonable Efforts A-25 ARTICLE VI COVENANTS OF BUYER 6.1 Conduct of Business A-25 6.2 Consents and Approvals of Third Parties A-25 6.3 All Reasonable Efforts A-25 6.4 Failure to Fulfill Conditions A-25 6.5 Disclosure Supplements A-25 6.6 Financial and Other Statements A-26 6.7 Employee Benefits A-26 6.8 Deposit of Exchange Fund with Exchange Agent A-26 6.9 Directors and Officers Indemnification and Insurance A-26 6.10 Stock Exchange Listing A-27 6.11 Buyer Sub A-27 ARTICLE VII REGULATORY AND OTHER MATTERS 7.1 Proxy Statement-Prospectus A-28 7.2 Regulatory Approvals A-28 7.3 Affiliates; Publication of Combined Financial Results A-28 ARTICLE VIII CLOSING CONDITIONS 8.1 Conditions to Each Party's Obligations under this Agreement A-29 (a) Stockholder Approval A-29 (b) Injunctions A-29 (c) Regulatory Approvals A-29 (d) Effectiveness of Registration Statement A-29 (e) Stock Exchange Listing A-29 (f) Tax Rulings or Opinions A-29 8.2 Conditions to the Obligations of Buyer under this Agreement A-30 (a) Representations and Warranties A-30 (b) Agreements and Covenants A-30 (c) Permits, Authorizations, Etc. A-30 (d) Legal Opinion A-30 (e) Pooling of Interests A-30 (f) Dissenting Orange Shareholders A-30 (g) Accountants' Letter A-31 (h) Fairness Opinion A-31 8.3 Conditions to the Obligations of Orange under this Agreement A-31 (a) Representations and Warranties A-31 (b) Agreements and Covenants A-31 (c) Permits, Authorizations, Etc. A-32 (d) Legal Opinion A-32 (e) Fairness Opinion A-32 ARTICLE IX THE CLOSING 9.1 Time and Place A-32 9.2 Deliveries at the Closing A-32 ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1 Termination A-32 10.2 Effect of Termination A-33 10.3 Termination Fee A-33 10.4 Expenses A-34 10.5 Amendment, Extension and Waiver A-34 ARTICLE XI CERTAIN DEFINITIONS 11.1 Certain Definitions A-34 ARTICLE XII MISCELLANEOUS 12.1 Confidentiality A-35 12.2 Public Announcements A-35 12.3 Survival A-35 12.4 Notices A-36 12.5 Parties in Interest A-36 12.6 Complete Agreement A-36 12.7 Counterparts A-36 12.8 Severability A-36 12.9 Governing Law A-37 12.10 Headings A-37
INDEX OF DEFINED TERMS Adjusted Maximum Exchange Ratio A-8 Affiliate A-34 Agreement A-7 Articles of Merger A-7 Average Closing Price A-8 Bank Regulator A-13 BBI A-13 Buyer A-7 Buyer Audited Financial Statements A-20 Buyer Common Shares A-19 Buyer Common Stock A-8 Buyer Financial Statements A-20 Buyer Interim Financial Statements A-20 Buyer Preferred Shares A-19 Buyer Reports A-21 Buyer Stock Option A-11 Buyer Stock Option Plan A-19 Buyer Sub A-7 Central Fund A-13 Certificate A-8 Closing A-7 Closing Date A-7 Code A-11 Dissenting Shares A-10 Effective Time A-7 Environmental Laws A-35 Environmental Permits A-35 ERISA Plans A-17 Exchange Act A-12 Exchange Fund A-9 Exchange Ratio A-8 Exhibit A A-30 Exhibit B A-32 Expenses A-33 FDIA A-17 FDIC A-13 Federal Reserve A-13 Hazardous Substances A-35 HSR Act A-13 Increased Dividend A-22 Indemnified Parties A-26 Investment Advisor A-17 Last Closing Price A-10 Massachusetts Commissioner A-8 Material Adverse Effect A-35 Maximum Exchange Ratio A-8 MBCL A-10 Merger A-7 Merger Consideration A-8 MHP A-13 Minimum Exchange Ratio A-8 Orange A-7 Orange Audited Financial Statements A-14 Orange Common Stock A-8 Orange Financial Statements A-14 Orange Interim Financial Statements A-14 Orange Option A-11 Orange Preferred Shares A-12 Orange Reports A-14 Orange Stock Option Plans A-11 Orange Sub A-18 Orange Subsidiaries A-12 Pension Plan A-17 Person A-35 Proxy Statement-Prospectus A-28 Record Holder A-9 Registration Statement A-28 Schedules A-12 SEC A-21 Secretary of State A-7 Securities Act A-11 Special Meeting A-24 Stock Exchange A-8 Subsidiaries A-35 Subsidiary A-35 Surviving Bank A-7 Termination Date A-32 Termination Fee A-33 Valuation Period A-8 Welfare Plan A-17
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as of July 26, 1994 (this "Agreement"), by and between CFX Corporation, a New Hampshire corporation ("Buyer"), and Orange Savings Bank, a Massachusetts-chartered savings bank in stock form ("Orange"). (Certain capitalized terms used herein shall have the meanings defined in Section 11.1 hereof.) WHEREAS, Buyer intends to cause to be organized a Massachusetts bank that will be a wholly-owned direct or indirect subsidiary of Buyer ("Buyer Sub") and thereafter to cause Buyer Sub to become a party to this Agreement; and WHEREAS, the respective Boards of Directors of Buyer and Orange have approved the acquisition of Orange by Buyer pursuant to the merger of Buyer Sub with Orange (the "Merger"); and WHEREAS, Buyer and Orange executed an Agreement and Plan of Merger on July 26, 1994; and WHEREAS Buyer and Orange now wish to amend and restate their Agreement and Plan of Merger to correct certain typographical and technical errors; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 The Merger. As promptly as practicable following the satisfaction or waiver of the conditions to the parties' respective obligations hereunder, at the Effective Time (as defined in Section 1.2 hereof), Buyer shall form the Buyer Sub in accordance with Massachusetts law, and Buyer Sub shall be merged into Orange. Orange shall be the surviving bank of the Merger (the "Surviving Bank"). At the Effective Time, the separate existence of Orange shall cease and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of Orange shall be vested in and assumed by Surviving Bank. 1.2 Effective Time. The Merger shall be effected by the filing of articles of merger (the "Articles of Merger") with the Secretary of State of The Commonwealth of Massachusetts (the "Secretary of State") in accordance with Massachusetts law to become effective on the day of the closing ("Closing Date") provided for in Article IX hereof (the "Closing"). The term "Effective Time" shall mean the time on the Closing Date when the Merger becomes effective, as set forth in the Articles of Merger. 1.3 Charter and By-laws. The Charter and By-laws of Surviving Bank shall be the Charter and By-laws of Orange as in effect immediately prior to the Effective Time, until thereafter amended as provided therein and by applicable law. 1.4 Directors of Surviving Bank and Buyer. (a) The directors of Orange immediately prior to the Effective Time shall be the initial directors of Surviving Bank, each to hold office in accordance with the Charter and By-Laws of Surviving Bank. Buyer intends to elect up to three additional directors to serve on the Board of Surviving Bank. Buyer agrees that, except as provided in the previous sentence, the Board of Directors of Orange will be kept in place for at least three years subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of Buyer's directors. (b) Prior to or at the Effective Time one of Orange's current directors (designated, subject to the reasonable approval of Buyer, by a vote of Orange's Board of Directors prior to the Effective Time) shall be elected to the Board of Directors of Buyer to serve in the class whose term expires in 1996. The Board of Directors of Buyer shall nominate such designee for election, and support his or her election, at the next succeeding annual meeting of shareholders of Buyer, to its Board of Directors to serve in the class whose term expires in 1996. 1.5 Officers of Surviving Bank. The officers of Orange immediately prior to the Effective Time shall be the initial officers of Surviving Bank, in each case until their respective successors are duly elected or appointed and qualified. 1.6 Additional Actions. If, at any time after the Effective Time, Surviving Bank shall consider or be advised that any further assignments or assurances in law or any other acts are necessary or desirable (a) to vest, perfect or confirm, of record or otherwise, in Surviving Bank, title to and possession of any property or right of Orange acquired or to be acquired by reason of, or as a result of, the Merger, or (b) otherwise to carry out the purposes of this Agreement, Orange and its proper officers and directors shall be deemed to have granted to Surviving Bank an irrevocable power of attorney to execute and deliver all such proper deeds, assignments and assurances in law and to do all acts necessary or proper to vest, perfect or confirm title to and possession of such property or rights in Surviving Bank and otherwise to carry out the purposes of this Agreement; and the proper officers and directors of Surviving Bank are fully authorized in the name of Orange or otherwise to take any and all such action. ARTICLE II CONVERSION OF SHARES 2.1 Conversion of Orange Common Stock. (a) At the Effective Time, each share of the common stock, par value $.10 per share, of Orange (the "Orange Common Stock") issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares (as such term is defined in Section 2.4 hereof) and other than Orange Common Stock then owned by Orange, any Orange subsidiary, Buyer, or any Buyer subsidiary (in each case other than in a fiduciary capacity or as a result of debts previously contracted)) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and exchangeable for the number of shares (the "Exchange Ratio") of the common stock, par value $1.00 per share of Buyer ("Buyer Common Stock") determined (to four decimal places) by multiplying .8333 by a fraction, the numerator of which is $18.00 and the denominator of which is the Average Closing Price (as defined below), provided, however, that (i) if the Average Closing Price is equal to or greater than $21.00, the Exchange Ratio shall be 0.7143 (the "Minimum Exchange Ratio"); and (ii) if the Average Closing Price is equal to or less than $16.00, the Exchange Ratio shall be 0.9375 (the "Maximum Exchange Ratio"); provided, further, however, that if the Average Closing Price is equal to or less than $14.00, Orange shall have the right, waivable by it, to terminate this Agreement pursuant to Section 10.1(f) hereof, unless Buyer elects, with the approval of Orange, to adopt as the Exchange Ratio the "Adjusted Maximum Exchange Ratio" which shall be determined by dividing $13.13 by the Average Closing Price. For purposes of this Agreement, the "Average Closing Price" shall mean the average closing sale price per share of Buyer Common Stock on the American Stock Exchange (the "Stock Exchange") (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source), for the ten Stock Exchange trading days ending on the business day before the date on which the approval of the Massachusetts Commissioner of Banks (the "Massachusetts Commissioner") required to consummate the transactions contemplated hereby is obtained (the "Valuation Period"). The consideration to be received for each share of Orange Common Stock, to the extent adjusted as provided above, is referred to herein as the "Merger Consideration." (b) Notwithstanding the provisions of Section 2.1(a), in the event that before the Effective Time an announcement is made with respect to a business combination involving the acquisition of Buyer or a substantial portion of its assets, the Exchange Ratio shall not be less than 0.7500. (c) All of the Orange Common Stock converted into Buyer Common Stock pursuant to this Section 2.1 shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each certificate (each a "Certificate") previously representing any such Orange Common Stock shall thereafter represent the right to receive (i) the number of whole shares of Buyer Common Stock and (ii) cash in lieu of fractional shares into which the Orange Common Stock represented by such Certificate have been converted pursuant to this Section 2.1 and Section 2.2 hereof. Certificates previously representing Orange Common Stock shall be exchanged for certificates representing whole shares of Buyer Common Stock and cash in lieu of fractional shares issued in consideration therefor upon the surrender of such Certifi- cates in accordance with Section 2.2 hereof, without any interest thereon. If prior to the Effective Time Buyer should split or combine its common stock or other convertible securities, or pay a dividend or other distribution in such common stock or other convertible securities, then the Exchange Ratio (including, if applicable, the Minimum Exchange Ratio, the Maximum Exchange Ratio, and the Adjusted Maximum Exchange Ratio) shall be appropriately adjusted to reflect such split, combination, dividend or distribution. All Orange Common Stock owned by Orange, any Orange subsidiary, Buyer, or any Buyer subsidiary (in each case other than in a fiduciary capacity or as a result of debts previously contracted) shall, at the Effective Time, cease to exist, and the certificates for such shares shall, as promptly as practicable thereafter, be cancelled and no payments shall be made in consideration therefor. All shares of Buyer Common Stock that are owned by Orange or any of the Orange Subsidiaries (in each case other than in a fiduciary capacity or as a result of debts previously contracted) shall become treasury stock of Buyer. 2.2 Procedures for Exchange of Orange Common Stock for Merger Consideration. (a) Buyer to Make Shares Available. Buyer shall take all steps necessary on and as of the Effective Time to deliver to the Exchange Agent (as hereinafter defined), for the benefit of the holders of Certificates, for exchange in accordance with this Section 2.2, certificates representing shares of Buyer Common Stock and the cash in lieu of fractional shares to be paid pursuant to Section 2.2(d) to holders of options to purchase Orange Common Stock (such cash and certificates for shares of Buyer Common Stock, together with any dividends or distributions with respect thereto being hereinafter referred to as the "Exchange Fund") to be issued and paid in exchange for outstanding Orange Common Stock in accordance with this Agreement. The Exchange Agent shall be such banking institution or corporate trust company reasonably satisfactory to Buyer as Orange shall appoint to act as exchange agent hereunder. The Exchange Agent shall act as agent on behalf of record holders (individually, a "Record Holder") of Orange Common Stock at the Effective Time, other than Orange, any Orange subsidiary, Buyer, or any Buyer subsidiary (in each case other than in a fiduciary capacity or as a result of debts previously contracted), or any Person holding Dissenting Shares. (b) Exchange of Certificates. Within three business days after the Effective Time, Buyer shall take all steps necessary to cause the Exchange Agent to mail to each Record Holder of a Certificate or Certificates, a form letter of transmittal for return to the Exchange Agent and instructions for use in effecting the surrender of the Certificates for certificates representing the Buyer Common Stock and the cash in lieu of fractional shares into which the Orange Common Stock represented by such Certificates shall have been converted as a result of the Merger. The form letter (which shall be subject to the reasonable approval of Orange) shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent. Upon surrender of a Certificate for exchange and cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate for the number of whole shares of Buyer Common Stock to which such holder of Orange Common Stock shall have become entitled pursuant to the provisions of this Article II and (y) a check representing the amount of cash in lieu of the fractional shares, if any, which such holder has the right to receive in respect of Certificates surrendered pursuant to the provisions of this Article II, and the Certificates so surrendered shall forthwith be cancelled. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if required by Buyer, the posting by such person of a bond in such amount as Buyer may direct as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed certificate the Merger Consideration deliverable in respect thereof pursuant to Section 2.1 hereof. (c) Rights of Certificate Holders after the Effective Time. The holder of a Certificate that prior to the Merger represented issued and outstanding Orange Common Stock shall have no rights, after the Effective Time, with respect to such Orange Common Stock except to surrender the Certificate in exchange for the Merger Consideration as provided in this Agreement or to perfect the rights of appraisal as a holder of Dissenting Shares that such holder may have pursuant to the applicable provisions of Massachusetts law. (d) Fractional Shares. Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of Buyer Common Stock shall be issued upon the surrender for exchange of Certificates, no dividend or distribution with respect to Buyer Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a stockholder of Buyer. In lieu of the issuance of any such fractional share, Buyer shall pay to each former holder of Orange Common Stock who otherwise would be entitled to receive a fractional share of Buyer Common Stock, an amount in cash determined by multiplying (i) the closing sale price of Buyer Common Stock on the Stock Exchange as reported by The Wall Street Journal for the trading day immediately preceding the date of the Effective Time (the "Last Closing Price") by (ii) the fraction of a share of Buyer Common Stock which such holder would otherwise be entitled to receive pursuant to Section 2.2(b) hereof. No interest will be paid on the cash which the holders of such fractional shares shall be entitled to receive upon such delivery. (e) Surrender by Persons Other than Record Holders. If the Person surrendering a Certificate and signing the accompanying letter of transmittal is not the Record Holder thereof, then it shall be a condition of the payment of the Merger Consideration that such Certificate is properly endorsed to such Person or is accompanied by appropriate stock powers, in either case signed exactly as the name of the Record Holder appears on such Certificate, and is otherwise in proper form for transfer, or is accompanied by appropriate evidence of the authority of the Person surrendering such Certificate and signing the letter of transmittal to do so on behalf of the Record Holder and that the person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (f) Closing of Transfer Books. From and after the Effective Time, there shall be no transfers on the stock transfer books of Orange of the Orange Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are pre- sented for transfer to the Exchange Agent, they shall be exchanged for the Merger Consideration and cancelled as provided in this Article II. (g) Return of Exchange Fund. At any time following the 12 month period after the Effective Time, Buyer shall be entitled to require the Exchange Agent to deliver to it any portions of the Exchange Fund which had been made available to the Exchange Agent and not disbursed to holders of Certificates (including, without limitation, all interest and other income received by the Exchange Agent in respect of all funds made available to it), and thereafter such holders shall be entitled to look to Buyer (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any Merger Consideration that may be payable upon due surrender of the Certificates held by them. Notwithstanding the foregoing, neither Buyer nor the Exchange Agent shall be liable to any holder of a Certificate for any Merger Consideration delivered in respect of such Certificate to a public official pursuant to any abandoned property, escheat or other similar law. 2.3 Buyer Sub Common Stock. Each share of common stock of Buyer Sub issued and outstanding immediately prior to the Effective Time shall be converted into one (1) share of common stock of the Surviving Bank at the Effective Time and shall be held by Buyer. 2.4 Dissenters' Rights. Notwithstanding anything in this Agreement to the contrary and unless otherwise provided by applicable law, Orange Common Stock which is issued and outstanding immediately prior to the Effective Time and which are owned by stockholders who, pursuant to applicable law, (a) deliver to Orange in the manner provided by law, before the taking of the vote of Orange's stockholders on the Merger, a written objection to the Merger and a written demand for the appraisal of their shares if the Merger is effected and (b) whose shares are not voted in favor of the Merger, nor consented thereto in writing (the "Dissenting Shares"), shall not be converted into the right to receive, or be exchangeable for, the Merger Consideration, but, instead, the holders thereof shall be entitled to payment of the appraised value of such Dissenting Shares in accordance with the provisions of Chapter 156B [SECTION] 86 et seq. of the Massachusetts Business Corporation Law (the "MBCL"). If any such holder shall have failed to perfect or shall have effectively withdrawn or lost such right of appraisal, the Orange Common Stock of such holder shall thereupon be deemed to have been converted into and be exchangeable for, at the Effective Time, the right to receive the Merger Consideration. Buyer shall have the right to participate in any proceeding involving dissenters' rights. 2.5 Stock Options. (a) At the Effective Time, each holder of a then outstanding stock option to purchase Orange Common Stock ("Orange Option") pursuant to the 1987, 1988 or 1989 Orange Bank Stock Option Plan (the "Orange Stock Option Plans") (it being understood that the aggregate number of shares of Orange Common Stock subject to purchase pursuant to the exercise of such Orange Options is not and shall not be more than 81,049) shall be entitled (whether or not such Orange Option is then vested or exercisable) to receive in cancellation of such Orange Option an option to acquire shares of Buyer Common Stock on the terms set forth below (a "Buyer Stock Option"). (b) A Buyer Stock Option shall be a stock option to acquire shares of Buyer Common Stock with the following terms: (i) the number of shares of Buyer Common Stock which may be acquired pursuant to such Buyer Stock Option shall be equal to the product of the number of shares of Orange Common Stock covered by the Orange Option multiplied by the Exchange Ratio, provided that any fractional share of Buyer Common Stock resulting from such multiplication shall be rounded down to the nearest share; and (ii) the exercise price per share of Buyer Common Stock shall be equal to the exercise price per share of Orange Common Stock of such Orange Option, divided by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent; (iii) the duration and other terms of such Orange Option shall be unchanged except that all references to Orange shall be deemed references to Buyer, each such Buyer Stock Option shall be exercisable for at least until the stated expiration of the related Orange Option regardless of whether the holder thereof shall remain in the employ of Surviving Bank or Buyer after the Effective Time and each such Buyer Stock Option shall be a non-qualified option; and (iv) Buyer shall assume such stock option as contemplated by Section 424(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the foregoing, pursuant to Section 8 of each of the Orange Option Plans, the Orange Stock Option Plans and all options or other rights to acquire Orange Common Stock issued thereunder shall terminate at the Effective Time. (c) Buyer shall not issue or pay for any fractional share otherwise issuable upon exercise of a Buyer Stock Option. Prior to the Effective Time, Buyer shall reserve for issuance (and, if not previously registered pursuant to the Securities Act of 1933, as amended (the "Securities Act"), register) the number of shares of Buyer Common Stock necessary to satisfy Buyer's obligations with respect to the issuance of Buyer Common Stock pursuant to the exercise of Buyer Stock Options. 2.6 Effects of the Merger; Liquidation Account. At and after the Effective Time, the Merger shall have the effects set forth in Chapter 156B, Section 80 of the General Laws of The Commonwealth of Massachusetts, as amended, and 12 USC [SECTION]215a(e). Without limiting the foregoing, for purposes of granting a limited priority claim to the assets of the Surviving Bank in the unlikely event (and only upon such event) of a complete liquidation of the Surviving Bank to Persons who continue to maintain savings accounts with the Surviving Bank after the Merger and who, immediately prior to the Merger had a subaccount balance (as defined in [SECTION]33.05(12)(a)(2) of Title 209 of the Code of Massachusetts Regulations, 209 C.M.R. [SECTION]33.05(12)(a)(2)) with respect to the liquidation account of Orange, the Surviving Bank shall, at the time of the Merger, establish a liquidation account in an amount equal to the liquidation account of Orange immediately prior to the Merger. If the balance in any savings account to which a subaccount balance relates at the close of business on the last day of any fiscal year of the Surviving Bank after the Merger is less than the balance in such savings account at the close of business on the last day of any other fiscal year of the Surviving Bank after the Merger, such subaccount balance shall be reduced in an amount proportionate to the reduction in such savings account balance. No subaccount balance shall be increased, notwithstanding any increase in the balance of the related savings account. If such related savings account is closed, such subaccount shall be reduced to zero upon such closing. In the event of a complete liquidation of the Surviving Bank, and only in such event, the amount distributable to each account holder will be determined in accordance with the rules and regulations pertaining to conversions by cooperative banks and savings banks from mutual to stock form of the Massachusetts Commissioner, set forth at 209 C.M.R. Part 33.00, on the basis of such account holder's subaccount balance with the Surviving Bank at the time of its liquidation. No merger, consolidation, purchase of bulk assets with assumption of savings accounts and other liabilities, or similar transaction, whether or not the Surviving Bank is the surviving institution, will be deemed to be a complete liquidation for this purpose, and, in any such transaction, the liquidation account shall be assumed by the surviving institution. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ORANGE Orange hereby represents and warrants to Buyer as follows: 3.1 Corporate Organization. (a) Orange is a savings bank in stock form duly organized and validly existing and in good standing under the laws of The Commonwealth of Massachusetts and in good standing with the Massachusetts Commissioner. The subsidiaries listed in Exhibit 9 of Orange's Annual Report on Form F-2 for the year ended December 31, 1993 constitute all of Orange's subsidiaries (the "Orange Subsidiaries"). Except as set forth in Schedule 3.1 of the Orange Disclosure Schedules (the "Schedules"), each of the Orange Subsidiaries is a corporation, in each case duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each of Orange and the Orange Subsidiaries has the power and authority to own or lease all of its properties and assets and to conduct its business as it is now being conducted, and, except as set forth in Schedule 3.1, is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing does not or would not have a Material Adverse Effect (as defined in Section 11.1) on Orange and the Orange Subsidiaries, taken as a whole. (b) Neither Orange nor any of the Orange Subsidiaries owns, controls or holds with the power to vote, directly or indirectly of record, beneficially or otherwise, any capital stock or any equity or ownership interest in any corporation, partnership, association, joint venture or other entity, other than not more than five percent of any equity security registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other than shares of the Federal Home Loan Bank of Boston, the Savings Bank Life Insurance Company of Massachusetts, or as otherwise disclosed on Schedule 3.1 hereto and except, in the case of Orange, for the Orange Subsidiaries. 3.2 Capitalization. (a) The authorized capital stock of Orange consists solely of 1,300,000 shares of Orange Common Stock and 200,000 shares of preferred stock, $.10 par value ("Orange Preferred Shares"). There are 724,412 shares of Orange Common Stock issued and outstanding, no shares of Orange Common Stock held in its treasury and no Orange Preferred Shares issued and outstanding or held in its treasury. All issued and outstanding Orange Common Stock has been duly authorized and validly issued and are fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. All issued and outstanding shares of each of the Orange Subsidiaries have been duly authorized and validly issued and are fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. All issued and outstanding shares or interests of each of the Orange Subsidiaries are owned by Orange free and clear of any security interest, pledge, lien, claim or other encumbrance or restriction on transfer. (b) Except for the options to acquire not more than 81,049 shares of Orange Common Stock pursuant to stock options outstanding as of the date hereof under the Orange Stock Option Plans, neither Orange nor any of the Orange Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase or issuance of, or representing the right to purchase, subscribe for or otherwise receive, any shares of its capital stock or any securities convertible into or representing the right to receive, purchase or subscribe for any such shares of Orange, or shares of any of the Orange Subsidiaries. The names of the optionees, the date of grant of each option to purchase Orange Common Stock, the number of shares subject to each such option, the expiration date of each such option, and the price at which each such option may be exercised under the Orange Stock Option Plans are set forth on Schedule 3.2. Except as set forth on Schedule 3.2, there are no agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares to which Orange is a party, nor does Orange have knowledge of any such agreements or understandings to which Orange is not a party with respect to the voting of any such shares or which restrict the transfer of such shares. The Orange Common Stock is listed on NASDAQ small cap market. 3.3 Authority. Orange has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by at least two-thirds of Orange's Directors (as defined in Orange's Amended and Restated Charter). The Board of Directors of Orange has directed that this Agreement and the transactions contemplated hereby be submitted to Orange's stockholders for approval at a meeting of such stockholders and has recommended approval of this Agreement by Orange's stockholders. Except for the adoption of this Agreement by such stockholders, no other corporate proceedings on the part of Orange are necessary to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by Orange, constitutes a valid and binding obligation of Orange, and is enforceable against Orange in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and (ii) general principles of equity, regardless of whether enforcement is sought in proceedings in equity or at law. 3.4 No Violation. Neither the execution and delivery of this Agreement by Orange, nor the consummation by Orange of the transactions contemplated hereby, nor the compliance by Orange with any of the terms or provisions hereof, does or will (a) violate any provision of the Charter or By-laws of Orange or any of the Orange Subsidiaries, (b) assuming that the consents and approvals referred to in Section 3.5 hereof are duly obtained, violate any statute, code, ordinance, permit, authorization, registration, rule, regulation, judgment, order, writ, decree or injunction applicable to Orange or any of the Orange Subsidiaries or any of their respective properties, securities or assets, except for violations which would not, individually or in the aggregate, have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, or (c) assuming that the consents and approvals referred to in Section 3.5 hereof are duly obtained and except as set forth on Schedule 3.4 hereto, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the respective properties or assets of Orange or any of the Orange Subsidiaries under, any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which Orange or any of the Orange Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except for violations, conflicts, breaches or defaults which would not, individually or in the aggregate, have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. 3.5 Consents and Approvals. The execution, delivery and performance of this Agreement by Orange does not require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative agency or commission or other governmental or regulatory authority or instrumentality, domestic or foreign, including, without limitation, any Bank Regulator (as hereinafter defined), except (i) for applicable requirements, if any, of the Exchange Act, state takeover laws, the pre-merger notification re- quirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), and filing and recordation of appropriate merger documents as required by Massachusetts and New Hampshire law, (ii) for consents and approvals of or filings or registrations with the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Massachusetts Commissioner, the Massachusetts Board of Bank Incorporation (the "BBI"), the Massachusetts Housing Partnership Fund ("MHP") and the Mutual Savings Central Fund, Inc. (the "Central Fund") (each of the foregoing, a "Bank Regulator"), and (iii) where failure to obtain any such consent, approval, authorization or permit, or to make any such filing or notification, would not prevent or significantly delay consummation of the Merger or otherwise prevent Orange from performing its obligations under this Agreement, or would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, or on Buyer. 3.6 Regulatory Approval. Orange is not aware of any reason why the conditions set forth in Section 8.1(c) hereof would not be satisfied without significant delay. 3.7 Financial Statements. (a) The consolidated balance sheets of Orange as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1993, 1992 and 1991, certified by KPMG Peat Marwick, in the form delivered to Buyer prior to execution and delivery of this Agreement (all of the above being collectively referred to as the "Orange Audited Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the footnotes thereto and except as required or permitted by SFAS 109 and 115) and present fairly in all material respects the consolidated financial position of and results of operations of Orange at the dates, and for the periods, stated therein. (b) The consolidated balance sheets of Orange as of March 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three months ended March 31, 1994 and 1993 in the form delivered to Buyer prior to execution and delivery of this Agreement (hereinafter referred to collectively as the "Orange Interim Financial Statements") present fairly, and the financial statements referred to in Section 5.5 hereof will present fairly, in all material respects the consolidated financial position and results of operations of Orange for the periods indicated thereon and have been, and the financial statements referred to in Section 5.5 hereof will be, prepared in accordance with generally accepted accounting principles applied on a consistent basis (except for the omission of notes to the Orange Interim Financial Statements and year-end adjustments to interim results, which adjustments will not be material) applied on a consistent basis (except as required or permitted by SFAS 109 and 115) with all prior periods and throughout the periods indicated. (c) The Orange Audited Financial Statements and the Orange Interim Financial Statements are herein referred to together as the "Orange Financial Statements." 3.8 Reports. Since January 1, 1991, Orange has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with bank regulatory agencies (except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Orange and the Orange Subsid- iaries, taken as a whole), with (i) the FDIC, including, but not limited to, Forms F-2, F-3, F-4 and proxy statements, (ii) the Massachusetts Commissioner, and (iii) any applicable state securities or banking authorities (all such reports and statements are collectively referred to herein as the "Orange Re- ports"). As of their respective dates, the Orange Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, and no such report on Forms F-2, F-3, F-4 or any proxy statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date shall be deemed to modify information as of an earlier date. 3.9 Absence of Certain Changes or Events. Except as set forth on Schedule 3.9 hereto, since December 31, 1993, Orange and the Orange Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any change or event which, individually or in the aggregate with other changes and events, has had a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole; (b) except as permitted by Section 5.1(b) with respect to actions that occur after the date hereof and as set forth in Schedule 3.9(b) hereto or in the ordinary course of business consistent with past practice with respect to actions that occurred prior to the date hereof, any increase in the compensa- tion payable or to become payable to any of the officers, directors or employ- ees of Orange or any of the Orange Subsidiaries or any bonus payment or arrangement made to or with any of them; (c) any agreement, contract or commitment entered into or agreed to be entered into except for those in the ordinary course of business (none of which, individually or in the aggregate, is reasonably expected to have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole); (d) any change in any of the accounting methods or practices of Orange or any of the Orange Subsidiaries other than changes required by applicable law or by generally accepted accounting principles; (e) any change in the credit policies or procedures of Orange or any Orange Subsidiary, the effect of which was or is to make any such policy or procedure less restrictive in any material respect; or (f) any material election made by Orange or any Orange Subsidiary for federal or state income tax purposes. 3.10 Legal Proceedings. (a) Except as set forth on Schedule 3.10 hereto and except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, neither Orange nor any of the Orange Subsidiaries is a party to any, and there are no pending or, to the best of Orange's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against Orange or any of the Orange Subsidiaries; and neither Orange nor any of the Orange Subsidiaries is a party to or subject to any order, judgment or decree. (b) Schedule 3.10 lists, as of the date of this Agreement, all pending litigation involving any claim against Orange or any Orange Subsidiary, whether directly or by counterclaim, involving a "lender liability" cause of action. 3.11 Taxes and Tax Returns. (a) Orange and the Orange Subsidiaries have timely filed all federal, state, and local tax returns required by applicable law to be filed except for filings which are filed pursuant to routine extensions permitted by law or the failure to file which or the late filing of which would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. Such returns were accurate and complete in all material respects except where the failure to be accurate or complete would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. (b) Orange and the Orange Subsidiaries have paid or, where payment is not required to have been made, have set up adequate reserves or accruals in the Orange Financial Statements for the payment of all taxes required to be paid in respect of the periods covered by such returns, including but not limited to accruals or withholdings relating to any tax withholding, social security or unemployment provisions of the applicable federal, state and local laws except where the failure to do so would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. As of the respective dates of the Orange Financial Statements in which such reserves or accruals are established, neither Orange nor any Orange Subsidiary had any liability for any such taxes in excess of the amounts so paid or reserved or accruals so established which was material to Orange and the Orange Subsidiaries, taken as a whole. Except for taxes which are being contested in good faith and for which adequate reserves or accruals are reflected in the Orange Financial Statements, neither Orange nor any of the Orange Subsidiaries is delinquent in the payment of any material tax, assessment or governmental charge the failure to pay which would have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, and none of them has requested any extension of time within which to file any tax returns in respect of any fiscal year which have not since been filed. (c) As of the date hereof, no material deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or definitively) against Orange or any of the Orange Subsidiaries which have not been settled and paid or adequately reserved against in the Orange Financial Statements and no requests for waivers of the time to assess any tax are pending. Orange and the Orange Subsidiaries file consolidated federal income tax returns. Orange's consolidated federal income tax returns have not been audited by the IRS since prior to 1988. 3.12 Properties. Except (i) as may be reflected in the Orange Financial Statements, (ii) for any lien for current taxes not yet delinquent, (iii) for pledges to secure deposits, (iv) for liens on real estate acquired by foreclosure or substantively repossessed, and (v) for such other liens, security interests, claims, charges, options or other encumbrances and imperfections of title as do not materially adversely affect the value of personal or real property reflected in the Orange Financial Statements or acquired since the date of such statements and which do not materially interfere with or impair the present and continued use of such property, Orange and the Orange Subsidiaries have good title, free and clear of any liens, claims, charges, options or other encumbrances, to all of the personal and real property reflected in the consolidated balance sheets of Orange included in the Orange Financial Statements and all personal and real property acquired since such date, except such personal and real property as has been disposed of in the ordinary course of business. 3.13 Certain Contracts. As of the date of this Agreement, except as set forth in Schedule 3.13 hereto and except for agreements, indentures, arrangements and contracts which are exhibits to Orange's Annual Report on Form F-2 for the year ended December 31, 1993, accurate copies of which have been made available to Buyer, neither Orange nor any of the Orange Subsid- iaries is a party to, is bound by, owns properties subject to, or receives benefits under: (a) any agreement, arrangement or other contract not made in the ordinary course of business that (x) would be required to be filed as an exhibit to a Form F-2 under the Exchange Act or (y) is or may reasonably be expected to be material to the financial condition, business or results of operations of Orange and the Orange Subsidiaries, taken as a whole, (b) any agreement, indenture or other instrument relating to the borrowing of money by Orange or any Orange Subsidiary or the guarantee by Orange or any Orange Subsidiary of any such obligation (other than instruments relating to transactions entered into in the ordinary course of the banking business of Orange or in the ordinary course of business of any Orange Subsidiary), (c) any agreement, arrangement or commitment which cannot be terminated at will relating to the employment of a consultant or the employment, election or retention of any present or former director, officer or employee, (d) any contract, agreement or understanding with a labor union, or (e) any agreement (other than any agreement (x) with a banking customer entered into by Orange in the ordinary course of business under which Orange provides banking services to such banking customer or (y) relating to the sale of mortgage loans, including forward commitments) that involves a payment or series of payments of more than $100,000 from or to Orange or any Orange Subsidiary. 3.14 Certain Defaults. Except as set forth in Schedule 3.14 hereto, neither Orange nor any Orange Subsidiary, nor, to the knowledge of Orange, any other party thereto, is in default in any material respect under any material lease, contract, mortgage, promissory note, deed of trust, loan or other commitment or arrangement pursuant to which Orange or any Orange Subsidiary has borrowed funds or is otherwise the obligor, which default would have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. 3.15 Insurance. (a) The deposit accounts of Orange which are of an insurable type are insured by the FDIC to the extent permitted by the FDIC and by the Central Fund to the extent permitted by the Central Fund. (b) Orange has made available to Buyer correct and complete copies of all material policies of insurance of Orange and the Orange Subsidiaries currently in effect. Neither Orange nor any of the Orange Subsidiaries has any liability for unpaid premiums or premium adjustments not properly reflected on Orange's financial statements included in Orange's Quarterly Report on Form F- 4 for the period ended March 31, 1994, except for any such liability that would not have a Material Adverse Effect. Except as set forth on Schedule 3.15 hereto, neither Orange nor any Orange Subsidiary has received any notice of termination of any such insurance coverage or material increase in the premiums therefor or has any reason to believe that any such insurance coverage will be terminated or the premiums therefor materially increased. 3.16 Employee Benefit Plans. (a) Except as described on Schedule 3.16 hereto, neither Orange nor any of the Orange Subsidiaries has any obligation, contingent or otherwise, under any employment, consulting, retirement or severance agreement which would require Orange or any Orange Subsidiary to make payments exceeding $100,000 for any employee or former employee. (b) Schedule 3.16 hereto sets forth a complete list of all ERISA Plans (as defined below). Except as set forth in Schedule 3.16, neither Orange nor any Orange Subsidiary maintains or contributes to any "multi-employer plan" as that term is defined at Section 4001(a)(3) of ERISA, and neither Orange nor any Orange Subsidiary has incurred any material liability under Section 4062, 4063 or 4201 of ERISA. To the knowledge of Orange, each pension plan, as defined at Section 3(2) of ERISA, maintained by Orange or any Orange Subsidiary (each, a "Pension Plan") which is intended to be qualified under Section 401(a) of the Code is so qualified. Except as set forth in Schedule 3.16 hereto, to the knowledge of Orange, since January 1, 1991, (i) each welfare plan, as defined at Section 3(1) of ERISA, maintained by Orange or an Orange Subsidiary (each, a "Welfare Plan"), and each Pension Plan (the Pension Plans and Welfare Plans being hereinafter referred to as "ERISA Plans"), has been administered substantially in accordance with the terms of such plan and the provisions of ERISA, (ii) nothing has been done or omitted to be done with respect to any ERISA Plan that would result in any material liability on the part of Orange or any Orange Subsidiary, including the loss of any material tax deduction, under ERISA or the Code, (iii) no "reportable event" as defined at Section 4043 of ERISA, other than any such event for which the thirty-day notice period has been waived, has occurred with respect to any Pension Plan subject to Title IV of ERISA, and (iv) except for continuation of health coverage to the extent required under Section 4980B of the Code, there are no unfunded obligations under any ERISA Plan providing benefits after termination of employment. (c) Schedule 3.16 hereto sets forth a complete list of all material employment, consulting, retirement and severance agreements with individuals and all material incentive, bonus, fringe benefit and other employee benefit arrangements of Orange and the Orange Subsidiaries, covering employees or former employees of Orange and the Orange Subsidiaries. (d) Orange has made available to Buyer copies of all ERISA Plans, copies of all agreements and arrangements referred to in (c) above that have been reduced to writing, and a written summary of the material terms of all such agreements or arrangements that have not been reduced to writing. 3.17 Compliance with Applicable Law; Regulatory Examinations. (a) Orange and each of the Orange Subsidiaries holds, and has at all times held, all licenses, franchises, permits, approvals, consents, qualifications and authorizations material for the lawful conduct of its business under and pursuant to, and has complied with, and is not in default under, any applicable law, statute, order, rule, regulation, policy, ordinance, reporting or filing requirement and/or guideline of any federal, state or local governmental authority relating to Orange or any of the Orange Subsidiaries, except as set forth on Schedule 3.17 hereto and except for violations which, either individually or in the aggregate, do not or would not have a Material Adverse Effect on Orange and the Orange Subsidiaries taken as a whole, and neither Orange or any of the Orange Subsidiaries has knowledge of any violation of any of the above. (b) Except for normal examinations conducted by a regulatory agency in the regular course of the business of Orange and the Orange Subsidiaries, no regulatory agency has initiated any proceeding or, to the best knowledge of Orange, investigation into the business or operations of Orange or any of the Orange Subsidiaries since prior to December 31, 1990. Orange has not received any objection from any regulatory agency to Orange's response to any violation, criticism or exception with respect to any report or statement relating to any examinations of Orange or any of the Orange Subsidiaries. (c) Except as set forth on Schedule 3.17 hereto, neither Orange nor any Orange Subsidiary will be required to divest any assets currently held by it or discontinue any activity currently conducted as a result of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIA"), any regulations promulgated thereunder, or otherwise. 3.18 Broker's Fees. Neither Orange, any Orange Subsidiary, nor any of its officers or directors has employed any broker, finder or investment advisor, or incurred any liability for any broker's fees, commissions, finder's fees or investment advisory fees in connection with any of the transactions contemplated by this Agreement, except that Orange has engaged, and will pay a fee or commission (set forth on Schedule 3.18 hereto) to BEI Golembe, a division of EDS (the "Investment Advisor"). 3.19 Orange Information. The information relating to Orange and the Orange Subsidiaries to be contained in the Proxy Statement-Prospectus (as defined in Section 7.1) and any application to any Bank Regulator, or any other statement or application filed with any other governmental body in connection with the Merger and the other transactions contemplated by this Agreement, will not contain as of the date of such Proxy Statement-Prospectus and as of the date of the Special Meeting (defined in Section 5.6) any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, Orange makes and will make no representation or warranty with respect to any information supplied by Buyer which is contained in any of the foregoing documents. The Proxy Statement-Prospectus (except for such portions thereof that relate only to Buyer and its subsidiaries) will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. 3.20 Environmental Issues. Except as set forth on Schedule 3.20 hereto and except where such violation, liability or noncompliance would not have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole: (i) neither Orange nor any of the Orange Subsidiaries has violated during the last five years or is in violation of any Environmental Law (as defined in Section 11.1); (ii) none of the properties owned or leased by Orange or any Orange Subsidiary (including, without limitation, soils and surface and ground waters) are contaminated with any Hazardous Substance (as defined in Section 11.1); (iii) neither Orange nor any of the Orange Subsidiaries is liable for any off-site contamination; (iv) neither Orange nor any of the Orange Subsidiaries is liable under any Environmental Law; and (v) Orange and each of the Orange Subsidiaries is, and has during the last five years been, in compliance with, all of their respective Environmental Permits (as defined in Section 11.1). For purposes of the foregoing, all references to "properties" include, without limitation, any owned real property or leased real property. 3.21 Material Interests of Certain Persons. Except as set forth in the proxy statement for Orange's 1994 Annual Meeting of Stockholders, to the knowledge of Orange, no officer or director of Orange, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any material interest in any material contract or property (real or personal), tangible or intangible, used in or pertaining to the business of Orange or any of the Orange Subsidiaries that would be required to be disclosed in a proxy statement to stockholders under Regulation 14A of the Exchange Act. 3.22 Certain Transactions. Since December 31, 1993, neither Orange nor any Orange Subsidiary has entered into any material transactions involving interest rate and currency swaps, options and futures contracts, or any other similar transactions, except in the ordinary course of business. 3.23 Regulatory Agreements. On the date hereof, neither Orange nor any Orange Subsidiary is a party to any assistance agreement, supervisory agreement, memorandum of understanding, consent order, cease and desist order, or condition of any regulatory order or decree with or by the FDIC, the Federal Reserve, the Massachusetts Commissioner or any other financial services regulatory agency that relates to the conduct of the business of Orange or any Orange Subsidiary, nor has Orange or any of the Orange Subsidiaries been advised by any such regulatory agency or other governmental entity that it is considering issuing or requesting any such agreement, order or decree. 3.24 Status as a Limited Partner. In connection with the investments in Hampton Housing Associates Limited Partnership and Nashua Plaza Housing Limited Partnership by Orange's subsidiary, Orange Corporation ("Orange Sub"), (i) Orange Sub has acted solely as a limited partner, and has taken no action which would cause Orange or Orange Sub to have the liability of a general partner (including, without limitation, as a result of any action which might be deemed to constitute control over the affairs of such partnerships), (ii) all investments in such partnerships have been through Orange Sub and Orange Sub has been operated as a separate corporate entity from Orange, (iii) Orange has delivered copies of the applicable partnership agreements, and all related subscription materials, as amended, to Buyer, (iv) Orange and Orange Sub are not aware of any requirement for additional capital contributions to such partnerships by Orange or Orange Sub except as set forth on Schedule 3.1 hereto and (v) there is no potential recapture of any tax credits relating to such partnerships previously taken by Orange or Orange Sub. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Orange as follows: 4.1 Corporate Organization. Buyer is a corporation, duly organized, validly existing and in good standing under the laws of New Hampshire. Buyer has the power and authority to own or lease all of its properties and assets and to conduct its business as it is now being conducted, and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing does not or would not, either individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. Buyer is registered as a bank holding company with the Federal Reserve under the Bank Holding Company Act of 1956, as amended. Buyer has previously made available to Orange for inspection true and complete copies as amended to date of the Charter and By-laws of Buyer. 4.2 Capitalization. (a) The authorized capital stock of Buyer consists solely of 15,000,000 shares of common stock ("Buyer Common Shares") and 3,000,000 shares of preferred stock ("Buyer Preferred Shares"). As of June 30, 1994, there were 3,675,705 Buyer Common Shares issued and outstanding, 577,265 Buyer Common Shares held in its treasury and 193,053 Series A Buyer Preferred Shares issued and outstanding. All issued and outstanding Buyer Common Shares have been duly authorized and validly issued and are fully paid, nonassess- able, and free of preemptive rights, with no personal liability attaching to the ownership thereof. The shares of Buyer Common Stock to be issued pursuant to the Merger will be duly authorized and validly issued and (at the Effective Time) will be fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. (b) Except for the options to acquire not more than 244,444 Buyer Common Shares pursuant to stock options under the 1986 Cheshire Financial Corporation Stock Option Plan (the "Buyer Stock Option Plan"), Buyer is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase or issuance of, or repre- senting the right to purchase, subscribe for or otherwise receive, any shares of its capital stock or any securities convertible into or representing the right to receive, purchase or subscribe for any such shares of Buyer. There are no agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares to which Buyer is a party, nor does Buyer have knowledge of any such agreements or understandings to which Buyer is not a party with respect to the voting of any such shares or which restrict the transfer of such shares. Buyer Common Shares are listed on the Stock Exchange. 4.3 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consum-mation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Buyer. No corporate proceedings on the part of Buyer are necessary to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by Buyer, constitutes a valid and binding obligation of Buyer, and is enforceable against Buyer in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and (ii) general principles of equity, regardless of whether enforcement is sought in proceedings in equity or at law. 4.4 No Violation. Neither the execution and delivery of this Agreement by Buyer, nor the consummation by Buyer of the transactions contemplated hereby, nor the compliance by Buyer with any of the terms or provisions hereof, does or will (a) violate any provision of the Charter or By-laws of Buyer, (b) assuming that the consents and approvals referred to in Section 4.5 hereof are duly obtained, violate any statute, code, ordinance, permit, authorization, registration, rule, regulation, judgment, order, writ, decree or injunction applicable to Buyer or any of its subsidiaries or any of their respective properties, securities or assets, except for violations which would not, individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole, or (c) assuming that the consents and approvals referred to in Section 4.5 hereof are duly obtained and except as set forth on Schedule 4.4 hereto, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the respective properties or assets of Buyer or any of its subsidiaries under, any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyer or any of its subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except for violations, conflicts, breaches or defaults which would not, individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 4.5 Consents and Approvals. The execution, delivery and performance of this Agreement by Buyer does not require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative agency or commission or other governmental or regulatory authority or instrumentally, domestic or foreign, including, without limitation, any Bank Regulator, except (i) for applicable requirements, if any, of the Exchange Act or the laws of certain states under which a "blue sky" filing or consent may be required, state takeover laws, the pre-merger notification requirements of the HSR Act, and filing and recordation of appropriate merger documents as required by Massachusetts and New Hampshire law, (ii) for consents and approvals of or filings or registrations with the FDIC, the Massachusetts Commissioner, the BBI, the MHP, or the Central Fund, and (iii) where failure to obtain any such consent, approval, authorization or permit, or to make any such filing or notification, would not prevent or significantly delay consummation of the Merger or otherwise prevent Buyer from performing its obligations under this Agreement, or would not have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 4.6 Regulatory Approval. Buyer is not aware of any reason why the conditions set forth in Section 8.1(c) hereof would not be satisfied without significant delay. 4.7 Financial Statements. (a) The consolidated balance sheets of Buyer as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in stockholders' equity, cash flows and changes in financial position for the years ended December 31, 1993, 1992 and 1991, certified by Wolf & Company, PC, for 1993 and by Ernst & Young for 1992 and 1991, in the form delivered to Orange prior to execution and delivery of this Agreement (all of the above being collectively referred to as the "Buyer Audited Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the footnotes thereto and except as required or permitted by SFAS 109 and 115) and present fairly in all material respects the consolidated financial position of and results of operations of Buyer at the dates, and for the periods, stated therein. (b) The consolidated balance sheets of Buyer as of June 30, 1994 and 1993, and the related consolidated statements of income for the six months ended June 30, 1994 and 1993 in the form delivered to Orange prior to execution and delivery of this Agreement (hereinafter referred to collectively as the "Buyer Interim Financial Statements") present fairly in all material respects the consolidated financial position and results of operations of Buyer at the dates and for the periods indicated thereon and are prepared in accordance with generally accepted accounting principles applied on a consistent basis (except for the omission of notes to the Buyer Interim Financial Statements and year-end adjustments to interim results, which adjustments will not be material) applied on a consistent basis (except as required or permitted by SFAS 109 and 115) with all prior periods and throughout the periods indicated. (c) The Buyer Audited Financial Statements and the Buyer Interim Financial Statements are herein referred to together as the "Buyer Financial Statements." 4.8 SEC Reports. Buyer has previously made available to Orange a true and complete, in all material respects, copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1991 by Buyer with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act or the Exchange Act (the "Buyer Reports") and (b) communication mailed by Buyer to its shareholders since January 1, 1991, and, as of their respective dates, no such Buyer Reports contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date shall be deemed to modify information as of an earlier date. 4.9 Absence of Certain Changes or Events. Except as set forth on Schedule 4.9 hereto, since December 31, 1993, there has not been: (a) any change or event which, individually or in the aggregate with other changes and events, has had a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole; (b) any agreement, contract or commitment entered into or agreed to be entered into except for those in the ordinary course of business (none of which, individually or in the aggregate, is reasonably expected to have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole); (c) any change in any of the accounting methods or practices of Buyer or any of its subsidiaries other than changes required by applicable law or by generally accepted accounting principles; or (d) any incurrence by Buyer of any liability that has had, or to the knowledge of Buyer, could reasonably be expected to have, a Material Adverse Effect upon Buyer and its subsidiaries, taken as a whole. 4.10 Legal Proceedings. (a) Except as set forth on Schedule 4.10 hereto and except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole, neither Buyer nor any of its subsidiaries is a party to any, and there are no pending or, to the best of Buyer's knowledge, threatened, legal, adminis- trative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against Buyer or any of its subsidiaries; and neither Buyer nor any of its subsidiaries is a party to or subject to any order, judgment or decree. (b) As of the date of this Agreement, there is no action, suit or proceeding pending against, affecting or, to the knowledge of Buyer, threatened against, Buyer or any Affiliate (as defined in Section 11.1) of Buyer or any of their respective properties before any court or arbitrator or any governmental body, agent or official which in any manner challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby or which, if adversely determined, would prevent the consummation of the transactions contemplated by this Agreement or would materially adversely affect Buyer's ability to consummate the transactions contemplated hereby. 4.11 Fairness Opinion. Buyer has engaged, and will pay a fee or commission, to HAS Associates to render an opinion to Buyer and its stockholders as to the fairness to Buyer and its stockholders, from a financial point of view, of the Merger Consideration. HAS Associates has advised the Board of Directors of Buyer that it considers such consideration to be fair. 4.12 Buyer Information. The information relating to Buyer to be contained in the Proxy Statement-Prospectus (as contemplated by Section 7.1) and any application to any Bank Regulator, or any other statement or application filed with any governmental body in connection with the Merger and the other transactions contemplated by this Agreement will not contain as of the date of such Proxy Statement-Prospectus or filing any untrue statement of a material fact or omit to state a material fact necessary to make such information not misleading. Notwithstanding the foregoing, Buyer makes and will make no representation or warranty with respect to any information supplied by Orange which is contained in any of the foregoing documents. 4.13 Capital. At June 30, 1994, (a) Buyer's Tier 1 risk-based capital ratio and total risk-based capital ratios were each in excess of applicable limits, and (b) its leverage ratio was 8.85%, such ratios having been calculated in accordance with the guidelines of the Federal Reserve applicable to bank holding companies on a fully phased-in basis. 4.14 Regulatory Agreements. Neither Buyer nor any of its subsidiaries is a party to any assistance agreement, supervisory agreement, memorandum of understanding, consent order, cease and desist order, or condition of any regulatory order or decree with or by the FDIC, the Federal Reserve, the New Hampshire Bank Commissioner, or other financial services regulatory agency that restricts Buyer's ability to perform its obligations hereunder, nor has Buyer or any of its subsidiaries been advised by any such regulatory agency or other governmental entity that it is considering issuing or requesting any such agreement, order or decree. ARTICLE V COVENANTS OF ORANGE 5.1 Conduct of Business. (a) Affirmative Covenants. During the period from the date of this Agreement to the Effective Time, except with the written consent of Buyer, Orange will operate its business, and it will cause each of the Orange Subsidiaries to operate its business, only in the usual, regular and ordinary course of business; use reasonable efforts to preserve intact its business organization and assets and maintain its rights and franchises; and to take no action which would (i) materially adversely affect the ability of Buyer or Orange to obtain any necessary approvals of governmental authorities required for the transactions contemplated hereby or materially increase the period of time necessary to obtain such approvals, or (ii) materially adversely affect its ability to perform its covenants and agreements under this Agreement. (b) Negative Covenants. Orange agrees that from the date of this Agree- ment to the Effective Time, except as otherwise specifically permitted or required by this Agreement, or consented to by Buyer in writing, Orange will not, and will cause each of the Orange Subsidiaries not to: (1) change or waive any provision of its Charter or By-laws; (2) change the number of shares of its authorized or issued capital stock (except for the issuance of Orange Common Stock pursuant to the exercise of outstanding stock options under the Orange Stock Option Plans, as contemplated by Section 3.2(b) hereof); (3) issue or grant any option, warrant, call, commitment, subscription, right to purchase or agreement of any character relating to the authorized or issued capital stock of Orange or any of the Orange Subsidiaries, or any securities convertible into shares of such stock; (4) split, combine or reclassify any shares of its capital stock; (5) declare or pay any dividends except for Orange's regular $.04 per share quarterly dividend and its $.04 per share year-end special dividend (with declaration, record and payment dates that are consistent with past practice) and for dividends paid by an Orange Subsidiary to Orange, provided, however, that Orange's regular quarterly cash dividend may be increased to the Increased Dividend (as defined below) per share of Orange Common Stock beginning in the first quarter of 1995, and (ii) that the parties agree (x) to consult with respect to the amount of the last Orange quarterly dividend payable prior to the Effective Time with the objective of assuring that the shareholders of Orange do not receive a shortfall based on the record and payment dates of their last dividend prior to the Merger and the record and payment dates of the first dividend of Buyer following the Merger and (y) that Orange may pay a special dividend to holders of record of Orange Common Stock immediately prior to the Effective Time consistent with the objective described in clause (x) above. The quarterly "Increased Dividend" shall be determined by multiplying the quarterly dividend then being paid by Buyer with respect to each share of Buyer Common Stock by .8333. (6) except as contemplated by Section 2.5 hereof, purchase, redeem, retire or otherwise acquire, or hypothecate, pledge or otherwise encumber, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock; (7) enter into, amend in any material respect or terminate any contract or agreement (including without limitation any settlement agreement with respect to litigation) that is or may reasonably be expected to have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice; (8) except in the ordinary course of business consistent with past practice, incur any material liabilities or material obligations, whether directly or by way of guaranty, including any obligation for borrowed money whether or not evidenced by a note, bond, debenture or similar instrument, or acquire any equity, debt, or other investment securities; (9) make any capital expenditures other than in the ordinary course of business or as necessary to maintain existing assets in good repair; (10) except as described on Schedule 5.1(b), grant any increase in rates of compensation to its employees, except merit increases in accordance with past practices and general increases to employees as a class in accordance with past practice or as required by law; grant any increase in rates of compensation to its directors; adopt or amend in any material respect or terminate any employee benefit plan, pension plan or incentive plan except as required by law, or permit the vesting of any material amount of benefits under any such plan other than pursuant to the provisions thereof as in effect on the date of this Agreement; or enter into any employment, severance or similar agreements or arrangements with any directors or officers; (11) make application for the opening or closing of any, or open or close any, branches or automated banking facility; (12) make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business consistent with customary banking practices; (13) merge into, consolidate with, affiliate with, or be purchased or acquired by, any other Person, or permit any other to be merged, consolidated or affiliated with it or be purchased or acquired by it, or, except to realize upon collateral in the ordinary course of its business, acquire a significant portion of the assets of any other Person, or sell a significant portion of its assets; (14) make any material change in its accounting methods or practices, except changes as may be required by generally accepted accounting principles or by regulatory requirements; (15) take or cause to be taken any action which would disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code; (16) take any action that would result in the representations and warranties of Orange contained in this Agreement not being true and correct on the date of this Agreement or at any future date on or prior to the Closing Date; or (17) agree to do any of the foregoing. 5.2 No Solicitation. Except for actions required for a director or officer to satisfy his fiduciary obligations upon advice of counsel, neither Orange nor any of its directors, officers, employees, representatives or agents or other Persons controlled by Orange shall directly or indirectly, negotiate, authorize, recommend, propose, solicit or announce an intention to authorize, recommend or propose, or enter into, any offer, agreement in principle, agreement, understanding or commitment, written or oral, with or from any third party, which relates to the acquisition of Orange by such third party or which is otherwise inconsistent with the obligations arising under this Agreement. Orange will promptly communicate to Buyer the terms of any proposal or offer or any inquiry or request for information which it may receive in respect of any such transaction. 5.3 Current Information. During the period from the date of this Agreement to the Effective Time, Orange will cause one or more of its representatives to confer with representatives of Buyer and report the general status of its ongoing operations at such times as Buyer may reasonably request. Orange will promptly notify Buyer of any material change in the normal course of its business or in the operation of its properties and, to the extent permitted by applicable law, of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of material litigation involving Orange. Orange will also provide Buyer such information with respect to such events as Buyer may reasonably request from time to time. 5.4 Access to Properties and Records. Orange shall permit Buyer reasonable access to its properties and those of the Orange Subsidiaries, and shall disclose and make available to Buyer during normal business hours all of its books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including the general ledger), tax records, minute books of directors' and stockholders' meetings, organizational documents, by-laws, material contracts and agreements, filings with any regulatory authority, litigation files, plans affecting employees, and any other business activities or prospects in which Buyer may have a reasonable interest; provided, however, that Orange shall not be required to take any action that would provide access to or to disclose information where such access or disclosure would violate or prejudice the rights or business interests or confidences of any customer or other person or would result in the waiver by it of the privilege protecting communications between it and any of its counsel. 5.5 Financial and Other Statements. (a) Promptly upon receipt thereof, Orange will furnish to Buyer copies of each annual, interim or special audit of the books of Orange and the Orange Subsidiaries made by its independent accountants and copies of all internal control reports submitted to Orange by such accountants in connection with each annual, interim or special audit of the books of Orange and the Orange Subsidiaries made by such accountants. (b) As soon as practicable, Orange will furnish to Buyer copies of all such financial statements and reports as it shall send to its stockholders, the FDIC, the Massachusetts Commissioner or any other regulatory authority, except as legally prohibited thereby. (c) Orange will advise Buyer promptly of Orange's receipt of any examination report of any federal or state regulatory or examination authority with respect to the condition or activities of Orange or any of the Orange Subsidiaries. If requested by Buyer, Orange will use its best efforts to obtain authority to make available to Buyer confidential examination reports of federal or state regulatory or examination authorities with respect to the condition or activities of Orange or any of the Orange Subsidiaries. (d) With reasonable promptness, Orange will furnish to Buyer such additional financial data as Buyer may reasonably request, including without limitation, detailed monthly financial statements and loan reports. 5.6 Approval of Orange's Stockholders. Orange will take all reasonable steps necessary to duly call, give notice of, solicit proxies for, convene and hold a special meeting (the "Special Meeting") of its stockholders as soon as practicable for the purpose of approving this Agreement and the transactions contemplated hereby. The date of the Special Meeting shall occur as soon as practicable following the later of (a) clearance of the Proxy Statement- Prospectus by the FDIC and (b) effectiveness of the Registration Statement on Form S-4 (as more fully described in Section 7.1) filed with the SEC. The Board of Directors of Orange will recommend to Orange's stockholders the approval of this Agreement and the transactions contemplated hereby and will use all reasonable efforts to obtain, as promptly as practicable, the necessary approvals by Orange's stockholders of this Agreement and the transactions contemplated hereby, provided, however, that nothing contained herein shall prohibit the Board of Directors of Orange from failing to make such a recommendation or modifying or withdrawing its recommendation, if such Board shall have concluded in good faith with the advice of counsel that such action is required to prevent such Board from breaching its fiduciary duties to the stockholders of Orange, and no such action shall constitute a breach of this Agreement. 5.7 Disclosure Supplements. From time to time prior to the Effective Time, Orange will promptly supplement or amend the Schedules delivered in connection herewith pursuant to Article III with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Schedules or which is necessary to correct any information in such Schedules which has been rendered inaccurate thereby. No supplement or amendment to such Schedules shall have any effect for the purpose of determining satisfaction of the conditions set forth in Article VIII or the compliance by Orange with the covenants set forth in Section 5.1 hereof. 5.8 Failure to Fulfill Conditions. In the event that Orange determines that a condition to its obligation to complete the Merger cannot be fulfilled and that it will not waive that condition, it will promptly notify Buyer. 5.9 Consents and Approvals of Third Parties. Orange shall use all reasonable efforts to obtain as soon as practicable all consents and approvals of any other Persons necessary or desirable for the consummation of the transactions contemplated by this Agreement. 5.10 All Reasonable Efforts. Subject to the terms and conditions herein provided, Orange agrees to use all reasonable efforts to take, or cause to be taken, all corporate or other action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. ARTICLE VI COVENANTS OF BUYER 6.1 Conduct of Business. During the period from the date of this Agree- ment to the Effective Time, except with the written consent of Orange, Buyer will take no action which would (i) materially adversely affect the ability of Buyer or Orange to obtain any necessary approvals of governmental authorities required for the transactions contemplated hereby or materially increase the period of time necessary to obtain such approvals, or (ii) materially adversely affect its ability to perform its covenants and agreements under this Agreement, or (iii) disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code, or (iv) result in the representations and warranties of Buyer contained in this Agreement not being true and correct on the date of this Agreement or at any future date on or prior to the Closing Date. 6.2 Consents and Approvals of Third Parties. Buyer shall use all reasonable efforts to obtain as soon as practicable all consents and approvals of any other Persons necessary or desirable for the consummation of the transactions contemplated by this Agreement. 6.3 All Reasonable Efforts. Subject to the terms and conditions herein provided, Buyer agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 6.4 Failure to Fulfill Conditions. In the event that Buyer determines that a condition to its obligation to complete the Merger cannot be fulfilled and that it will not waive that condition, it will promptly notify Orange. 6.5 Disclosure Supplements. From time to time prior to the Effective Time, Buyer will promptly supplement or amend the Schedules delivered in connection herewith pursuant to Article IV with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Schedules or which is necessary to correct any information in such Schedules which has been rendered inaccurate thereby. No supplement or amendment to such Schedules shall have any effect for the purpose of determining satisfaction of the conditions set forth in Article VIII. 6.6 Financial and Other Statements. Promptly upon receipt thereof, Buyer will furnish to Orange copies of each annual, interim or special audit of the books of Buyer and its subsidiaries made by its independent accountants. As soon as practicable after the filing thereof, Buyer will furnish to Orange copies of each Quarterly Report on Form 10-Q and each Annual Report on Form 10-K or other periodic report which it files with the SEC under the Exchange Act. 6.7 Employee Benefits. (a) While nothing in this Agreement shall give any employee a right to continuing employment, Buyer will use its best efforts to retain all employed by Orange at the Effective Time. (b) After the Effective Time, Buyer shall provide for those Persons who were employees of Orange immediately prior to the Effective Time and who remain employees of Surviving Bank after the Effective Time, employee benefits no less favorable overall than those available to employees of Buyer, subject to the terms and conditions under which those employee benefits are made available to employees of Buyer and provided that the terms providing or substituting pension benefits shall be determined after consultation among the Savings Bank Employees Retirement Association, Orange and Buyer, and provided further, that for purposes of determining eligibility for vesting of such employee benefits (but not for determining the amount of benefits payable under defined benefit pension plans), service with Orange by Persons who were employees thereof at the Effective Time shall be treated as service with an "employer" to the same extent as if such Persons had been employees of Buyer during the period such Persons were employed by Orange. 6.8 Deposit of Exchange Fund with Exchange Agent. On the Closing Date, immediately prior to the Effective Time, Buyer shall take such actions as may be necessary to permit the Exchange Agent to issue the Buyer Common Stock to be delivered in exchange for Certificates and shall deposit with the Exchange Agent cash in an amount sufficient to satisfy all of Buyer's other obligations with respect to deposit of the Exchange Fund. 6.9 Directors and Officers Indemnification and Insurance. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, administrative or criminal, including, without limitation, any such claim, action, suit, proceeding or investigation in which any Person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, a director, officer or employee of Orange or any Orange Subsidiary (the "Indemnified Parties") is, or is threatened to be, made a party, based in whole or in part on, or arising in whole or in part out of, or pertaining to, this Agreement or any of the transactions contemplated hereby, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use their reasonable efforts to defend against and respond to such claim, action, suit, proceedings or investigation. It is understood and agreed that from and after the Effective Time, Buyer shall indemnify and hold harmless, as and to the fullest extent permitted by applicable law, each Indemnified Party against any and all losses, claims, damages, liabilities and fines, and amounts paid in settlement, in connection with any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time). In connection with any such claim, action, suit, proceeding or investigation, (x) Buyer shall pay expenses (including without limitation reasonable attorney fees) in advance of the final disposition of any such claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by applicable law upon receipt of any undertaking required by applicable law, and (y) Buyer shall use all reasonable efforts to assist in the vigorous defense of any such matter; provided, however, that (1) Buyer shall have the right to assume the defense thereof and upon such assumption Buyer shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by any Indemnified Party in connection with the defense thereof, except that if Buyer does not assume such defense or counsel for the Indemnified Parties reasonably advises that there are issues which raise conflicts of interest between Buyer and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with Buyer, and Buyer shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (2) Buyer shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties, (3) Buyer shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld) and (4) Buyer shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. Any Indemnified Party wishing to claim indemnification under this Section shall, upon learning of any such claim, action, suit, proceeding or investigation, notify Buyer thereof, provided that the failure so to notify shall not affect the obligations of Buyer under this Section except to the extent such failure materially prejudices it. (b) All rights to indemnification and all limitations of liability existing in favor of the Indemnified Parties as provided in Orange's Amended and Restated Charter and By-laws, or similar governing documents of any Orange Subsidiary, as in effect as of the date hereof with respect to claims or liabilities arising from facts or events existing or occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six (6) years from the Effective Time; provided, however, that all rights to indemnification in respect of any claim asserted or made within such period shall continue until the final disposition of such claim. Buyer shall indemnify, defend and hold harmless the Indemnified Parties pursuant to the rights surviving pursuant to the preceding sentence to the full extent permitted under applicable law. (c) Buyer will, or will cause the Surviving Bank to, maintain in effect for at least six years after the Effective Time present policies for directors' and officers' liability insurance, or policies having at least the same coverage and containing terms and conditions no less favorable to directors and officers of Orange, than the present policies of Orange, provided that Buyer shall be required to maintain only such coverage as is commercially available. (d) In the event Buyer or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Buyer assume the obligations set forth in this Section. (e) Buyer agrees that, to the extent permissible under applicable law, for purposes of the limitation of liability and indemnification provisions of Buyer's Certificate of Incorporation and/or By-laws, the directors and officers of Orange prior to the Effective Time shall be deemed to be for all such purposes former directors and officers of an Affiliate of Buyer. (f) The provisions of this Section 6.9 are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each director, officer and employee covered hereby and his or her heirs and representatives. 6.10 Stock Exchange Listing. Buyer shall cause the shares of Buyer Common Stock to be issued in the Merger to be approved for listing on the Stock Exchange, subject to official notice of issuance, prior to the Effective Time. 6.11 Buyer Sub. Prior to the Effective Time, Buyer will take any and all necessary action to cause (i) Buyer Sub to be organized, (ii) Buyer Sub to become a direct or indirect wholly-owned subsidiary of Buyer, (iii) the directors and stockholder or stockholders of Buyer Sub to approve the transactions contemplated by this Agreement, and (iv) Buyer Sub to execute one or more counterparts of this Agreement and to deliver at least one such counterpart so executed to Orange, whereupon Buyer Sub shall become a party to and bound by this Agreement. On and as of the date Buyer Sub becomes a party to this Agreement, Buyer and Buyer Sub will represent and warrant to Orange as follows: (a) Buyer Sub is a trust company in stock form, duly organized (or in organization, as the case may be), validly existing and in good standing under the laws of Massachusetts, all of the outstanding capital stock of which is, or will be prior to the Effective Time, owned directly or indirectly by Buyer free and clear of any lien, charge or other encumbrance. Since the date of its incorporation, Buyer Sub has not engaged in any activities other than in connection with or as contemplated by this Agreement. (b) Buyer Sub has, or will have prior to the Effective Time, the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Buyer Sub and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of Buyer Sub. This Agreement is a valid and binding obligation of Buyer Sub, enforceable in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and (ii) general principles of equity, regardless of whether enforcement is sought in proceedings in equity or at law. ARTICLE VII REGULATORY AND OTHER MATTERS 7.1 Proxy Statement-Prospectus. For the purposes (x) of registering Buyer's Common Stock to be issued to holders of Orange's Common Stock in connection with the Merger with the SEC under the Securities Act and applicable state securities laws and (y) of holding the Orange shareholders' meeting, Buyer and Orange shall cooperate in the preparation of a registration statement (such registration statement, together with all and any amendments and supplements thereto, being herein referred to as the "Registration State- ment"), including a proxy statement/prospectus or statements satisfying all applicable requirements of applicable state securities and banking laws, and of the Securities Act and the Exchange Act, and the rules and regulations thereunder (such proxy statement/prospectus in the form mailed by Orange to the Orange shareholders, together with any and all amendments or supplements thereto, being herein referred to as the "Proxy Statement-Prospectus"). Orange shall promptly prepare and file with the FDIC the Proxy State- ment/Prospectus and Buyer shall promptly prepare and file with the SEC the Registration Statement, in which the Proxy Statement/Prospectus will be included as a prospectus. Each of Buyer and Orange shall use their best efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing, and Orange shall thereafter promptly mail the Proxy Statement-Prospectus to its stockholders. Buyer shall also use its best efforts to obtain all necessary state securities law or "Blue Sky" permits and approvals required to carry out the transactions contemplated by this Agreement, and Orange shall furnish all information concerning Orange and the holders of Orange Common Stock as may be reasonably requested in connection with any such action. Orange and Buyer shall each promptly notify the other if at any time it becomes aware that the Proxy Statement-Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. In such event, Orange and Buyer shall cooperate in the preparation of a supplement or amendment to the Proxy State- ment-Prospectus, which corrects such misstatement or omission, and shall cause the same to be filed with the FDIC and the SEC and distributed to stockholders of Orange. 7.2 Regulatory Approvals. Each of Orange and Buyer will cooperate with the other and use all reasonable efforts to prepare all necessary documentation, to effect all necessary filings and to obtain all necessary permits, consents, approvals and authorizations of all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement. Orange and Buyer will furnish each other and each other's counsel with all information concerning themselves, their subsidiaries, directors, officers and stockholders and such other matters as may be necessary or advisable in connection with the Proxy Statement-Prospectus and any application, petition or any other statement or application made by or on behalf of Orange or Buyer to any governmental body in connection with the Merger and the other transactions contemplated by this Agreement. Orange and Buyer shall have the right to review and approve in advance all characteriza- tions of the information relating to Buyer or Orange, as the case may be, and any of their respective subsidiaries, which appear in any filing made in connection with the transactions contemplated by this Agreement with any governmental body. In addition, Orange and Buyer shall each furnish to the other a final copy of each such filing made in connection with the transac- tions contemplated by this Agreement with any governmental body. 7.3 Affiliates; Publication of Combined Financial Results. (a) Each of Buyer and Orange shall use all reasonable efforts to cause each director, executive officer and other person who is an "affiliate" (for purposes of Rule 145 under the Securities Act and for purposes of qualifying the Merger for "pooling-of-interests" accounting treatment) of such party to deliver to the other party hereto, as soon as practicable after the date of this Agreement, and prior to the date of the shareholders meeting called by Orange to approve this Agreement, a written agreement, in the form of Exhibit 7.3 hereto, providing that such person will not sell, pledge, transfer or otherwise dispose of any shares of Buyer Common Stock or Orange Common Stock held by such "affiliate", and, in the case of the "affiliates" of Orange, the shares of Buyer Common Stock to be received by such "affiliate" in the Merger: (1) otherwise than in compliance with the applicable provisions of the Securi- ties Act and the rules and regulations thereunder or (2) during the period commencing 30 days prior to the Merger and ending at the time of the publica- tion of financial results covering at least 30 days of combined operations of Buyer and Orange. (b) Buyer shall use its best efforts to publish no later than thirty (30) days after the end of the first month after the Effective Time in which there are at least thirty (30) days of post-Merger combined operations (which month may be the month in which the Effective Time occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. ARTICLE VIII CLOSING CONDITIONS 8.1 Conditions to Each Party's Obligations under this Agreement. The respective obligations of each party under this Agreement shall be subject to the fulfillment at or prior to the Effective Time of the following conditions, none of which may be waived: (a) Stockholder Approval. This Agreement and the transactions contemplated hereby shall have been approved in accordance with applicable law by the requisite vote of the stockholders of Orange. (b) Injunctions. None of the parties hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger. (c) Regulatory Approvals. All necessary approvals, authorizations and consents of all governmental bodies required to consummate the Merger and the other transactions contemplated by this Agreement shall have been obtained and shall remain in full force and effect and all waiting periods relating to such approvals, authorizations or consents shall have expired. (d) Effectiveness of Registration Statement. The Registration Statement shall have become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) Stock Exchange Listing. The shares of Buyer Common Stock to be issued in the Merger shall have been authorized for listing on the Stock Exchange, subject to official notice of issuance. (f) Tax Rulings or Opinions. Each of Buyer and Orange shall have received either a ruling of the Internal Revenue Service ("IRS") or an opinion of counsel reasonably acceptable to Buyer and Orange, addressed to Buyer and the shareholders of Orange, with respect to federal tax laws or regulations, to the effect that: (1) The merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"); (2) No gain or loss will be recognized by Buyer, Orange or Buyer Sub or Surviving Bank by reason of the Merger; (3) The bases of the assets of Orange in the hands of the Surviving Bank will be the same as the bases of such assets in the hands of Orange immediately prior to the Merger; (4) The holding period of the assets of Orange in the hands of the Surviving Bank will include the period during which such assets were held by Orange prior to the Merger; (5) No gain or loss will be recognized by the Orange shareholders on the exchange of shares of Orange Common Stock solely for shares of Buyers Common Stock; income gain or loss will be recognized, however, to each such shareholder upon the receipt of cash by such shareholders on the exchange. The determination of whether the receipt of cash by Orange shareholders will have the effect of the distribution of a dividend will be made by treating the shareholder as having received solely shares of Buyer Common Stock in the reorganization exchange and then having received the cash payment from Buyer in a hypothetical redemption of that number of shares of Buyer Common Stock equal in value to such cash payment. (6) The basis on the shares of Buyers Common Stock to be received by Orange shareholders will be the same as the basis of the shares of Orange's Common Stock surrendered in the reorganization exchange, decreased by the amount of cash received and increased by the amount of any gain (and by the amount of any dividend income) recognized on the exchange. (7) The holding period of the shares of Buyer's Common Stock to be received by the shareholders of Orange will include the period during which they held the shares of Orange's Common Stock surrendered, provided the shares of Orange's Common Stock are held as a capital asset on the date of the exchange. 8.2 Conditions to the Obligations of Buyer under this Agreement. The obligations of Buyer under this Agreement shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of Orange in this Agreement which is qualified as to materiality shall be true and correct and each such representation or warranty that is not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement, as applicable, and (except to the extent such representations and warranties speak as of an earlier date) as of the Effective Time; provided, however, that, for purposes hereof, such representations and warranties shall be deemed to be true and correct in all material respects unless the failure or failures of such representations and warranties to be so true and correct represent, in the aggregate, a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. Orange shall have delivered to Buyer a certificate of Orange to such effect signed by the Chief Executive Officer and the Chief Operating Officer of Orange as of the Effective Time. (b) Agreements and Covenants. Orange shall have performed in all material respects all obligations and complied in all material respects with all agreements or covenants of Orange to be performed or complied with by it at or prior to the Effective Time under this Agreement and Buyer shall have received a certificate signed on behalf of Orange by the Chief Executive Officer and Chief Operating Officer of Orange to such effect dated as of the Effective Time. (c) Permits, Authorizations, Etc. Orange and the Orange Subsidiaries shall have obtained any and all material permits, authorizations, consents, waivers, clearances or approvals required for the lawful consummation of the Merger by Orange, the failure to obtain which would have a Material Adverse Effect on Orange and the Orange Subsidiaries, taken as a whole. (d) Legal Opinion. Buyer shall have received an opinion, dated the Closing Date, from Foley, Hoag & Eliot, counsel to Orange, in substantially the form of Exhibit A hereto. In rendering any such opinion, such counsel may require and, to the extent they deem necessary or appropriate may rely upon, opinions of other counsel and upon representations made in certificates of officers of Orange, Buyer, Affiliates of the foregoing, and others. (e) Pooling of Interests. Buyer shall have received a letter from Wolf & Company, PC, addressed to Buyer, to the effect that the Merger will qualify for "pooling of interests" accounting treatment. (f) Dissenting Orange Shareholders. The holders of not more than 10% of the Orange Common Stock outstanding immediately prior to the Effective Time shall have given notice of their intention to exercise dissenters' rights pursuant to the MBCL. (g) Accountants' Letter. Buyer shall have received a "comfort" letter from the independent certified public accountants for Orange, dated (i) the effective date of the Registration Statement and (ii) the Closing Date, in each case substantially to the effect that: (1) it is a firm of independent public accountants with respect to Orange and its subsidiaries within the meaning of the Securities Act and the rules and regulations of the SEC thereunder; (2) in its opinion the audited consolidated financial statements of Orange and its subsidiaries examined by it and included in the Registration Statement comply as to form in all material respects with the applicable requirements of the Securities Act and the applicable published rules and regulations of the SEC thereunder with respect to registration statements on the form employed; and (3) on the basis of specified procedures (which do not constitute an examination in accordance with generally accepted auditing standards), consisting of a reading of the unaudited consolidated financial statements, if any, of Orange included in such Registration Statement and of the latest available unaudited consolidated financial statements of Orange, inquiries of officers responsible for financial and accounting matters of Orange and its subsidiaries and a reading of the minutes of meetings of shareholders and the Board of Directors of Orange and its subsidiaries, nothing has come to its attention which causes it to believe: (i) that the consolidated financial statements, if any, of Orange included in such Registration Statement do not comply in all material respects with the applicable accounting requirements of the Securities Act and the published rules and regulations thereunder; and (ii) that any such unaudited consolidated financial statements of Orange from which unaudited quarterly financial information set forth in such Registration Statement has been derived, are not fairly presented in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited consolidated financial statements. (h) Fairness Opinion. Buyer shall have received a letter from its investment advisor, dated as of a date not later than ten (10) days after the execution of this Agreement, stating its opinion that the consideration to be paid to Orange's stockholders pursuant to the Merger is fair to Buyer and its stockholders, from a financial point of view. Orange will furnish Buyer with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 8.2 as Buyer may reasonably request. 8.3 Conditions to the Obligations of Orange under this Agreement. The obligations of Orange under this Agreement shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of Buyer in this Agreement which is qualified as to materiality shall be true and correct and each such representation or warranty that is not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement, as applicable, and (except to the extent such representations and warranties speak as of an earlier date) as of the Effective Time; provided, however, that, for purposes hereof, such representations and warranties shall be deemed to be true and correct in all material respects unless the failure or failures of such representations and warranties to be so true and correct represent, in the aggregate, a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. Buyer shall have delivered to Orange a certificate of Buyer to such effect signed by the Chief Executive Officer and the Chief Financial Officer of Buyer as of the Effective Time. (b) Agreements and Covenants. Buyer shall have performed in all material respects all obligations and complied in all material respects with all agreements or covenants of Buyer to be performed or complied with by it at or prior to the Effective Time under this Agreement and Orange shall have re- ceived a certificate signed on behalf of Buyer by the Chief Executive Officer and Chief Financial Officer of Buyer to such effect dated as of the Effective Time. (c) Permits, Authorizations, Etc. Buyer and its subsidiaries shall have obtained any and all material permits, authorizations, consents, waivers, clearances or approvals required for the lawful consummation of the Merger by Buyer, the failure to obtain which would have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. (d) Legal Opinion. Orange shall have received an opinion from Devine, Millimet & Branch, Professional Association, counsel to Buyer, dated the Closing Date, in substantially the form of Exhibit B hereto. In rendering any such opinion, such counsel may require and, to the extent they deem necessary or appropriate may rely upon, opinions of other counsel and upon representations made in certificates of officers of Buyer, Orange, Affiliates of the foregoing, and others. (e) Fairness Opinion. Orange shall have received a letter from the Investment Advisor, dated as of a date not more than five days prior to the date the Proxy Statement-Prospectus contemplated by Section 7.1 is mailed to Orange's stockholders, stating its opinion that the consideration to be paid to Orange's stockholders pursuant to the Merger is fair to such stockholders, from a financial point of view. Buyer will furnish Orange with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 8.3 as Orange may reasonably request. ARTICLE IX THE CLOSING 9.1 Time and Place. Subject to the provisions of Articles VIII and X hereof, the Closing of the transactions contemplated hereby shall take place at the offices of Foley, Hoag & Eliot, One Post Office Square, Boston, Massachusetts at 10:00 a.m. on a date specified by Buyer at least three business days prior to such date. The Closing Date shall be as soon as practi- cable after the last required approval for the Merger has been obtained and the last of all required waiting periods under such approvals have expired, or at such other place, date or time as Buyer and Orange may mutually agree upon. 9.2 Deliveries at the Closing. At the Closing there shall be delivered to Buyer and Orange the opinions, certificates, and other documents and instruments required to be delivered under Article VIII hereof. ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of Orange: (a) At any time by the mutual written agreement of Buyer and Orange; (b) By either Orange or Buyer (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein), if there has been a material breach on the part of the other party of any representation, warranty or agreement contained herein which cannot be or has not been cured within 30 days after written notice by the Buyer to Orange (or by Orange to Buyer) of such breach; (c) At the election of either Buyer or Orange, if the Closing shall not have occurred on or before July 31, 1995 (the "Termination Date"), or such later date as shall have been agreed to in writing by Buyer and Orange; provided, that no party may terminate this Agreement pursuant to this Section 10.1(c) if the failure of the Closing to have occurred on or before said date was due to such party's breach of any of its obligations under this Agreement, and provided, further, that the Termination Date may be extended until Septem- ber 30, 1995 by Orange by written notice to Buyer (given not later than July 25, 1995) if the Closing shall not have occurred because of failure to have obtained approval from one or more regulatory authorities whose approval is required in connection with this Agreement and the transactions contemplated hereby under circumstances in which neither party has the right to terminate this Agreement pursuant to Section 10.1(e) hereof; (d) By either Orange or Buyer if the stockholders of Orange shall have voted at the Special Meeting on the transactions contemplated by this Agreement and such vote shall not have been sufficient to approve such transactions; (e) By either Orange or Buyer if final action has been taken by a regulatory authority whose approval is required in connection with this Agreement and the transactions contemplated hereby, which final action (i) has become unappealable and (ii) does not approve this Agreement or the transactions contemplated hereby; or (f) By Orange, if the Average Closing Price is equal to or less than $14.00, by written notice to Buyer within two business days following the end of the Valuation Period, provided, however, that Orange's right to terminate this Agreement pursuant to this Section 10.1(f) shall be of no further force if Buyer shall have elected (by written notice to Orange given not later than three business days after the end of the Valuation Period) with the approval of Orange to adopt as the Exchange Ratio the Adjusted Maximum Exchange Ratio. 10.2 Effect of Termination. (a) In the event of termination of this Agreement pursuant to any provision of Section 10.1, this Agreement shall forthwith become void and have no further force, except that (i) the provisions of Sections 10.3, 10.4, 11.1, 12.1, 12.6, 12.9, and 12.10 (and of this Section 10.2) shall survive such termination of this Agreement and remain in full force and effect and (ii) notwithstanding anything to the contrary contained in this Agreement, each party shall remain liable (in an action at law or otherwise) for any liabilities or damages arising out of its gross negligence or its wilful breach of any provision of this Agreement. (b) If this Agreement is terminated, expenses of the parties hereto shall be determined as follows: (1) Any termination of this Agreement pursuant to Sections 10.1(a), 10.1(c), 10.1(d), 10.1(e) or 10.1(f) hereof (other than as a result of a wilful breach or gross negligence by a party hereto) shall be without cost or expense on the part of any party to the other; and (2) In the event of a termination of this Agreement pursuant to Section 10.1(b) hereof as a result of a breach of a representation, warranty or covenant which is caused by the wilful conduct or gross negligence of a party, such party shall (while remaining liable for any liabilities or damages arising out of such wilful breach or gross negligence) be obligated to reimburse the other party for all out-of- pocket costs and expenses, including, without limitation, reasonable legal, accounting and investment banking fees and expenses, incurred by such other party in connection with the entering into of this Agreement and the carrying out of any and all acts contemplated hereunder (collectively referred to as "Expenses"), provided that in no event shall such amount exceed $250,000, and provided, further, that in the event Orange is required to pay a Termination Fee (as described in Section 10.3 hereof), the maximum Expenses payable by Orange shall not exceed $150,000. (c) The payment of Expenses is not an exclusive remedy, but is in addition to any other rights or remedies available to the parties hereto at law or in equity and notwithstanding anything to the contrary contained herein, no party shall be relieved or released from any liabilities or damages arising out of its gross negligence or wilful breach of any provision of this Agreement. (d) In no event shall any officer, agent or director of Orange, any Orange Subsidiary, Buyer or any Buyer subsidiary, be personally liable thereunder for any default by any party in any of its obligations hereunder unless any such default was intentionally caused by such officer, agent or director. 10.3 Termination Fee. Orange shall pay to Buyer a termination fee of $450,000 ("Termination Fee") within twenty (20) business days of the occurrence of any of the following: (a) the failure of Orange's shareholders to approve the affiliation of Buyer and Orange in accordance with this Agreement at a meeting called for such purpose after the public announcement by any person or group of persons (other than Buyer) of a bona fide, credible offer or proposal to acquire 45.0% or more of Orange's Common Stock, or to acquire, merge, or consolidate with Orange or to purchase all or substantially all of Orange's assets (unless such offer has been publicly withdrawn ten or more days prior to such meeting); (b) the acquisition by any person or group of persons (other than Buyer) of 45.0% or more of Orange's Common Stock (or the acquisition by any person or group of persons of the right to acquire 45.0% or more of Orange's Common Stock), exclusive of shares of Orange's Common Stock sold directly or indirectly to such person or group of persons by Buyer; or (c) the entry of Orange into an agreement or other understanding with a person or group of persons (other than Buyer) for such person or group of persons to acquire, merge or consolidate with Orange or to purchase all or substantially all of Orange's assets or acquire 45.0% or more of the outstand- ing shares of Orange's Common Stock. As used herein, "person" and "group of persons" shall have the meanings conferred thereon by Section 13(d) of the Securities Exchange Act of 1934, as amended. (d) The Termination Fee payable in accordance with this Section 10.3 shall constitute liquidated damages and shall, except as otherwise provided in Section 10.2(b) with respect to Expenses, be the sole monetary remedy of Buyer for termination of this Agreement under the circumstances described in this Section 10.3. 10.4 Expenses. Except as provided in Section 10.2(b) hereof, whether or not the Merger is consummated, all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such costs and expenses, provided, however, that the Expenses of printing and mailing the Proxy Statement-Prospectus shall be shared equally by Buyer and Orange, provided, further, however, that nothing contained herein shall limit either party's rights under Section 10.2 hereof, including but not limited to the right to recover any liability or damages arising out of the other party's gross negligence or wilful breach of this Agreement. 10.5 Amendment, Extension and Waiver. Subject to applicable law, at any time prior to the Effective Time (whether before or after approval thereof by the stockholders of Orange), the parties hereto may (a) amend this Agreement, (b) extend the time for the performance of any of the obligations or other acts of any other party hereto, (c) waive any inaccuracies in the repre- sentations and warranties contained herein or in any document delivered pursuant hereto, or (d) waive compliance with any of the agreements or conditions contained herein; provided, however, that after any approval of this Agreement and the transactions contemplated hereby by the stockholders of Orange, there may not be, without further approval of such stockholders, any amendment of this Agreement which reduces the amount or changes the form of consideration to be delivered to Orange's stockholders pursuant to this Agree- ment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party, but such waiver or failure to insist on strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE XI CERTAIN DEFINITIONS 11.1 Certain Definitions. As used in this Agreement, the following terms have the following meanings (unless the context otherwise requires, both here and throughout this Agreement, references to Articles and Sections refer to Articles and Sections of this Agreement). (a) "Affiliate" of a specified Person shall mean a Person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified Person, including, without limitation, any partnership or joint venture in which a Person (either alone, or through or together with any subsidiary) has, directly or indirectly, an interest of 5% or more. (b) "Environmental Laws" shall mean any federal, state or local law relating to (A) releases or threatened releases of Hazardous Substances or materials containing Hazardous Substances, (B) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Substances or materials containing Hazardous Substances, or (C) otherwise relating to pollution of the environment. (c) "Environmental Permits" means all permits, licenses and other authorizations referred to under any Environmental Law. (d) "Hazardous Substances" means (A) those substances defined in or regulated under the Comprehensive Environmental Response, Compensation and Liability Act, and its state counterparts, as each may be amended from time to time, and all regulations thereunder, (B) petroleum and petroleum products including crude oil and any fractions thereof, (C) natural gas, synthetic gas, and any mixtures thereof, (D) radon, (E) any other contaminant, and (F) any substance with respect to which a federal, state or local agency requires environmental investigation, monitoring, reporting or remediation. (e) "Material Adverse Effect", when used with respect to any Person, shall mean a material adverse effect on the financial condition, business, or results of operations of such Person; provided, however, that the following matters shall not constitute or contribute to a Material Adverse Effect: (i) changes in the financial condition, business, or results of operations of a person resulting directly or indirectly from (w) changes in interest rates, (x) changes in general economic conditions, (y) changes in regulations or legislation affecting Massachusetts banks, or (z) the public announcement of the transactions contemplated hereby; or (ii) matters related to changes in federal, state or local tax laws or changes in federal, state or local tax status, characteristics, or attributes or the ability to use such attributes. (f) "Person" shall mean any individual, corporation, partnership, joint venture, association, trust, unincorporated organization or government or any agency or political subdivision thereof. (g) "subsidiary" or "subsidiaries" of any Person shall mean an Affiliate controlled by such Person, directly or indirectly, through one or more intermediaries, except as otherwise defined herein. ARTICLE XII MISCELLANEOUS 12.1 Confidentiality. Except as specifically set forth herein, Buyer and Orange mutually agree to be bound by the terms of the Confidentiality Agreement previously executed by the parties hereto, which Agreement is hereby incorporated herein by reference. The parties hereto agree that such Confi- dentiality Agreement shall continue in accordance with its respective terms, notwithstanding the termination of this Agreement. 12.2 Public Announcements. Orange and Buyer shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement or any of the transactions contemplated hereby, except as may be otherwise required by law, and neither Orange nor Buyer shall issue any joint news releases with respect to this Agreement or any of the transactions contemplated hereby, unless such news releases have been mutually agreed upon by the parties hereto. 12.3 Survival. Except for any agreement of the parties contained in this Agreement which by its terms is intended to be performed after the Effective Time, the respective representations, warranties and agreements of the parties contained in this Agreement or in any Exhibit, Schedule, certificate, list, letter or other instrument referred to in this Agreement, and which are delivered or made pursuant to this Agreement (or in connection with any transaction contemplated by this Agreement) shall not survive the Effective Time but shall terminate as of the Effective Time. 12.4 Notices. All notices or other communications hereunder shall be in writing and shall be deemed given if delivered by receipted hand delivery or mailed by prepaid registered or certified mail (return receipt requested) or by cable, telegram, telex or telecopy addressed as follows: If to Buyer to: CFX Corporation 102 Main Street Keene, New Hampshire 03431 Attention: Peter J. Baxter, President Copy to: Paul C. Remus, Esq. Paul G. Mattaini, Esq. Devine, Millimet & Branch, Professional Association 111 Amherst Street Manchester, New Hampshire 03105 If to Orange, to: Orange Savings Bank 30 East Main Street Orange, Massachusetts 01364 Attention: Richard F. Astrella, President Copy to: Peter W. Coogan, Esq. Carol Hempfling Pratt, Esq. Foley, Hoag & Eliot One Post Office Square Boston, Massachusetts 02109 or such other address as shall be furnished in writing by any party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 12.5 Parties in Interest. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, and that (except as otherwise expressly provided in this Agreement) nothing in this Agreement is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement. 12.6 Complete Agreement. This Agreement, including the Exhibits and Schedules hereto and the documents and other writings referred to herein or delivered pursuant hereto, contains the entire agreement and understanding of the parties with respect to its subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties other than those expressly set forth herein or therein. This Agreement supersedes all prior agreements and understandings (other than the Confidentiality Agreement referred to in Section 12.1 hereof) between the parties, both written and oral, with respect to its subject matter. 12.7 Counterparts. This Agreement may be executed in one or more counterparts all of which shall be considered one and the same agreement and each of which shall be deemed an original. 12.8 Severability. In the event that any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties shall use their reasonable efforts to substitute a valid, legal and enforceable provision which, insofar as practical, implements the purposes and intents of this Agreement. 12.9 Governing Law. This Agreement shall be governed by the laws of the State of New Hampshire. 12.10 Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. * * * * * IN WITNESS WHEREOF, Buyer and Orange have caused this Agreement to be executed under seal by their duly authorized officers on November 3, 1994 but as of the 26th day of July, 1994. CFX CORPORATION [SEAL] By: /s/ Peter J. Baxter Its President By: /s/ Mark A. Gavin Its Chief Financial Officer ORANGE SAVINGS BANK [SEAL] By: /s/ Richard F. Astrella Its President By: /s/ Dana C. Robinson Its Treasurer LIST OF EXHIBITS AND SCHEDULES Exhibit A Form of Opinion of Foley, Hoag & Eliot Exhibit B Form of Opinion of Devine, Millimet & Branch, P.A. Schedules to Representations and Warranties of Orange The Exhibits listed above have been intentionally omitted. CFX will furnish supplementally to the Securities and Exchange Commission upon request a copy of any such omitted Exhibit or Schedule. Annex B January 17, 1995 EDS Board of Directors Orange Savings Bank 30 East Main Street Orange, Massachusetts 01364 Directors: You have requested our opinion as to the fairness to the holders of the outstanding shares of common stock of Orange Savings Bank ("Orange" or "the Bank") of the merger consideration to be received by such holders pursuant to the Amended and Restated Agreement and Plan of Merger ("Merger Agreement") dated as of July 26, 1994, by and between CFX Corporation ("CFX") and Orange. The merger consideration is subject to certain adjustments as provided in the Merger Agreement. EDS Management Consulting Services, Banking Group, as part of its financial advisory business, is continually engaged in the valuation of banking businesses and their securities in connection with mergers and acquisitions, competitive biddings, and valuations for estate, corporate and other purposes. In connection with this opinion, we have reviewed, among other things, the Merger Agreement; Reports to Stockholders for the three fiscal years ended December 31, 1993 for Orange and CFX and fiscal quarter ended September 30, 1994 for CFX; certain interim reports to directors of Orange and CFX; and certain internal financial analyses and forecasts for Orange and CFX prepared by their management. We also have held discussions with members of the senior management and Directors of Orange and CFX regarding past and current business operations, regulatory relationships, financial condition and future prospects. In addition, we have reviewed the reported price and trading activity for Orange and CFX common stock, compared certain financial and stock market information for certain recent business combinations in the thrift and commercial banking industries, and performed such other studies and analyses as we considered appropriate. We have relied without independent verification upon the accuracy and completeness of all of the financial and other information reviewed by us for purposes of the opinion. We have also relied upon the management of the Bank and CFX as to the reasonableness and achievability of the financial and operating forecasts and the assumptions and bases therefore provided to us. In that regard, the managements of the Bank and CFX affirmed, and we have assumed, with your consent, that such forecasts, including without limitation projections regarding under-performing and non-performing assets, net chargeoffs and the adequacy of reserves reflect the best currently available estimates and judgments of the management of the Bank and CFX. In addition, we have not made an independent evaluation or appraisal of the assets and liabilities of the Bank or any of its subsidiaries or CFX and we have not been furnished with any such evaluation or appraisal. Based upon, and subject to, the foregoing and such other matters as we consider relevant, it is our opinion that as of the date hereof the merger consideration (subject to adjustment as provided in the Merger Agreement) to be received by the shareholders of Orange pursuant to the Merger Agreement is fair from a financial point of view to such shareholders. Very truly yours, EDS Management Consulting Services, Banking Group Reservoir Place 1601 Trapelo Road Waltham, Massachusetts 02154 Management Consulting Services (617) 890-0977 BEI GOLEMBE Fax: (617) 890-8996 Annex C Text of Chapter 156B, Sections 85 to 98 of the Massachusetts Business Corporation Law [SECTION] 85. Dissenting stockholder; right to demand payment for stock; exception A stockholder in any corporation organized under the laws of Massachusetts which shall have duly voted to consolidate or merge with another corporation or corporations under the provisions of sections seventy-eight or seventy-nine who objects to such consolidation or merger may demand payment for his stock from the resulting or surviving corporation and an appraisal in accordance with the provisions of sections eighty-six to ninety-eight, inclusive, and such stockholder and the resulting or surviving corporation shall have the rights and duties and follow the procedure set forth in those sections. This section shall not apply to the holders of any shares of stock of a constituent corporation surviving a merger if, as permitted by subsection (c) of section seventy-eight, the merger did not require for its approval a vote of the stockholders of the surviving corporation. [SECTION] 86. Selections applicable to appraisal; prerequisites If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eighty-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. [SECTION] 87. Statement of rights of objecting stockholders in notice of meeting; form The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payment for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts." [SECTION] 88. Notice of effectiveness of action objected to The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed a written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address as it appears in the records of the corporation. [SECTION] 89. Demand for payment; time for payment If within twenty days after the date of mailing of a notice under subsection (e) of section eighty-two, subsection (f) of section eighty-three, or section eighty-eight, any stockholder to whom the corporation was required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. [SECTION] 90. Demand for determination of value; bill in equity; venue If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or any such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. [SECTION] 91. Parties to suit to determine value; service If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to the last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty- nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. [SECTION] 92. Decree determining value and ordering payment; valuation date After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment for their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or, if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. [SECTION] 93. Reference to special master The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. [SECTION] 94. Notation on stock certificates of pendency of bill On motion the court may order stockholder parties to the bill to submit their certificates of stock to the corporation for the notation thereon of the pendency of the bill and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholder parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. [SECTION] 95. Costs; interest The costs of the bill, including reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. [SECTION] 96. Dividends and voting rights after demand for payment Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) A bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provisions of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. [SECTION] 97. Status of shares paid for The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock, or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. [SECTION] 98. Exclusive remedy; exception The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Under New Hampshire law, a corporation has the power to indemnify any director or officer or former director or officer of the corporation, or any person who may have served, at its request, as a director of officer of another corporation, against expenses actually and reasonably incurred by him in connection with any threatened, pending or completed action, suit or proceeding, civil, criminal, administrative or investigative, in which he is a party or is threatened to be made a party by reason of being or having been such director or officer, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The registrant's By-Laws contain the following provision in connection with indemnification of directors and officers. Any person, or the heirs, executors, or administrators of any such person, who has been made a party to any action, suit or proceeding by reason of the fact that such party, or person whose legal representative or successor such party is, was or is a director, officer or employee of the Corporation or of any corporation, partnership, firm or organization which that person serves or has served in any such capacity at the request of the Corporation, may be indemnified and reimbursed by the Corporation for expenses, including attorneys' fees, and for such amount of any judgement, money decree, fine, penalty or settlement for which that person may have become liable as the Board of Directors may deem reasonable, but only to the extent actually incurred by such person in connection with the defense or the reasonable settlement of any such action, suit or proceeding, or any appeal therein; provided, however, that no person shall be so indemnified or reimbursed in relation to any matter as to which such party, or the person whose legal representative or successor such party is, is finally adjudged in such action, suit or proceeding not to have acted in good faith in the reasonable belief that the action or failure to act of the person was in the best interests of the Corporation; and provided further that no person shall be so indemnified or reimbursed in respect of any such action, suit or proceeding which has been made the subject of a compromise settlement except with the approval of a court of competent jurisdiction or a majority of the Board of Directors, exclusive of those Directors who are parties to the same or substantially the same action, suit or proceeding. The foregoing right of indemnification and reimbursement shall not be exclusive of other rights of indemnification and reimbursement shall not be exclusive of other rights to which such person, or the heirs, executors or administrators of that person may be entitled as a matter of law. Item 21. List of Exhibits and Financial Statement Schedules (a) Exhibits 2 Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 (filed as Annex A to the Proxy Statement-Prospectus which constitutes a part of this Registration Statement). *3 Articles of Incorporation and By-Laws of CFX Corporation, as amended. 5 Opinion of Devine, Millimet & Branch, Professional Association, as to the legality of the Common Stock being registered. 8.1 Form of opinion of Foley, Hoag & Eliot as to tax matters. 8.2 Form of opinion of Devine, Millimet & Branch, Professional Association, as to tax matters. **10.1 Cheshire Financial Corporation Retirement Plan. **10.2 1992 Cheshire Financial Corporation Profit Sharing/Bonus Plan. **10.3 Cheshire Financial Corporation 401(k) Plan. ***10.4 Cheshire Financial Corporation 1986 Stock Option Plan. ***10.5 Cheshire Financial Corporation 1992 Employee Stock Purchase Plan. ****10.6 Employment Agreement dated as of January 1, 1991 between Cheshire Financial Corporation and Peter J. Baxter, as amended. ****10.7 Change of Control Agreement dated June 5, 1991 between Cheshire Financial Corporation and Laurence E. Babcock. **10.8 Change of Control Agreement dated December 31, 1992 between Cheshire Financial Corporation and John F. Foley. ****10.9 Change of Control Agreement dated June 5, 1991 between Cheshire Financial Corporation and David S. Foote. **10.10 Change of Control Agreement dated December 31, 1992 between Cheshire Financial Corporation and Mark A. Gavin. *****10.11 Change of Control Agreement dated August 4, 1993 between Cheshire Financial Corporation and Daniel J. LaPlante. *****10.12 Employment Agreement dated September 1, 1993 between Cheshire Financial Corporation and Paul D. Spiess. *10.13 Change of Control Agreement dated March 28, 1994 between Cheshire Financial Corporation and Irene L. Soucy. ****10.14 Change of Control Agreement dated June 5, 1991 between CFX Bank and William H. Dennison. ****10.15 Change of Control Agreement dated June 5, 1991 between CFX Bank and Peter T. Whittemore. ****10.16 Change of Control Agreement dated June 5, 1991 between CFX Bank and Wayne R. Gordon. *****10.17 Employment Agreement dated September 1, 1993 between CFX Mortgage, Inc. and Paul T. Pouliot. ***10.18 Lease dated May 1, 1983 by and between Santifotto, Inc. and CFX Bank. **10.19 Lease dated October 16, 1991 by and between Market Basket, Inc. and CFX Bank. *****10.20 Lease dated May 11, 1993 by and between Cheshire Oil Company, Inc. and CFX Bank. *****10.21 Lease dated January 24, 1993 between Thomas F. Moran and Ruth M. Moran, husband and wife, and CFX Mortgage, Inc. *****10.22 Lease dated April 14, 1993 by and between Arnold S. Katz and Blair J. Finnegan, Trustees of Commerce Center Trust, and CFX Mortgage, Inc. *****10.23 Lease dated September 15, 1993 by and between Bedford Farms Limited Partnership and CFX Mortgage, Inc. *21 Subsidiaries of CFX Corporation. *23.1 Consent of Wolf & Company, P.C. *23.2 Consent of Ernst & Young LLP. *23.3 Consent of KPMG Peat Marwick LLP. *23.4 Consent of EDS Management Consulting Services, Banking Group. 23.5 Consent of Foley, Hoag & Eliot. 23.6 Consent of Devine, Millimet & Branch, Professional Association filed as Exhibit 8.2. *24 Power of Attorney contained on Page II-6 of this Registration Statement. 99.1 Form of Proxy for Special Meeting of Stockholders of Orange Savings Bank. *99.2 Filings of Orange Savings Bank with the Federal Deposit Insurance Corporation under the Securities Exchange Act of 1934, as amended. *99.21 Orange's Annual Report on Form F-2 for the year ended December 31, 1993, including Orange's Proxy Statement for its 1994 Annual Meeting and Orange's 1994 Annual Report to Stockholders, which were incorporated by reference into the Form F-2; *99.22 Orange's Quarterly Reports on Form F-4 for the quarters ended March 31, June 30 and September 30, 1994; *99.23 Orange's Current Reports on Form F-3 for the months ended December 31, 1993 and July 31, 1994. 99.3 Opinion of EDS Management Consulting Services, Banking Group (filed as Annex B to the Proxy Statement-Prospectus which constitutes a part of this Registration Statement). * Previously filed with the Registration Statement. ** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of Cheshire Financial Corporation for the year ended December 31, 1992. *** Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of Cheshire Financial Corporation No. 33-52598 effective in 1992. **** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of Cheshire Financial Corporation for the year ended December 31, 1991. ***** Incorporated herein by reference to the Exhibits to the Annual Reports Statement on Form S-8 of Cheshire Financial Corporation for the year ended December 31, 1993.
Item 22. Undertakings Rule 512(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Rule 512(e) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Rule 512(g) (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition of the information called for by the other Items of the applicable form. (2) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Rule 512(h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. Additional Undertakings The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Keene, State of New Hampshire on January 13, 1995. CFX CORPORATION By: /s/ PETER J. BAXTER Peter J. Baxter, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, the Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Principal Executive Officer: /s/ PETER J. BAXTER Peter J. Baxter, President and Chief Executive Officer /s/ MARK A. GAVIN Mark A. Gavin, Chief Financial Officer (Principal Financial Officer) /s/ GREGG R. TEWKSBURY Gregg R. Tewksbury, Corporate Controller (Principal Accounting Officer) Directors: Peter J. Baxter Richard B. Baybutt Calvin L. Frink By: /s/ PETER J. BAXTER Eugene E. Gaffey (Peter J. Baxter, as Attorney-in-Fact Emerson H. O'Brien and as a Director) L. William Slanetz EX-5 2 OPINION OF DEVINE MILLMET & BRANCH DEVINE, MILLIMET & BRANCH PROFESSIONAL ASSOCIATION-ATTORNEYS AT LAW Victory Park 111 Amherst Street Box 719 Manchester, NH 03105 Tel: 603-669-1000 Fax: 603-669-8547 January 13, 1995 CFX Corporation 102 Main Street Keene, NH 03431 Ladies and Gentlemen: We have acted as counsel to CFX Corporation (the "Company") in connection with the negotiation, execution and delivery of the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 (the "Merger Agreement") pursuant to which the Company will acquire all of the outstanding shares of common stock of Orange Savings Bank ("Orange") in exchange for the issuance by the Company of up to 713,111 shares of the Company's common stock, $1 par value (the "CFX Common Stock"). Prior to rendering this opinion, we have reviewed such certificates, documents and records as we have deemed necessary for the purposes hereof, including the following: a. Copies of the Articles of Agreement and the Bylaws of the Company as now in effect; b. The Registration Statement relating to the CFX Common Stock to be issued pursuant to the Merger Agreement (Form S-4, File No. 33-56875) and Amendment No. 1 thereto being filed with the Securities and Exchange Commission contemporaneously herewith, and exhibits to each of the foregoing; and c. Resolutions adopted by the Board of Directors of the Company authorizing the execution and delivery of the Merger Agreement and the performance of the transactions contemplated therein, including the issuance of the 713,111 shares of CFX Common Stock. Based upon the foregoing and such other investigation as we have deemed necessary, it is our opinion that when the CFX Common Stock shall have been issued and delivered to the shareholders of Orange and the consideration therefor shall have been received by the Company, all in accordance with the provisions of the Merger Agreement, the CFX Common Stock will be validly issued, fully paid and non-assessable. We understand that this opinion is to be used in connection with the Company's Registration Statement and hereby consent (i) to the filing with and as a part of said Registration Statement of (a) this opinion and (b) the form of our opinion as to certain tax consequences addressed to the Company and CFX Interim Trust Company to be dated the date of the consummation of the merger contemplated in the Merger Agreement and (ii) to the use of our name therein and in the related Proxy Statement-Prospectus under the caption "Legal Opinions". Very truly yours, DEVINE, MILLIMET & BRANCH Professional Association By: Frederick J. Coolbroth EX-8 3 EXHIBIT 8.1--OPINON OF FOLEY HOAG & ELIOT FOLEY, HOAG & ELIOT ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109-2170 TELEPHONE: (617)832-1000 IN WASHINGTON, D.C. CABLE ADDRESS "FOLEY HOAG" 1615 L STREET, N.W. FACSIMILE (617) 832-7000 SUITE 850 WASHINGTON, D.C. 20036 TELEX 940693 TELEPHONE (202) 775-0600 [Date of Closing] ORANGE SAVINGS BANK 30 East Main Street Orange, Massachusetts 01364 Re: Federal Income Tax Consequences of Proposed Merger of CFX Interim Trust Company with and into Orange Savings Bank. Ladies and Gentlemen: We have acted as counsel to Orange Savings Bank, a Massachusetts- chartered stock savings bank ("Orange"), in connection with the proposed merger (the "Merger") of CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub") and wholly-owned subsidiary of CFX Corporation, a New Hampshire corporation ("CFX"), with and into Orange in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994, between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. We have examined the law and such papers as deemed necessary to render these opinions, including the Agreement, the Registration Statement and the Proxy Statement-Prospectus. As to questions of fact material to our opinions we have relied upon representations set forth in the Agreement, the Proxy Statement-Prospectus and certain letters (the "Letters of Representation") of even date addressed to us and attached to this letter, without undertaking to verify the same by independent investigation. The Merger will be consummated pursuant to the Agreement and the Proxy Statement-Prospectus. The Agreement provides that each share of Orange Common Stock (other than Dissenting Shares, if any, and other than Orange Common Stock then owned by Orange, any Orange subsidiary, CFX, or any CFX subsidiary (in each case other than in a fiduciary capacity or as a result of debts previously contracted)) will be converted into shares of CFX Common Stock. (We understand that no Orange Common Stock is owned by any Orange subsidiary, CFX, or any CFX subsidiary.) As a result of the Merger, Orange, as the Surviving Bank, will become a wholly-owned subsidiary of CFX. The business reasons for the Merger are stated in the Proxy Statement- Prospectus. We have assumed that these reasons will constitute a valid business purpose, within the meaning of Treasury Regulation section 1.368-1(b) and (c), for the Merger. We express no opinion as to the federal income tax consequences other than those described below, if any, or as to any state, local or foreign income or other tax consequences, with respect to the Merger. Based on the foregoing, we are of opinion, as of the date hereof and under existing law, that for federal income tax purposes: 1. The Merger will constitute a reorganization within the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the ("Code"). 2. Orange will be a "party to a reorganization" within the meaning of Code section 368(b) 3. No gain or loss will be recognized by Orange as a result of the Merger. 4. Except to the extent of cash received in lieu of fractional shares, as described below, no gain or loss will be recognized by the stockholders of Orange upon the receipt in the Merger of CFX Common Stock in exchange for their shares of Orange Common Stock. 5. Cash received in lieu of a fractional share of CFX Common Stock will be treated as full payment in exchange for the Orange Common Stock for which it is exchanged, and will result in the recognition of gain or loss, if any, measured by the difference between the portion of the basis of the Orange Common Stock allocable to such shares and the cash received therefor. If such shares are capital assets in the hands of the Orange stockholder, such gain or loss will be a capital gain or loss. 6. The aggregate basis of the CFX Common Stock received by an Orange stockholder in the Merger will be the same as the aggregate basis of the Orange Common Stock surrendered in exchange therefor. 7. The holding period for each share of CFX Common Stock received by each Orange stockholder in exchange for Orange Common Stock will include the period for which such stockholder held such Orange Common Stock, provided that the stockholder's Orange Common Stock is held as a capital asset at the Effective Time. 8. An Orange stockholder who does not vote in favor of the Merger, who exercises dissenters' rights as to all such holder's shares of Orange Common Stock and who is not deemed to be an owner of any shares of Orange Common Stock held by others, will recognize gain or loss measured by the difference between the basis of such stockholder's Dissenting Shares and the cash received in exchange therefor. Such gain or loss will be capital, provided that the holder's Dissenting Shares are held as a capital asset at the Effective Time. While the accuracy of each representation set forth in the Letters of Representation is essential to these opinions, we call your particular attention to the fact that dispositions of CFX Common Stock received by Orange stockholders in the Merger may cause the Merger to become retroactively taxable to each Orange stockholder, even those who do not make such dispositions. In particular, Orange stockholders must not, pursuant to a plan or intent existing prior to the Effective Time, dispose of an amount of CFX Common Stock to be received in the Merger (including, under certain circumstances, pre-merger dispositions of Orange Common Stock) such that the Orange stockholders do not retain a meaningful continuing equity ownership in CFX. Generally, so long as the Orange stockholders have no plan or intention to dispose of CFX Common Stock to be received in the Merger that would result in their retention, in the aggregate, of continuing interest through stock ownership in CFX that is equal in value, as of the Effective Time, to less than 50 percent of the value of all of the formerly outstanding Orange Common Stock as of the same time, this requirement will be satisfied. If this requirement were not satisfied, each Orange stockholder would recognize gain or loss with respect to each share of Orange Common Stock surrendered equal to the difference between (i) the stockholder's basis in the share and (ii) the fair market value of the CFX Common Stock received in exchange therefor. In such event, the stockholder's aggregate basis in the shares of CFX Common Stock received in the exchange would equal the fair market value of such shares, and the stockholder's holding period for such CFX Common Stock would not include the period during which the stockholder held the Orange Common Stock exchanged therefor. We are furnishing this letter to you solely in connection with the Merger. This letter is not to be used, circulated, quoted or otherwise referred to for any other purpose without our prior written consent, except that you are authorized to furnish a copy of this letter to Devine, Millimet & Branch, who may rely on this letter for the sole purpose of rendering opinions to CFX and CFX Sub. Very truly yours, FOLEY, HOAG & ELIOT By: RICHARD SCHAUL-YODER A partner Attachments CFX CORPORATION 102 Main Street, Box 429 Keene, New Hampshire 03431 [Closing Date] FOLEY, HOAG & ELIOT One Post Office Square Boston, Massachusetts 02109 Devine, Millimet & Branch Professional Association 111 Amherst Street Manchester, New Hampshire 03101 Ladies and Gentlemen: We hereby make the following representations to you and intend that you will rely upon these representations in rendering your opinions on the federal income tax consequences of the proposed merger (the "Merger") of CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub") to be formed as a wholly-owned subsidiary of CFX Corporation, a New Hampshire corporation ("CFX"), with and into Orange Savings Bank, a Massachusetts- chartered stock savings bank ("Orange"), in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. 1. The fair market value of the CFX Common Stock and other consideration received by each Orange shareholder will be approximately equal to the fair market value of the Orange Common Stock surrendered in the Merger. 2. Prior to the Merger, CFX will be in control of CFX Sub within the meaning of section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. In the Merger, CFX will exchange solely voting stock of CFX for shares of Orange Common Stock representing control of Orange, as defined in section 368(c) of the Code. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property originating with CFX will be treated as outstanding Orange Common Stock on the date of the Merger. 4. CFX has no plan or intention to cause Orange to issue additional shares of its stock that would result in CFX losing control of Orange within the meaning of section 368(c) of the Code. 5. Following the Merger, CFX will cause Orange to continue its historic business or use a significant portion of its historic business assets in a business. 6. CFX will pay its own expenses in connection with the Merger. 7. There is no intercorporate indebtedness existing between CFX and Orange that was issued, acquired, or will be settled at a discount. 8. CFX has no plan or intention to reacquire any of its stock issued in the Merger. 9. CFX has no plan or intention to liquidate Orange; to merge Orange with or into another corporation; to sell or otherwise dispose of the stock of Orange, except for transfers of stock to corporations controlled by CFX; or to cause Orange to sell or otherwise dispose of any of its assets or any of the assets acquired from CFX Sub, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by Orange. 10. CFX does not own, nor has it owned during the past five years, any shares of the stock of Orange. 11. CFX is not an investment company as defined in sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code. 12. The payment of cash in lieu of fractional shares of CFX Common Stock is solely for the purpose of avoiding the expense and inconvenience to CFX of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to Orange shareholders instead of issuing fractional shares of CFX Common Stock will not exceed one percent of the total consideration that will be issued in the Merger to the Orange shareholders in exchange for their shares of Orange Common Stock. The fractional share interests of each Orange shareholder will be aggregated, and no Orange shareholder will receive cash in an amount equal to or greater than the value of one full share of CFX Common Stock. Sincerely yours, CFX CORPORATION By: Its Chief Executive Officer By: Its Chief Financial Officer ORANGE SAVINGS BANK 30 East Main Street Orange, Massachusetts 01364 [Closing Date] FOLEY, HOAG & ELIOT One Post Office Square Boston, Massachusetts 02109 Devine, Millimet & Branch Professional Association 111 Amherst Street Manchester, New Hampshire 03101 Ladies and Gentlemen: We hereby make the following representations to you and intend that you will rely upon these representations in rendering your opinions on the federal income tax consequences of the proposed merger (the "Merger") of CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub") to be formed as a wholly-owned subsidiary of CFX Corporation, a New Hampshire corporation ("CFX"), with and into Orange Savings Bank, a Massachusetts- chartered stock savings bank ("Orange"), in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994, between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. 1. The fair market value of the CFX Common Stock and other consideration received by each Orange shareholder will be approximately equal to the fair market value of the Orange Common Stock surrendered in the Merger. 2. To the best of the knowledge of the management of Orange, there is no plan or intention on the part of the shareholders of Orange to sell, exchange, or otherwise dispose of a number of shares of CFX Common Stock received in the Merger that would reduce the Orange shareholders' ownership of CFX Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the value of all of the formerly outstanding Orange Common Stock as of the same date. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of CFX Common Stock will be treated as outstanding Orange Common Stock on the date of the Merger. Moreover, shares of Orange Common Stock otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Merger, Orange will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of CFX Sub's net assets and at least 70 percent of the fair market value of CFX Sub's gross assets held immediately prior to the Merger. For purposes of this representation, amounts paid by Orange or CFX Sub to dissenters, amounts paid by Orange or CFX Sub to shareholders who receive cash or other property, amounts used by Orange or CFX Sub to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by Orange will be included as assets of Orange or CFX Sub, respectively, immediately prior to the Merger. 4. Orange has no plan or intention to issue additional shares of its stock that would result in CFX's losing control of Orange within the meaning of section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. Following the Merger, Orange will continue its historic business or use a significant portion of its historic business assets in a business. 6. CFX, CFX Sub, Orange, and the shareholders of Orange will pay their respective expenses, if any, incurred in connection with the Merger. 7. There is no intercorporate indebtedness existing between CFX and Orange or between CFX Sub and Orange that was issued, acquired, or will be settled at a discount. 8. In the Merger, shares of Orange Common Stock representing control of Orange, as defined in section 368(c) of the Code, will be exchanged solely for voting stock of CFX. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property originating with CFX will be treated as outstanding Orange Common Stock on the date of the Merger. 9. At the time of the Merger, Orange will not have outstanding any warrants, options, convertible securities, or any other type of rights pursuant to which any person could acquire stock in Orange that, if exercised or converted, would affect CFX's acquisition or retention of control of Orange, as defined in section 368(c) of the Code. 10. CFX does not own, nor has it owned during the past five years, any shares of the stock of Orange. 11. Orange is not an investment company as defined in sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code. 12. Orange is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of section 368(a)(3)(A) of the Code. 13. On the date of the Merger, the fair market value of the assets of Orange will equal or exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 14. None of the compensation received by any shareholder-employees of Orange will be separate consideration for, or allocable to, any of their shares of Orange Common Stock. None of the shares of CFX Common Stock received by any shareholder-employees of Orange will be separate consideration for, or allocable to, any employment agreement. The compensation paid to any shareholder-employees of Orange will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. Sincerely yours, ORANGE SAVINGS BANK By: Its President EX-8 4 EXHIBIT 8.2--OPINION OF DEVINE MILLIMET & BRANCH DEVINE, MILLIMET & BRANCH PROFESSIONAL ASSOCIATION-ATTORNEYS AT LAW Victory Park 111 Amherst Street Box 719 Manchester, NH 03105 Tel: 603-669-1000 Fax: 603-669-8547 [Date of Closing] CFX Corporation 102 Main Street Keene, NH 03431 Re: Federal Income Tax Consequences of Proposed Merger of CFX Interim Trust Company with and into Orange Savings Bank. Ladies and Gentlemen: We have acted as counsel to CFX Corporation, a New Hampshire corporation ("CFX"), and CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub"), a wholly-owned subsidiary of CFX, in connection with the proposed merger (the "Merger") of CFX Sub with and into Orange Savings Bank ("Orange") in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. We have examined the law and such documents as deemed necessary to render these opinions, including the Agreement, the Registration Statement and the Proxy Statement-Prospectus. As to questions of fact material to our opinions, we have relied upon representations of CFX, CFX Sub, Orange and certain Orange stockholders contained in letters (the "Letters of Representation") of even date addressed to us and attached to this letter, without undertaking to verify the same by independent investigation. The Merger will be consummated pursuant to the Agreement. Under the Agreement, each share of Orange Common Stock (other than Dissenting Shares, if any, and other than Orange Common Stock then owned by Orange, any Orange subsidiary, CFX, or any CFX subsidiary (in each case other than in a fiduciary capacity or as a result of debts previously contracted)) will be converted into shares of CFX Common Stock. Based upon the Letters of Representation, we understand that no Orange Common Stock is owned by any Orange subsidiary, CFX, or any CFX subsidiary. As a result of the Merger, Orange, as the surviving bank (the "Surviving Bank"), will become a wholly-owned subsidiary of CFX. The business reasons for the Merger are stated in the Proxy Statement- Prospectus. We have assumed that these reasons will constitute a valid business purpose within the meaning of Treasury Regulation section 1.368-1(b) and (c), for the Merger. We express no opinion as to the federal income tax consequences other than those described below, if any, or as to any state, local or foreign income or other tax consequences, with respect to the Merger. Based on the foregoing, and in reliance on the opinion of Foley, Hoag & Eliot rendered to Orange attached to this letter, we are of the opinion, as of the date hereof and under existing law, that for federal income tax purposes: 1. CFX and CFX Sub will each be a "party to the reorganization" within the meaning of Section 368(b) of the Internal Revenue Code of 1986 (the "Code"); 2. No gain or loss will be recognized by CFX, CFX Sub or the Surviving Bank by reason of the Merger; 3. The bases of the assets of Orange in the hands of Orange as the Surviving Bank will be the same as the bases of such assets in the hands of Orange immediately prior to the Merger; and 4. The holding period of the assets of Orange in the hands of Orange as the Surviving Bank will include the period during which such assets were held by Orange prior to the Merger. We express no opinion concerning the tax consequences of the Merger if, in fact, there is, subsequent to the effective time of the Merger, a disposition of stock by Orange stockholders which causes the transaction to fail to meet the continuity of interest requirement as provided in Treasury Regulation section 1.368-2(b)(2). We are furnishing this letter to you solely in connection with the Merger. This letter is not to be used, circulated, quoted or otherwise referred to for any purpose without our prior written consent. Very truly yours, DEVINE, MILLIMET & BRANCH PROFESSIONAL ASSOCIATION By: Duly Authorized CFX CORPORATION 102 Main Street, Box 429 Keene, New Hampshire 03431 [Closing Date] FOLEY, HOAG & ELIOT One Post Office Square Boston, Massachusetts 02109 Devine, Millimet & Branch Professional Association 111 Amherst Street Manchester, New Hampshire 03101 Ladies and Gentlemen: We hereby make the following representations to you and intend that you will rely upon these representations in rendering your opinions on the federal income tax consequences of the proposed merger (the "Merger") of CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub") to be formed as a wholly-owned subsidiary of CFX Corporation, a New Hampshire corporation ("CFX"), with and into Orange Savings Bank, a Massachusetts- chartered stock savings bank ("Orange"), in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994 between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. 1. The fair market value of the CFX Common Stock and other consideration received by each Orange shareholder will be approximately equal to the fair market value of the Orange Common Stock surrendered in the Merger. 2. Prior to the Merger, CFX will be in control of CFX Sub within the meaning of section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. In the Merger, CFX will exchange solely voting stock of CFX for shares of Orange Common Stock representing control of Orange, as defined in section 368(c) of the Code. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property originating with CFX will be treated as outstanding Orange Common Stock on the date of the Merger. 4. CFX has no plan or intention to cause Orange to issue additional shares of its stock that would result in CFX losing control of Orange within the meaning of section 368(c) of the Code. 5. Following the Merger, CFX will cause Orange to continue its historic business or use a significant portion of its historic business assets in a business. 6. CFX will pay its own expenses in connection with the Merger. 7. There is no intercorporate indebtedness existing between CFX and Orange that was issued, acquired, or will be settled at a discount. 8. CFX has no plan or intention to reacquire any of its stock issued in the Merger. 9. CFX has no plan or intention to liquidate Orange; to merge Orange with or into another corporation; to sell or otherwise dispose of the stock of Orange, except for transfers of stock to corporations controlled by CFX; or to cause Orange to sell or otherwise dispose of any of its assets or any of the assets acquired from CFX Sub, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by Orange. 10. CFX does not own, nor has it owned during the past five years, any shares of the stock of Orange. 11. CFX is not an investment company as defined in sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code. 12. The payment of cash in lieu of fractional shares of CFX Common Stock is solely for the purpose of avoiding the expense and inconvenience to CFX of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to Orange shareholders instead of issuing fractional shares of CFX Common Stock will not exceed one percent of the total consideration that will be issued in the Merger to the Orange shareholders in exchange for their shares of Orange Common Stock. The fractional share interests of each Orange shareholder will be aggregated, and no Orange shareholder will receive cash in an amount equal to or greater than the value of one full share of CFX Common Stock. Sincerely yours, CFX CORPORATION By: Its Chief Executive Officer By: Its Chief Financial Officer ORANGE SAVINGS BANK 30 East Main Street Orange, Massachusetts 01364 [Closing Date] FOLEY, HOAG & ELIOT One Post Office Square Boston, Massachusetts 02109 Devine, Millimet & Branch Professional Association 111 Amherst Street Manchester, New Hampshire 03101 Ladies and Gentlemen: We hereby make the following representations to you and intend that you will rely upon these representations in rendering your opinions on the federal income tax consequences of the proposed merger (the "Merger") of CFX Interim Trust Company, a Massachusetts-chartered trust company ("CFX Sub") to be formed as a wholly-owned subsidiary of CFX Corporation, a New Hampshire corporation ("CFX"), with and into Orange Savings Bank, a Massachusetts- chartered stock savings bank ("Orange"), in accordance with the Amended and Restated Agreement and Plan of Merger dated as of July 26, 1994, between CFX and Orange (the "Agreement"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Agreement. 1. The fair market value of the CFX Common Stock and other consideration received by each Orange shareholder will be approximately equal to the fair market value of the Orange Common Stock surrendered in the Merger. 2. To the best of the knowledge of the management of Orange, there is no plan or intention on the part of the shareholders of Orange to sell, exchange, or otherwise dispose of a number of shares of CFX Common Stock received in the Merger that would reduce the Orange shareholders' ownership of CFX Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the value of all of the formerly outstanding Orange Common Stock as of the same date. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property, surrendered by dissenters, or exchanged for cash in lieu of fractional shares of CFX Common Stock will be treated as outstanding Orange Common Stock on the date of the Merger. Moreover, shares of Orange Common Stock otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Merger, Orange will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of CFX Sub's net assets and at least 70 percent of the fair market value of CFX Sub's gross assets held immediately prior to the Merger. For purposes of this representation, amounts paid by Orange or CFX Sub to dissenters, amounts paid by Orange or CFX Sub to shareholders who receive cash or other property, amounts used by Orange or CFX Sub to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by Orange will be included as assets of Orange or CFX Sub, respectively, immediately prior to the Merger. 4. Orange has no plan or intention to issue additional shares of its stock that would result in CFX's losing control of Orange within the meaning of section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. Following the Merger, Orange will continue its historic business or use a significant portion of its historic business assets in a business. 6. CFX, CFX Sub, Orange, and the shareholders of Orange will pay their respective expenses, if any, incurred in connection with the Merger. 7. There is no intercorporate indebtedness existing between CFX and Orange or between CFX Sub and Orange that was issued, acquired, or will be settled at a discount. 8. In the Merger, shares of Orange Common Stock representing control of Orange, as defined in section 368(c) of the Code, will be exchanged solely for voting stock of CFX. For purposes of this representation, shares of Orange Common Stock exchanged for cash or other property originating with CFX will be treated as outstanding Orange Common Stock on the date of the Merger. 9. At the time of the Merger, Orange will not have outstanding any warrants, options, convertible securities, or any other type of rights pursuant to which any person could acquire stock in Orange that, if exercised or converted, would affect CFX's acquisition or retention of control of Orange, as defined in section 368(c) of the Code. 10. CFX does not own, nor has it owned during the past five years, any shares of the stock of Orange. 11. Orange is not an investment company as defined in sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code. 12. Orange is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of section 368(a)(3)(A) of the Code. 13. On the date of the Merger, the fair market value of the assets of Orange will equal or exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 14. None of the compensation received by any shareholder-employees of Orange will be separate consideration for, or allocable to, any of their shares of Orange Common Stock. None of the shares of CFX Common Stock received by any shareholder-employees of Orange will be separate consideration for, or allocable to, any employment agreement. The compensation paid to any shareholder-employees of Orange will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. Sincerely yours, ORANGE SAVINGS BANK By: Its President EX-23 5 EXHIBIT 23.5--CONSENT OF FOLEY HOAG & ELIOT FOLEY, HOAG & ELIOT ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109-2170 TELEPHONE: (617)832-1000 IN WASHINGTON, D.C. CABLE ADDRESS "FOLEY HOAG" 1615 L STREET, N.W. FACSIMILE (617) 832-7000 SUITE 850 WASHINGTON, D.C. 20036 TELEX 940693 TELEPHONE (202) 775-0600 January 11, 1995 CFX Corporation 102 Main Street Keene, New Hampshire 03431 RE: Consent We hereby consent to the inclusion in this Registration Statement on Form S-4 of CFX Corporation of the form of our opinion as to certain tax matters addressed to Orange Savings Bank, to be dated the date of consummation of the merger of CFX Interim Trust Company, a Massachusetts-chartered trust company and wholly-owned subsidiary of CFX Corporation, with and into Orange Savings Bank. We also consent to the use of our name under the headings "Certain Federal Income Tax Consequences" and "Legal Opinions" in the Proxy Statement-Prospectus that forms a part of this Registration Statement. Very truly yours, FOLEY, HOAG & ELIOT By: Richard Schaul-Yoder A Partner -----END PRIVACY-ENHANCED MESSAGE-----