-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WG+xZtQ0oNElOhzx7beofgb69a1A8+MpxHO/san+c+a5ouiDzy+yQSnpTrLeML0g 3OycNwIhmziBVL9iuP3j+g== 0000950133-97-001144.txt : 19970401 0000950133-97-001144.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950133-97-001144 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFX CORP CENTRAL INDEX KEY: 0000800042 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 020402421 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10633 FILM NUMBER: 97569825 BUSINESS ADDRESS: STREET 1: 102 MAIN 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 10-K405 1 CFX CORPORATION 1996 FORM 10-K. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION For the transition period from __________________ to ____________________ Commission File Number 1-10633 CFX CORPORATION (Exact name of registrant as specified in its charter) NEW HAMPSHIRE 02-0402421 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 102 MAIN STREET KEENE, NEW HAMPSHIRE 03431 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (603) 352-2502 -------------------------- Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.66 2/3 PAR VALUE, LISTED ON THE AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on March 17, 1997, was $212,331,000. Although directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of March 17, 1997, 13,045,157 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated by reference into Part II and Part IV of this Form 10-K. Portions of the definitive Proxy Statement for the 1997 Annual Meeting of Shareholders for the fiscal year ended December 31, 1996, which is to be filed within 120 days of the end of the Company's fiscal year, are incorporated by reference into Part III of this Form 10-K. The incorporation by reference herein of portions of the Proxy Statement shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a) (8) of Regulation S-K. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL CFX Corporation (the "Company") is a bank holding company incorporated under the laws of the State of New Hampshire. The Company's wholly-owned subsidiary banks are CFX Bank, headquartered in Keene, New Hampshire, Orange Savings Bank ("Orange"), headquartered in Orange, Massachusetts, and Safety Fund National Bank ("Safety Fund"), headquartered in Fitchburg, Massachusetts. CFX Bank is a New Hampshire state-chartered savings bank that has been incorporated since 1897. CFX Bank had total assets of $1.16 billion as of December 31, 1996 and operates 28 full-service branches, 29 remote service units ("RSUs") and 23 automated teller machines ("ATMs") in its service area. CFX Bank's subsidiaries include CFX Capital Systems, Inc. ("CFX Capital") and CFX Financial Services, Inc. ("CFX Financial"). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. ("CFX Mortgage"), which engages in mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C. ("CFX Funding"), which engages in the facilitation of lease financing and securitization. Orange is a Massachusetts state-chartered savings bank that had total assets of $84 million as of December 31, 1996. Orange operates two full-service branches in Orange and Athol, Massachusetts, and 2 ATMs in its service area. On July 1, 1996, Milford Co/operative Bank ("Milford"), a New Hampshire state-chartered co-operative bank located in Milford, New Hampshire, with total assets of $160 million, was merged into CFX Bank. In connection with the Milford merger, the Company issued 1,914,000 shares of its common stock in exchange for all the issued and outstanding shares of Milford common stock. The transaction was accounted for as a pooling-of-interests. On July 1, 1996, the Company acquired The Safety Fund Corporation ("SFC"), a bank holding company, and its subsidiary bank, Safety Fund, a national banking association. Safety Fund had total assets of $331 million as of December 31, 1996 and operates 12 full-service branches and 14 ATMs in its service area. In connection with the SFC and Safety Fund acquisitions, the Company issued 2,973,000 shares of its common stock in exchange for all the issued and outstanding shares of SFC common stock. The transaction was accounted for as a pooling-of-interests. The acquisition of Safety Fund provided an expanded penetration of the Company into commercial banking services. In addition, Safety Fund had approximately $370 million in trust assets as of December 31, 1996. As previously reported, on February 13, 1997, the Company entered into a definitive agreement to acquire Portsmouth Bank Shares, Inc. ("Portsmouth"), a bank holding company headquartered in Portsmouth, New Hampshire. Pursuant to the Portsmouth agreement, each of the issued and outstanding shares of Portsmouth common stock (5,711,000 at December 31, 1996) will be converted into .93 shares of CFX common stock, as adjusted for Portsmouth's 2% stock dividend declared on February 19, 1997 and subject to adjustment based on the trading price of the Company's common stock. The Portsmouth transaction is expected to be tax free to the owners of Portsmouth and is subject to regulatory approval and the approval of both the Company's and Portsmouth's shareholders. It is anticipated that the transaction will be accounted for as a pooling-of-interests. At December 31, 1996, Portsmouth reported total assets of $272 million, deposits of $198 million and stockholders' equity of $66 million. Following the Portsmouth acquisition, Portsmouth's subsidiary bank, Portsmouth Savings Bank ("Portsmouth Bank"), a New Hampshire state-chartered savings bank headquartered in Portsmouth, New Hampshire, will be merged into CFX Bank. Portsmouth Bank operates 3 full-service branches and 3 ATMs in its service area. On March 24, 1997, the Company entered into a definitive agreement to acquire Community Bankshares, Inc. ("Community"), a bank holding company headquartered in Concord, New Hampshire. Pursuant to the Community agreement, it is anticipated that each of the issued and outstanding shares of Community common stock (2,465,000 at December 31, 1996) will be converted into 2.2 shares of CFX common stock, subject to adjustment based on the trading price of the Company's common stock. The Community transaction is expected to be tax free to the shareholders of Community and is subject to regulatory approval and the approval of the respective shareholders of the Company and Community. It is anticipated that the transaction will be accounted for as a pooling-of-interests. At December 31, 1996, Community reported total assets of $550 million, deposits of $396 million and stockholders' equity of $41 million. Following the Community acquisition, the Company plans to merge Community's subsidiary banks, Concord Savings Bank, a New Hampshire state-chartered savings bank, and Centerpoint Bank, a New Hampshire state-chartered commercial bank, into CFX Bank. Concord Savings Bank operates 7 full-service branches and 27 2 3 ATMs, and Centerpoint Bank operates 4 full-service branches and 4 ATMs, in their respective service areas. The Community agreement is attached hereto as Exhibit 2.2. In connection with the Community agreement, the Company and Community entered into a Stock Option Agreement that grants the Company an option to acquire up to 493,000 shares of the common stock of Community at a purchase price of $28.50 per share, upon the occurrence of certain events specified in the Stock Option Agreement. The Stock Option Agreement is attached hereto as Exhibit 99.3. For additional information regarding the Community transaction, reference is made to the joint press release of the Company and Community, dated March 24, 1997, which is attached hereto as Exhibit 99.2 and incorporated herein by reference. Additional information about Community is contained in Community's filings with the Commission under the Securities Exchange Act of 1934 (Commission File No. 0-14620). The Company serves as a financial intermediary, attracting deposits from, and making loans to, consumers and small-to-mid sized businesses. It's principal lines of business are mortgage banking, retail banking, commercial banking, investment and trust services, and equipment lease funding. The Company's primary retail banking markets are New Hampshire and central Massachusetts. The mortgage banking company uses loan production offices and correspondent banks attracting loan applications from throughout New Hampshire, Maine, Vermont and northern Massachusetts. CFX Bank, Orange, and Safety Fund (collectively referred to as the "Banks") use customer deposits and loan payments to fund first mortgage loans on residential real estate. In addition to originating mortgage loans, the Banks also make commercial, consumer and other term and installment loans. Other traditional services available at the Banks include: a wide range of deposit programs designed to attract both short-term and long-term deposits from the general public, businesses and local government; safe deposit boxes; travelers checks and money orders; and many other banking services. To further the Banks' goals of providing a broad range of retail services and to generate additional fee income, the Banks operate remote service units and automated teller machines located at various business locations in their respective service areas providing customers with a convenient vehicle for conducting routine banking transactions. In addition, CFX Bank is a subscriber to INVEST(TM) Financial Corporation which enables customers to buy and sell securities and obtain investment advice at CFX Bank offices. A full line of trust and investment management services are also available to the Bank's customers. These services to customers were enhanced by the acquisition of Safety Fund, which has provided trust services to its customers for many years. CFX Mortgage originates and purchases residential and construction mortgage loans and sells these loans to the Banks and the secondary market, while retaining the servicing for a majority of these loans. CFX Mortgage is an approved seller and servicer of the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Department of Housing and Urban Development, Veteran's Administration, and New Hampshire Housing Financing Authority. CFX Mortgage services loans in an aggregate amount of $1.4 billion as of December 31, 1996, including loans serviced for the Banks. The Company operates a small-ticket lease financing and securitization business through CFX Funding. CFX Funding's strategy is to increase the availability of credit to a select group of lessors while controlling the risk inherent in lease portfolios through credit enhancements. The business is built on stable relationships with a limited number of well-qualified lease originators (lessors) who adhere to specified underwriting guidelines. Warehouse lines of credit provided by CFX Bank to these originators are typically paid down every 90 to 180 days through securitization or sales of the various lease portfolios. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earning assets, primarily loans, leases, trading and investment securities, and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. The Company's results of operations are also affected by the provision for loan and lease losses, resulting from the Company's assessment of the adequacy of the allowance for loan and lease losses; the level of its other operating income, including gains and losses on the sale of loans and securities, and loan and other fees; operating expenses; and income tax expenses. The Company has made, and may continue to make, various forward-looking statements with respect to earnings per share, cost savings related to acquisitions, credit quality and other financial business matters for 1997 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to 3 4 numerous assumptions, risks and uncertainties, and that statements for periods subsequent to 1997 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements: continued pricing pressures on loan and deposit products, actions of competitors, changes in economic conditions, the extent and timing of actions of the Federal Reserve, customers' acceptance of the Company's products and services and the extent and timing of legislative and regulatory actions and reforms. The Company's forward-looking statements speak only as of the date on which such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. MARKET AREA The Banks operate primarily in New Hampshire and central Massachusetts. Based on total deposits as of June 30, 1996, CFX Bank had the largest market share in Cheshire County with 55% of the total deposit base. In the other three counties CFX Bank operates in; Belknap, Hillsborough and Merrimack, CFX Bank has less than 4% market share in each of these. Collectively, CFX Bank ranks 5th in New Hampshire with 4.33% of total deposits. Furthermore, the acquisition of Safety Fund increased the Company's market share in Worcester County, Massachusetts from 1% to 4%. INVESTMENT PORTFOLIO The following table sets forth the book value of securities available for sale and securities held to maturity at the dates indicated. Securities available for sale are carried at estimated fair value. Securities held to maturity are carried at amortized cost.
- ----------------------------------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE: United States Treasury and agency obligations $ 128,863 $ 102,531 $ 76,357 State and municipal 441 - - Corporate bonds 3,163 5,072 150 Federal agency mortgage pass-through securities 75,153 55,707 1,494 Other collateralized mortgage obligations (CMOs) 19,608 24,158 6,373 Money market funds - - 1,056 Other marketable equity securities 5,961 5,454 3,856 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston Stock 12,135 8,324 8,295 ------------ ----------- ------------ $ 245,324 $ 201,246 $ 97,581 ============ =========== ============ SECURITIES HELD TO MATURITY: United States Treasury and agency obligations $ 9,417 $ 48,323 $ 52,518 State and municipal 13,986 19,229 23,498 Corporate bonds - - 5,932 Federal agency mortgage pass-through securities 7,783 21,243 82,885 Other collateralized mortgage obligations (CMOs) 1,184 8,098 27,240 Other 300 200 100 ------------ ----------- ------------ $ 32,670 $ 97,093 $ 192,173 ============ =========== ============
In the third quarter of 1996, the acquisitions of Safety Fund and Milford necessitated a transfer of securities held to maturity with an amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In November 1995, the FASB issued guidance allowing a one-time reassesment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, securities held to maturity with an amortized cost of $95,819,000 and a net 4 5 unrealized loss of $815,000 were transferred to securities available for sale and securities held to maturity with an amortized cost of $6,000,000 were sold at a net realized gain of $6,000. At December 31, 1996 and 1995, net unrealized gains (losses) on securities available for sale included in the shareholders' equity section of the consolidated balance sheets, included net unrealized gains (losses) of $126,000 and $(138,000), respectively, on securities transferred from available for sale to held to maturity during 1994 and 1995. The following table sets forth an analysis of the maturity distributions and the weighted average yields of all debt securities of the Company at December 31, 1996:
---------------------------------------------------------------------------------------- MATURING ---------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE BUT WITHIN BUT WITHIN WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS ---------------------- ---------------------- -------------------- --------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------------ --------- ------------ --------- ---------- --------- ------------ -------- (DOLLARS IN THOUSANDS) U.S. Treasury securities and other $ 10,047 6.11% $ 82,151 6.61% $44,116 6.71% $ 1,966 7.40% State and municipal (1) 2,151 6.94 8,166 7.38 3,669 7.64 441 8.73 Corporate securities 3,035 6.84 - - 128 6.00 - - Mortgage-backed securities and CMO's (2) - - 10,802 7.16 8,606 6.83 84,320 6.74 Other - - - - 300 7.28 - - ---------- ------------ ------- --------- Total debt securities $ 15,233 6.37% $ 101,119 6.73% $56,819 6.79% $ 86,727 6.77% ========== ============ ======= =========
- ---------- (1) Yields on tax-exempt investment securities are stated on a taxable-equivalent basis (using a 38.62% tax rate). (2) Included in table based on contractual maturities. LOAN PORTFOLIO The following table shows the Company's loan distribution, net of unearned income and deferred costs, at the dates indicated:
- ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Real estate: Residential $ 712,980 $ 586,489 $ 547,356 $ 473,673 $ 490,470 Construction 8,101 9,190 10,021 11,296 13,625 Commercial 142,989 141,618 119,775 117,267 101,400 Commercial, financial, and agricultural 120,380 104,412 104,126 105,147 121,078 Warehouse lines of credit to leasing companies 18,393 12,906 15,339 5,428 1,497 Consumer lease financing 67,146 24,399 306 - - Consumer and other 48,175 48,416 45,833 35,095 34,016 ------------- ------------ ----------- ---------- ----------- Total loans and leases $ 1,118,164 $ 927,430 $ 842,756 $ 747,906 $ 762,086 ============= ============ =========== ========== ===========
5 6 The following table shows the maturity of loans (excluding residential mortgages on 1 - 4 family residences and all consumer loans) outstanding at December 31, 1996. Also provided are the amounts due after one year, classified according to sensitivity to changes in interest rates.
------------------------------------------------------ MATURING ------------------------------------------------------ AFTER ONE WITHIN ONE BUT WITHIN AFTER FIVE YEAR FIVE YEARS YEARS TOTAL ------------- ------------- -------------- ------------ (IN THOUSANDS) Real estate--construction $ 6,558 $ 1,170 $ 373 $ 8,101 Real estate--commercial 61,760 43,961 37,268 142,989 Commercial, financial, and agricultural 64,513 26,543 29,324 120,380 Warehouse lines of credit to leasing companies 18,393 - - 18,393 ------------ ---------- ---------- ---------- Total $ 151,224 $ 71,674 $ 66,965 $ 289,863 ============ ========== ========== =========== Loans maturing after one year with: Fixed interest rates $ 37,018 $ 46,303 Variable interest rates 34,656 20,662 ---------- --------- Total $ 71,674 $ 66,965 ========== ==========
The following table summarizes the Company's nonaccrual, past due, and restructured loans and leases:
- ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31 (DOLLARS IN THOUSANDS) 1996(3) 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Nonaccrual loans and leases: (1) Real estate (2) $ 7,132 $ 7,693 $ 8,573 $ 11,412 $ 7,885 Commercial, financial, and agricultural 1,021 2,039 1,970 5,293 3,858 Consumer and other 146 108 34 195 209 --------- --------- --------- --------- -------- Total 8,299 9,840 10,577 16,900 11,952 --------- --------- --------- --------- -------- Accruing loans and leases past due 90 days or more: Real estate (2) - 203 557 2,971 5,978 Commercial, financial, and agricultural - - - 246 483 Consumer and other - 32 12 15 131 --------- --------- --------- --------- -------- Total - 235 569 3,232 6,592 --------- --------- --------- --------- -------- Total nonperforming loans and leases $ 8,299 $ 10,075 $ 11,146 $ 20,132 $ 18,544 ========= ========= ========= ========= ======== Percentage of total loans and leases .74% 1.09% 1.32% 2.69% 2.43% Percentage of total assets .54% .75% .88% 1.65% 1.61% Total restructured loans and leases $ 1,895 $ 1,360 $ 2,804 $ 4,105 $ 7,429 ========= ========= ========= ========= ========
- --------- (1) All loans past due 90 days or more as to principal or interest are generally placed on nonaccrual status. Prior to the third quarter of 1993, loans past due 90 days or more remained on nonaccrual status if, in management's judgement, they were fully secured and in process of collection. In addition, a loan, including an impaired loan, is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Cash received on impaired loans is generally allocated to principal and interest based on the contractual terms of the note, unless management believes such receipt should be applied directly to principal based on collection concerns. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. (2) Includes residential, construction and commercial real estate loans. (3) In addition to nonaccrual loans, management identifies "potential problem loans" which are current as to principal and interest payments under original or restructured agreements, but are expected to have insufficient future cash flows to service the loan in accordance with the original or restructured provisions. At December 31 1996, potential problem loans totaled $2,205,000. 6 7 Interest income that would have been recorded under the original terms of nonaccrual and restructured loans and the interest income actually recognized for the year ended December 31, 1996 amounted to $1,069,000 and $462,000, respectively. SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE This table summarizes the Company's loan and lease loss experience for the years indicated:
- ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan and lease losses, beginning of year $ 15,449 $ 14,401 $ 16,168 $ 12,639 $ 11,038 Allowance of acquired subsidiaries - - - 13 - Allowance acquired through regulatory-assisted transactions - - - - 350 Loans charged-off: Real estate (1) 1,946 1,496 3,272 5,234 3,168 Commercial, financial and agricultural 906 1,269 1,986 3,071 2,268 Consumer and other 449 169 209 341 356 --------- ---------- ---------- --------- --------- Total loans charged-off 3,301 2,934 5,467 8,646 5,792 --------- ---------- ---------- --------- --------- Recoveries of amounts previously charged-off: Real estate (1) 335 380 535 278 110 Commercial, financial and agricultural 225 417 362 193 119 Consumer and other 97 148 106 83 86 --------- ---------- ---------- --------- --------- Total recoveries 657 945 1,003 554 315 --------- ---------- ---------- --------- --------- Net loans charged-off 2,644 1,989 4,464 8,092 5,477 Provision for loan and lease losses (2) 2,935 3,037 2,697 11,608 6,728 --------- ---------- ---------- --------- --------- Allowance for loan and lease losses, end of year $ 15,740 $ 15,449 $ 14,401 $ 16,168 $ 12,639 ========= ========== ========== ========= ========= Net loans charged-off to average loans outstanding .26% .23% .56% 1.06% .71% ========= ========== ========== ========= =========
- ---------------------- (1) Includes residential, construction and commercial real estate loans. (2) The amount charged to operations and the related balance in the allowance for loan and lease losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan and lease loss experience, and management's estimation of future potential losses. The large provision in 1993 resulted in part from losses incurred as a result of the earlier real estate decline as well as for the losses incurred in conjunction with a bulk sale of nonperforming assets totaling $6,600,000 to a private investor. The amount of loss recognized on this 1993 sale was $2,473,000. The combination of this bulk sale and a general economic strengthening evidenced during 1994 allowed the Company to provide substantially less to the allowance for loan and lease losses in 1994. From 1994 through 1996 the provision for loan and lease losses has remained fairly consistent. These provisions have increased the allowance for loan and lease losses, partially reduced by net charge-offs, each year since 1994. The increase in the allowance was necessary, despite a lower level of nonperforming loans and leases, due to the growth in the loan and lease portfolio which has increased 50% since 1993. 7 8 ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION The following table shows an allocation of the allowance for loan and lease losses as of the dates indicated:
- --------------------------------------------------------------------------------------------- DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - --------------------------------------------------------------------------------------------- Real estate $ 6,727 77.27% $ 5,927 79.50% $ 5,121 80.35% Commercial, financial, and agricultural 3,241 12.41 2,791 12.65 1,528 14.18 Consumer and other 559 10.32 705 7.85 365 5.47 Unallocated 5,213 - 6,026 - 7,387 - ------- ------- ------- ------- ------- ------ $15,740 100.00% $15,449 100.00% $14,401 100.00% ======= ======= =======
- ----------------------------------------------------------------------- DECEMBER 31 1993 1992 - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) PERCENT PERCENT OF LOANS OF LOANS IN EACH IN EACH CATEGORY CATEGORY TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS - ----------------------------------------------------------------------- Real estate $ 4,993 80.52% $ 3,122 79.45% Commercial, financial, and agricultural 4,638 14.79 3,819 16.09 Consumer and other 322 4.69 347 4.46 Unallocated 6,215 - 5,351 - ------- ------ -------- --------- $16,168 100.00% $12,639 100.00% ======= =======
DEPOSITS The average daily balances of deposits and of rates paid on such deposits is summarized for the periods indicated in the following table:
- -------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE - -------------------------------------------------------------------------------------------------------------------------------- Noninterest bearing demand deposits $ 131,008 -% $ 119,021 -% $ 102,152 -% Regular savings deposits 169,648 2.69 164,944 2.81 175,888 2.55 NOW and money market deposits 279,353 2.14 300,905 2.37 336,221 2.36 Time deposits 541,945 5.57 466,025 5.48 359,619 4.37 ------------ ------------- ---------- Total $ 1,121,954 3.63% $ 1,050,895 3.55% $ 973,880 2.89% ============ ============= ==========
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 1996, are summarized as follows:
TIME OTHER CERTIFICATES TIME OF DEPOSITS(1) DEPOSITS TOTAL -------------- -------- ----- (IN THOUSANDS) 3 months or less $ 5,782 $ 20,323 $ 26,105 Over 3 through 6 months 901 39,621 40,522 Over 6 through 12 months 2,494 54,415 56,909 Over 12 months 203 13,509 13,712 -------- -------- -------- Total $ 9,380 $127,868 $137,248 ======== ======== ========
- ------------- (1) Time deposits with a minimum required balance of $100,000. 8 9 RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Company for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Return on: Average total assets .86% .86% .56% Average total shareholders' equity 9.58 9.08 5.94 Average common shareholders' equity 9.58 9.17 6.12 Average total shareholders' equity to average total assets ratio 8.94 9.45 9.35 Common dividend payout ratio 55.56 56.18 53.45
SHORT-TERM BORROWINGS Short-term borrowings are borrowed funds with an original maturity of one year or less. Securities sold under repurchase agreements generally mature within 90 days. The details of these borrowings for the years 1996 and 1995 are presented below:
- ---------------------------------------------------------------------------------------------------------- DECEMBER 31 (Dollars in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements: Balance at year end $ 67,325 $ 42,855 Average amount outstanding 68,456 43,675 Maximum amount outstanding at any month end 94,762 48,372 Average interest rate for the year 4.78% 5.03% Average interest rate on year-end balance 4.66% 4.81% Advances from Federal Home Loan Bank of Boston: Balance at year end $ 174,657 $ 102,613 Average amount outstanding 131,539 75,307 Maximum amount outstanding at any month end 191,970 103,613 Average interest rate for the year 5.66% 6.28% Average interest rate on year-end balance 5.88% 6.16%
SUBSIDIARIES CFX Bank owns two subsidiary companies--CFX Capital and CFX Financial. CFX Capital is a service corporation which owns CFX Mortgage and certain investment securities. CFX Financial owns 51% of CFX Funding, a company which facilitates lease financing and securitization. CFX Mortgage has fully integrated its mortgage banking into the retail banking franchise, providing the retail lending units (mortgage and consumer) with a strong sales-oriented culture and a larger variety of products. CFX Mortgage makes available to borrowers in its primary consumer market area a full range of residential loans, including FHA-insured and VA-guaranteed loans, conventional fixed-rate loans for terms of 15 or 30 years, and adjustable-rate mortgage loans (ARMs). ARMs are advantageous to the Company because adjustable rates retained in the Company's loan portfolio better match its natural liability base. However, CFX Mortgage's ability to originate ARMs in lieu of fixed-rate loans has varied in response to changes in market interest rates. Under the Company's current ARMs program, the borrower may choose among loans that have the initial interest rate fixed for one, three, five, or seven years before the adjustment begins. Currently, ARMs are indexed to the 1-year Treasury Securities Index and have annual caps of two percent. All of CFX Mortgage's residential mortgage lending is subject to non-discriminatory underwriting standards, and most is subject to loan origination and documentation procedures acceptable to the secondary market. Residential loans are originated using standard Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) applications and appraisal forms. All loans are subject to underwriting review and approval by various levels of CFX Mortgage personnel, depending on the size of the loan. Residential loan applications come in through various channels, including the Company's bank branches and loan production offices. 9 10 In addition, CFX Mortgage originates 50% of its lending volumes through a correspondent network located in New Hampshire, Maine, Vermont, and Massachusetts. The majority of CFX Mortgage's correspondent network consists of unaffiliated community banks with the remaining consisting of mortgage bankers and mortgage brokers. CFX Bank provides CFX Mortgage with warehouse and working capital funding. CFX Funding engages in the facilitation of lease financing and securitization. Through its national securitization program, CFX Funding establishes relationships with lessors who are selected by CFX Funding to participate in the program based on a variety of factors, including the lessor's demonstrated portfolio performance, underwriting criteria, experience in the leasing industry, and credit history. CFX Funding arranges for short-term warehouse lines of credit with CFX Bank based on the credit of the participating leasing company. The warehouse lines of credit enable program participants in the securitization program to originate leases for portfolio sale or securitization. Upon securitization, CFX Funding functions as the master servicer with respect to the lease receivables. Orange and Safety Fund own OSB Securities Corp. and Safety Fund Securities Corp., respectively, each of which principally holds investment securities. Safety Fund also owns two additional subsidiaries, The Lenders/Massachusetts, Inc. ("Lenders") and Prichard Plaza Realty Corp., ("Prichard Plaza"). Lenders was established as a mortgage company operation which focused on originating and servicing second mortgages. Currently, this company does not, and it is not anticipated that it will in the future, originate new production. It is currently dormant and only services a small portfolio of approximately $2 million in loans, $575,000 of which is its own portfolio. Prichard Plaza principally holds real estate related assets. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries had 580 full-time and 243 part-time employees. The employees of the Company and its subsidiaries are not represented by any collective bargaining unit. Relations between management and employees are considered good. RISK MANAGEMENT In the normal course of business, the Company is subject to various risks, the most significant of which are credit, liquidity and interest rate. Although it cannot eliminate these risks, the Company has risk management processes designed to provide for risk identification, measurement, monitoring and control. Credit Risk. Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities and entering into certain off-balance-sheet financial derivative transactions. Risk associated with the extension of credit includes general risk, which is inherent in the lending business, and risk specific to individual borrowers. The Company seeks to manage credit risk through portfolio diversification, underwriting policies and procedures, and loan monitoring practices. Liquidity Risk. Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and demands of depositors and debtholders, and invest in strategic initiatives. Liquidity risk represents the likelihood the Company would be unable to generate cash or otherwise obtain funds at reasonable rates for such purposes. Liquidity is managed through the coordination of the relative maturities of assets, liabilities and off-balance-sheet positions and is enhanced by the ability to raise funds in capital markets through direct borrowing or securitization of assets, such as mortgage loans and lease receivables. Interest Rate Risk. Interest rate risk arises primarily through the Company's normal business activities of extending loans and taking deposits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the timing, magnitude and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and off-balance-sheet positions. Interest rate risk also results from, among other factors, changes in the relationship or spread between interest rates. Many factors, including economic and financial conditions, general movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Financial derivatives, primarily interest rate swaps, caps and floors, are used to alter the interest rate characteristics of assets and liabilities. The Company uses a number of measures to monitor and manage interest rate risk, including income simulation and interest sensitivity ("gap") analyses. 10 11 For additional information relating to the Company's risk management processes, see Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report to Shareholders for the year ended December 31, 1996 and incorporated herein by reference. REGULATION AND SUPERVISION General Bank holding companies and banks are extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to the Company and the Banks, and does not purport to be complete. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular provisions. In addition to existing government regulation, federal and state statutes and regulations are subject to changes that may have significant impact on the way in which banks and bank holding companies may conduct business. The likelihood and potential effects of such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, savings banks, thrift institutions and nonbanking companies, including insurance companies, securities brokerage firms, mutual funds, investment banks and major retailers. Recent legislation also has broadened the regulatory powers of the federal banking agencies in a number of areas and has restricted the powers of state-chartered banks. The Company Bank Holding Company Regulation. As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and related federal statutes, and is subject to supervision, regulation and inspection by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Boston (collectively, the "Federal Reserve"). The Company is required to file with the Federal Reserve an annual report and any additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve possesses cease and desist powers over bank holding companies and their non-bank subsidiaries if their actions represent unsafe or unsound practices. Bank Acquisitions. The BHC Act requires, among other things, the prior approval of the Federal Reserve in any case where the Company proposes to (i) acquire all or substantially all the assets of any bank, (ii) acquire direct or indirect ownership or control of more than 5 percent of the voting shares of any bank, or (iii) merge or consolidate with any other bank holding company. The BHC Act currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed concentration limits. Effective June 1, 1997, the Company will have the ability, subject to certain restrictions, including state opt-out provisions, to acquire by acquisition or merger branches outside its home state. States may affirmatively opt-in to permit these transactions earlier, which Massachusetts, among other states, has done (although New Hampshire has opted-in to interstate branching, it is not effective until June 1, 1997). The establishment of new interstate branches also will be possible in those states with laws that expressly permit it. Interstate branches will be subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. Non-Bank Acquisitions. The BHC Act also prohibits a bank holding company, with certain exceptions, from acquiring or retaining direct or indirect ownership or control or more than 5 percent of the voting shares of any company that is not a bank or bank holding company, and from engaging in any activities other than those of banking, managing or controlling banks, or activities which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. Restrictions on the Acquisition of the Company. The acquisition of 10 percent or more of the Company's outstanding shares by any person or group of persons may, in certain circumstances, be subject to the provisions of the Change in Bank Control Act of 1978, as amended, and the acquisition of control of the Company by another company would be subject to regulatory approval under the BHC Act. Source of Strength Policy. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with its "source of strength" policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. 11 12 Cross-Guarantee. As a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, any or all of the Company's subsidiary banks can be held liable under so-called "cross-guarantee" provisions for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any other of the Company's subsidiary banks, or (ii) any assistance provided by the FDIC to any other of CFX's subsidiary banks in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur without regulatory assistance. Securities Regulation. The Company has registered its common stock with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of such registration, the proxy and tender offer rules, periodic reporting requirements and insider trading restrictions and reporting requirements, as well as certain other requirements of the Exchange Act, are applicable to the Company. Because the Company's stock is traded on the American Stock Exchange (the "AMEX"), the Company is also subject to the rules and regulations of the AMEX. The Company also may, from time to time, be subject to regulation by various state securities commissions with respect to the offer and sale of its securities. New Hampshire Corporation Law. As a New Hampshire corporation, the Company also must comply with the general corporation laws of the state of New Hampshire. The Banks Bank Regulation. As a New Hampshire state-chartered savings bank the deposits of which are insured by the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"), CFX Bank is subject to supervision, regulation and examination by the New Hampshire State Banking Department and the FDIC. As a Massachusetts state-chartered savings bank the deposits of which are insured by the BIF, Orange is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and the FDIC. As a national banking association, Safety Fund is subject to supervision, regulation and examination primarily by the Office of the Comptroller of the Currency (the "OCC"). Each of the Banks is subject to various requirements and restrictions under federal and, in the case of CFX Bank and Orange, state law, including (i) requirements to maintain reserves against deposits, (ii) restrictions on the types, amount and terms and conditions of loans that may be granted, (iii) limitations on the types of investments that may be made, the activities that may be engaged in, and the types of services that may be offered, and (iv) standards relating to asset quality, earnings, and employee compensation. The approval of a Bank's primary regulator is required prior to any merger or consolidation or the establishment or relocation of any office. Various consumer laws and regulations also affect the operations of the Banks. Affiliate Transactions. The Banks are subject to federal laws that limit the transactions by subsidiary banks to or on behalf of their parent company and to or on behalf of any nonbank subsidiaries. Such transactions by a subsidiary bank to its parent company or to any nonbank subsidiary are limited to 10 percent of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20 percent of such bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also prohibits banks from purchasing "low-quality" assets from affiliates. FDIC Assessments. The deposits of the Banks are insured by the BIF and the SAIF up to a maximum of $100,000 per depositor and are subject to FDIC insurance assessments. The amount of FDIC and the SAIF assessments paid by individual insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. During 1995, the FDIC's Board of Directors significantly reduced premium rates assessed on deposits insured by the BIF. Milford, a state-chartered co/operative bank with deposits insured by the SAIF, was acquired and merged into CFX Bank as of July 1, 1996. The deposits of Milford remain subject to SAIF assessment as the purchase of Milford was completed through an "Oakar transaction" where deposits of one insurance fund are moved to another without paying exit fees (to old fund) or entrance fees (to new fund). Following an Oakar transaction, a portion (Adjusted Attrributable Deposits Amounts - "AADA") of the transferred deposits remains subject to the old fund assessment. Oakar deposits comprise approximately 11% of the Company's total deposits. In 1996, the Deposit Insurance Funds Act of 1996 was enacted and called for a special assessment on SAIF-assessable deposits to capitalize the SAIF. CFX Bank was assessed, and paid, this special assessment totaling $691,000 (pre-tax) in 1996. Also in 1996, legislation was enacted that provides that the FICO-bond repayment obligations would be shared by SAIF- and BIF-insured institutions. For the years 1997 through 1999, BIF-assessable deposits will be assessed at a FICO premium rate of 1/5 of the rate 12 13 imposed on SAIF-assessable deposits. The FICO premiums for BIF and SAIF are 1.3 and 6.4 basis points, respectively, beginning January 1, 1997. Other than the Oakar fees and FICO fees, there are no other deposit insurance premiums currently assessed to any of the Company's banking subsidiaries. Prompt Corrective Action. Federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". At December 31, 1996, each of the Banks exceeded the required ratios for classification as "well capitalized." The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action powers and is not intended to be, and should not be interpreted as, a representation of the overall financial condition or prospects of any financial institution. The agencies' prompt corrective action powers can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and only an "adequately capitalized" depository institution may accept brokered deposits with prior regulatory approval. Federal Home Loan Bank. Each of the Banks is a member of the Federal Home Loan Bank of Boston (the "FHLB"), which is one of twelve regional Federal Home Loan Banks. The FHLB serves as a reserve or central bank for its members and makes advances to its members in accordance with the FHLB's policies and procedures. As members of the FHLB, the Banks are required to purchase and hold stock in the FHLB. As of December 31, 1996, CFX Bank, Orange and Safety Fund held stock in the FHLB in the amount of $9,962,000, $1,025,000 and $867,000 respectively. Risk-Based Capital Requirements Under the risk-based capital guidelines applicable to the Company and the Banks, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities) is 8 percent. At least half of the total capital must be "Tier 1" capital, which primarily includes common shareholders' equity and qualifying preferred stock, less goodwill and other disallowed tangibles. "Tier 2" capital includes, among other items, certain cumulative and limited-life preferred stock, qualifying subordinated debt and the allowance for credit losses, subject to certain limitations, less required deductions as prescribed by regulation. In addition, the federal bank regulators established leverage ratio (Tier 1 capital to total adjusted average assets) guidelines providing for a minimum leverage ratio of 3 percent for bank holding companies and banks meeting certain specified criteria, including that such institutions have the highest regulatory examination rating and are not contemplating significant growth or expansion. Institutions not meeting these criteria are expected to maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200 basis points. The federal bank regulatory agencies may, however, set higher capital requirements when particular circumstances warrant. Under the federal banking laws, failure to meet the minimum regulatory capital requirements could subject a bank to a variety of enforcement remedies available to federal bank regulatory agencies, including the termination of deposit insurance by the FDIC and seizure of the institution. At December 31, 1996, the total and Tier 1 risk-based capital ratios and leverage ratios of the Company and each of the Banks exceeded the minimum regulatory capital requirements. See Management's Discussion and Analysis of Financial Condition and Results of Operations. Community Reinvestment Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms of the CRA, a bank's record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods, is generally annually assessed by the bank's primary federal regulator. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. At December 31, 1996, the Company and each of the Banks was rated "Satisfactory" or "Outstanding" with respect to CRA. 13 14 Dividend Restrictions Under the New Hampshire Business Corporation Act, a distribution, including dividends and the purchase or redemption of a corporation's own shares, must be authorized by the Board of Directors and may not be paid if the corporation, after the payment is made, would not be able to pay its debts as they become due in the usual course of business, or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. The principal source of the Company's revenue and cash flow is dividends from the Banks and its other subsidiaries. The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends or otherwise make distributions or supply funds to the Company. In addition, bank regulators may have authority to prohibit a bank subsidiary from paying dividends, depending on the subsidiary's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The Company is a legal entity separate and distinct from the Banks and its other subsidiaries. Accordingly, the right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the Banks and its other Subsidiaries is necessarily subject to the prior claims of creditors of the Banks and its other subsidiaries, except to the extent that claims of the Company in its capacity as creditor may be recognized. Earnings appropriated to bad debt reserves for losses and deducted for federal income tax purposes are not available for dividends without the payment of taxes at the current income tax rates on the amount used. Other Regulations The policies of regulatory authorities, including the Federal Reserve and the FDIC, have had a significant effect on the operating results of financial institutions in the past and are expected to do so in the future. An important function of the Federal Reserve is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on bank borrowings and changes in reserve requirements against bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government. Supervision, regulation or examination of the Company by these regulatory agencies is not intended for the protection of the Company's shareholders. The United States Congress has periodically considered and adopted legislation which has resulted in and could result in further deregulation of both banks and other financial institutions. Such legislation could relax or eliminate geographic restrictions on banks and bank holding companies and could place the Company in more direct competition with other financial institutions, including mutual funds and securities brokerage firms. No assurance can be given as to whether any additional legislation will be enacted or as to the effect of such legislation on the business of the Company. Competition Bank holding companies and their subsidiaries are subject to vigorous and intense competition from various financial institutions and other "nonbank" or non-regulated companies or firms that engage in similar activities. The Bank competes for deposits with other commercial banks, savings banks, savings and loan associations, insurance companies and credit unions, as well as issuers of commercial paper and other securities, including shares in mutual funds. In making loans, the Bank competes with other commercial banks, savings banks, savings and loan associations, consumer finance companies, credit unions, leasing companies and other nonbank lenders. In addition, various nonbank subsidiaries engaged in investment banking and venture capital activities compete with commercial banks, investment banking firms, insurance companies and venture capital firms. The Company and the Bank compete not only with financial institutions based in New Hampshire and Massachusetts, but also with a number of large out-of-state and foreign banks, bank holding companies and other financial and nonbank institutions. Some of the financial and other institutions operating in the same markets are engaged in national and international operations and have more assets and personnel than the Company. Some of the Company's competitors are not subject to the extensive bank regulatory structure and restrictive policies which apply to the Company and the Bank. 14 15 The principal factors in successfully competing for deposits are convenient office locations and remote service units, flexible hours, competitive interest rates and services, while those relating to loans are competitive interest rates, the range of lending services offered and lending fees. The Company believes that the local character of the Banks' businesses and their community bank management philosophy enabled them to compete successfully in their respective market areas. However, it is anticipated that competition will continue to increase in the years ahead. ITEM 2. PROPERTIES The Company neither owns nor leases any real property but utilizes the premises and equipment of CFX Bank. CFX Bank owns its main office and two branch offices in Keene, New Hampshire. CFX Bank also owns branches in Allenstown, Amherst, Greenville, Henniker, Hillsborough, Jaffrey, Milford, New Boston, New Ipswich, Peterborough, Troy and Wilton/Lyndeborough, New Hampshire while leasing other branches in Brookline, Gilford, Hinsdale, Laconia, Loudon, Manchester, Marlborough, Mont Vernon, North Swanzey, Rindge, Walpole, West Chesterfield and Winchester, New Hampshire. Included above are five "mini-branches" that are located at various retail establishments in its market area. In addition, CFX Bank and subsidiaries also own or lease several other properties used for administrative purposes. Orange Savings Bank owns its main office, located in Orange Massachusetts, and leases a branch facility in Athol, Massachusetts. Safety Fund owns its main office and leases a branch office in Fitchburg, Massachusetts. Additionally, Safety Fund owns branches in Gardner, Leominster and Worcester, while leasing other branches in Gardner, Leominster, Westborough and Worcester, Massachusetts. In addition, Prichard Plaza owns a real estate investment property in Fitchburg, Massachusetts. The Banks also own 68 automated teller and remote service units located in New Hampshire and central Massachusetts. At December 31, 1996, the total net book value of the Company's premises and equipment was $27,386,000. ITEM 3. LEGAL PROCEEDINGS There are no pending legal proceedings to which the Company is a party or any of its property is the subject. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of banking, to which the Banks are a party or of which the Banks' property is subject. There are no material pending legal proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent (5%) of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company or any security holder is a party adverse to the Company or has a material interest adverse to the Company or the Banks. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information relating to the market for the Company's common equity and related stockholder matters on page 63 of the Annual Report to Shareholders for the fiscal year ended December 31, 1996 is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information relating to selected financial data on page 1 of the Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 10-24 inclusive of the Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) Financial Statements Required by Regulation S-X Information relating to financial statements on pages 25-57 inclusive of the Annual Report to Shareholders for the year ended December 31, 1996 is incorporated herein by reference. The opinion of KPMG Peat Marwick, LLP for the years ended 1995 and 1994 pertaining to The Safety Fund Corporation, and the opinion of Deloitte & Touche, LLP for the year ended 1994 pertaining to Orange Savings Bank follow: Independent Auditors' Report To the Board of Directors and Stockholders of The Safety Fund Corporation: We have audited the accompanying consolidated balance sheet of The Safety Fund Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Safety Fund Corporation and subsidiaries at December 31, 1995, and the results of their operations and their cash flows for the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /S/ KPMG Peat Marwick LLP January 22, 1996 Boston, Massachusetts Independent Auditors' Report To the Board of Directors and Stockholders of Orange Savings Bank: We have audited the consolidated statements of operations, stockholders' equity, and cash flows of Orange Savings Bank and subsidiary for the year ended December 31, 1994 (not included herein). These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the Company's results of operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. /S/ Deloitte & Touche LLP January 27, 1995 Boston, Massachusetts 16 17 (b) Supplementary Financial Information (1) Selected Quarterly Financial Data Information relating to selected quarterly financial data on page 57 of the draft of the Annual Report to Shareholders for the fiscal year ended December 31, 1996 is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of the registrant under the caption "Proposal I - Election of Directors" of the Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation under the caption "Proposal I - Election of Directors" of the Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management under the caption "Proposal I - Election of Directors" of the Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions under the caption "Proposal I - Election of Directors" of the Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of This Report: (1) Financial Statements The financial statements listed below are incorporated herein by reference from the Annual Report to Shareholders for the year ended December 31, 1996:.
FINANCIAL STATEMENTS PAGE REFERENCES -------------------- --------------- Consolidated Balance Sheets ...................................... 25 Consolidated Statements of Income................................. 26 Consolidated Statements of Shareholders' Equity................... 27 Consolidated Statements of Cash Flows............................. 28 Notes to Consolidated Financial Statements........................ 29-57 Report of Independent Auditors.................................... 59
(2) Financial Statement Schedules See Item 14 (d) 17 18 (3) Exhibits Required by Item 601 See Item 14 (c) (b) Reports on Form 8-K On February 21, 1997, a Form 8-K was filed announcing the Company entered into a definitive agreement for the acquisition of Portsmouth Bank Shares, Inc., headquartered in Portsmouth, New Hampshire. (c) Exhibits The exhibits listed below are filed herewith or are incorporated herein by reference to other filings.
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 2.1(1) Agreement and Plan of Reorganization dated February 13, 1997 between CFX Corporation and Portsmouth Bank Shares, Inc. 2.2 Agreement and Plan of Reorganization, dated March 24, 1997 between CFX Corporation and Community Bankshares, Inc. 3 (4) Articles of Incorporation and by-laws of CFX Corporation, as amended. 10.1(6) 1992 CFX Corporation Profit Sharing/Bonus Plan. 10.2(7) 1986 CFX Corporation Stock Option Plan. 10.3(5,8) Employment Agreement dated as of January 1, 1991 between CFX Corporation and Peter J. Baxter, as amended. 10.4(3,8) Change of Control Agreement dated December 31, 1992 between CFX Corporation and Mark A. Gavin. 10.5 Change of Control Agreement dated January 27, 1997 between CFX Corporation and Gregg R. Tewksbury 10.6(2) 1995 CFX Corporation Stock Option Plan. 10.7(9) Employment Agreement between The Safety Fund Corporation and Christopher W. Bramley dated as of February 1, 1994, assumed by the Company as of July 1, 1996. 10.8(9) Employment and Change of Control Agreement between The Safety Fund Corporation and Stephen R. Shirley, dated June 1, 1994, assumed by the Company as of July 1, 1996. 10.19(10) CFX Corporation 1992 Employee Stock Purchase Plan 13 CFX Corporation Annual Report to Shareholders for fiscal year ended December 31, 1996. 21 Subsidiaries--Reference is made to Item 1. 23.1 Consent of Wolf & Company, P.C. 23.2 Consent of Deloitte & Touche, LLP 23.3 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
18 19 99.1(1) Stock Option Agreement dated February 13, 1997 between CFX Corporation and Portsmouth Bank Shares, Inc. 99.2 Joint Press Release, dated March 24, 1997 99.3 Stock Option Agreement dated March 24, 1997 between CFX Corporation and Community Bankshares, Inc.
- --------------- (1) Incorporated herein by reference to the Exhibits to the Form 8-K of CFX Corporation filed on February 21, 1997. (2) Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of CFX Corporation No. 33-61787 effective in 1995. (3) Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of CFX Corporation for the year ended December 31, 1994. (4) Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-4 of CFX Corporation No. 33-56875 effective in 1994. (5) Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of CFX Corporation for the year ended December 31, 1993. (6) Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of CFX Corporation for the year ended December 31, 1992. (7) Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of CFX Corporation No. 33-17071 effective in 1987. (8) Exhibits refer to compensatory agreements with executives of CFX Corporation and its subsidiaries. (9) Incorporated herein by reference to The Safety Fund Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1994. (10) Incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of CFX Corporation No. 33-52598 effective in 1992. (d) Financial Statement Schedules. Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CFX CORPORATION Date: March 24, 1997 By: /s/ PETER J. BAXTER ------------------- Peter J. Baxter, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ RICHARD F. ASTRELLA Director March 24, 1997 - ------------------------------------ Richard F. Astrella /s/ WILLIAM E. AUBUCHON, III Director March 24, 1997 - ------------------------------------ William E. Aubuchon, III Director March 24, 1997 - ------------------------------------ Richard B. Baybutt /s/ PETER J. BAXTER President and Director March 24, 1997 - ------------------------------------ (Principal Executive Officer) Peter J. Baxter /s/ CHRISTOPHER V. BEAN Director March 24, 1997 - ------------------------------------ Christopher V. Bean /s/ CHRISTOPHER W. BRAMLEY Director March 24, 1997 - ------------------------------------ Christopher W. Bramley /s/ P. KEVIN CONDRON Director March 24, 1997 - ------------------------------------ P. Kevin Condron /s/ CALVIN L. FRINK Director March 24, 1997 - ------------------------------------ Calvin L. Frink /s/ EUGENE E. GAFFEY Director March 24, 1997 - ------------------------------------ Eugene E. Gaffey /s/ DAVID R. GRENON Director March 24, 1997 - ------------------------------------ David R. Grenon /s/ ELIZABETH SEARS HAGER Director March 24, 1997 - ------------------------------------ Elizabeth Sears Hager /s/ DOUGLAS S. HATFIELD, JR. Director March 24, 1997 - ------------------------------------ Douglas S. Hatfield, Jr. /s/ PHILIP A. MASON Director March 24, 1997 - ------------------------------------ Philip A. Mason /s/ WALTER R. PETERSON Director March 24, 1997 - ------------------------------------ Walter R. Peterson /s/ L. WILLIAM SLANETZ Director March 24, 1997 - ------------------------------------ L. William Slanetz /s/ MARK A. GAVIN Chief Operating Officer March 24, 1997 - ------------------------------------ (Principal Operating Officer) Mark A. Gavin /s/ GREGG R. TEWKSBURY Chief Financial Officer March 24, 1997 - ------------------------------------ (Principal Financial and Gregg R. Tewksbury Accounting Officer)
20 EX-2.2 2 AGREEMENT AND PLAN OF REORGANIZATION. 1 EXHIBIT 2.2 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Reorganization Agreement"), dated as of March 24, 1997, is by and among COMMUNITY BANKSHARES, INC. ("Community"), a New Hampshire corporation, CONCORD SAVINGS BANK ("Concord Bank"), a New Hampshire state-chartered savings bank, CENTERPOINT BANK, a New Hampshire state-chartered commercial bank (Concord Bank and Centerpoint Bank being referred to together herein as the "Community Banks"), CFX CORPORATION ("CFX"), a New Hampshire corporation, and CFX BANK, a New Hampshire state-chartered savings bank. WITNESSETH WHEREAS, the parties hereto desire to combine their respective businesses on the terms and subject to the conditions of this Reorganization Agreement; WHEREAS, the parties hereto desire that CFX acquire all the outstanding shares of capital stock of Community, including each attached right issued pursuant to the Community Rights Agreement (as defined below), through an exchange (the "Share Exchange") of shares of CFX Common Stock (as defined below) for the issued and outstanding shares of Community Common Stock (as defined below) pursuant to a Plan of Share Exchange (the "Plan of Exchange") in the form attached hereto as Annex A; WHEREAS, the parties desire that, following the Share Exchange, Community shall be merged (the "Holding Company Merger") with and into CFX, pursuant to a merger agreement or plan of merger (the "Merger Agreement") in a form to be specified by CFX and reasonably satisfactory to Community and consistent with the terms of this Reorganization Agreement; WHEREAS, the parties desire that, following the consummation of the Holding Company Merger, the Community Banks, wholly owned subsidiaries of Community, shall be merged (the "Bank Merger") with and into CFX Bank, a wholly-owned subsidiary of CFX, pursuant to an Agreement and Plan of Merger (the "Plan of Merger") in the form attached hereto as Annex B; WHEREAS, in connection with the execution of this Reorganization Agreement, Community and CFX have entered into a Stock Option Agreement (the "Stock Option Agreement") dated as of even date herewith pursuant to which Community will grant CFX the right to purchase certain shares of Community Common Stock; and WHEREAS, the parties hereto desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with Share Exchange, the Holding Company Merger, the Bank Merger and the other transactions (collectively, the "Transactions") contemplated 2 by this Reorganization Agreement, the Plan of Exchange, the Merger Agreement, the Plan of Merger and the Stock Option Agreement (collectively, the "Transaction Documents"); WHEREAS, it is intended that all of the parties hereto except Centerpoint Bank shall execute this Reorganization Agreement on the date first above written, with Centerpoint Bank to execute this Reorganization Agreement, as promptly thereafter as practicable, as provided in Section 4.7(d) hereof; NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties and covenants herein contained and intending to be legally bound hereby, the parties hereto do hereby agree as follows: ARTICLE 1. CERTAIN DEFINITIONS 1.1. "AMEX" shall mean the American Stock Exchange, Inc. 1.2. "BHC Act" shall mean the Bank Holding Company Act of 1956, as amended. 1.3. "CFX Entities" shall mean CFX and the CFX Subsidiaries. 1.4. "CFX Financial Statements" shall mean (i) the consolidated balance sheets of CFX as of September 30, 1996 and as of December 31, 1995 and 1994 and the related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) for the nine months ended September 30, 1996 and each of the three years ended December 31, 1995, 1994 and 1993 as filed by CFX in SEC Documents, together with the consolidated balance sheet of CFX and the related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) as of and for the period ended December 31, 1996, as delivered to Community prior to the date hereof and (ii) the consolidated balance sheets of CFX and related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) as filed by CFX in SEC Documents with respect to periods ended subsequent to September 30, 1996. 1.5. "Closing Date" shall mean the date specified pursuant to Section 4.8 hereof as the date on which the Parties shall close the Transactions. 1.6. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.7. "Commissioner" shall mean the New Hampshire State Bank Commissioner. 1.8. "Community Entities" shall mean Community and the Community Subsidiaries. - 2 - 3 1.9. "Community Financial Statements" shall mean (i) the consolidated balance sheets of Community as of September 30, 1996 and as of December 31, 1995 and 1994 and the related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) for the nine months ended September 30, 1996 and each of the three years ended December 31, 1995, 1994 and 1993 as filed by Community in SEC Documents, together with the consolidated balance sheet of Community and the related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) as of and for the period ended December 31, 1996, as delivered to CFX prior to the date hereof and (ii) the consolidated balance sheets of Community and related consolidated statements of income, cash flows and changes in shareholders' equity (including related notes, if any) as filed by Community in SEC Documents with respect to periods ended subsequent to September 30, 1996. 1.10. "Effective Date" shall mean the date specified pursuant to Section 4.8 hereof as the effective date of the Share Exchange. 1.11. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.12. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.13. "FDIA" shall mean the Federal Deposit Insurance Act. 1.14. "FDIC" shall mean the Federal Deposit Insurance Corporation. 1.15. "Federal Reserve" shall mean the Board of Governors of the Federal Reserve System or any appropriate Federal Reserve Bank. 1.16. "Intellectual Property" means domestic and foreign letters patent, patents, patent applications, patent licenses, software licensed or owned, know-how, know-how licenses, trade names, common law and other trademarks, service marks, licenses of trademarks, trade names and/or service marks, trademark registrations and applications, service mark registrations and applications and copyright registrations and applications. 1.17. "Investment Company Act" means the Investment Company Act of 1940, as amended. 1.18. "Material Adverse Effect" shall mean, with respect to Community or CFX, as the case may be, a material adverse effect on (A) the business, results of operations or financial condition of such party and its subsidiaries taken as a whole (provided, however, that the following shall not constitute or contribute to a Material Adverse Effect: (i) changes in the financial condition, business, or results of operations of a person resulting directly or indirectly from (1) changes in interest rates (provided that Community is in compliance with its asset/liability - 3 - 4 management policy as Previously Disclosed to CFX, as the same may be revised thereafter with CFX's concurrence), or (2) changes in state and federal regulations or legislation affecting New Hampshire banks; or (ii) matters related to changes in federal, state or local tax laws or changes in federal, state or local tax status, characteristics, or attributes or the ability to use such attributes); or (B) the ability of any Party to perform its obligations under, and to consummate the transactions contemplated by, the Transaction Documents. 1.19. "Parties" shall mean CFX, CFX Bank, Community and the Community Banks. 1.20. "Previously Disclosed" shall mean disclosed prior to the execution hereof in (i) an SEC Document filed with the SEC subsequent to December 31, 1995 and prior to the date hereof, or (ii) a letter dated of even date herewith from the Party making such disclosure and delivered to the other Parties prior to the execution hereof. 1.21. "Proxy Statement" shall mean the proxy statement/prospectus (or similar documents) together with any supplements thereto sent to the shareholders of CFX or Community to solicit their votes in connection with this Reorganization Agreement and the Plan of Exchange. 1.22. "Registration Statement" shall mean the registration statement with respect to the CFX Common Stock to be issued in connection with the Share Exchange as declared effective by the SEC under the Securities Act, if required. 1.23. "Rights" shall mean subscriptions, warrants, options, rights, calls, agreements, understandings or commitments of any character calling for the transfer, purchase, issuance or disposition of, or representing the right to purchase, acquire, subscribe to or otherwise receive any shares of capital stock, or any securities convertible into or representing the right to purchase, acquire, subscribe to or otherwise receive any shares of capital stock, or any stock appreciation rights, performance units and other similar stock-based rights whether they obligate the issuer thereof to issue stock or other securities or to pay cash. 1.24. "SEC" shall mean the Securities and Exchange Commission. 1.25. "SEC Documents" shall mean all reports and registration statements filed, or required to be filed, by a Party pursuant to the Securities Laws. 1.26. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.27. "Securities Laws" shall mean the Securities Act; the Exchange Act; the Investment Company Act; the Investment Advisers Act of 1940, as amended; the Trust Indenture Act of 1939, as amended; and the rules and regulations of the SEC promulgated thereunder. - 4 - 5 Other terms used herein are defined in the preamble and the recitals to this Reorganization Agreement and in Articles II, III and IV hereof. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF COMMUNITY AND THE COMMUNITY BANKS Community and the Community Banks hereby represent and warrant to CFX and CFX Bank that, except as Previously Disclosed: 2.1. Capital Structure of Community (a) The authorized capital stock of Community consists solely of 3,000,000 shares of common stock, par value $1.00 per share ("Community Common Stock"), and 1,000,000 shares of preferred stock, par value $1.00 per share ("Community Preferred Stock"). There are 2,465,237 shares of Community Common Stock issued and outstanding, no shares of Community Common Stock held in its treasury, no shares of Community Preferred Stock issued and outstanding, and no shares of Community Preferred Stock held in its treasury. No shares of Community Common Stock or Community Preferred Stock are reserved for issuance, except that (i) 36,924 shares of Community Common Stock are reserved for issuance under Community's employee stock purchase plans (the "Community Stock Purchase Plans"), (ii) 143,781 shares of Community Common Stock are reserved for issuance upon the exercise of stock options heretofore granted pursuant to Community's stock option plans (the "Community Stock Option Plans") and (iii) 24,653 shares of Community Preferred Stock are reserved for issuance upon the exercise of rights pursuant to the Rights Agreement dated as of October 31, 1989 between Community and the First National Bank of Boston (the "Community Rights Agreement"). (b) Except for shares of Community Common Stock subject to purchase under the Community Stock Purchase Plans or subject to options under the Community Stock Option Plans as Previously Disclosed and to the Stock Option Agreement and shares of Community Preferred Stock subject to the Community Rights Agreement, Community is not bound by any outstanding Rights. Except for the Community Rights Agreement and the Stock Option Agreement, there are no agreements, understandings or commitments to which Community is a party with respect to the voting of any shares of Community Common Stock or which restrict the transfer of such shares. (c) All outstanding shares of Community's capital stock have been duly issued and are validly outstanding, fully paid and nonassessable. None of the shares of Community's capital stock has been issued in violation of the preemptive rights of any person. All options granted under the Community Stock Option Plans have become fully exercisable in accordance therewith or in accordance with certain change in control agreements that have been Previously Disclosed. 2.2. Organization, Standing and Authority of Community Community is a duly organized corporation, validly existing and in good standing under the laws of New Hampshire, with full corporate power and authority to carry on its business as now conducted and is duly licensed or qualified to do business in the states of the United States and - 5 - 6 foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Community. Community is registered as a bank holding company under the BHC Act. 2.3. Ownership and Capital Structure of the Community Subsidiaries (a) Community does not own, directly or indirectly, 5 percent or more of the outstanding capital stock or other voting securities of any corporation, bank or other organization, except as Previously Disclosed (collectively, the "Community Subsidiaries" and individually a "Community Subsidiary"). (b) The authorized and issued capital stock of each of the Community Subsidiaries has been Previously Disclosed. (c) The outstanding shares of capital stock of each Community Subsidiary are validly issued and outstanding, fully paid and nonassessable and all such shares are directly or indirectly owned by Community free and clear of all liens, claims and encumbrances, subject, in the case of Concord Bank, to the Distribution and Liquidation Account (the "Liquidation Account") established by Concord in connection with its conversion from mutual to stock form and maintained pursuant to Article 7 of Concord Bank's Amended and Restated Charter. No Community Subsidiary is bound by any Rights with respect to its capital securities and there are no agreements, understandings or commitments relating to the right of Community to vote or dispose of said shares. None of the shares of capital stock of any Community Subsidiary has been issued in violation of the preemptive rights of any person whose cause of action is not time barred by any applicable statute of limitations. Concord Bank has established and maintained the Liquidation Account in accordance with all applicable laws and regulations. 2.4. Organization, Standing and Authority of the Community Subsidiaries Each of the Community Subsidiaries is a corporation, savings bank or commercial bank duly organized, validly existing and in good standing under the laws of New Hampshire with full power and authority to carry on its business as now conducted and is duly licensed or qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Community. Neither of the Community Banks engages in any activities other than those expressly authorized to it by applicable New Hampshire and federal banking laws, including without limitation the regulations of the FDIC under Section 24 of the FDIA. Each of the Community Banks is a member in good standing of the Federal Home Loan Bank of Boston and owns the requisite amount of stock therein. The deposits of each of the Community Banks are insured by the Bank Insurance Fund of the FDIC in accordance with the FDIA, and each of - 6 - 7 the Community Banks has paid all assessments that have come due and has filed all reports required by the FDIA. 2.5. Authorized and Effective Agreement (a) Community has all requisite corporate power and authority to enter into and perform all its obligations under the Transaction Documents to which Community is a party. The adoption, execution and delivery of the Transaction Documents to which Community is a party and the consummation of the Transactions contemplated thereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of Community, including without limitation the approval of a majority of the "Disinterested Directors" as contemplated by Article Ninth, Section A of Community's Articles of Incorporation, except that (1) pursuant to applicable New Hampshire law and Community's Articles of Incorporation and By-laws, the Plan of Exchange must be approved by the affirmative vote of the holders of not less than two-thirds of all the shares of Community Common Stock entitled to vote thereon, and (2) pursuant to applicable New Hampshire law, certain required or appropriate actions may or must be taken with respect to the rights of any dissenting shareholders. The Board of Directors of Community has directed that the Transaction Documents and the Transactions be, to the extent necessary, submitted to Community's stockholders for approval at an annual or special meeting to be held as soon as practicable. (b) Each of the Community Banks has all requisite corporate power and authority to enter into and perform all its obligations under the Transaction Documents to which it is a party. The execution and delivery of this Reorganization Agreement and the Plan of Merger and the consummation of the Transactions contemplated thereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of the Community Banks. (c) Assuming the accuracy of the representations contained in Section 3.5(c) hereof, the Transaction Documents constitute legal, valid and binding obligations of the Community Entities, enforceable against them in accordance with their respective terms subject, as to enforceability, to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. (d) Except as Previously Disclosed, and except for such violations, rights, conflicts, breaches, creations or defaults which, either individually or in the aggregate, will not have a Material Adverse Effect on Community, neither the adoption, execution and delivery of the Transaction Documents nor the consummation of the Transactions nor compliance by the Community Entities with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provision of the articles or certificates of incorporation or association, charters or by-laws of any of the Community Entities, (ii) assuming that the regulatory approvals referred to in Section 5.1(b) hereof are duly obtained, constitute or result in a breach of any term, condition or provision of, or - 7 - 8 constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of any Community Entity pursuant to, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, or (iii) assuming that the regulatory approvals referred to in Section 5.1(b) hereof are duly obtained, violate any order, writ, injunction, decree, statute, rule or regulation applicable to any Community Entity. (e) Except for the approvals specified in Sections 4.2 and 4.4 hereof, except as Previously Disclosed and except as expressly referred to in this Reorganization Agreement, no consent, approval or authorization of, or declaration, notice, filing or registration with, any governmental or regulatory authority, or any other person, is required to be made or obtained by the Community Entities on or prior to the Closing Date in connection with the execution, delivery and performance of the Transaction Documents or the consummation of the Transactions other than the filing of certificates or articles of merger or share exchange or similar documents with the appropriate New Hampshire state authorities. 2.6. SEC Documents; Regulatory Filings Community has, since January 1, 1992, filed all SEC Documents required by the Securities Laws and such SEC Documents complied, as of their respective dates, in all material respects with the Securities Laws. As of their respective dates, no such SEC Documents filed with the SEC contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information filed as of a later date shall be deemed to modify information as of an earlier date. Each of the Community Entities has, since January 1992, filed all reports required by statute or regulation to be filed with any federal or state bank regulatory agency, and such reports were prepared in accordance with the applicable statutes, regulations and instructions in existence as of the date of filing of such reports in all material respects. 2.7. Financial Statements; Books and Records; Minute Books The Community Financial Statements fairly present, or when filed will fairly present, in all material respects, the consolidated financial position of the Community Entities as of the dates indicated and the results of operations, changes in shareholders' equity and cash flows of the Community Entities for the periods then ended in conformity with generally accepted accounting principles applicable to banking organizations or financial institutions applied on a consistent basis (except as disclosed therein and except for the omission of notes for unaudited financial statements and year-end adjustments to interim results). The books and records of each of the Community Entities fairly reflect in all material respects the transactions to which it is a party or to or by which its properties are subject or bound. Such books and records - 8 - 9 have been properly kept and maintained and are in compliance in all material respects with all applicable legal and accounting requirements. The minute books of the Community Entities contain records which are accurate in all material respects of all corporate actions of their respective shareholders and Boards of Directors (including committees of their respective Boards of Directors). 2.8. Material Adverse Change Community has not, on a consolidated basis, suffered any Material Adverse Effect in its financial condition, results of operations or business since December 31, 1996. 2.9. Absence of Undisclosed Liabilities None of the Community Entities has any liability (contingent or otherwise) that is material to Community, on a consolidated basis or that, when combined with all similar liabilities, would be material to the Community Entities, except as Previously Disclosed, as disclosed in the Community Financial Statements described in clause (i) of Section 1.9 hereof and except for liabilities incurred in the ordinary course of business subsequent to December 31, 1996. 2.10. Properties The Community Entities have good title free and clear of all liens, encumbrances, charges, defaults or equitable interests to all of their respective properties and assets, real and personal that are reflected on the Community Financial Statements as of September 30, 1996 or acquired after such date, except (i) as may be reflected in the Community Financial Statements, (ii) for liens for taxes not yet delinquent, (iii) for liens on real estate acquired by foreclosure or substantively repossessed, (iv) for pledges to secure deposits and other liens incurred in the ordinary course of banking business, (v) for such imperfections of title, easements, encumbrances, liens, charges, defaults and equitable interests, if any, that do not have a Material Adverse Effect on the value of personal or real property reflected in the Community Financial Statements or acquired since the date of such statements and which do not materially interfere with or impair the present and continued use of such property, and (vi) for dispositions and encumbrances in the ordinary course of business. All leases pursuant to which any of the Community Entities, as lessee, leases real and personal property which, individually or in the aggregate, are material to the business of the Community Entities are valid and enforceable by one or both of the Community Entities in accordance with their respective terms. 2.11. Loans; Allowance for Possible Loan Losses (a) Each loan reflected as an asset in the Community Financial Statements (i) is evidenced by notes, agreements or other evidences of indebtedness which are true, genuine and what they purport to be, (ii) to - 9 - 10 the extent secured, has been secured by valid liens and security interests which have been perfected, and (iii) is not subject to any known defenses, set-off or counterclaims except as may be provided under bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. (b) The Community Entities have Previously Disclosed all loans in the original principal amount in excess of $200,000 of each Community Entity that, as of the date of this Reorganization Agreement, are classified by Community or any state or federal bank regulatory or supervisory authority as "Special Mention," "Substandard," "Doubtful," "Loss" or "Classified," together with the aggregate principal amount of and accrued and unpaid interest on such loans, by category, it being understood that no representation is being made that any state or federal bank regulatory or supervisory authority would agree with such loan classifications. (c) Except as Previously Disclosed or as identified in the notes to the Community Financial Statements, as of September 30, 1996, neither of the Community Banks was, as of the date hereof, a party to any loan, including any loan guaranty, in the amount of $50,000 or more, with any director, executive officer or 5% shareholder of Community or any person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing. All loans and extensions of credit that have been made by the Community Banks and that are subject to Section 22(h) of the Federal Reserve Act, comply therewith. 2.12. Tax Matters Except as Previously Disclosed: (a) Each of the Community Entities has timely filed federal income tax returns for each year through December 31, 1995 and has timely filed all other material federal, state, local and foreign tax returns (including, without limitation, estimated tax returns, returns required under Sections 1441-1446 and 6031-6060 of the Code and the regulations thereunder and any comparable state, foreign and local laws, any other information returns, withholding tax returns, FICA and FUTA returns and back-up withholding returns required under Section 3406 of the Code and any comparable state, foreign and local laws) required to be filed with respect to the Community Entities. All taxes due in respect of the periods covered by such tax returns and for any subsequent periods have been paid or adequate reserves have been established for the payment of such taxes. As of the Closing Date, all material taxes due in respect of any subsequent periods ending on or prior to the Closing Date (or that portion of any period that is prior to the Closing Date) will have been paid or adequate reserves will have been established for the payment thereof. No (i) audit examination, (ii) deficiency or (iii) refund litigation with respect to any tax is pending. The Community Entities will not have any material - 10 - 11 liability for any taxes in excess of amounts paid or reserves or accruals established. (b) All federal, state and local (and, if applicable, foreign) tax returns filed by the Community Entities are complete and accurate in all material respects. None of the Community Entities is delinquent in the payment of any material tax, assessment or governmental charge, and no Community Entity has requested any extension of time within which to file any tax returns in respect of any fiscal year or portion thereof which have not since been filed. No deficiency for any tax, assessment or governmental charge has been proposed, asserted or assessed (tentatively or otherwise) against any Community Entity which has not been settled and paid. There are currently no agreements in effect with respect to any Community Entity to extend the period of limitations for the assessment or collection of any tax. 2.13. Employee Benefits; ERISA (a) The Community Entities have Previously Disclosed a true and complete list of each bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance pay, medical, life or other insurance, profit-sharing, or pension plan, program, agreement or arrangement, and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to or required to be contributed to by any Community Entity or by any trade or business, whether or not incorporated, that together with any Community Entity would be deemed a "single employer" under Section 414 of the Code (an "ERISA Affiliate") for the benefit of any employee or director (including advisory directors) or former employee or former director (including advisory directors) of any Community Entity, whether formal or informal and whether legally binding or not (the "Plans"). None of the Community Entities has any formal plan or commitment, whether legally binding or not, to create any additional plan or modify or change any existing Plan that would affect any employee or director or former employee or former director of any Community Entity. (b) With respect to each of the Plans, the Community Entities have made available to CFX true and complete copies of each of the following documents: (a) the Plan and related documents (including all amendments thereto); (b) the two most recent annual reports and financial statements, if any; (c) the most recent Summary Plan Description, together with each Summary of Material Modifications, required under ERISA with respect to such Plan, and all material employee communications relating to such Plan; and (d) the most recent determination letter received from the IRS with respect to each Plan that is intended to be qualified under the Code and all material communications to or from the IRS or any other governmental or regulatory authority relating to each Plan. (c) No liability under Title IV of ERISA has been incurred by any Community Entity or any ERISA Affiliate since the effective date of ERISA that has not been satisfied in full, and no condition exists that presents - 11 - 12 a material risk to Community or any ERISA Affiliate of incurring a liability under such Title. No reportable event under Section 4043 of ERISA (other than the reportable event described in Pension Benefit Guaranty Corporation Regulation Section 2615.23 occurring by reason of the Transactions) has occurred or will occur with respect to any Plan on or before the Closing Date or the Effective Date. (d) No Community Entity, no ERISA Affiliate, no Plan, no trust created thereunder, and no trustee or administrator thereof has engaged in a transaction in connection with which any Community Entity, any Plan, any trust, or any trustee or administrator thereof, could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA, or a tax imposed pursuant to Section 4975 or 4976 of the Code. (e) Full payment has been made, or will be made in accordance with Section 404(a)(6) of the Code, of all amounts that any Community Entity or any ERISA Affiliate is required to pay under Section 412 of the Code or under the terms of the Plans, and all such amounts properly accrued through the Closing Date or the Effective Date will be paid on or prior to the Closing Date or the Effective Date (as applicable) or will be properly recorded on the books and records of Community. None of the Plans or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived. (f) Except as Previously Disclosed, with respect to each Plan that is subject to Title IV of ERISA, the present value of accrued benefits under such Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Plan's actuary with respect to such Plan, did not, as of the valuation date used in such report, exceed the current value of the assets of such Plan allocable to such accrued benefits as of such valuation date and no material adverse change in the funded status of any such Plan has occurred since such valuation date. (g) No Plan is a "multiemployer pension plan," as such term is defined in Section 3(37) of ERISA, a "multiple employer welfare arrangement," as such term is defined in Section 3(40) of ERISA, or a single employer plan that has two or more contributing sponsors, at least two of whom are not under common control, within the meaning of Section 4063(a) of ERISA. (h) Each Plan that is intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified. Each Plan that is intended to satisfy the requirements of Section 125 or 501(c)(9) of the Code satisfies such requirements. Each Plan has been operated and administered in all material respects in accordance with its terms and applicable laws, including without limitation ERISA and the Code. (i) Except as Previously Disclosed, each Plan may be amended or terminated without liability to Community or any ERISA Affiliate. No - 12 - 13 amounts payable under the Plans will fail to be deductible for federal income tax purposes under Section 280G of the Code. (j) There are no actions, suits or claims pending, or, to the knowledge of the Community Entities, threatened or anticipated (other than routine claims for benefits) against any Plan, the assets of any Plan or against any Community Entity or any ERISA Affiliate with respect to any Plan. There is no judgment, decree, injunction, rule or order of any court, governmental body, commission, agency or arbitrator outstanding against or in favor of any Plan or any fiduciary thereof (other than rules of general applicability). There are no pending or threatened audits, examinations or investigations by any governmental body, commission or agency involving any Plan. (k) Except as Previously Disclosed, neither consummation of the Transactions nor termination of the employment or service of any employee or director of any of the Community Entities prior to or following consummation of the Transactions will (i) entitle any current or former employee or director of any Community Entity to severance pay, or any similar payment, (ii) accelerate the time of payment or vesting, or increase the amount, of any compensation due to any such current or former employee or director, (iii) renew or extend the term of any agreement regarding compensation for a current or former employee or director, or (iv) result in the Community Entities making or being required to make any "excess parachute payment" as that term is defined in Section 280G of the Code. 2.14. Certain Contracts (a) Except as Previously Disclosed or as specifically identified in the notes to the Community Financial Statements, none of the Community Entities is a party to, or bound by, (i) any material contract, arrangement or commitment whether or not made in the ordinary course of business requiring the payment of more than $100,000 in any year or any agreement restricting the nature or geographic scope of its business activities in any material respect, (ii) any agreement, indenture or other instrument relating to the borrowing of money by any Community Entity or the guarantee by any Community Entity of any such obligation, other than instruments relating to transactions entered into in the customary course of the Community Banks' business, (iii) any written or oral agreement, arrangement or commitment not terminable at will without liability or requiring the payment of more than $25,000 relating to the employment of a consultant or the employment, election, retention in office or severance of any present or former director or officer, or (iv) any contract, agreement or understanding with a labor union. (b) No Community Entity is in default in any material respect under any material agreement, commitment, arrangement, lease, insurance policy or other instrument whether entered into in the ordinary course of business or otherwise, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a material default. - 13 - 14 2.15. Legal Proceedings Except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on Community, neither Community nor any of the Community Subsidiaries is a party to any, and there are no pending or, to the best of Community's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against Community or any of the Community Subsidiaries; and neither Community nor any of the Community Subsidiaries is a party to or subject to any order, judgment or decree. To the knowledge of the Community Entities, there are no actual or threatened actions, suits or proceedings which present a claim to restrain or prohibit the Transactions or to impose any material liability in connection therewith. There are no actions, suits or proceedings instituted, pending or, to the knowledge of the Community Entities, threatened against any present or former director or officer of any Community Entity, that would be likely to give rise to a claim for indemnification and that, in the event of an unfavorable outcome, would, individually or in the aggregate, have a Material Adverse Effect on Community and, to the knowledge of the Community Entities, there is no reasonable basis for any such action, suit or proceeding. 2.16. Compliance with Laws; Regulatory Examinations; Regulatory Approvals (a) Each Community Entity holds, and at all times since January 1, 1994 has held, all licenses, franchises, permits, approvals, consents, qualifications and authorizations material for the lawful conduct of its business under and pursuant to, and has complied with, and is not in default under, and no Community Entity has any knowledge of any violation of, any applicable law, statute, order, rule, regulation, policy, ordinance, reporting or filing requirement and/or guideline of any federal, state or local governmental authority relating to the Community Entities, except as Previously Disclosed and except for failures to hold, failures to comply, defaults or violations which, either individually or in the aggregate, do not or would not have a Material Adverse Effect on Community. (b) Except for normal examinations conducted by a regulatory agency in the regular course of business of the Community Entities, no regulatory agency has initiated any proceeding or, to the best knowledge of the Community Entities, investigation into the business or operations of any Community Entity since December 31, 1996. None of the Community Entities has received any objection from any regulatory agency to any response by any Community Entity to any violation, criticism or exception with respect to any report or statement relating to any examinations of the Community Entities. (c) No Community Entity has, since January 1, 1994 received notification from any agency or department of federal, state or local government (i) asserting a material violation of any such statute or regulation, (ii) threatening to revoke any license, franchise, permit or - 14 - 15 government authorization, or (iii) restricting or in any way limiting its operations. No Community Entity is subject to any regulatory or supervisory cease and desist order, agreement, directive, memorandum of understanding or commitment, and none of them has received any communication requesting that it enter into any of the foregoing. (d) No Community Entity is aware of any reason why the conditions set forth in Section 5.1(b) hereof would not be satisfied without significant delay. 2.17. Labor Matters With respect to their respective employees, the Community Entities are not parties to any labor agreement with any labor organization, group or association and have not engaged in any unfair labor practice as defined under applicable federal law. Since January 1, 1996, no Community Entity has experienced any attempt by organized labor or its representatives to make any Community Entity conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized labor that would cover the employees of any Community Entity. There is no unfair labor practice charge or other complaint by any employee or former employee of any Community Entity against it pending before any governmental agency arising out of the activities of the Community Entities which charge or complaint (i) has a reasonable probability of an unfavorable outcome and (ii) in the event of an unfavorable outcome would, individually or in the aggregate, have a Material Adverse Effect on Community; there is no labor strike or labor disturbance pending or, to the knowledge of the Community Entities, threatened against any Community Entity; and no Community Entity has experienced a work stoppage or other labor difficulty since January 1, 1996. 2.18. Brokers and Finders Neither the Community Entities nor any of their respective officers, directors or employees, has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the Transactions, except that Community has engaged and will pay a fee or commission to McConnell, Budd & Downes, Inc., as Previously Disclosed. 2.19. Insurance Community has made available to CFX true and correct copies of all material policies of insurance of any Community Entity in effect as of the date hereof. No Community Entity has any liability for unpaid premiums or premium adjustments not properly reflected on Community's Financial Statements, except for any such liability that would not have a Material Adverse Effect on Community. Except as Previously Disclosed, no Community Entity has received any notice of termination of any such insurance coverage or material increase in the premiums therefor or has any reason to believe that any such insurance coverage will be terminated or the premiums therefor materially increased except as a result of the Transactions. - 15 - 16 2.20. Environmental Liability (a) Except for any violation, liability or noncompliance which does not have a Material Adverse Effect on Community: (i) no Community Entity has violated during the last five years or is in violation of or is liable under any federal, state or local environmental law; (ii) none of the properties owned or leased by any Community Entity (including, without limitation, soils and surface and ground waters) are contaminated with any hazardous substance; (iii) no Community Entity is liable for any off-site contamination; and (iv) each Community Entity is, and during the last five years has been, in compliance with, all of its respective permits, licenses and other authorizations issued under any environmental laws. For purposes of the foregoing, all references to "properties" include, without limitation, any owned real property or leased real property. (b) No Community Entity has received any written notice of any legal, administrative, arbitral or other proceeding, claim or action and, to the knowledge of the Community Entities, there is no governmental investigation of any nature ongoing, in each case that could reasonably be expected to result in the imposition, on the Community Entities of any liability arising under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, which liability would have a Material Adverse Effect on Community; there are no facts or circumstances which could reasonably be expected to form the basis for any such proceeding, claim, action or governmental investigation that would impose any such liability; and no Community Entity is subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. 2.21. Administration of Trust Accounts Except as Previously Disclosed, neither of the Community Banks currently administers or previously has administered any accounts for which it acts as a fiduciary or agent, including without limitation accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor other than IRA accounts. 2.22. Intellectual Property The Community Entities own the entire right, title and interest in and to, or have valid licenses with respect to, all the Intellectual Property necessary in all material respects to conduct their business and operations as presently conducted, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Community. None of such Intellectual Property is subject to any outstanding order, decree, judgment, stipulation, settlement, lien, charge, encumbrance or attachment, which order, decree, judgment, stipulation, - 16 - 17 settlement, lien, charge, encumbrance or attachment would have a Material Adverse Effect on Community. 2.23. Certain Information As of the effectiveness of the Registration Statement or any post- effective amendment thereto and as of the date of the Community shareholders' meeting to vote upon the Transactions, as of the mailing of any Proxy Statement or any amendment thereto and as of the date of the Community shareholders' meeting to vote upon the Transactions, such Registration Statement or Proxy Statement and all amendments or supplements thereto, with respect to all information set forth therein furnished by Community relating to Community shall (i) comply in all material respects with the applicable provisions of the Securities Laws, and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading. 2.24. Pooling of Interests The Community Entities know of no reason which would reasonably cause any of them to believe that the Transactions will not qualify as a pooling of interests for financial accounting purposes. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CFX AND CFX BANK CFX and CFX Bank hereby represent and warrant to Community and the Community Banks that, except as Previously Disclosed: 3.1. Capital Structure of CFX (a) The authorized capital stock of CFX consists solely of 22,500,000 shares of common stock, par value $0.66 2/3 per share ("CFX Common Stock"), and 3,000,000 shares of preferred stock, par value $1.00 per share ("CFX Preferred Stock"). As of December 31, 1996, there were 13,008,787 shares of CFX Common Stock issued and outstanding, 28,000 shares of CFX Common Stock held in its treasury, no shares of CFX Preferred Stock issued and outstanding, and no shares of CFX Preferred Stock held in its treasury. All outstanding shares of CFX's capital stock have been duly issued and are validly outstanding, fully paid and nonassessable. None of the shares of CFX's capital stock has been issued in violation of the preemptive rights of any person. The shares of CFX Common Stock to be issued in connection with the Share Exchange will have been duly authorized upon adoption of an amendment to CFX's Articles of Incorporation authorizing additional shares of CFX Common Stock (a "Charter Amendment"), and, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid, nonassessable and free and clear of any preemptive rights. - 17 - 18 (b) As of December 31, 1996, CFX's Tier 1 risk-based capital ratio, total risk-based capital ratio, and leverage ratio, each calculated in accordance with the capital guidelines of the Federal Reserve applicable to bank holding companies on a fully phased-in basis, were each in excess of the specified minimum levels for qualification as "well capitalized." (c) As of the date hereof, except for shares of CFX Common Stock subject to options under CFX's employee stock option and incentive plans, and except for shares to be issued pursuant to that certain Agreement and Plan of Reorganization, dated as of February 13, 1997, by and among CFX, CFX Bank, Portsmouth Bank Shares, Inc. and Portsmouth Savings Bank, CFX is not bound by any outstanding Rights. There are no agreements or understandings to which CFX is a party with respect to the voting of any shares of CFX Common Stock or which restrict the transfer of such shares. 3.2. Organization, Standing and Authority of CFX CFX is a duly organized corporation, validly existing and in good standing under the laws of New Hampshire, with full corporate power and authority to carry on its business as now conducted and is duly licensed or qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on CFX. CFX is registered as a bank holding company under the BHC Act. CFX has made available to Community true and correct copies of its charter and bylaws. 3.3. Ownership and Capital Structure of CFX's Subsidiaries Except as Previously Disclosed, CFX does not own, directly or indirectly, 25 percent or more of the outstanding capital stock or other voting securities of any corporation, bank or other organization (each a "CFX Subsidiary" and collectively the "CFX Subsidiaries"). The outstanding shares of capital stock or other equity interests of the CFX Subsidiaries are validly issued and outstanding, fully paid and nonassessable and, except with respect to CFX Funding L.L.C. in which CFX owns 51% of the equity interests, all such shares or interests are directly or indirectly owned by CFX free and clear of all liens, claims and encumbrances. No CFX Subsidiary has or is bound by any Rights which are authorized, issued or outstanding with respect to the capital stock or other equity interests of any CFX Subsidiary, and there are no agreements, understandings or commitments relating to the right of CFX to vote or to dispose of said shares or interests. None of the shares of capital stock or other equity interests of any CFX Subsidiary has been issued in violation of the preemptive rights of any person. 3.4. Organization, Standing and Authority of CFX Subsidiaries Each CFX Subsidiary is a duly organized corporation or banking association, validly existing and in good standing under applicable laws. Each CFX Subsidiary (i) has full power and authority to carry on its - 18 - 19 business as now conducted, and (ii) is duly licensed or qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such licensing or qualification and where failure to be licensed or qualified would have a Material Adverse Effect on CFX. Each CFX Subsidiary has all federal, state, local and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now being conducted, except where the failure to be so authorized would not have a Material Adverse Effect on CFX. 3.5. Authorized and Effective Agreement (a) Subject to adoption of a Charter Amendment, CFX has all requisite corporate power and authority to enter into and perform all of its obligations under the Transaction Documents to which CFX is a party. The adoption, execution and delivery of the Transaction Documents to which CFX is a party and the consummation of the Transactions contemplated thereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of CFX, except that a Charter Amendment must be approved by the affirmative vote of the holders of at least two thirds of all of the shares of CFX entitled to vote for the election of directors in accordance with the Articles of Incorporation of CFX and the issuance of CFX Common Stock pursuant to the Transaction Documents must be approved by the affirmative vote of the holders of a majority of the votes cast by the holders of CFX Common Stock eligible to vote thereon in accordance with AMEX policy. The Board of Directors of CFX has directed that a Charter Amendment, the Transaction Documents and the Transactions be submitted to CFX's stockholders for approval at an annual or special meeting to be held as soon as practicable. (b) CFX Bank has all requisite corporate power and authority to enter into and perform all of its obligations under the Transaction Documents to which CFX Bank is a party. The execution and delivery of this Reorganization Agreement and the Plan of Merger and the consummation of the Transactions contemplated thereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of CFX Bank. (c) Assuming the accuracy of the representations contained in Sections 2.5(c) hereof, the Transaction Documents constitute legal, valid and binding obligations of CFX and CFX Bank, in each case enforceable against them in accordance with their respective terms subject, as to enforceability, to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity. (d) Except as Previously Disclosed and subject to adoption of a Charter Amendment, neither the adoption, execution and delivery of the Transaction Documents nor the consummation of the Transactions nor compliance by the CFX Entities with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provision of the - 19 - 20 articles or certificates of incorporation or association, charters or by- laws of the CFX Entities, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of the CFX Entities pursuant to, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the CFX Entities, except for such violations, rights, conflicts, breaches, creations or defaults which, either individually or in the aggregate, will not have a Material Adverse Effect on CFX. (e) Except for the approvals specified in Sections 4.2 and 4.4 hereof, except as Previously Disclosed and except as expressly referred to in this Reorganization Agreement, no consent, approval or authorization of, or declaration, notice, filing or registration with, any governmental or regulatory authority, or any other person, is required to be made or obtained by the CFX Entities on or prior to the Closing Date in connection with the execution, delivery and performance of the Transaction Documents or the consummation of the Transactions other than the filing of certificates or articles of merger or share exchange or similar documents with the appropriate New Hampshire state authorities. 3.6. SEC Documents; Regulatory Filings CFX has filed all SEC Documents required by the Securities Laws and such SEC Documents complied, as of their respective dates, in all material respects with the Securities Laws. As of their respective dates, no such SEC Documents filed with the SEC contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information filed as of a later date shall be deemed to modify information as of an earlier date. CFX and each of the CFX Subsidiaries has filed all reports required by statute or regulation to be filed with any federal or state bank regulatory agency, and such reports were prepared in accordance with the applicable statutes, regulations and instructions in existence as of the date of filing of such reports in all material respects. 3.7. Financial Statements The CFX Financial Statements fairly present or when filed will fairly present the consolidated financial position of CFX and the consolidated CFX Subsidiaries as of the dates indicated and the consolidated results of operations, changes in shareholders' equity and cash flows of CFX and the consolidated CFX Subsidiaries for the periods then ended in conformity with generally accepted accounting principles applicable to banking organizations or financial institutions applied on a consistent basis except as disclosed therein. The books and records of CFX fairly reflect in all material respects the transactions to which it is a party or by - 20 - 21 which its properties are subject or bound. Such books and records have been properly kept and maintained and are in compliance in all material respects with all applicable legal and accounting requirements. The minute books of the CFX Entities contain records which are accurate in all material respects of all corporate actions of their respective shareholders and Boards of Directors (including committees of their respective Boards of Directors). 3.8. Material Adverse Change CFX has not, on a consolidated basis, suffered any material adverse change in its financial condition, results of operations or business since December 31, 1996. 3.9. Absence of Undisclosed Liabilities Neither CFX nor any CFX Subsidiary has any liability (contingent or otherwise) that is material to CFX on a consolidated basis, or that, when combined with all similar liabilities, would be material to CFX on a consolidated basis, except as Previously Disclosed, as disclosed in the CFX Financial Statements filed with the SEC prior to the date hereof and except for liabilities incurred in the ordinary course of business subsequent to December 31, 1996. 3.10. Brokers and Finders Neither the CFX Entities nor any of their respective officers, directors or employees, has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the Transactions, except that CFX has engaged and will pay a fee or commission to Alex. Brown & Sons Incorporated. 3.11. Legal Proceedings Except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on CFX, neither CFX nor any of the CFX Subsidiaries is a party to any, and there are no pending or, to the best of CFX's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against CFX or any of the CFX Subsidiaries; and neither CFX nor any of the CFX Subsidiaries is a party to or subject to any order, judgment or decree. To the knowledge of the CFX Entities, there are no actual or threatened actions, suits or proceedings which present a claim to restrain or prohibit the Transactions or to impose any material liability in connection therewith. 3.12. Compliance with Laws; Regulatory Examinations; Regulatory Approvals (a) CFX and each of the CFX Subsidiaries holds, and has at all times held, all licenses, franchises, permits, approvals, consents, qualifications and authorizations material for the lawful conduct of its - 21 - 22 business under and pursuant to, and has complied with, and is not in default under, any applicable law, statute, order, rule, regulation, policy, ordinance, reporting or filing requirement and/or guideline of any federal, state or local governmental authority relating to CFX or any of the CFX Subsidiaries, except for violations which, either individually or in the aggregate, do not or would not have a Material Adverse Effect on CFX, and neither CFX or any of the CFX Subsidiaries has knowledge of any violation of any of the above. (b) Except for normal examinations conducted by a regulatory agency in the regular course of the business of CFX and the CFX Subsidiaries, no regulatory agency has initiated any proceeding or, to the best knowledge of CFX, investigation into the business or operations of CFX or any of the CFX Subsidiaries since September 30, 1996. None of the CFX Entities has received any objection from any regulatory agency to any response to any violation, criticism or exception with respect to any report or statement relating to any examinations of CFX or any of the CFX Subsidiaries. (c) No CFX Entity has received notification from any agency or department of federal, state or local government (i) asserting a material violation of any such statute or regulation, (ii) threatening to revoke any license, franchise, permit or government authorization, or (iii) restricting or in any way limiting its operations. No CFX Entity is subject to any regulatory or supervisory cease and desist order, agreement, directive, memorandum of understanding or commitment, and none of them has received any communication requesting that it enter into any of the foregoing. (d) No CFX Entity is aware of any reason why the conditions set forth in Section 5.1(b) hereof would not be satisfied without significant delay. 3.13. Certain Information At all times subsequent to the effectiveness of the Registration Statement or any post-effective amendment thereto and up to and including the time of the CFX shareholders' meeting to vote upon the Transactions, and at all times subsequent to the mailing of any Proxy Statement or any amendment thereto and up to and including the time of the CFX shareholders' meeting to vote upon the Transactions, such Registration Statement or Proxy Statement and all amendments or supplements thereto, with respect to all information set forth therein furnished by CFX relating to the CFX Entities shall (i) comply in all material respects with the applicable provisions of the Securities Laws, and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading. - 22 - 23 3.14. Pooling of Interests The CFX Entities know of no reason which would reasonably cause either of them to believe that the Transactions will not qualify as a pool- ing of interests for financial accounting purposes. 3.15 Employee Benefits CFX has Previously Disclosed a list of all benefit plans and programs made available by CFX to officers and employees of the CFX Entities. True and correct copies of all such plans and of all documents related to such programs have been made available to Community. ARTICLE 4. COVENANTS 4.1. Shareholders' Meeting CFX and Community shall submit the Transaction Documents and, in the case of CFX, adoption of a Charter Amendment and the issuance of CFX Common Stock thereunder, to their respective shareholders for approval at annual or special meetings to be held as soon as practicable after the date hereof. Subject to the fiduciary duties of the respective boards of directors of Community and CFX as determined by each after consultation with counsel, the boards of directors of CFX and Community shall recommend at the respective shareholders' meetings that the shareholders vote in favor of such approvals. Nothing contained in this Section 4.1 shall prohibit either CFX or Community from taking and disclosing to its stockholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act or making such other disclosure to its stockholders which, in the judgment of its Board, based upon the advice of outside counsel, may be required under applicable law, or making disclosure to its stockholders of the absence of an opinion from Community's investment advisor dated the date of the Proxy Statement as to the fairness of the consideration to be paid to Community's stockholders in connection with the Share Exchange. 4.2. Proxy Statement; Registration Statement As promptly as practicable after the date hereof, CFX and Community shall cooperate in the preparation of the Proxy Statements to be mailed to the shareholders of Community and CFX in connection with the Transactions and, if required, to be filed by CFX as part of the Registration Statement. In the event that the issuance of CFX Common Stock in connection with the Share Exchange is exempt from registration under Section 3(a)(10) of the Securities Act and the SEC's regulations and interpretations thereunder and shares received will not be considered "restricted securities" for purposes of Rule 144 under the Securities Act, no Registration Statement will be filed. CFX will advise Community, promptly after it receives notice thereof, of the time when the Registration Statement or any post-effective amendment thereto has become effective or any supplement or amendment has - 23 - 24 been filed, of the issuance of any stop order, of the suspension of qualification of the CFX Common Stock issuable in connection with the Share Exchange for offering or sale in any jurisdiction, or the initiation or threat of any proceeding for any such purpose, or of any request by the SEC for the amendment or supplement of the Registration Statement or for additional information. CFX, after the Effective Date shall file a post- effective amendment to the Registration Statement or shall file a registration statement, as appropriate, either with respect to the sale of the shares of CFX Common Stock provided for in Article III of the Plan of Exchange to the holders of stock options issued by Community or for the resale of such shares by such optionees, as CFX and such optionees may agree. CFX shall take all actions necessary to register or qualify the shares of CFX Common Stock to be issued in the Share Exchange pursuant to all applicable state "blue sky" or securities laws and shall maintain such registrations or qualifications in effect for all purposes hereof. CFX shall apply for approval to list the shares of CFX Common Stock to be issued in the Share Exchange on the AMEX, subject to official notice of issuance, prior to the Effective Date. 4.3. Applications As promptly as practicable after the date hereof, the Parties shall take all action necessary or desirable to obtain any required regulatory approval for the Transactions. Without limiting the generality of the foregoing sentence, CFX or CFX Bank shall (i) file a request with the Federal Reserve for a waiver of the application and prior approval requirements of Section 3 of the BHC Act with respect to the Share Exchange and the Holding Company Merger, (ii) file an application with the FDIC for prior approval of the Bank Merger under the Bank Merger Act and the regulations promulgated thereunder, and (iii) file a notice with the Commissioner with respect to the Bank Merger pursuant to Chapter 388 or other applicable section of the New Hampshire Revised Statutes Annotated and the regulations promulgated thereunder. Each of the Parties shall, and they shall cause their respective subsidiaries to, submit any applications, notices, requests or other filings to any other state or federal government agency, department or body the approval of which is required for consummation of the Transactions. Community and CFX each represents and warrants to the other that all information concerning it and its directors, officers, shareholders and subsidiaries included (or submitted for inclusion) in any such application, notice, request or other filing and furnished by it shall be true, correct and complete in all material respects. 4.4. Best Efforts; Certain Notices and Information (a) The Parties shall each use their reasonable best efforts in good faith to (a) furnish such information as may be required in connection with the preparation of the documents referred to in Sections 4.2 and 4.3 above, and (b) take or cause to be taken all action necessary or desirable on its part so as to permit consummation of the Transactions at the earliest possible date, including, without limitation, (i) obtaining the - 24 - 25 consent or approval of each individual, partnership, corporation, association or other business or professional entity whose consent or approval is required for consummation of the Transactions, provided that no Community Entity shall agree to make any payments or modifications to agreements in connection therewith without the prior written consent of CFX, and (ii) requesting the delivery of appropriate opinions, consents and letters from its counsel and independent auditors. No Party shall take or fail to take, or cause or permit its subsidiaries to take or fail to take, or to the best of its ability permit to be taken or omitted to be taken by any third persons, any action that would substantially impair the prospects of completing the Transactions pursuant to the Transaction Documents, or that would adversely affect the qualification of the Transactions for pooling of interests accounting treatment or as a reorganization within the meaning of Section 368(a) of the Code; provided that nothing herein contained shall preclude CFX from exercising its rights under the Stock Option Agreement. In the event that any Party has taken any action, whether before, on or after the date hereof, that would adversely affect such qualification, each Party shall take such action as any other Party may reasonably request to cure such effect to the extent curable without a Material Adverse Effect on any of the Parties. (b) Community shall give prompt notice to CFX, and CFX shall give prompt notice to Community, of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Reorganization Agreement to be untrue or inaccurate in any material respect at the date hereof or on the Closing Date (if so required under Section 5.2(a) or Section 5.3(a) hereof), and (ii) any material failure of Community or CFX, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, and each Party shall use all reasonable efforts to remedy such failure. (c) Community shall provide and shall request its auditors to provide CFX with such historical financial information regarding it (and related audit reports and consents) as CFX may reasonably request for securities disclosure purposes. 4.5. Investigation and Confidentiality Community and CFX each will keep the other advised of all material developments relevant to its business or to consummation of the Transactions, material transactions outside of its ordinary course of business, and material changes in the normal course of its business or in the operation of its properties. The Parties each may make or cause to be made such investigation of the financial and legal condition of the other Parties as such Party reasonably deems necessary or advisable in connection with the Transactions; provided, however, that such investigation shall be reasonably related to such Transactions and shall not interfere unnecessarily with normal operations. Each Party agrees to furnish the other Parties and the other Parties' advisors with such financial data and other information with respect to its business and properties as such other - 25 - 26 Parties shall from time to time reasonably request. No investigation pursuant to this Section 4.5 shall affect or be deemed to modify any representation or warranty made by, or the conditions to the obligations to consummate the Transactions of, any Party. Each Party shall hold all information furnished by the other Parties or any of such Party's subsidiaries or representatives pursuant hereto in confidence to the extent required by, and in accordance with, the provisions of the confidentiality agreement dated February, 1997 by and between Community and CFX (the "Confidentiality Agreement"). 4.6. Press Releases Community and CFX shall agree with each other as to the form and substance of any press release related to the Transactions, and shall consult each other as to the form and substance of other public disclosures related thereto; provided, however, that nothing contained herein shall prohibit any Party, following notification to the other Parties, from making any disclosure which its counsel deems necessary. 4.7. Covenants of the Community Entities (a) Prior to the Closing Date, and except as otherwise provided for by the Transaction Documents or consented to or approved by CFX, the Community Entities shall, and shall cause each of their respective subsidiaries to, use their respective reasonable best efforts to preserve their respective properties, business and relationships with customers, employees and other persons. (b) Except with the prior written consent of CFX or except as Previously Disclosed or except as expressly contemplated or permitted by the Transaction Documents, no Community Entity shall, and no Community Entity shall permit any of its subsidiaries to: (1) carry on its business other than in the usual, regular and ordinary course in substantially the same manner as heretofore conducted; (2) with respect to Community only, declare, set aside, make or pay any dividend or other distribution in respect of its capital stock other than its regular cash dividends on Community Common Stock in amounts not in excess of $.16 per share and in a manner consistent with past practice and in accordance with applicable law, regulation and contractual and regulatory commitments, provided that Community's cash dividends may be increased to the Increased Dividend (as defined below) per share of Community Common Stock beginning with the dividend payable in the first quarter of 1998, and provided further that the parties agree (x) to consult with respect to the amount of the last Community quarterly dividend payable prior to the Effective Date with the objective of assuring that the shareholders of Community do not receive a shortfall or dividend or distribution from both Community and CFX for such quarter based on the record and payment dates of their last dividend prior to the Holding - 26 - 27 Company Merger and the record and payment dates of the first dividend of CFX following the Holding Company Merger and (y) that Community may pay a dividend to holders of record of Community Common Stock immediately prior to Effective Date consistent with the objective described in clause (x) above. The "Increased Dividend" shall be determined by multiplying the quarterly dividend then being paid by CFX with respect to each share of CFX Common Stock by 2.2; (3) issue any shares of its capital stock or permit any treasury shares to become outstanding other than pursuant to the Stock Option Agreement or Rights outstanding at the date hereof; (4) incur any additional obligation for borrowed money other than in the ordinary course of business consistent with past practice; (5) issue, grant or authorize any Rights or effect any recapitalization, reclassification, stock dividend, stock split or like change in capitalization, or redeem, repurchase or otherwise acquire any shares of its capital stock; (6) amend its articles or certificate of incorporation or association, charter or by-laws; (7) merge with any other corporation, savings association or bank or permit any other corporation, savings association or bank to merge into it or consolidate with any other corporation, savings association or bank; acquire control over any other firm, bank, corporation, savings association or organization or create any subsidiary; (8) except in the ordinary course of business consistent with past practice, waive or release any material right or cancel or compromise any material debt or claim; (9) except in connection with the hedging of interest rate risk related to Community's 1-4 family residential mortgage loan pipeline, enter into any material swap, hedge or other similar off-balance sheet transaction; (10) except as Previously Disclosed, except for foreclosing on collateral and except for sales of 1-4 family residential mortgage loans, automobile loans and Small Business Administration loans in the ordinary course of business consistent with past practice, liquidate or sell or dispose of any material assets or acquire any material assets; except as Previously Disclosed, make any capital expenditure in excess of $100,000 in any instance or $250,000 in the aggregate; or, except as Previously Disclosed, establish new branches or other similar facilities or enter into or modify any leases or other contracts relating thereto that involve annual payments that exceed $25,000 in any instance or $100,000 in the aggregate; - 27 - 28 (11) except as Previously Disclosed, increase the rate of compensation of, pay or agree to pay any bonus to, or provide any other employee benefit or incentive to, any of its directors, officers or employees except in a manner consistent with past practice; (12) enter into, modify or extend any employment or severance contracts with any of its present or former directors, officers or employees; (13) enter into or substantially modify (except as may be required by applicable law) any pension, retirement, stock option, stock purchase, stock appreciation right, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement related thereto, in respect of any of its directors, officers or other employees; (14) change its lending, investment, asset/liability management or other material banking policies in any material respect except as may be required by changes in applicable law or regulations; (15) change its methods of accounting in effect at December 31, 1995, except as required by changes in generally accepted accounting principles or regulatory requirements concurred in by its independent certified public accountants, or change any of its methods of reporting income and deductions for federal income tax purposes from those employed in the preparation of its federal income tax returns for the year ended December 31, 1995, except as required by law; (16) solicit or initiate inquiries or proposals with respect to any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, any Community Entity or any business combination with any Community Entity other than as contemplated by this Reorganization Agreement; or authorize or permit any officer, director, agent or affiliate of it to do any of the above; or fail to notify CFX as soon as practicable if any such inquiries or proposals are received by any Community Entity, or if any Community Entity or any officer, director, agent or affiliate thereof is requested to or does furnish any confidential information relating to, or participates in any negotiations or discussions concerning, any transaction of a type describe in this paragraph; or (17) agree to do any of the foregoing. (c) Each of the Community Entities agrees to approve, execute and deliver any amendment to the Transaction Documents and any additional plans and agreements requested by CFX to modify the structure of, or to substitute parties to, the Transactions; provided, however, that no such change shall (i) alter or change the amount or kind of consideration to be delivered to the shareholders of Community in connection with the Share Exchange, (ii) adversely affect the tax treatment to the shareholders of - 28 - 29 Community as a result of receiving such consideration in the Share Exchange, or (iii) materially impede or delay receipt of any approval referred to in Section 4.1 or 4.3 hereof or the consummation of the Transactions. (d) CFX, CFX Bank, Community and Concord Bank all acknowledge that this Reorganization Agreement is binding upon them as of the date hereof. Community hereby covenants that it shall cause the board of directors of Centerpoint Bank to approve this Reorganization Agreement and the Plan of Merger and shall cause Centerpoint Bank to execute this Reorganization Agreement and the Plan of Merger as soon as practicable, but in no event later than 10 days after the date hereof. Pending such approval and execution, the representations and warranties contained in Article 2 hereof shall be construed on the basis that such approval and execution have yet to occur. (e) Community undertakes and agrees that, if so requested by CFX, it shall take all necessary action to facilitate the liquidation of Community Subsidiaries or the merger of Community Subsidiaries with subsidiaries of CFX effective on or after the Effective Date; provided however, that in no event shall the Closing be delayed in order to facilitate any such liquidation or merger and provided further, however, that Community shall not be required to take any action that could adversely affect the qualification of the Share Exchange as a reorganization within the meaning of Section 368(a) of the Code. (f) Immediately prior to the Closing, the CFX Entities and the Community Entities will supplement or amend their prior disclosures pursuant to this Reorganization Agreement, including without limitation all Previously Disclosed documents and information, with respect to any matter hereafter arising which, at the Closing Date, would be required to be Previously Disclosed to the CFX Entities or the Community Entities, as appropriate, if this Reorganization Agreement were dated as of the Closing Date, or which is necessary to correct any Previously Disclosed document or information which was inaccurate at the time it was made. No such supplement or amendment shall have any effect for the purpose of determining satisfaction of the conditions set forth in Article 5 hereof or the compliance by any of the Community Entities with the covenants set forth in this Section 4.7. 4.8. Closing; Effective Date The Transactions shall be consummated at a closing (the "Closing") to be held at the offices of CFX, 102 Main Street, Keene, New Hampshire, as soon as practicable after the date on which the last of all required approvals for the Transactions has been obtained and the last of all required waiting periods under such approvals has expired (the "Earliest Possible Date") but not later than 10:00 a.m. on (x) the first business day following the last business day of the month containing the Earliest Possible Date or, (y) if the Earliest Possible Date occurs after the 20th day of a month, then the first business day following the last business day - 29 - 30 of the following month, or at such other place, date and time as the Parties may mutually agree upon (the "Closing Date"), with the Transactions to be consummated in such order and after such intermediate steps as CFX may specify; provided, however, that the order and any intermediate steps shall not (i) alter or change the amount or kind of consideration to be delivered to the shareholders of Community in connection with the Share Exchange, (ii) adversely affect the tax treatment to the shareholders of Community as a result of receiving such consideration in the Share Exchange, or (iii) materially impede or delay receipt of any approval referred to in Section 4.1 or 4.3 hereof or the consummation of the Transactions. In the event that the Closing occurs on a date determined under clause (y) of the preceding sentence and if such determination results in the passage of an additional calendar quarter prior to the publication of the financial information contemplated by Section 4.9(b) hereof, then CFX shall use its reasonable best efforts to publish no later than 25 days after the end of the first calendar month in which there are at least 30 days of combined operations following the consummation of the Transactions (which calendar month may be the calendar month in which the Effective Date occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. The Transactions shall be effective at the times and on the dates specified in the certificates or articles of merger or share exchange to be filed with the appropriate New Hampshire state authorities as contemplated by the Transaction Documents. For purposes of this Reorganization Agreement, the term "Effective Date" shall mean the effective time and date of the Share Exchange specified in the articles of share exchange to be filed with the appropriate New Hampshire state authorities as contemplated by the Plan of Exchange. 4.9. Affiliates (a) The Parties shall cooperate and use their reasonable efforts to identify those persons who may be deemed to be "affiliates" of CFX and Community within the meaning of Rule 145 promulgated by the SEC under the Securities Act and for purposes of qualifying the Share Exchange for "pooling of interests" accounting treatment. Each of Community and CFX shall use its reasonable best efforts to cause each person so identified to deliver, no later than 30 days prior to the Effective Date, a written agreement providing that such person will not dispose of any CFX Common Stock received in the Share Exchange except in compliance with the Securities Act, the rules and regulations promulgated thereunder and the SEC's rules relating to pooling of interests accounting treatment. Shares of CFX Common Stock issued to such affiliates in exchange for Community Common Stock shall not be transferable until such time as financial results covering at least 30 days of combined operations of CFX and Community have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies, regardless of whether each such affiliate has provided the written agreement referred to in this section. - 30 - 31 (b) CFX shall use its reasonable best efforts to publish no later than 25 days after the end of the first calendar quarter in which there are at least 30 days of combined operations following consummation of the Transactions (which calendar quarter may be the calendar quarter in which the Effective Date occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. 4.10. Community Employees; Directors and Management (a) All employees of the Community Entities as of the Effective Date (the "Continuing Employees") shall become employees of one or more of the CFX Entities, as determined by CFX, as of the Effective Date. Nothing in the Transaction Documents shall give any Continuing Employee a right to continued employment with the CFX Entities after the Effective Date. As soon as practicable after the Effective Date, CFX shall provide or cause to be provided to all Continuing Employees who remain employed by the CFX Entities after the Effective Date with employee benefits which, in the aggregate, are at least substantially equivalent to those generally afforded to other employees of the CFX Entities holding similar positions, subject to the terms and conditions under which those employee benefits are made available to such employees (the "CFX Benefits"); provided that (1) for purposes of determining eligibility for and vesting of the CFX Benefits only (and not for pension benefit accrual purposes), service with Community prior to the Effective Date shall be treated as service with an "employer" to the same extent as if such Continuing Employees had been employees of the CFX Entities; (2) for a one-year period after the Effective Date, CFX shall not be required to provide the CFX Benefits to the Continuing Employees who continue to be employed by the CFX Entities to the extent that the Continuing Employees continue to be covered under one or more of the Plans; (3) this Section 4.10(a) shall not be construed to limit the ability of the CFX Entities to terminate the employment of any employee or to review employee benefits programs from time to time and to make such changes of general applicability to all CFX employees as they deem appropriate; and (4) CFX will provide Continuing Employees with severance benefits in accordance with Community's Previously Disclosed Severance Policy for a period of 12 months following the Effective Date. (b) Effective upon the Effective Date, Mr. Douglas Crichfield, the President and Chief Executive Officer of Community and Concord, shall become an Executive Vice President of CFX and the President and Chief Executive Officer of CFX Bank and shall be offered a 3-year employment agreement with CFX on terms substantially equivalent to those contracts of other Executive Vice Presidents, but which agreement shall be no less favorable in the aggregate than the current employment agreement between CFX and its the President and Chief Executive Officer. (c) Prior to or at the Effective Date, three directors of Community to be designated by Community (one of whom shall be Mr. Crichfield), after consultation with and the consent of CFX (which consent shall not be unreasonably withheld), shall be elected to the Board of Directors of CFX - 31 - 32 effective upon the Effective Date, shall be divided evenly among the classes, and shall be nominated for re-election, if at all, pursuant to CFX's then existing policies and procedures. (d) Prior to or at the Effective Date, three directors of Community to be designated by Community (one of whom shall be Mr. Crichfield), after consultation with and the consent of CFX and CFX Bank (which consent shall not be unreasonably withheld), shall be elected to the Board of Trustees of CFX Bank effective upon the Effective Date and shall be nominated for re- election, if at all, pursuant to CFX Bank's then existing policies and procedures. (e) From and after the Effective Date, the appropriate CFX Entity shall assume and honor in accordance with their terms all employment agreements (including change in control agreements and supplemental retirement plans) Previously Disclosed by Community. CFX agrees that the consummation of the Transactions constitutes a "change in control" as defined in such agreements. This paragraph is intended for the irrevocable benefit of, and shall be enforceable by, the parties to the agreements. (f) From and after the Effective Date, CFX shall indemnify persons who served as directors and officers of Community and the Community Banks on or before the Effective Date ("Indemnified Parties") in accordance with and subject to the provisions of Community's Articles of Incorporation Previously Disclosed to CFX (without regard to any limitation contained in New Hampshire law, in the By-laws of Community or the By-laws or Articles of the Community Banks). CFX intends the indemnification provided in the preceding sentence to be a binding obligation upon it for the irrevocable benefit of, and enforceable by, those directors and officers so indemnified. Any Indemnified Party wishing to claim indemnification under this Section 4.10(f), upon learning of any claim, action, suit, proceeding or investigation for which indemnification is to be sought, shall promptly notify CFX thereof; provided, that the failure to so notify shall not affect the obligations of CFX under this Section 4.10(f), (unless such failure materially increases CFX's liability here under). In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Date), (1) CFX shall have the right to assume the defense thereof, if it so elects, and CFX shall pay all reasonable fees and expenses of counsel for the indemnified Parties promptly as statements therefor are received; provided however, that CFX shall be obligated pursuant to this Section 4.10(f) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction for any single action, suit or proceeding or any group of actions, suits or proceedings arising out of or related to a common body of facts, (2) the Indemnified Parties will cooperate in the defense of any such matter, and (3) CFX shall not be liable for any settlement effected without its prior written consent. From and after the Effective Date, CFX will cause the persons who served as directors or officers of Community and the Community Banks on or before the Effective Date to be covered by Community's existing directors' and officers' liability insurance policy (or policies of at least the same coverage and amounts and containing terms and conditions which are not less - 32 - 33 advantageous than such policy); provided that no such person shall be entitled to insurance coverage more favorable than that provided to the person in such capacity at the date hereof with respect to acts or omissions resulting from the person's service as such on or prior to the Effective Date, and provided further that CFX shall not be required to expend with respect to any year of coverage more than 150 percent of the current per annum amount expended by Community to maintain or procure insurance coverage pursuant hereto. Such insurance coverage shall commence on the Effective Date and will be provided for a period of no less than six years after the Effective Date. As a condition to receiving indemnification under this Section 4.10(f), the party claiming indemnification shall assign, by separate writing, to CFX all right, title and interest to and in proceeds of any insurance maintained or provided by Community or CFX or any of their respective affiliates for the benefits of the claiming party, to the extent of indemnification actually received from CFX hereunder and shall send such notices as CFX may reasonably request under any applicable directors' and officers' liability or blanket bond insurance coverage to preserve claims of which the claiming party is aware. No person shall be entitled to indemnification under this Section 4.10(f) if such person is seeking indemnification based on a claim (other than a claim arising as a supplier to, customer of or borrower from CFX or the CFX Subsidiaries or Community or the Community Subsidiaries) brought by such person or by an entity of which such person is a general partner, executive officer, director, trustee, beneficiary or controlling person unless such person has waived any right to participate in any damage or other award to such claiming party or other entity in any such action, suit or proceeding. ARTICLE 5. CONDITIONS PRECEDENT 5.1. Conditions Precedent to the Obligations of All the Parties The respective obligations of the Parties to effect the Transactions shall be subject to satisfaction or waiver of the following conditions at or prior to the Closing Date: (a) All corporate action necessary to authorize the execution, delivery and performance of the Transaction Documents and the consummation of the Transactions shall have been duly and validly taken; (b) The Parties shall have received all regulatory approvals required or mutually deemed necessary in connection with the Transactions, all notice periods and waiting periods required after the granting of any such approvals shall have passed and all conditions contained in any such approval required to have been satisfied prior to consummation of the Transactions shall have been satisfied, provided that no such approval shall have imposed any condition or requirement not reasonably foreseen as of the date of this Agreement that would, in the reasonable good faith opinion of the Board of Directors of CFX or Community, materially and adversely affects the anticipated economic and business benefits to CFX of the Transactions as to render consummation of the Transactions inadvisable, - 33 - 34 provided that no condition or requirement that relates primarily to regulatory matters existing at the date hereof with respect to CFX's business or activities shall be deemed to affect the business, operations, financial condition, property or assets of the combined enterprise or of Community or otherwise materially impair the value of Community to CFX; (c) One of the following shall have occurred: (i) a Registration Statement (including any post-effective amendment thereto) shall have been filed with the SEC and shall be effective under the Securities Act, and no proceeding shall be pending or to the knowledge of CFX threatened by the SEC to suspend the effectiveness of such Registration Statement; (ii) the Parties shall have received a "no-action" letter from the staff of the SEC stating that, by reason of the exemption afforded by Section 3(a)(10) of the Securities Act, it will not recommend any enforcement action to the SEC with respect to the issuance of CFX Common Stock in exchange for Community Common Stock in connection with the Share Exchange without registration thereof under the Securities Act and that such shares do not constitute "restricted securities"; or (iii) the Parties shall have received an opinion of Arnold & Porter to the effect that the issuance of CFX Common Stock in exchange for Community Common Stock in connection with the Share Exchange is exempt from the registration provisions of the Securities Act by reason of the exemption afforded by Section 3(a)(10) thereof and that such shares do not constitute "restricted securities"; (d) CFX shall have received all state securities or "Blue Sky" permits or other authorizations, or confirmations as to the availability of an exemption from registration requirements as may be necessary; (e) To the extent that any lease, license, loan, financing agreement or other contract or agreement to which Community is a party requires the consent of or waiver from the other party thereto as a result of the Transactions, such consent or waiver shall have been obtained, unless the failure to obtain such consents or waivers, individually or in the aggregate, would not have a Material Adverse Effect on Community; (f) None of the Parties shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Transactions; (g) The shares of CFX Common Stock that may be issued in the Share Exchange shall have been approved for listing on the AMEX, subject to official notice of issuance; and (h) Community and CFX shall have received an opinion of Arnold & Porter, reasonably satisfactory to tax counsel for Community, substantially to the effect that, on the basis of facts, representations and assumptions - 34 - 35 set forth in such opinion which are consistent with the state of facts existing on the Effective Date: (1) the Share Exchange shall either constitute a reorganization for federal income tax purposes within the meaning of Section 368(a) of the Code or be treated as part of a reorganization within the meaning of Section 368(a) of the Code; (2) no gain or loss will be recognized by a shareholder of Community who exchanges all of the shareholder's Community Common Stock (including each attached right issued pursuant to the Community Rights Agreement) solely for CFX Common Stock in the Share Exchange (except with respect to cash received in lieu of a fractional share interest in CFX Common Stock); (3) the tax basis of the CFX Common Stock received by a shareholder who exchanges all of the shareholder's Community Common Stock solely for CFX Common Stock in the Share Exchange will be the same as the tax basis of the Community Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); and (4) the holding period of the shares of CFX Common Stock to be received by a shareholder of Community will include the period during which such shareholder held the shares of Community Common Stock surrendered in exchange therefor, provided the Community Common Stock surrendered is held as a capital asset on the Effective Date. Each Party shall provide, in writing, a statement of facts, representations and assumptions on which Arnold & Porter may rely in rendering its opinion, which facts, representations and assumptions shall reflect the state of facts existing on the Effective Date. 5.2. Conditions Precedent to the Obligations of Community and the Community Banks The obligations of Community and the Community Banks to effect the Transactions shall be subject to satisfaction of the following additional conditions at or prior to the Closing Date unless waived by Community pursuant to Section 6.4 hereof: (a) The representations and warranties of CFX and CFX Bank set forth in Article 3 hereof shall be true and correct in all material respects as of the date of this Reorganization Agreement and as of the Closing Date as though made on and as of the Closing Date (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date), except as otherwise contemplated or permitted by this Reorganization Agreement or consented to in writing by Community; provided, however, that (i) in determining whether or not the condition contained in this paragraph (a) shall be satisfied, no effect shall be given to any exceptions in such representations and warranties relating to - 35 - 36 materiality or Material Adverse Effect, and (ii) the condition contained in this paragraph (a) shall be deemed to be satisfied unless the failure of such representations and warranties to be so true and correct constitute, individually or in the aggregate, a Material Adverse Effect on CFX; (b) CFX and CFX Bank shall have in all material respects performed all obligations and complied with all of their covenants required by the Transaction Documents prior to the Effective Date (including, without limitation, the covenant set forth in Section 4.10(b) hereof); (c) CFX and CFX Bank each shall have delivered to Community a certificate, dated the Closing Date and signed by its President or Chief Financial Officer to the effect that the conditions set forth in paragraphs (a) and (b) of this section have been satisfied; and (d) Community shall have received an opinion of Devine, Millimet & Branch, counsel to CFX, dated the Closing Date, as to such matters as Community may reasonably request with respect to the Transactions. 5.3. Conditions Precedent to the Obligations of CFX and CFX Bank The respective obligations of CFX and CFX Bank to effect the Transactions shall be subject to satisfaction of the following additional conditions at or prior to the Closing Date unless waived by CFX pursuant to Section 6.4 hereof: (a) The representations and warranties of Community and the Community Banks set forth in Article 2 hereof shall be true and correct in all material respects as of the date of this Reorganization Agreement and as of the Closing Date as though made on and as of the Closing Date (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date), except as otherwise contemplated or permitted by this Reorganization Agreement or consented to in writing by CFX; provided, however, that (i) in determining whether or not the condition contained in this paragraph (a) shall be satisfied, no effect shall be given to any exceptions in such representations and warranties relating to materiality or Material Adverse Effect, and (ii) the condition contained in this paragraph (a) shall be deemed to be satisfied unless the failure of such representations and warranties to be so true and correct constitute, individually or in the aggregate, a Material Adverse Effect on Community; (b) Community and the Community Banks shall have, in all material respects, performed all obligations and complied with all of their covenants required by the Transaction Documents; (c) Community and the Community Banks each shall have delivered to CFX a certificate, dated the Closing Date and signed by its President and Chief Executive Officer to the effect that the conditions set forth in paragraphs (a) and (b) of this section have been satisfied; - 36 - 37 (d) No event shall have occurred that shall preclude the Transactions from being accounted for as a pooling of interests; (e) The Rights issued pursuant to the Community Rights Agreement shall not have become nonredeemable, exercisable, distributed or triggered pursuant to the terms of such agreement (unless, in the case of a distribution or trigger, the effects can be cured by Community); (f) CFX shall have received from KPMG Peat Marwick LLP a "comfort letter" dated not more than five days prior to (i) the effective date of the Registration Statement, if any, and, otherwise, the mailing date of the Proxy Statement, and (ii) the Closing Date, with respect to certain financial information regarding Community, in form and substance which is customary in transactions such as the Transactions; and (g) CFX shall have received an opinion of Foley, Hoag & Eliot LLP, counsel to Community, dated the Closing Date, as to such matters as CFX may reasonably request with respect to the Transactions. ARTICLE 6. TERMINATION, WAIVER AND AMENDMENT 6.1. Termination This Reorganization Agreement and the other Transaction Documents (other than the Stock Option Agreement, which shall be governed by the terms thereof) may be terminated, either before or after approval by the shareholders of CFX and Community: (a) At any time on or prior to the Effective Date, by the mutual consent in writing of the Parties; (b) At any time on or prior to the Closing Date, by CFX in writing, if Community or either of the Community Banks has, or by Community in writing, if CFX or CFX Bank has, in any material respect, breached, and the Party seeking to terminate the Transaction Documents has not, in any material respect, breached (i) any covenant or agreement contained in the Transaction Documents, or (ii) any representation or warranty contained herein (without giving effect to any exceptions in such representations or warranties relating to materiality or a Material Adverse Effect), and in either case if such breach has not been cured by the earlier of 30 days after the date on which written notice of such breach is given to the Party committing such breach or the Closing Date (unless the breach, by its nature, is curable within 30 days after the date of written notice thereof and such 30-day cure period extends beyond the Closing Date, in which case the Closing Date shall be delayed to permit the cure of the breach by the breaching Party within such 30-day cure period); provided, however, that no breach or breaches of any representation or warranty referenced in this paragraph 6.1(b) shall be grounds for termination pursuant to this paragraph 6.1(b) unless such breach or breaches, singly or in the aggregate, shall have a Material Adverse Effect on the breaching party; - 37 - 38 (c) At any time, by any Party in writing, if the applications for prior approval or consents referred to in Section 4.3 hereof have been denied, and the time period for appeals and requests for reconsideration has run, or if any governmental entity of competent jurisdiction shall have issued a final non-appealable order enjoining or otherwise prohibiting the Transactions or any of them; (d) At any time, by any Party in writing, if the shareholders of CFX or Community do not approve the Transactions or the shareholders of CFX do not approve the Charter Amendment at the annual or special meetings duly called for that purpose; (e) By any Party in writing, if the Closing Date has not occurred by the close of business on March 31, 1998 (the "Termination Date"), unless the failure of the Closing to occur by such date shall be due to the failure of the Party seeking to terminate this Reorganization Agreement and the other Transaction Documents to perform or observe the covenants and agreements set forth herein, provided that the Termination Date may be extended until June 30, 1998 by any Party by written notice to the other Parties (given not later than February 28, 1998) if the Closing shall not have occurred because of failure to obtain approval from one or more regulatory authorities whose approval is required in connection with this Reorganization Agreement and the Transactions under circumstances in which neither party has the right to terminate this Reorganization Agreement pursuant to Section 6.1(c) hereof; or (f) By Community, if (i) the CFX Price (as that term is defined in the Plan of Exchange) is less than the Floor Price (as that term is defined in the Plan of Exchange), (ii) Community provides written notice to CFX prior to the third business day immediately preceding the Closing Date of its intent to terminate this Reorganization Agreement and the other Transaction Documents (other than the Stock Option Agreement) pursuant to this Section 6.1(f), and (iii) CFX does not elect prior to the close of business on the business day immediately preceding the Closing Date to increase the Exchange Ratio (as that term is defined in the Plan of Exchange) to the Cure Ratio (as that term is defined in the Plan of Exchange). 6.2. Effect of Termination (a) In the event this Reorganization Agreement and the other Transaction Documents are terminated pursuant to Section 6.1 hereof, the Transaction Documents (other than the Stock Option Agreement) shall become void and have no effect, except that (i) this Section 6.2, the provisions relating to confidentiality, expenses and governing law set forth in Sections 4.5, 7.1 and 7.7 hereof, respectively, shall survive any such termination and (ii) a termination pursuant to Section 6.1(b)(i) shall not relieve the breaching Party from liability (in an action at law or otherwise) for an uncured willful breach of such covenant or agreement giving rise to such termination. - 38 - 39 (b) If this Reorganization Agreement is terminated, expenses of the Parties hereto shall be determined as follows: (1) Any termination of this Reorganization Agreement pursuant to Sections 6.1(a), 6.1(c), 6.1(d), 6.1(e) or 6.1(f) hereof (other than as a result of a willful breach or gross negligence by a Party hereto) shall be without cost or expense on the part of any Party to the others; and (2) In the event of a termination of this Reorganization Agreement pursuant to Section 6.1(b) hereof as a result of a breach of a representation, warranty or covenant which is caused by the willful conduct or gross negligence of a Party, such Party shall (while remaining liable for any liabilities or damages arising out of such willful breach or gross negligence) be obligated to reimburse the other Parties for all out-of-pocket costs and expenses, including, without limitation, reasonable legal, accounting and investment banking fees and expenses, incurred by such other Parties in connection with the entering into of this Reorganization Agreement and the carrying out of any and all acts contemplated hereunder (collectively referred to as "Expenses"). (c) The payment of Expenses is not an exclusive remedy, but is in addition to any other rights or remedies available to the parties hereto at law or in equity and notwithstanding anything to the contrary contained herein, no Party shall be relieved or released from any liabilities or damages arising out of its gross negligence or willful breach of any provision of this Reorganization Agreement. 6.3. Non-Survival of Representations, Warranties and Covenants All representations, warranties and covenants in this Reorganization Agreement and the other Transaction Documents or in any instrument delivered pursuant hereto or thereto shall expire on, and be terminated and extinguished at, the Effective Date other than covenants that by their terms are to survive or be performed after the Effective Date, provided that no such representations, warranties or covenants shall be deemed to be terminated or extinguished so as to deprive any Party (or any director, officer or controlling person thereof) of any defense in law or equity which otherwise would be available against the claims of any person, including, without limitation, any shareholder or former shareholder of either CFX or Community, the aforesaid representations, warranties and covenants being material inducements to the consummation by the Parties of the Transactions. 6.4. Waiver Except with respect to any required shareholder or regulatory approval, CFX and Community, respectively, by written instrument signed by an executive officer of such Party, may at any time (whether before or after approval of the Transaction Documents by the shareholders of CFX and Community) extend the time for the performance of any of the obligations or - 39 - 40 other acts of the Community Entities, on the one hand, or the CFX Entities, on the other hand, and may waive (i) any inaccuracies of the Parties in the representations or warranties contained in the Transaction Documents or any document delivered pursuant hereto or thereto, (ii) compliance with any of the covenants, undertakings or agreements of the Parties, or satisfaction of any of the conditions precedent to its obligations, contained in the Transaction Documents, or (iii) the performance by such parties of any of its obligations set out herein or therein; provided, however, that, after any such approval by the shareholders of Community, no such modification shall (i) alter or change the amount or kind of consideration to be received by holders of Community Common Stock as provided in the Plan of Exchange, or (ii) adversely affect the tax treatment to Community shareholders as a result of the receipt of such consideration. 6.5. Amendment or Supplement The Transaction Documents may be amended or supplemented at any time by mutual agreement of the parties thereto. Any such amendment or supplement must be in writing and approved by their respective boards of directors and/or officers authorized thereby and shall be subject to the proviso in Section 6.4 hereof. ARTICLE 7. MISCELLANEOUS 7.1. Expenses Except as provided in Section 6.2(b) hereof, each Party shall bear and pay all costs and expenses incurred by it in connection with the Transactions, including fees and expenses of its own financial consultants, accountants and counsel, provided, however, that CFX and Community each shall bear and pay 50 percent of all filing fees associated with the Proxy Statements insofar as they pertain to the Transactions and with the Registration Statement, if required. 7.2. Entire Agreement The Transaction Documents contain the entire agreement between the parties with respect to the Transactions and supersede all prior arrangements or understandings with respect thereto, written or oral, other than documents referred to herein or therein and the Confidentiality Agreement. The terms and conditions of the Transaction Documents shall inure to the benefit of and be binding upon the Parties and thereto and their respective successors. Except as specifically set forth in the Transaction Documents, nothing in the Transaction Documents, expressed or implied, is intended to confer upon any person, other than the Parties, and their respective successors, any rights, remedies, obligations or liabilities. - 40 - 41 7.3. No Assignment No Party may assign any of its rights or obligations under this Reorganization Agreement to any other person. 7.4. Notices All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by facsimile transmission or overnight express or by registered or certified mail, postage prepaid, addressed as follows: If to Community or the Community Banks: Community Bankshares, Inc. 43 North Main Street Concord, NH 03301 Attention: Mr. Douglas Crichfield Facsimile No.: 603-228-5190 With a copy to: Foley, Hoag & Eliot LLP One Post Office Square Boston, MA 02109 Attention: Peter W. Coogan, Esquire Facsimile No.: 617-832-7000 If to CFX or CFX Bank: CFX Corporation 102 Main Street Keene, NH 03431 Attention: Mark A. Gavin Facsimile No.: 603-358-5028 With a copy to: Arnold & Porter 555 Twelfth Street, N.W. Washington, D.C. 20004 Attention: Steven Kaplan, Esquire Facsimile No.: 202-942-5999 7.5. Captions The captions contained in this Reorganization Agreement are for reference purposes only and are not part of this Reorganization Agreement. - 41 - 42 7.6. Counterparts This Reorganization Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. This Agreement may be executed by facsimile transmission. 7.7. Governing Law This Reorganization Agreement shall be governed by and construed in accordance with the laws of the State of New Hampshire applicable to agreements made and entirely to be performed within such jurisdiction, except to the extent federal law may be applicable. - 42 - 43 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement and Plan of Reorganization to be executed in counterparts by their duly authorized officers and their corporate seal to be hereunto affixed and attested by their officers thereunto duly authorized, all as of the day and year first above written. COMMUNITY BANKSHARES, INC. By: --------------------------------------- Douglas Crichfield President and Chief Executive Officer CONCORD SAVINGS BANK By: --------------------------------------- Douglas Crichfield President and Chief Executive Officer CENTERPOINT BANK By: --------------------------------------- Name: ---------------------------------- Title: --------------------------------- CFX CORPORATION By: --------------------------------------- Peter J. Baxter, President and Chief Executive Officer CFX BANK By: --------------------------------------- Peter J. Baxter, President and Chief Executive Officer - 43 - 44 ANNEX A PLAN OF SHARE EXCHANGE PURSUANT TO THIS PLAN OF SHARE EXCHANGE (this "Plan of Exchange"), dated as of March 24, 1997, CFX CORPORATION ("CFX"), a New Hampshire corporation, shall, subject to the terms and conditions specified herein and in a related Agreement and Plan of Reorganization dated as of even date herewith (the "Reorganization Agreement"), acquire through a share exchange all the outstanding shares of COMMUNITY BANKSHARES, INC. ("Community"), a New Hampshire corporation. ARTICLE 1. SHARE EXCHANGE 1.1. On the Effective Date (as hereinafter defined), each share of common stock of Community, par value $1.00 per share ("Community Common Stock"), outstanding immediately prior to the Effective Date (except as provided in Paragraphs 4, 7 and 8 of this Article), including each attached right issued pursuant to the Community Rights Agreement (as defined in Section 2.1(a) of the Reorganization Agreement), shall be converted without any action on the part of the holder thereof into an amount of common stock, par value $0.66 2/3 per share, of CFX ("CFX Common Stock") equal to one share multiplied by the Exchange Ratio as determined below (rounded to the nearest four decimal places). 1.2. As used herein, the term "CFX Price" shall mean the average of the averages of the high and low prices of CFX Common Stock on the American Stock Exchange (as reported by The Wall Street Journal) for each of the 15 consecutive trading days ending on the business day before the Effective Date. 1.3. (a) For purposes of this Plan of Exchange, the Exchange Ratio shall be 2.2 shares of CFX Common Stock for each share of Community Common Stock; provided, however, that (i) the Exchange Ratio shall be 2.0 shares of CFX Common Stock for each share of Community Stock if the CFX Price is greater than $20.00; (ii) the Exchange Ratio shall be $40.00 / the CFX Price, if the CFX Price is greater than $18.18 but not greater than $20.00; and (iii) the Exchange Ratio shall be $29.70 / the CFX Price (the "Cure Ratio"), if the CFX Price is $13.50 (the "Floor Price") or less and CFX has elected to increase the Exchange Ratio in accordance with Section 6.1(f) of the Reorganization Agreement. (b) Notwithstanding the provisions of the preceding subparagraph (a), in the event that before the Effective Date an announcement is made with respect to a business combination involving the acquisition of CFX or a substantial portion of its assets, the Exchange Ratio shall not be less than 2.2 shares of CFX Common Stock for each share of Community Common Stock A-1 45 1.4. On the Effective Date, all shares of Community Common Stock held in the treasury of Community or owned beneficially by any subsidiary of Community other than in a fiduciary capacity or in connection with a debt previously contracted and all shares of Community Common Stock owned by CFX or owned beneficially by any subsidiary of CFX other than in a fiduciary capacity or in connection with a debt previously contracted shall be canceled and no cash, stock or other property shall be delivered in exchange therefor. 1.5. (a) Prior to the Effective Date, CFX shall appoint a bank, trust company or other stock transfer agent selected by CFX as the exchange agent (the "Exchange Agent") to effect the exchange of certificates evidencing shares of Community Common Stock (any such certificate being hereinafter referred to as a "Certificate") for shares of CFX Common Stock to be received in the share exchange. On the Effective Date, CFX shall have granted the Exchange Agent the requisite power and authority to effect for and on behalf of CFX the issuance of the number of shares of CFX Common Stock issuable in the share exchange. (b) Within five business days after the Effective Date, the Exchange Agent shall mail to each holder of record of Community Common Stock as of the Effective Date a notice of consummation of the share exchange and a form of transmittal letter pursuant to which each such shareholder shall transmit the Certificate or Certificates, or, in lieu thereof, such evidence of lost, stolen or mutilated Certificate or Certificates and such surety bond as the Exchange Agent may reasonably require in accordance with customary exchange practices. Community shareholders who satisfy such requirements for lost, stolen or mutilated certificates shall for purposes of the exchange procedures set forth herein be deemed to have submitted Certificates for Community Common Stock. As soon as practicable after surrender of such Certificate to the Exchange Agent with a properly completed transmittal letter, the Exchange Agent will promptly mail by first class mail to such shareholder a certificate or certificates representing the number of full shares of CFX Common Stock into which the shares of Community Common Stock evidenced by the Certificate surrendered shall have been converted pursuant to this Plan of Exchange. (c) The Exchange Agent shall accept such Certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with customary exchange practices. Until so surrendered, each Certificate shall be deemed for all purposes to evidence ownership of the number of shares of CFX Common Stock into which the shares represented by such Certificates have been changed or converted as aforesaid. No dividends or other distributions declared after the Effective Date with respect to CFX Common Stock shall be paid to the holder of any unsurrendered Certificate until the holder thereof shall surrender such Certificate in accordance with this Article I. After the surrender of a Certificate in accordance with this Article I, the record holder thereof shall be entitled to receive any such A-2 46 dividends or other distributions, without any interest thereon, which theretofore had become payable with respect to shares of CFX Common Stock represented by such Certificate. (d) No transfer taxes shall be payable by any shareholders of Community in respect of the issuance of certificates for CFX Common Stock and no expenses shall be imposed on any shareholder of Community in connection with the conversion of shares of Community Common Stock into shares of CFX Common Stock and the delivery of such shares to the former holder of Community Common Stock entitled thereto, except that, if any certificate for shares of CFX Common Stock is to be issued in a name other than that in which a certificate or certificates for shares of Community Common Stock surrendered shall have been registered, it shall be a condition to such issuance that the person requesting such issuance shall pay to CFX any transfer taxes payable by reason thereof or of any prior transfer of such surrendered certificate or certificates or establish to the reasonable satisfaction of the Exchange Agent that such taxes have been paid or are not payable. (e) Certificates surrendered for exchange by any person who is an "affiliate" of Community for purposes of Rule 145(c) under the Securities Act of 1933, as amended, shall not be exchanged for certificates representing shares of CFX Common Stock until CFX has received the written agreement of such person contemplated by Section 4.9 of the Reorganization Agreement. If any certificate for shares of Community Common Stock is to be issued in a name other than that in which a certificate surrendered for exchange is issued, the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and the person requesting such exchange shall affix any requisite stock transfer tax stamps to the certificate surrendered or provide funds for their purchase or establish to the reasonable satisfaction of CFX or its agent that such taxes are not payable. 1.6. Upon the Effective Date, the stock transfer books of Community shall be closed and no transfer of Community Common Stock shall thereafter be made or recognized. Any other provision of this Plan of Exchange notwithstanding, neither CFX or its agent nor any party to the share exchange shall be liable to a holder of Community Common Stock for any amount paid or property delivered in good faith to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.7. In the event that, between the date hereof and prior to the Effective Date, the outstanding shares of CFX Common Stock or Community Common Stock shall have been increased, decreased or changed into or exchanged for a different number or kind of shares or securities by reorganization, recapitalization, reclassification, stock split or other like changes in the capitalization of CFX or Community, or if a stock dividend is declared on CFX Common Stock or Community Common Stock with a record date within such period, then an appropriate and proportionate adjustment shall be made in the number and kind of shares of CFX Common Stock to be thereafter delivered pursuant to this Plan of Exchange, and the A-3 47 dollar amounts and the Exchange Ratio set forth in Section 3 of this Article I, so that each shareholder of Community shall be entitled to receive such number of shares of CFX Common Stock or other securities as such shareholder would have received pursuant to such reorganization, recapitalization, reclassification, stock split, exchange or shares or readjustment or other like changes in the capitalization of CFX or Community, or as a result of a stock dividend on CFX Common Stock or Community Common Stock, had the record date therefor been immediately following the Effective Date. 1.8. Notwithstanding any other provision hereof, each holder of shares, or of options to purchase shares, of Community Common Stock who would otherwise have been entitled to receive a fraction of a share of CFX Common Stock (after taking into account all Certificates delivered by such holder or all shares such holder is entitled to receive in accordance with Article III hereof) shall receive (by check from the Exchange Agent, mailed to the shareholder with the certificate(s) for CFX Common Stock which such holder is to receive pursuant to the share exchange), in lieu thereof, cash in an amount equal to such fractional part of a share of CFX Common Stock multiplied by the "market value" of such Common Stock. The "market value" of one share of CFX Common Stock shall be the closing price of CFX Common Stock on the American Stock Exchange (as reported by The Wall Street Journal) on the last business day preceding the Effective Date. No such holder shall be entitled to dividends, voting rights or any other shareholder right in respect of any fractional share. 1.9. On the Effective Date, the share exchange contemplated hereby shall have the effect set forth in Section 293-A:11.06 of the New Hampshire Revised Statutes Annotated. ARTICLE 2. DISSENTERS' RIGHTS Notwithstanding anything in this Plan of Exchange to the contrary and unless otherwise provided by applicable New Hampshire law, shares of Community Common Stock that are issued and outstanding immediately prior to the Effective Date and that are owned by stockholders who, pursuant to applicable New Hampshire law, (1) deliver to Community before the taking of the vote of Community's stockholders on the Plan of Exchange a written notice of their intent to demand payment for their shares of Community Common Stock if the share exchange is effectuated, and (2) do not vote their shares in favor of this Plan of Exchange (the "Dissenting Shares"), shall not be converted into the right to receive, or be exchangeable for, shares of CFX Common Stock, but, instead, the holders of such Dissenting Shares shall be entitled to payment of the fair value of such Dissenting Shares, plus accrued interest, in accordance with applicable New Hampshire law. If any holders of Community Common Stock shall have failed to perfect or shall have effectively withdrawn, waived or lost the right to dissent from the share exchange and to receive the fair value of such shares as provided under applicable New Hampshire law, the shares of Community Common A-4 48 Stock held by such holder shall be deemed to have been converted into and be exchangeable for shares of CFX Common Stock on the Effective Date. ARTICLE 3. STOCK OPTIONS On the Effective Date, each then outstanding stock option to purchase Community Common Stock ("Community Option") pursuant to the 1985 Stock Option Plan, the 1988 Stock Option Plan, the 1989 Centerpoint Bank Stock Option Plan, the 1992 Stock Option Plan or the 1991 Employee Stock Purchase Plan (collectively, the "Community Stock Option Plans") (it being understood that the aggregate number of shares of Community Common Stock subject to purchase pursuant to the exercise of such Community Options (excluding those under the 1991 Employee Stock Purchase Plan) is not and shall not be more than 95,379), whether vested or unvested, will be assumed by CFX. Each Community Option so assumed by CFX under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Community Stock Option Plans immediately prior to the Effective Date, except that (i) such Community Option shall be exercisable (when vested) for that number of whole shares of CFX Common Stock equal to the product of the number of shares of Community Common Stock covered by the Community Option multiplied by the Exchange Ratio, provided that any fractional share of CFX Common Stock resulting from such multiplication shall be rounded down to the nearest share; and (ii) the exercise price per share of CFX Common Stock shall be equal to the exercise price per share of Community Common Stock of such Community Option, divided by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent. It is the intention of the parties that the Community Options assumed by CFX qualify following the Effective Date as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended to the extent that the Community Options qualified as incentive stock options immediately prior to the Effective Date. ARTICLE 4. EFFECTIVE DATE OF THE SHARE EXCHANGE Articles of share exchange evidencing the transactions contemplated herein shall be delivered to the New Hampshire Secretary of State in accordance with applicable New Hampshire law. The share exchange contemplated hereby shall be effective at the time and on the date specified in such articles of share exchange (such date and time being herein referred to as the "Effective Date"). ARTICLE 5. CONDITIONS PRECEDENT The obligations of CFX and Community to effect the share exchange as herein provided shall be subject to satisfaction, unless duly waived, of the conditions set forth in the Reorganization Agreement. A-5 49 ARTICLE 6. TERMINATION Anything contained in this Plan of Exchange to the contrary notwithstanding, and notwithstanding the adoption hereof by the shareholders of Community, this Plan of Exchange may be terminated and the share exchange abandoned as provided in the Reorganization Agreement. ARTICLE 7. MISCELLANEOUS 7.1. This Plan of Exchange may be amended or supplemented at any time prior to its Effective Date by mutual agreement of CFX and Community. Any such amendment or supplement must be in writing and approved by their respective Boards of Directors and/or by officers authorized thereby and shall be subject to the proviso in Section 6.4 of the Reorganization Agreement. 7.2. Any notice or other communication required or permitted under this Plan of Exchange shall be given, and shall be effective, in accordance with the provisions of the Reorganization Agreement. 7.3. The headings of the several Articles herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Plan of Exchange. 7.4. This Plan of Exchange shall be governed by and construed in accordance with the laws of New Hampshire applicable to the internal affairs of Community and CFX. A-6 50 ANNEX B AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Plan of Merger"), dated as of March 24, 1997, is by and among Concord Savings Bank, a New Hampshire state-chartered savings bank ("Concord Bank"), Centerpoint Bank, a New Hampshire state-chartered commercial bank ("Centerpoint Bank"), and CFX BANK ("CFX Bank"), a New Hampshire state chartered savings bank, and is joined in by COMMUNITY BANKSHARES, INC. ("Community"), a New Hampshire corporation, and CFX CORPORATION ("CFX"), a New Hampshire Corporation. WITNESSETH WHEREAS, the respective Boards of Directors of Concord Bank, Centerpoint Bank and CFX Bank deem the merger of Concord Bank and Centerpoint Bank with and into CFX Bank, under and pursuant to the terms and conditions herein set forth or referred to, desirable and in the best interests of the respective banks and their respective shareholders, and the respective Boards of Directors of Concord Bank, Centerpoint Bank and CFX Bank have adopted resolutions approving this Plan of Merger and a related Agreement and Plan of Reorganization dated as of even date herewith (the "Reorganization Agreement"). WHEREAS, Community, the sole shareholder of Concord Bank and Centerpoint Bank, and CFX, the sole shareholder of CFX Bank, have consented to and joined in this Plan of Merger and have entered into the Reorganization Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto do hereby agree as follows: ARTICLE 1. BANK MERGER Subject to the terms and conditions of this Plan of Merger, on the Effective Date (as hereinafter defined), Concord Bank and Centerpoint Bank shall be merged with and into CFX Bank, pursuant to the provisions of, and with the effect provided in, Title 35 of the New Hampshire Revised Statutes Annotated (the "Bank Merger"). On the Effective Date, the separate existence of Concord Bank and Centerpoint Bank shall cease and CFX Bank, as the surviving entity, shall continue unaffected and unimpaired by the Bank Merger (CFX Bank, as existing on and after the Effective Date, being hereinafter sometimes referred to as the "Surviving Bank"). ARTICLE 2. ARTICLES OF AGREEMENT AND BY-LAWS The Amended and Restated Articles of Agreement and the By-laws of CFX Bank in effect immediately prior to the Effective Date shall be the Articles of Agreement and the By-laws of the Surviving Bank, amended as set B-1 51 forth below, in each case until amended in accordance with applicable law. The Articles of Agreement of the Surviving Bank shall be amended effective upon the Effective Date to add the following paragraph to the end of existing Article VI: "The Bank shall assume the Distribution and Liquidation Account (the "Liquidation Account") initially established and maintained by Concord Savings Bank for the benefit of Concord Savings Bank's eligible savings account holders as of May 8, 1986 ("eligible savers"). Notwithstanding any provision of these Articles or of the By-laws of the Bank to the contrary, in the event of a complete liquidation of the Bank, it shall comply with such regulations with respect to the amount and the priorities on liquidation of each of the Bank's eligible savers' inchoate interest in the Liquidation Account, to the extent it is still in existence; provided, that an eligible saver's inchoate interest in the Liquidation Account shall not entitle such eligible saver to any voting rights at meetings of the Bank's shareholders." ARTICLE 3. DIRECTORS AND OFFICERS The directors of CFX Bank immediately prior to the Effective Date, together with three directors of Community to be designated by Community in accordance with Section 4.10(c) of the Reorganization Agreement, will be the directors of the Surviving Bank on the Effective Date. The officers of CFX Bank immediately prior to the Effective Date shall be the officers of the Surviving Bank on the Effective Date, except then Mr. Douglas Crichfield, if he is the President and Chief Executive Officer of Concord Bank immediately prior to the Effective Date, shall become the President and Chief Executive Officer of the Surviving Bank on the Effective Date. ARTICLE 4. CAPITAL The shares of capital stock of CFX Bank issued and outstanding immediately prior to the Effective Date shall be the shares of the Surviving Bank issued and outstanding on the Effective Date. ARTICLE 5. CANCELLATION OF CONCORD AND CENTERPOINT STOCK Each share of Concord Bank and Centerpoint Bank capital stock issued and outstanding immediately prior to the Effective Date shall, by virtue of the Bank Merger, be cancelled on the Effective Date, and no cash, stock or other property shall be delivered in exchange therefor. B-2 52 ARTICLE 6. EFFECTIVE DATE OF THE BANK MERGER Certificates or articles of merger evidencing the transactions contemplated herein shall be delivered to the New Hampshire Secretary of State in accordance with applicable New Hampshire law. The Bank Merger shall be effective at the time and on the date specified in such certificates or articles of merger (such date and time being herein referred to as the "Effective Date"). ARTICLE 7. CONDITIONS PRECEDENT The obligations of Concord Bank, Centerpoint Bank and CFX Bank to effect the Bank Merger as herein provided shall be subject to satisfaction, unless duly waived, of the conditions set forth in the Reorganization Agreement. ARTICLE 8. TERMINATION Anything contained in this Plan of Merger to the contrary notwithstanding, this Plan of Merger may be terminated and the Bank Merger abandoned as provided in the Reorganization Agreement. ARTICLE 9. MISCELLANEOUS 9.1. This Plan of Merger may be amended or supplemented at any time prior to the Effective Date by mutual agreement of the parties hereto. Any such amendment or supplement must be in writing and approved by the parties' respective Boards of Directors and/or by officers authorized thereby. 9.2. Any notice or other communication required or permitted under this Plan of Merger shall be given, and shall be effective, in accordance with the provisions of the Reorganization Agreement. 9.3. The headings of the several Articles herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Plan of Merger. 9.4. This Plan of Merger shall be governed by and construed in accordance with the laws of New Hampshire applicable to the internal affairs of Concord Bank, Centerpoint Bank and CFX Bank. B-3 53 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement and Plan of Merger to be executed in counterparts by their duly authorized officers and their corporate seals to be hereunto affixed and attested by their officers thereunto duly authorized, all as of the day and year first above written. CONCORD SAVINGS BANK By: --------------------------------------- Douglas Crichfield President and Chief Executive Officer CENTERPOINT BANK By: --------------------------------------- Name: ---------------------------------- Title: --------------------------------- CFX BANK By: --------------------------------------- Peter J. Baxter, President and Chief Executive Officer JOINED IN BY: COMMUNITY BANKSHARES, INC. By: --------------------------------------- Douglas Crichfield President and Chief Executive Officer CFX CORPORATION By: --------------------------------------- Peter J. Baxter, President and Chief Executive Officer B-4 EX-10.6 3 CHANGE OF CONTROL AGREEMENT. 1 Exhibit 10.5 CHANGE OF CONTROL AGREEMENT AGREEMENT made as of this 27th day of January, 1997 between CFX CORPORATION, a New Hampshire corporation (hereinafter "Company") and Gregg R. Tewksbury, residing at Keene, New Hampshire (hereinafter "Executive"). WHEREAS the Company wishes to assure the continued availability of the Executive's services and to create an environment which will promote the Executive's giving impartial and objective advice in any circumstances resulting from the possibility of Change of Control of the Company (as herein defined), and WHEREAS the Company and the Executive wish to provide the Executive with financial protection in the event significant changes in the Executive's employment status occur following a Change of Control of the Company (as herein defined); NOW THEREFORE, the Company and the Executive, in consideration of the terms and conditions set forth herein and other valuable consideration, receipt of which is hereby acknowledged, mutually covenant and agree as follows: 1. Term. The term of this Agreement shall commence on the date hereof and terminate on the date three years from the date hereof unless the Executive's employment is sooner terminated as provided in Section 13 hereof (the "Term"). On each December 31st thereafter, the Term shall automatically be extended for an additional calendar year unless either party gives written notice to the other, by no later than the preceding November 30th, that he or it does not concur in such extension. 2. Payments Upon Change of Control and Termination Event. The Company shall make payments to the Executive as provided for in paragraph 4 hereof upon the occurrence of both a Change of Control of the Company and a Termination Event, as such terms are defined in paragraph 3 hereof. 3. Definitions. (a) "Base Amount" shall mean an amount equal to the average annual compensation payable by the Company, or any subsidiary in which the Company owns more than fifty (50) percent of the outstanding shares, to the Executive and includable by the Executive in gross income for the most recent five (5) taxable years, or such shorter period as the Executive shall have been employed by the Company, ending before the date on which the Change of Control occurred. (b) A "Change of Control" shall be deemed to have occurred if any of the following have occurred: 2 (i) any individual, corporation (other than the Company), partnership, trust, association, pool, syndicate, or any other entity or any group of persons acting in concert becomes the beneficial owner, as that concept is defined in Rule 13d-3 promulgated by the Securities Exchange Commission under the Securities Exchange Act of 1934, as the result of any one or more securities transactions (including gifts and stock repurchases but excluding transactions described in subdivision (ii) following) of securities of the Company possessing fifty-one percent (51%) or more of the voting power for the election of directors of the Company; (ii) there shall be consummated any consolidation, merger or stock-for-stock exchange involving securities of the Company in which the holders of voting securities of the Company immediately prior to such consummation own, as a group, immediately after such consummation, voting securities of the Company (or if the Company does not survive such transaction, voting securities of the corporation surviving such transaction) having less than fifty percent (50%) of the total voting power in an election of directors of the Company (or such other surviving corporation), excluding securities received by any members of such group which represent disproportionate percentage increases in their shareholdings vis-a-vis the other members of such group; (iii) "approved directors" shall constitute less than a majority of the entire Board of Directors of the Company, with "approved directors" defined to mean the members of the Board of Directors of the Company as of the date of this Agreement and any subsequently elected members of the Board of Directors of the Company who shall be nominated or approved by a majority of the approved directors on the Board of Directors of the Company prior to such election; or (iv) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions, excluding any transaction described in subdivision (ii) above), of all, or substantially all, of the assets of the Company or its subsidiaries to a party which is not controlled by or under common control with the Company. (c) A "Termination Event" shall be deemed to have occurred if, within the thirty-six month period following a Change of Control, the Executive experiences the loss of his position by reason of discharge or demotion, for other than termination for good cause, or the Executive's voluntary termination following the substantial withholding, substantial adverse alteration or substantial reduction of responsibility, authority, or compensation (including any compensation or benefit plan in which the Executive participates or substitute plans adopted prior to the -2- 3 Change of Control) to which the Executive was charged or empowered with or entitled to immediately prior to a Change of Control of the Company or to which he would normally be charged or empowered with or entitled to from time to time by reason of his office, for other than good cause. (d) Termination for Good Cause. "Termination for good cause" means termination: (i) based on the willful and continued failure by the Executive to perform his duties for the Company or a subsidiary (other than such failure resulting from the Executive's incapacity due to physical or mental illness), after a written demand for performance is delivered to the Executive by the Board of Directors of the Company which specifically identifies the manner in which the Board believes the Executive has not performed his duties; an act or acts of dishonesty taken by the Executive; or an act or acts intended to result in his personal enrichment at the expense of the Company or a subsidiary; or an act or acts of willful misconduct which are materially injurious to the Company. Termination shall be by written notice to the Executive identifying the cause; or (ii) If the Executive shall have been absent from the full-time performance of his duties with the Company for six consecutive months as the result of the Executive's incapacity due to physical or mental illness, and the Executive shall not have returned to full-time performance of his duties within thirty days after written notice of proposed termination, the Executive's employment may be terminated by the Company on or after the expiration of such thirty day period for disability. Termination shall be by written notice to the Executive. Termination of the Executive's employment based on retirement shall mean termination in accordance with the Company's generally applicable retirement policy or with any retirement arrangement established with the Executive's consent. 4. Cash Payments. Upon the occurrence of both a Change of Control of the Company and a Termination Event, the Company shall, during the period commencing on the date of the Termination Event and over a period of twelve months (the "Pay-Out Period"), make equal monthly payments to the Executive in an amount such that the present value of all such payments, determined as of the date of the Termination Event, equals 1.0 times the Base Amount. 5. Advance Payments for Financial Hardship. If at any time during the Pay-Out Period the Company's Board of Directors in its sole discretion shall concur, upon application of the Executive, the Company -3- 4 shall make available to the Executive, in one (l) lump sum, an amount up to but not greater than the present value of all monthly payments remaining to be paid to him in the Pay-Out Period, calculated with the Federal Funds rate in effect as of the date of such Board concurrence. If (a) the lump sum amount thus made available is less than (b) the present value of all such remaining monthly payments, the Company shall continue to pay to the Executive monthly payments for the duration of the Pay-Out Period, but from such date forward such monthly payments will be in a reduced amount such that the present value of such payments will equal the difference between (b) and (a), above. The Executive may elect to waive any or all payments due him under this subparagraph. 6. Death of Executive. If the Executive dies before receiving all payments payable to him under this Agreement, the Company shall pay to the Executive's spouse, or if the Executive leaves no spouse, to the estate of the Executive, one (l) lump sum payment in an amount equal to the present value of all such remaining unpaid payments, determined as of the date of death of the Executive. 7. Reimbursement of Expenses. In the event a Change of Control of the Company and a Termination Event occur and any action, suit or proceeding is brought by the Company or the Executive for the enforcement, performance or construction of this Agreement, the Company agrees to reimburse the Executive for all costs and expenses reasonably incurred by him in such action, suit or proceeding, including reasonable attorneys' and accountants' fees and expenses, unless the Executive shall have been substantially unsuccessful, on the merits or otherwise, in such action, suit or proceeding. 8. No Duty to Seek Other Employment. Amounts payable to the Executive under this Agreement shall not be reduced by the amount of any compensation received by the Executive from any other employer or source during the Pay-Out Period, and the Executive shall not be under any obligation to seek other employment or gainful pursuit during such Pay-Out Period as a result of this Agreement. 9. Non-Competition, Future Services and Compensation. (a) During such period as the Executive is receiving cash payments under this Agreement, the Executive agrees: (i) that he shall not, without the prior approval of the Board of Directors of the Company, certified to him by the Secretary or Acting -4- 5 Secretary of the Company, become an officer, employee, agent, partner, or director of any other business in substantial competition with the Company, its subsidiaries or any other company or bank affiliated with the Company, including any branch or office of any of the foregoing. Such restriction shall apply to any such other business doing business in any county in the State of New Hampshire in which the Company, its subsidiaries or any such other company or bank is then conducting any material business or into which, to the knowledge of the Executive at the time of such termination, any such entity has immediate plans to expand its activities in material respects; and (ii) to provide such consulting services as may be requested by the Company. (b) As compensation to the Executive for his promises in (a) of this paragraph, the Bank agrees to maintain, during such period, the Executive's eligibility for and participation in any health and life insurance plans, in which the Executive was eligible to participate prior to the Termination Event. 10. Reduction of Payments. In the event any of the payments made under this Agreement would be considered an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended, then there shall be a reduction in the amount otherwise payable under this Agreement such that all payments are deductible by the Company. 11. Withholding. Distribution of any payments under this Agreement shall be reduced for the amount required to be withheld pursuant to any law or regulation with respect to taxes or similar provisions. 12. Payment of Compensation to Termination Date. In addition to any other payments payable to the Executive hereunder, the Company shall pay the Executive full compensation and all other amounts and benefits to which the Executive is entitled through the termination of his employment. 13. No Right to Continued Employment. This Agreement shall not confer upon the Executive any right with respect to continuance of employment by the Company or any subsidiary, nor shall it interfere in any way with the right of his employer to terminate his employment at any time. -5- 6 No payments hereunder shall be required except upon the occurrence of both a Change of Control of the Company and a Termination Event as set forth in Section 3 herein. Thus, except as specifically provided in Section 2 herein, no payments hereunder shall be made on account of termination of the Executive's employment (i) upon the Executive's death, disability or retirement, (ii) by the Company with or without cause or (iii) upon the Executive's voluntary termination. 14. Waiver of Breach. Waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver by such party of any subsequent breach hereof. 15. Invalidity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect. 16. Entire Agreement; Written Modification; Termination. This Agreement contains the entire agreement between the parties concerning the matters covered hereby. No modification, amendment or waiver of any provision hereof shall be effective unless in writing specifically referring hereto and signed by the party against whom such provision as modified or amended or such waiver is sought to be enforced. This Agreement shall terminate as of the time the Company makes the final payment which it may be obligated to pay hereunder or provides the final benefit which it may be obligated to provide hereunder. 17. Counterparts. This Agreement may be made and executed in counterparts, each of which may be considered an original for all purposes. 18. Governing Law. This Agreement is governed by and is to be construed and enforced in accordance with the laws of the State of New Hampshire. 19. Authorization. The Company represents and warrants that the execution of this Agreement has been duly authorized by resolution of the Board of Directors of the Company. -6- 7 IN WITNESS WHEREOF, the undersigned parties have executed or caused to be executed this Agreement as of the day and year first above written. CFX CORPORATION --------------- By: /s/ ------------------------------------ Peter J. Baxter its duly --------------------------- authorized President and CEO . ------------------------- "EXECUTIVE" /s/ ----------------------------------- Gregg R. Tewksbury -7- EX-13 4 ANNUAL REPORT. 1 DIVERSITY MORTGAGE BANKING [GRAPHIC] RETAIL BANKING [GRAPHIC] COMMERCIAL BANKING [GRAPHIC] INVESTMENT & TRUST SERVICES [GRAPHIC] EQUIPMENT LEASE FUNDING [GRAPHIC] CFX CORPORATION 1996 Annual Report 2 - ----------------------- SELECTED FINANCIAL DATA - -----------------------
=================================================================================================================== AT OR FOR YEARS ENDED DECEMBER 31 (1) (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 (2&3) 1993 (2) 1992 =================================================================================================================== STATEMENT OF INCOME DATA: Net interest and dividend income $ 56,859 $ 52,026 $ 47,998 $ 46,478 $ 45,409 Provision for loan and lease losses 2,935 3,037 2,697 11,608 6,728 Net income available to common stock (5) 12,641 11,249 6,976 3,927 4,986 Common earnings per share (3 & 5) .99 .89 .58 .34 .42 Common dividends declared per share (3) .55 .50 .31 .27 .25 Preferred dividends declared per share - .4625 1.3875 1.3875 1.3875 - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets 1,547,092 1,344,880 1,267,113 1,218,394 1,152,323 Net loans and leases 1,102,424 911,981 828,355 731,738 749,447 Investments 278,191 311,814 308,241 369,297 290,752 Deposits 1,157,207 1,056,824 999,217 974,694 1,006,977 Advances from Federal Home Loan Bank of Boston 175,081 102,814 94,201 49,801 3,000 Other borrowed funds 67,374 44,012 45,295 32,822 17,421 Total shareholders' equity 132,953 127,032 118,918 117,327 115,627 Common shareholders' equity 132,953 127,032 118,725 113,949 112,224 Common shareholders' equity per share (3) 10.22 10.52 9.74 9.77 9.38 - ------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCE DATA: Total assets 1,475,860 1,311,455 1,256,260 1,155,507 1,160,949 Interest earning assets 1,360,296 1,214,876 1,140,680 1,065,317 1,074,168 Loans and leases (net of unearned income) (5) 1,025,013 878,952 790,554 765,294 769,692 Interest bearing liabilities 1,194,994 1,053,060 997,080 940,905 965,791 Common shareholders' equity 131,974 122,733 113,939 114,546 110,133 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS: Return on average common shareholders' equity (4) 9.58% 9.17% 6.12% 3.43% 4.53% Return on average assets (4) .86% .86% .56% .34% .43% Efficiency ratio (4) 69.58% 68.69% 75.00% 71.46% 70.78% Net interest margin 4.24% 4.36% 4.27% 4.41% 4.27% ====================================================================================================================
(1) On July 1, 1996, the Company acquired The Safety Fund Corporation (Safety Fund), a bank holding company, and the Milford Co/operative Bank (Milford), a state-chartered co/operative bank. Both transactions were accounted for as a pooling-of-interests. Accordingly, all prior period balances have been restated to reflect this transaction. See Note B of the "Notes to Consolidated Financial Statements." (2) On September 1, 1993, the Company, through its subsidiary, Cheshire County Savings Bank, acquired the remaining 52.4% of Colonial Mortgage, Inc. (renamed CFX Mortgage, Inc.). Previously, the Company owned 47.6% and as a result of the purchase Colonial became a wholly-owned subsidiary. The transaction was accounted for by the purchase method of accounting. (3) Common per share data has been restated to reflect the Company's 5% stock dividend declared on December 10, 1996. (4) As a result of the Safety Fund and Milford acquisitions discussed in (1) above, the Company recorded a charge to earnings in the third quarter of 1996 of $3,722,000, on an after-tax basis for merger related costs. Also during the third quarter of 1996, the Company recorded adjustments relating to a pension settlement gain of $539,000 after tax and an FDIC-SAIF assessment of $424,000 after tax. See "Management's Discussion and Analysis." (5) Average loans and leases include total loans and leases and mortgage loans held for sale. 3 THE COMPANY CFX(R) Corporation is a bank holding company headquartered in Keene, New Hampshire. The Company operates 42 full-service offices and 68 automated teller and remote service banking locations in New Hampshire and central Massachusetts. The Company's three banking subsidiaries (the Banks) are CFX Bank, with headquarters in Keene, New Hampshire, Safety Fund National Bank, with headquarters in Fitchburg, Massachusetts, and Orange Savings Bank, with headquarters in Orange, Massachusetts. The principal business of the Banks is to serve as financial intermediaries, attracting deposits from, and making loans to, consumers and small-and mid-sized businesses. A Trust Division furnishes trust and investment services to individuals, corporations, municipalities and charitable organizations. CFX Mortgage, CFX Bank's mortgage banking subsidiary, operates loan production offices in Bedford and Keene, New Hampshire and throughout the Bank's branch network. CFX Bank owns 51 percent of CFX Funding L.L.C., which engages in the facilitation of lease financing and securitization nationwide. 4 - ------------------- TO OUR SHAREHOLDERS - -------------------
TOTAL ASSETS (in Millions) Year Ended 1994 1995 1996 $1,267 $1,345 $ 1,547
TOTAL DEPOSITS (in Millions) Year Ended 1994 1995 1996 $ 999 $1,057 $1,157
TOTAL SHAREHOLDERS' EQUITY (in Millions) Year Ended 1994 1995 1996 $ 119 $ 127 $ 133
[PHOTO] PETER J. BAXTER President & Chief Executive Officer The long-term financial success of an institution is dependent upon its ability to retain profitable business, develop new growth markets, protect itself from economic cycles by diversifying its revenue base, and preserve the dedication of its people. During 1996, we made substantial progress toward all of these success measurements, resulting in increased shareholder value. Completing the acquisition of The Milford Co/operative Bank has contributed greatly to the retention and expansion of our core markets in southwestern New Hampshire. New branches in Laconia and Merrimack will provide new high-growth markets to our retail banking franchise. Adding Massachusetts-based Safety Fund National Bank to our Company opened up a significant new geographic market to our mortgage banking subsidiary and a very important investment and trust operation, which will be expanded throughout the CFX franchise. I am pleased to report another year of record earnings; achieved by diversifying our revenue stream, leveraging our balance sheet, and improving our operating efficiency. The condensed financial review that follows presents a summary of the lines of business that are driving our Company's performance. Looking ahead, CFX Corporation will continue to grow core product lines by focusing on customer satisfaction and retention, and by penetrating our new, higher-growth markets. Our recently announced acquisitions of Portsmouth Bank Shares, Inc. ("POBS") and Community Bankshares, Inc. ("Community") bring to CFX a state-wide presence in New Hampshire. With Portsmouth, we extend our franchise to the seacoast region of Rockingham County while Community advances the Company to the number two position in Merrimack County, the state's largest market area. In addition to the pursuit of new growth markets, we will continue to seek new products and technologies that will enhance our revenue stream, reduce our costs, and provide our customers with high-quality and convenient banking options. Standing behind our initiatives is our most diverse resource and the foundation of our success-- our Board of Directors, management, and staff who dedicate themselves to the pursuit of excellence. My thanks to them and you for your continued support and confidence. Peter J. Baxter President & Chief Executive Officer 5 - -------------------------- CONDENSED FINANCIAL REVIEW - --------------------------
EARNINGS PER SHARE Year Ended 1994 1995 1996 $ .58 $ .89 $1.27
*Excludes Charges for Mergers and Other Adjustments
RETURN ON EQUITY Year Ended 1994 1995 1996 5.94% 9.08% 12.31%
*Excludes Charges for Mergers and Other Adjustments
RETURN ON ASSETS Year Ended 1994 1995 1996 0.56% 0.86% 1.10%
*Excludes Charges for Mergers and Other Adjustments [GRAPHIC] OVERVIEW For the year-ended December 31, 1996, CFX Corporation (the Company) reported earnings of $12.6 million, or $.99 per share, compared to earnings of $11.2 million, or $.89 per share, for the prior year. Return on assets and return on equity were .86% and 9.58%, respectively, for 1996 compared to .86% and 9.08%, respectively for 1995. The increase in earnings came despite charges for mergers and other adjustments (see "Management's Discussion and Analysis"). Excluding charges for mergers and other adjustments, net income was $16.2 million, or $1.27 per share, an increase of 44% over 1995. On the same basis, return on assets, return on equity, and the efficiency ratio (the cost to earn a dollar of revenue) were 1.10%, 12.31%, and 63.33%, respectively. Net income per share, excluding merger and other adjustments, has increased at a compound annual growth rate of 24.77% over the last five years. Note: The charts within this section, "Condensed Financial Review", exclude charges for mergers and other adjustments for 1996. The improvement in the Company's earnings for 1996 can be attributed to the following factors: - - DIVERSIFIED REVENUE INITIATIVES: In addition to traditional income from loans and investments, the Company has developed strong revenue sources from mortgage banking, the facilitation of commercial lease financing and securitization, consumer leasing, and investment and trust operations. - - BALANCE SHEET LEVERAGE: The Company has successfully leveraged its capital, resulting in the generation of significant loan and lease assets. Increased leverage reduced the Company's Tier 1 leverage capital ratio from 8.78% in 1995 to 8.00% in 1996. - - LOAN AND LEASE GROWTH: The Company experienced strong loan growth across all product lines. For the year ended December 31, 1996, the loan and lease portfolio increased as follows:
Annual Increase -------------------- $000's % -------- ----- Residential mortgage and construction $125,402 21.05% Consumer 42,506 58.38 Commercial and commercial real estate 22,826 8.82 -------- Total Loans $190,734 20.57 ========
6 - -------------------------- CONDENSED FINANCIAL REVIEW - --------------------------
EFFICIENCY RATIO Year Ended 1994 1995 1996* 75.00% 68.69% 63.33%
*Excludes Charges for Mergers and Other Adjustments
TIER 1 LEVERAGE CAPITAL RATIO Year Ended 1994 1995 1996* 9.04% 8.78% 8.00%
Year Ended
NET REVENUE* ($ in Millions) Year Ended 1994 1995 1996* $59,077 $66,337 $72,809
*Net interest and dividend income plus other income, exclusive of pension settlement gain in 1996 [GRAPHIC] - - EXPANDED DEPOSIT FRANCHISE: Over the past three years, the Company has significantly strengthened and expanded its deposit franchise into markets that offer greater opportunities for growth. De novo Branch--Gilford, NH (Central NH) 12/01/94 Acquisition--Orange Savings Bank (North Central MA) 04/28/95 De novo Branch--Manchester, NH (Southern NH) 06/30/95 Acquisition--The Safety Fund Corporation (Central MA) 07/01/96 Acquisition--Milford Co/operative Bank (South Central NH) 07/01/96 De novo Branch--Laconia, NH (Central NH) 10/01/96
- - IMPROVED EFFICIENCY: The consummation of three acquisitions within three years has afforded the Company the opportunity to reduce overhead and improve key efficiency ratios through the consolidation of operations and the elimination of duplicative administrative overhead. The Company has successfully grown its balance sheet by leveraging its employee and financial resources, thereby maintaining a constant level of operating costs. - - BALANCED RISKS: The Company has grown its balance sheet while monitoring overall credit and interest rate risk through a disciplined approach to managing the Company's asset quality and asset/liability position. BUSINESS STRATEGY As a public company, the principal objective of the Company is to improve shareholder value through enhancing profitability by growing and diversifying revenue streams. Since 1993, the Company has made significant strides in achieving the above objective. The successful leverage of the Company's capital and generation of higher shareholder returns has been consistently achieved through the expansion and strengthening of the Company's lines of business and a strong dividend. A brief summary of the Company's key lines of business are as follows: MORTGAGE BANKING CFX Corporation operates a mortgage banking subsidiary, CFX Mortgage, Inc., which originates residential housing loans to be held in portfolio by the Company's banking subsidiaries, as well as loans for sale to secondary market investors. Residential loans are originated through various channels, including the subsidiary banks' branch networks and through loan production offices. In addition, CFX Mortgage originates approximately half of its loan volumes through a correspondent network of community banks, mortgage bankers, and mortgage brokers throughout New Hampshire, Massachusetts, Maine, and Vermont. 7 - -------------------------- CONDENSED FINANCIAL REVIEW - --------------------------
DIVIDENDS DECLARED PER SHARE Year Ended 1994 1995 1996 .31 .50 .55
CORE DEPOSITS* ($ in Millions) Year Ended 1994 1995 1996 $999,118 $1,036,158 $1,087,447
*Excludes Brokered Deposits
TOTAL LOANS AND LEASES ($ in Millions) Year Ended 1994 1995 1996 $842,756 $927,430 $1,118,164
[GRAPHIC] Loans originated by CFX Mortgage in 1996 totalled $300 million of which $179 million were sold to one of the Company's banking affiliates, contributing to the 1996 increase in the Company's residential and construction real estate portfolio of $125 million or 21%. At year-end, CFX Mortgage serviced over $1.3 billion in mortgage loans, including the subsidiary banks' mortgage portfolios which totaled $721 million. RETAIL BANKING CFX Corporation gathers deposits to meet its various funding requirements through the banking subsidiaries' branch networks and, to a lesser degree, through the purchase of brokered deposits from around the country. During the year, core deposits (excluding brokered deposits) increased by $51 million or 5%. Total core deposits at year-end were $1.1 billion. Consumer loans, both collateralized and unsecured, are also originated through the subsidiary banks' branch networks. Additionally, consumer loans and leases are originated through an extensive, state-wide (New Hampshire) merchant referral and dealer network which provide financing for a multitude of consumer purchases. Expectations are to expand these same networks throughout Worcester County in Massachusetts. During the year, consumer loans outstanding increased by $43 million or 58%. Total outstandings at year-end were $115 million. COMMERCIAL BANKING The Company's commercial banking division provides a complete line of deposit, loan and fee-based products to small and medium-sized businesses in the New Hampshire and Massachusetts market areas. The operating philosophy is to develop close relationships with commercial customers, provide them with unparalleled customer service and ensure a commitment to local decision-making. The recent acquisition of Safety Fund National Bank has greatly increased both the geographic coverage and the number of commercial customers. As a larger, more geographically diverse company, the subsidiary banks offer a more competitive and sophisticated product line including a full range of cash management services and an expanded small business lending program. These products, combined with an active sales program, will contribute to the Company's loan and deposit growth and generate fee income. During the year, commercial and commercial real estate loans increased by $23 million or 9%. At the end of 1996, our commercial loan portfolio exceeded $280 million and the credit quality of our portfolio remained strong. 8 - -------------------------- CONDENSED FINANCIAL REVIEW - --------------------------
NET INTEREST MARGIN Year Ended 1994 1995 1996* 4.27% 4.36% 4.24%
[GRAPHIC] INVESTMENT AND TRUST SEVICES With the acquisition of Safety Fund National Bank, the Company gained an Investment and Trust Services Division with a long history of solid performance. A comprehensive array of investment and trust products and services now complement our traditional product offerings. The emphasis of the Investment and Trust Services Division is focused on the investor as much as on the investments. We employ a disciplined investment process, assisted by state-of-the-art technology and our combined years of experience in the trust and investment industry, to yield superior investment performance. We offer investment management and financial planning for individuals, corporations, municipalities and non-profit organizations. We are a leading provider of investment management and administrative services to funeral homes for pre-need funeral trusts. Strong new business growth and excellent investment performance contributed to an outstanding year for the Investment and Trust Services Division. In 1996, the proprietary "Equity Buy List", a model portfolio of equity selection, outperformed the S&P 500 Stock Index. With trust assets approaching $400 million, continued growth is anticipated in 1997 as the Company expands into new markets throughout New Hampshire and Massachusetts. EQUIPMENT LEASE FUNDING A unique concept within the banking industry, CFX Funding facilitates the funding, accumulation, sale and servicing of small-ticket leases originated by participating lessors and provides the structural enhancements and administrative coordination needed to create attractive products for the capital markets. CFX Funding arranges short-term warehouse lines of credit with CFX Bank based on the credit of the participating leasing company. The warehouse lines of credit enable the Program participants to originate leases for portfolio sale or securitization. During the year, lease receivables serviced by CFX Funding increased by $48 million or 96%. At year-end, total lease receivables serviced amounted to approximately $98 million. 9 - -------------------------- CONDENSED FINANCIAL REVIEW - -------------------------- [GRAPHIC] SHAREHOLDER VALUE The Company's corporate culture is focused on maximizing shareholder value. The accompanying graph displays the Company common stock, the broad-based Standard & Poor's (S&P) 500 Index, and Keefe, Bruyette & Woods' (KBW) New England Bank Index. The total return as shown on this graph is measured using both stock price appreciation and the effect of continuous reinvestment of dividend payments. The graph indicates that an initial $100 investment in the Company common stock on December 31, 1991 would be worth $410 on December 31, 1996, provided that all quarterly dividends were reinvested in the Company common stock. This increase in value is equivalent to a compound annual return of 32.6% over those five years for an investment in the Company common stock, compared to 15.2% for the S&P 500 Index and 38.5% for the KBW New England Bank Index. CFX CORPORATION (CFX) VS. THE FIVE YEAR TOTAL RETURN FOR THE KBW NEW ENGLAND BANK INDEX AND S&P 500 INDEX [GRAPH] 10 - -------------------------------------------------------------------------------- FINANCIAL CONTENTS - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS......................................................... 10 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets................................................................ 25 Consolidated Statements of Income.......................................................... 26 Consolidated Statements of Shareholders' Equity............................................ 27 Consolidated Statements of Cash Flows...................................................... 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Significant Accounting Policies......................................................... 29 B. Mergers and Acquisitions................................................................ 34 C. Restrictions on Cash and Due From Bank Accounts......................................... 35 D. Investment Securities................................................................... 35 E. Loans and Leases........................................................................ 38 F. Allowance for Loan and Lease Losses..................................................... 39 G. Premises and Equipment.................................................................. 39 H. Foreclosed Real Estate.................................................................. 39 I. Deposits................................................................................ 40 J. Short-Term Borrowed Funds............................................................... 41 K. Advances from Federal Home Loan Bank of Boston.......................................... 41 L. Preferred Stock......................................................................... 42 M. Income Taxes............................................................................ 42 N. Pension and 401(k) Plans................................................................ 44 O. Stock Compensation Plans................................................................ 46 P. Commitments and Contingencies........................................................... 47 Q. Related Party Transactions.............................................................. 48 R. Derivative Financial Instruments........................................................ 48 S. Financial Instruments with Off-Balance-Sheet Lending Risk............................... 50 T. Fair Value of Financial Instruments..................................................... 51 U. Regulatory Capital Requirements and Other Restrictions.................................. 53 V. Mortgage Loan Servicing................................................................. 54 W. Subsequent Events....................................................................... 54 X. CFX Corporation (Parent-Company-Only) Condensed Financial Statements.......................................................... 55 Y. Quarterly Results of Operations (Unaudited)............................................. 57 REPORT OF MANAGEMENT--ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING................ 58 REPORTS OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS......................................59 & 60 DIRECTORS AND OFFICERS OF CFX CORPORATION..................................................... 61 TRUSTEES AND BANKING PARTNERS OF CFX BANK..................................................... 61 DIRECTORS OF CFX FINANCIAL SERVICES, INC...................................................... 61 MANAGEMENT OF CFX FUNDING L.L.C............................................................... 61 DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC.................................. 62 DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK.................................... 62 DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK......................................... 62 INFORMATION ON COMMON STOCK................................................................... 63 CORPORATE INFORMATION......................................................................... 64
9 11 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- All information within this section should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report and the tables appearing throughout the discussion and analysis. All references in the discussion to financial condition and to results of operations are to the consolidated position and results of CFX Corporation and its subsidiaries (the Company) taken as a whole. CFX Corporation is a bank holding company incorporated under the laws of the State of New Hampshire. Diversified financial services are provided to customers through its three wholly-owned subsidiaries: CFX Bank, headquartered in Keene, New Hampshire, Safety Fund National Bank, headquartered in Fitchburg, Massachusetts, and Orange Savings Bank (Orange), headquartered in Orange, Massachusetts. CFX Bank has two wholly-owned subsidiaries: CFX Capital Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX Financial). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. (CFX Mortgage) which engages in mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C. (CFX Funding), which engages in the facilitation of lease financing and securitization. Services provided to our customer base by these subsidiaries include traditional depository banking services, retail and commercial banking, and investment and trust services. CFX Mortgage, Inc. offers a full complement of mortgage products to our customers, as well as purchases approximately one-half of its total originations through a correspondent network located throughout northern New England. CFX Funding, through its national small-ticket lease financing program, facilitates the funding, accumulation, sale and servicing of the small-ticket leases originated by participating lessors and provides the structure, credit enhancements, and administrative coordination needed to create attractive investments for the capital markets. Both CFX Mortgage and CFX Funding have been instrumental in the growth, both in total assets and profitability, and the diversity of the Company. CFX Corporation has grown profitably over the past several years by leveraging its capital and through a series of strategic acquisitions. This activity has strengthened the franchise and assisted in the transition from a traditional thrift institution to a full-service bank. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earnings assets, primarily loans, leases, and investment securities, and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. Also affecting the Company's operations are the levels of the provision for loan and lease losses; the level of other operating income consisting of deposit fees, trust and investment fees, gains and losses on the sale of investment securities, mortgage banking activities and leasing activities; the level of operating expenses; and income taxes. - -------------------------------------------------------------------------------- ACQUISITIONS - -------------------------------------------------------------------------------- On July 1, 1996, the Company acquired The Safety Fund Corporation, and its subsidiary bank, Safety Fund National Bank (Safety Fund), a commercial bank with total assets of $308 million headquartered in Fitchburg, Massachusetts. In connection with the merger of Safety Fund, the Company issued 2,973,000 shares of its common stock in exchange for all of the outstanding shares of Safety Fund common stock. Under the terms of the agreement, Safety Fund shareholders received 1.785 shares of CFX Corporation common stock for each share of Safety Fund common stock they owned. The transaction was accounted for as a pooling-of-interests and as such, the Consolidated Financial Statements have been restated to include Safety Fund for all periods presented. The acquisition of Safety Fund provided an expanded penetration of the Company into commercial business services. In addition, Safety Fund provided the foothold into trust and investment services for the Company. Safety Fund has trust assets totaling approximately $370 million. Also on July 1, 1996, the Company acquired the Milford Co/operative Bank (Milford), a state-chartered co/operative bank located in Milford, New Hampshire with total assets of $160 million. In connection with the merger of Milford, the Company issued 1,914,000 shares of its common stock in exchange for all of the outstanding shares of Milford common stock. Under the terms of the agreement, Milford shareholders received 2.777 shares of CFX Corporation common stock for each share of their Milford common stock. The transaction was accounted for as a pooling-of-interests and as such, the Consolidated Financial Statements have been restated to include Milford for all periods presented. In conjunction with the acquisition, the Company merged Milford into its CFX Bank subsidiary as of the acquisition date. The Milford acquisition serves to connect existing branch facilities in western and central New Hampshire without creating any market overlap. In connection with the mergers, the Company incurred merger-related expenses totaling $4,552,000 (pre-tax). These expenses are described in detail in the "Other Expense" section of this Management's Discussion and Analysis. On February 13, 1997 and on March 24, 1997, respectively, the Company entered into separate definitive agreements for the acquisitions of Portsmouth Bank Shares, Inc. (Portsmouth) headquartered in Portsmouth, New hampshire and Community Bankshares, Inc. (Community), headquartered in Concord, New Hampshire. As a result of these acquisitions, which are anticipated to be accounted for by the pooling-of-interests method of accounting, the Company anticipates that it will take charges to earnings in 1997 of approximately $7.7 million on an after-tax basis for one-time costs of the transactions. It is intended that substantially all of the costs will be recognized 10 12 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- upon consummation of the acquisitions and will be paid in 1997 and/or 1998. The one-time after-tax charges of the transactions pertain to the following areas: data processing $1,400,000; personnel, $1,398,000; and other, $4,902,000. Data processing costs consist primarily of write-offs due to duplication of computer hardware, software, telecommunications equipment, and certain conversion related expenses. Personnel costs consist primarily of charges related to employee severance and employment outplacement assistance. Other costs include investment banking fees, legal and accounting fees, due diligence costs, proxy registration/filing fees and mailing costs. A significant portion of other costs are capitalized for tax purposes and, therefore, are not tax deductible. CFX management continues to review all these costs. There can be no assurance that such costs will not exceed the amounts described above. Pursuant to the definitive agreement for Portsmouth, each outstanding share of Portsmouth common stock will be converted to .95 share of CFX Corporation common stock. If the average price of CFX Corporation common stock for the ten trading days preceeding the last regulatory approval required for the transaction is below $15.70, the exchange ratio becomes 1.05 shares, and the exchange ratio floats between .95 and 1.05 shares if the average price of CFX Corporation common stock is between $17.375 and $15.70. Portsmouth may terminate the agreement if the average price of CFX Corporation common stock is below $14.20 per share unless the Company agrees to increase the exchange ratio. In the event that, prior to the closing, the outstanding shares of the Company's common stock or Portsmouth's common stock shall have been increased due to a stock dividend declared on the respective stock with a record date prior to the closing, then an appropriate and apportionate adjustment shall be made in the number of shares exchanged. See "Capital Resources" of this "Management's Discussion and Analysis" for further discussion of leverage strategies for the Portsmouth transaction. Pursuant to the definitive agreement for Community, each outstanding share of Community common stock will be converted to 2.20 shares of CFX common stock. If the average price of CFX common stock for the fifteen days preceding the closing date is between $18.18 and $20.00, the exchange ratio floats between 2.20 and 2.00 shares. Community may terminate the agreement if the average price of CFX common stock is below $13.50 per share unless the Company agrees to increase the exchange ratio. - -------------------------------------------------------------------------------- FINANCIAL CONDITION--LOANS AND LEASES - -------------------------------------------------------------------------------- The table below sets forth the composition of the Company's loan and lease portfolio at the dates indicated. Loan categories are presented net of unearned income and net deferred origination costs.
-------------------------------------------------------------------------------------------------- December 31 (Dollars in thousands) 1996 1995 -------------------------------------------------------------------------------------------------- % OF % OF BALANCES PORTFOLIO BALANCES PORTFOLIO -------------------------------------------------------------------------------------------------- Real estate: Residential $ 712,980 63.76% $586,489 63.24% Construction 8,101 .72 9,190 .99 Commercial 142,989 12.79 141,618 15.27 Commercial, financial, and agricultural 120,380 10.77 104,412 11.26 Warehouse lines of credit to leasing companies 18,393 1.64 12,906 1.39 Consumer lease financing 67,146 6.01 24,399 2.63 Other consumer 48,175 4.31 48,416 5.22 ---------- ------- -------- ------- Total loans and leases 1,118,164 100.00% 927,430 100.00% ======= ======= Less: Allowance for loan and lease losses 15,740 15,449 ---------- -------- Net loans $1,102,424 $911,981 ========== ========
Net loans and leases were $1,102,424,000 or 71% of total assets, at December 31, 1996, compared with $911,981,000, or 68% of total assets, at December 31, 1995. Total loans and leases have increased by $190,734,000 primarily due to a $126,491,000 increase in residential real estate loans, a $42,747,000 increase in consumer lease financing, and a $15,968,000 increase in commercial business loans. Residential loan production is primarily generated by a combination of originations and purchases by the Company's mortgage banking affiliate, CFX Mortgage. Residential loans are originated using standards established by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) allowing CFX Mortgage to sell to the secondary market those loans which are not desired by the Company's banking subsidiaries. During 1996, lower interest rates spawned higher refinancing activity generating significant volume for CFX Mortgage. These lower rates, coupled with an improving economy, allowed CFX Mortgage to originate and purchase $300 million in residential loans during the year, compared to $133 million in 1995. Of the $300 million loan production, a total of $179 million was sold to the Company's subsidiary banks for portfolio. The growth in the consumer lease portfolio is the result of a maturing lease program targeted toward automobile dealerships throughout New Hampshire and central Massachusetts. This program began in December 1994 and continues to grow as consumers choose leasing as an acceptable alternative to purchasing. Commercial lending continues to grow, but at a slower rate as compared to the other two portfolios. Strong lending volumes remain in the warehouse lines of credit to leasing companies participating in CFX Funding's lease financing and securitization programs. During 1996, the average balance of these warehouse lines of credit totaled $14,752,000. During 1996, CFX Funding facilitated lease portfolio securitizations totaling approximately $55,814,000, and sold lease portfolios totaling approximately $16,430,000. 11 13 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- ---------------------------------------------------------- RISK ELEMENTS ---------------------------------------------------------- The Company operates principally in New Hampshire and central Massachusetts. Through acquisitions of banking franchises in new marketplaces, the opening of de novo branches in geographically dispersed markets, the purchase and origination of mortgages and leases throughout northern New England, and with the introduction of CFX Funding's national lease financing program, the Company has diversified its credit risk in terms of both loan type and geographic concentrations. The majority of the Company's assets still remain in residential real estate loans as this portfolio comprises 46% of all assets as of December 31, 1996, compared with 44% a year ago. Asset quality remains strong as nonperforming loans and leases were .74% of total loans and leases at December 31, 1996, compared to 1.09% a year earlier. All loans and leases past due 90 days or more as to principal or interest are generally placed on nonaccrual status. In addition, a loan (including a loan impaired under Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS No. 114) defined below) is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. Prior to 1996, certain loans past due 90 days or more originated by Safety Fund National Bank, remained on accrual status if, in management's judgment, they were fully secured and in the process of collection. The following table provides information with respect to the Company's nonperforming loans and assets at the dates indicated:
----------------------------------------------------------------------------------------------- December 31 (Dollars in thousands) 1996 1995 ----------------------------------------------------------------------------------------------- Loans 90 days or more past due, still accruing $ - $ 235 Nonaccrual loans 8,299 9,840 ------- ------- Total nonperforming loans 8,299 10,075 Foreclosed real estate 2,233 1,236 Valuation allowance on foreclosed real estate (10) (50) ------- ------- Total nonperforming assets $10,522 $11,261 ======= ======= Nonperforming loans as a percent of total loans and leases .74% 1.09% ======= ======= Nonperforming assets as a percent of total loans and leases and foreclosed real estate .94% 1.21% ======= =======
The following table provides the composition of the Company's nonperforming loans and assets at the dates indicated:
----------------------------------------------------------------------------------------------- December 31 (Dollars in thousands) 1996 1995 ----------------------------------------------------------------------------------------------- % of % of BALANCES TOTAL BALANCES TOTAL ----------------------------------------------------------------------------------------------- Nonperforming loans: Real estate: Residential $ 5,986 72.13% $ 6,218 61.72% Commercial 1,146 13.81 1,710 16.97 Commercial, financial, and agricultural 1,021 12.30 2,039 20.24 Consumer and other 146 1.76 108 1.07 ------- ------- -------- ------ 8,299 100.00% 10,075 100.00% ------- ======= -------- ======= Foreclosed real estate: Residential 1,383 62.21% 735 61.97% Construction 428 19.25 128 10.79 Commercial 422 18.98 373 31.45 Valuation allowance (10) (.44) (50) (4.21) ------- ------- -------- ------- 2,223 100.00% 1,186 100.00% ------- ======= -------- ======= Total nonperforming assets $10,522 $ 11,261 ======= ========
12 14 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following table provides a rollforward of the Company's foreclosed real estate at the dates indicated:
------------------------------------------------------------------------ December 31 (In thousands) 1996 1995 ------------------------------------------------------------------------ Balance at beginning of year, net $ 1,186 $ 2,599 Reclassification to nonperforming loans to reflect adoption of SFAS No. 114 (See Note A to "Notes to Consolidated Financial Statements") - (665) Additions 2,870 3,053 Pay-offs/sales/other (1,833) (3,801) -------- ------- Balance at end of year, net $ 2,223 $ 1,186 ======== =======
-------------------------------------------------------- ALLOWANCE FOR LOAN AND LEASE LOSSES -------------------------------------------------------- The allowance for loan and lease losses is maintained through charges to earnings. Loan and lease losses realized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loan and lease losses based on current economic conditions and historical experience. Changes in the allowance for loan and lease losses are as follows:
Year Ended December 31 (Dollars in thousands) 1996 1995 1994 Balance at beginning of year $15,449 $14,401 $16,168 Provision for loan and lease losses 2,935 3,037 2,697 Loans and leases charged-off (3,301) (2,934) (5,467) Recoveries of loans and leases previously charged-off 657 945 1,003 ------ ------ ------ Balance at end of year $15,740 $15,449 $14,401 ====== ====== ====== Allowance for loan and lease losses as a percent of total loans and leases 1.41% 1.67% 1.71% ====== ====== ====== Allowance for loan and lease losses as a percent of total nonperforming loans 189.66% 153.34% 129.20% ====== ====== ======
Management considers the allowance for loan and lease losses to be adequate in view of its evaluation of the Company's loan and lease portfolio, the level of nonperforming loans and leases, current economic conditions and historical experience with loan and lease losses. 13 15 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- --------------------------------------------------------- TRADING SECURITIES AND INVESTMENT SECURITIES --------------------------------------------------------- Investment securities consist of the following at the dates indicated:
------------------------------------------------------------ December 31 (In thousands) 1996 1995 ------------------------------------------------------------ Securities available for sale $245,324 $201,246 Securities held to maturity 32,670 97,093 -------- -------- Total $277,994 $298,339 ======== ========
As a result of the Company's acquisition of Safety Fund and Milford on July 1, 1996, and to be consistent with the Company's current interest rate risk profile, certain securities held to maturity were transferred to securities available for sale. The table below describes those securities and the net unrealized losses associated with such securities which were transferred to securities available for sale from securities held to maturity as a result of the 1996 acquisitions:
------------------------------------------------------------------------------------- Net Unrealized (In thousands) Amortized Cost Losses ------------------------------------------------------------------------------------- U.S. Treasury and agency obligations $54,581 $ 2,036 Federal agency mortgage pass-through securities 22,268 486 ------- ------- $76,849 $ 2,522 ======= =======
During 1996 and 1995, the Company had assets in its trading portfolio. Trading securities primarily related to investments in money market mutual funds that generated capital gains to offset capital loss carryforwards. The average balances in the trading portfolio for 1996 and 1995 were $15,220,000 and $19,636,000, respectively. 14 16 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- DEPOSITS AND BORROWED FUNDS --------------------------------------------------------- The following table shows the various components of average deposits and borrowed funds and the respective rates paid for the periods indicated:
----------------------------------------------------------------------------------------------- Year Ended December 31 (Dollars in thousands) 1996 1995 ----------------------------------------------------------------------------------------------- AMOUNT RATES AMOUNT RATES ----------------------------------------------------------------------------------------------- Deposits: Noninterest bearing demand deposits $ 131,008 -% $ 119,021 -% Regular savings deposits 169,648 2.69 164,944 2.81 NOW and money market deposits 279,353 2.14 300,905 2.37 Time deposits 477,556 5.55 438,463 5.43 ---------- ---------- Total retail deposits 1,057,565 3.50 1,023,333 3.73 Brokered time deposits 64,389 5.73 27,562 6.30 ---------- ---------- Total deposits $1,121,954 3.63% $1,050,895 3.55% ========== ==== ========== ==== Borrowed Funds: Advances from Federal Home Loan Bank of Boston $ 131,913 5.67% $ 75,508 6.28% Other borrowed funds 72,135 4.64 45,678 5.13 ---------- ---------- Total borrowed funds $ 204,048 5.31% $ 121,186 5.84% ========== ==== ========== ====
During 1996, the Company increased average demand deposits by $11,987,000 and average interest bearing retail deposits by $22,245,000. The majority of the increase in overall retail deposits is the result of two de-novo New Hampshire branches opened in Gilford (December 1994) and Manchester (June 1995). In addition, as a result of fixed rate deposits (time deposits) becoming more attractive to our customers, the Company has experienced a shift in deposits from shorter-term variable rate deposits (NOW and money market accounts) to longer-term fixed rate deposits. The increase in Federal Home Loan Bank of Boston advances, brokered deposits and other borrowings funded asset growth. Management customarily directs movement of funding between brokered deposits, advances from the Federal Home Loan Bank and repurchase agreements (included in other borrowed funds) in order to achieve a more favorable cost of funds. 15 17 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS--GENERAL - -------------------------------------------------------------------------------- CFX Corporation (the Company) reported net income of $12,641,000, or $.99 per share, compared to earnings of $11,249,000, or $.89 per share, for the prior year. Return on assets and return on equity were .86% and 9.58%, respectively, for 1996 compared to .86% and 9.08%, respectively, for 1995. Excluding charges for mergers and other adjustments, earnings and earnings per share were $16,248,000 and $1.27 per share, respectively, in 1996 representing an increase of $4,999,000, or 44% over prior year earnings. Return on assets and return on equity in 1996 were 1.10% and 12.31%, respectively, excluding merger charges and special adjustments. During 1996, the Company incurred charges associated with the mergers of Safety Fund and Milford totaling $3,722,000 (after tax). Other adjustments included a special assessment related to the recapitalization of the Savings Association Insurance fund (SAIF) of $424,000 (after tax) and a gain of $539,000 (after tax) related to the termination of the Company's previous pension plans in order to transfer the assets and liabilities to a multi-employer pension plan. The increase in earnings was primarily due to increased net interest and dividend income and higher noninterest income, while maintaining noninterest expenses at 1995 levels. The increased net interest and dividend income was primarily due to leveraging the Company's balance sheet with loans and leases which increased $191 million, or 20.57% over the past twelve months. The increase in noninterest income of $2,516,000 in 1996 over that in 1995 primarily came from mortgage banking and leasing activities. Also included in this increase was the pension settlement gain of $877,000 discussed earlier. Noninterest expense for 1996 totaled $51,370,000 and was $46,157,000 excluding merger-related charges and the one-time SAIF assessment charge. Despite the growth in core earnings (net interest and dividend income and other income), the noninterest expenses in 1996, excluding special charges, compared favorably to those in 1995 which totaled $46,202,000. The 1996 expenses were contained due to efficiencies gained from the 1996 mergers in the back-room operations of the Company, eliminations of various professional fees resulting from the mergers, and the reduction of the FDIC insurance premiums at two of the Company's banking subsidiaries. - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1996 AND 1995--NET INTEREST AND DIVIDEND INCOME - -------------------------------------------------------------------------------- Taxable-equivalent net interest and dividend income was $57,721,000 in 1996, up 9% from $52,950,000 in 1995. The $4,771,000 increase in net interest and dividend income was due to an increase in average interest earning assets in 1996, offset by a decline in the Company's interest rate spread from 3.80% in 1995 to 3.71% in 1996. The increase in average interest earning assets resulted primarily from an increase in loans and leases. See "Financial Condition--Loans and Leases" of this "Management's Discussion and Analysis." The interest rate spread in 1996 decreased nine basis points to 3.71% compared to 3.80% for 1995, primarily due to the increase in costs of interest bearing liabilities outpacing the increase in yields on interest earning assets, indicating an increasingly competitive market for retail deposits. See "Other Income" section for a discussion of the impact of bank-owned life insurance on the net interest margin. Most of the interest earning assets were funded by higher cost products such as certificates of deposit or borrowings. The cost of time deposits increased from 5.48% in 1995 to 5.57% in 1996. The Company continues to see a shift in its deposit mix from lower variable rate deposits (NOW and money market accounts) to the higher rate time deposits. The dollar effect of the decline in net interest spread was partially offset by an increase in demand deposits in 1996 compared to 1995. 16 18 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following table sets forth comparisons of average interest earning assets and interest bearing liabilities, and interest income and interest expense expressed as a percentage of the related asset or liability. In order to reflect the economic impact of the Company's tax-exempt loans and investments in state and municipal securities and to present data on a comparative basis, the income from and yields on these loans and securities have been restated to a taxable-equivalent basis (using a 34.00% and 38.62% tax rate, respectively). The taxable-equivalent income adjustments for loans and leases are $346,000, $294,000, and $211,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The taxable-equivalent income adjustments for investment securities are $516,000, $630,000, and $533,000 for the years ended December 31, 1996, 1995, and 1994, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
- --------------------------------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- INTEREST Interest AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average (Dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance - --------------------------------------------------------------------------------------------------------------------------- Assets Interest and dividend earning assets: Loans and leases (1) $1,016,088 $87,743 8.64% $ 871,620 $76,176 8.74% $ 784,113 Tax-exempt loans and leases (2) 8,925 1,019 11.42 7,332 865 11.80 6,441 Taxable securities (3) 303,307 18,565 6.12 286,907 17,420 6.07 298,840 Tax-exempt securities (4) 18,054 1,337 7.41 22,605 1,632 7.22 21,365 Other 13,922 623 4.47 26,412 1,220 4.62 29,921 ---------- ------- ---------- ------- ---------- Total interest earning assets 1,360,296 109,287 8.03 1,214,876 97,313 8.01 1,140,680 ------- ------- Noninterest earning assets 115,564 96,579 115,580 ---------- ---------- ---------- Total $1,475,860 $1,311,455 $1,256,260 ========== ========== ========== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits $ 449,001 10,539 2.35 $ 465,849 11,745 2.52 $ 512,109 Time deposits 541,945 30,201 5.57 466,025 25,534 5.48 359,619 Advances from Federal Home Loan Bank of Boston 131,913 7,476 5.67 75,508 4,740 6.28 97,960 Other borrowed funds 72,135 3,350 4.64 45,678 2,344 5.13 27,392 --------- ------- ---------- ------- ---------- Total interest bearing liabilities 1,194,994 51,566 4.32 1,053,060 44,363 4.21 997,080 ------- ------- Noninterest bearing liabilities: Demand deposits 131,008 119,021 102,152 Other 17,884 15,496 39,510 Shareholders' equity 131,974 123,878 117,518 ---------- ---------- ---------- Total $1,475,860 $1,311,455 $1,256,260 ========== ========== ========== Net interest and dividend income $57,721 $52,950 ======= ======= Interest rate spread 3.71% 3.80% Net interest margin 4.24% 4.36%
- ------------------------------------------------------------ Year Ended December 31 1994 - ------------------------------------------------------------ Interest Income/ Yield/ (Dollars in thousands) Expense Rate - ------------------------------------------------------------ Assets Interest and dividend earning assets: Loans and leases (1) $62,136 7.92% Tax-exempt loans and leases (2) 621 9.64 Taxable securities (3) 17,178 5.75 Tax-exempt securities (4) 1,380 6.46 Other 1,066 3.56 ------- Total interest earning assets 82,381 7.22 ------- Noninterest earning assets Total Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits 12,400 2.42 Time deposits 15,722 4.37 Advances from Federal Home Loan Bank of Boston 4,529 4.62 Other borrowed funds 988 3.61 ------- Total interest bearing liabilities 33,639 3.37 ------- Noninterest bearing liabilities: Demand deposits Other Shareholders' equity Total Net interest and dividend income $48,742 ======= Interest rate spread 3.85% Net interest margin 4.27%
(1) For the purpose of these computations, nonaccrual loans and mortgage loans held for sale are included in loans. (2) Tax-exempt loans are included within loans and leases. (3) Taxable securities include trading securities and investment securities. (4) Tax-exempt securities are included within investment securities. 17 19 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following table presents changes in interest and dividend income, interest expense, and net interest and dividend income which are attributable to changes in the average amounts of interest earning assets and interest bearing liabilities and/or changes in rates earned or paid thereon. The net changes attributable to both volume and rate have been allocated proportionately.
---------------------------------------------------------------------------------------------- (In thousands) 1996 vs 1995 1995 vs 1994 ---------------------------------------------------------------------------------------------- INCREASE (DECREASE) DUE TO Increase (Decrease) Due to ---------------------------------------------------------------------------------------------- VOLUME RATE NET Volume Rate Net ---------------------------------------------------------------------------------------------- Interest and dividends earned on: Loans and leases $12,648 $(1,081) $11,567 $ 7,284 $ 6,756 $14,040 Tax-exempt loans and leases 185 (31) 154 93 151 244 Taxable securities 1,045 100 1,145 (700) 942 242 Tax-exempt securities (333) 38 (295) 83 169 252 Other (556) (41) (597) (136) 290 154 Total interest and ------- ------- ------- ------- ------- ------- dividend income 12,989 (1,015) 11,974 6,624 8,308 14,932 ------- ------- ------- ------- ------- ------- Interest paid on: Savings deposits (411) (795) (1,206) (1,155) 500 (655) Time deposits 4,307 360 4,667 5,280 4,532 9,812 FHLB advances 3,250 (514) 2,736 (1,188) 1,399 211 Other borrowings 1,253 (247) 1,006 832 524 1,356 ------- ------- ------- ------- ------- ------- Total interest expense 8,399 (1,196) 7,203 3,769 6,955 10,724 ------- ------- ------- ------- ------- ------- Change in net interest and dividend income $ 4,590 $ 181 $ 4,771 $ 2,855 $ 1,353 $ 4,208 ======= ======= ======= ======= ======= =======
--------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES --------------------------------------------------------- The allowance for loan and lease losses is maintained primarily through charges to earnings. Loan and lease losses realized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loans and leases based on current economic conditions and historical experience. The provision for loan and lease losses in 1996 was $2,935,000, compared to $3,037,000 in 1995. Total net charge-offs amounted to $2,644,000 for 1996, compared to $1,989,000 for 1995. The increase in net charge offs in 1996 as compared to 1995 was primarily due to our increase in gross charge-offs of $367,000 and a decrease in recoveries of 288,000. The increase in gross charge-offs was primarily in the residential loan portfolio and is attributable to the higher volume of loans in this category. At December 31, 1996, nonperforming loans stood at $8,299,000, or .74% of total loans and leases, compared to $10,075,000, or 1.09% of total loans and leases, as of December 31, 1995. The allowance for loan and lease losses as a percentage of nonperforming loans as of December 31, 1996 and December 31, 1995 amounted to 189.66% and 153.34%, respectively. Despite the improvements in asset quality, the provision for loan and lease losses remained consistent with the prior year due to the growth in the loan and lease portfolio. 18 20 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- OTHER INCOME --------------------------------------------------------- Other income totaled $16,827,000 for 1996, up $2,516,000, or nearly 18%, when compared to $14,311,000 for 1995. Excluding the pension settlement gain of $877,000 recognized in 1996, year-over-year increases in noninterest income totaled $1,639,000, or 11%. Although service charges on deposit accounts and trust fees were up 7% and 5%, respectively, the significant increases came in the areas of mortgage banking services, leasing activities and income earned on an investment in bank-owned life insurance. Mortgage banking income includes net gains on sales of loans which totaled $1,383,000 in 1996 compared to $648,000 in 1995, a 113% increase in income. This is primarily due to the higher level of mortgage production in 1996 where a total of $300 million of loans were originated and purchased compared to $133 million in 1995. The increase in production resulted from a more favorable interest rate environment as well as a larger correspondent network. A portion ($256,000) of the net gains on sales of loans came from a sale of performing residential loans totaling approximately $12 million from one of the Company's banking subsidiaries to an independent financial institution. Total net loan servicing fees in 1996 nearly kept pace with 1995 totals despite higher amortization of mortgage servicing rights resulting from a high level of refinancing activity. Income generated from leasing activities totaled $2,487,000 in 1996, up $520,000, or 26%, from 1995 levels. The increase is due to more lease securitizations in 1996 than in 1995, and an increase in servicing income as a result of a larger servicing base. The pension settlement gain of $877,000 resulted when the Company terminated certain pension plans and transferred the plans' assets and liabilities to a multi-employer benefit plan. See Note N - "Pension and 401(k) Plans" of the Notes to Consolidated Financial Statements for more detail on this transaction. Included in other noninterest income is $975,000 of income resulting from the Company's investment in bank-owned life insurance (BOLI). During 1996, the Company invested $30 million in bank-owned life insurance to help finance the cost of certain employee benefit plan expenses. The BOLI investment is accomplished through the purchase of life insurance on the lives of certain employees through two insurance companies with a Standard & Poors rating of AA+ or better. The Company, not the employee or family, is the beneficiary of the insurance policies. The first source of income is from the growth of the cash value of the policy. The cash value increases each year as interest (rate is guaranteed each year and changes annually to reflect market rates) is added by the insurance company. The second source of income comes from the insurance proceeds paid to the bank upon the death of an employee. The payment of the insurance proceeds and the earnings from the cash value are income tax free (unless the policy is surrendered). The Company finances the cost of the premium payment with wholesale funding (i.e. Federal Home Loan Bank borrowings). While the earnings from the investment are captured in other income as the cash surrender value increases, the net interest margin is negatively impacted as a result of funding the investment with wholesale borrowings. --------------------------------------------------------- OTHER EXPENSE --------------------------------------------------------- Noninterest expenses for 1996 totaled $51,370,000, compared to $46,202,000 for 1995. Included in the 1996 totals are merger-related charges incurred with the acquisitions of Safety Fund and Milford for $4,522,000 and a one-time SAIF special assessment of $691,000. Excluding these charges, total noninterest expenses decreased by $45,000 in 1996 compared to 1995. Salaries and employee benefits increased 3% in 1996 due to increases in wage rates, additional hires to staff new initiatives, and a full year of salary expense for a branch which was opened in June 1995, partially offset by employee reductions resulting from efficiencies gained from the mergers. Similarly, professional fees are down 19% from the prior year as a result of the mergers and the elimination of certain services required as separate institutions. The insurance premiums assessed by the Federal Deposit Insurance Corporation (FDIC) were $377,000 in 1996, down $1,006,000 from $1,383,000 in 1995. Effective June 1, 1995, the FDIC's Bank Insurance Fund was adequately reserved allowing the FDIC to charge significantly lower premiums for future periods. The reduction of expense in 1996 reflects the benefit of the lower premiums for an entire year. 19 21 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In conjunction with the acquisitions of Safety Fund and Milford, the Company incurred charges of $4,522,000. These charges were comprised of the following:
--------------------------------------- December 31 (In thousands) 1996 --------------------------------------- Personnel $1,440 Data processing 118 Facilities 157 Other 2,807 ------ $4,522 ======
Personnel charges relate primarily to the costs of employee severance and employment outplacement assistance. Data processing costs consist primarily of write-offs due to duplication of computer hardware, software, and certain telecommunications equipment. Facilities charges are the result of the consolidation of certain back-office operations and consist of write-downs of properties owned. Other merger expenses include investment banking fees, legal and accounting fees, due diligence costs, proxy registration/filing fees and mailing costs. All costs were recorded in earnings during 1996, although not all cash has been paid out for such expenses. The following table presents a summary of activity with respect to the merger accrual:
------------------------------------------------- Year Ended December 31 (In thousands) 1996 ------------------------------------------------- Balance at beginning of year $ - Provision charged against income 4,522 Cash outlays 3,207 Noncash write-downs 275 ------ Balance at end of year $1,040 ======
In 1996, Congress passed a bill which required savings institutions (i.e., Milford) which have deposits insured by the FDIC-Savings Association Insurance Fund (SAIF) be charged a special assessment in order to capitalize the insurance fund. This assessment totaled $691,000 and was paid to the SAIF during the fourth quarter of 1996. --------------------------------------------------------- INCOME TAXES --------------------------------------------------------- In 1996, the Company recognized income tax expense of $6,740,000, an effective tax rate of 34.8%, compared to $5,760,000 and an effective tax rate of 33.7% for 1995. The higher tax rate for 1996 is primarily due to nondeductible merger-related expenses, partially offset by income earned from the bank-owned life insurance investment which is exempt from income taxes, higher tax credits pertaining to low income housing projects, and the reversal of a valuation allowance established by Safety Fund for net operating loss carryforwards at one of their subsidiaries as a result of current and projected profits from that subsidiary. - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1995 AND 1994 - -------------------------------------------------------------------------------- CFX Corporation reported earnings of $11,249,000, or $.89 per share, for 1995 compared to $6,976,000, or $.58 per share, for the prior year. The increase of $4,273,000, or 61%, in earnings from 1994 to 1995 was primarily due to stronger core earnings (net interest and dividend income and other income). Core earnings for the year ended December 31, 1995 were $66,337,000 compared to $59,077,000 for 1994. Return on assets and return on equity were .86% and 9.08%, respectively, for 1995 compared to .56% and 5.94%, respectively, for 1994. --------------------------------------------------------- NET INTEREST AND DIVIDEND INCOME --------------------------------------------------------- Net interest and dividend income on a fully taxable equivalent basis totaled $52,950,000 in 1995, compared to $48,742,000 in 1994. The interest rate spread and net interest margin were 3.80% and 4.36%, respectively, for 1995 compared to 3.85% and 4.27%, respectively, for 1994. The decrease of 5 basis points in the interest rate spread was principally due to the rise in interest rates during 1995 as the increased cost of funding sources outpaced the increase in yield on earning assets. An increase of 9 basis points in net interest margin was due to an increase of $74,196,000 in average earning assets from $1,140,680,000 in 1994 to $1,214,876,000 in 1995. This increase in average earning assets was primarily comprised of loans and leases which have higher yields than other interest earning assets. 20 22 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES --------------------------------------------------------- The provision for loan and lease losses in 1995 was $3,037,000, compared to $2,697,000 in 1994. The higher provision for loan and lease losses in 1995 was primarily due to the significant increase in outstanding loans and leases which increased $85 million from 1994 to 1995 and a change in loan mix toward consumer loans and leases. At December 31, 1995, nonperforming loans stood at $11,261,000, or 1.09% of total loans and leases, compared to $11,146,000, or 1.32% of total loans and leases, as of December 31, 1994. The allowance for loan and lease losses as a percentage of nonperforming loans as of December 31, 1995 and 1994 amounted to 153.34% and 129.20%, respectively. --------------------------------------------------------- OTHER INCOME --------------------------------------------------------- Other income totaled $14,311,000 for 1995, up $3,232,000 or 29%, from $11,079,000 in 1994. The increase is primarily due to increases of $708,000 in service charges on deposit accounts, $1,586,000 in leasing activities, and $1,349,000 in gains on trading securities, partially offset by a decrease in mortgage banking revenues of $357,000. The increased income from service charges on deposit accounts is due to an increase in fees and enhanced collection practices. Gains on the sale of loans increased in 1995 as a result of the implementation of SFAS No. 122, "Accounting for Mortgage Servicing Rights." See Note A of the "Notes to Consolidated Financial Statements." The Company adopted SFAS No. 122 as of January 1, 1995, which resulted in a $484,000 increase in gains on the sales of loans. Offsetting this increase was a decrease in gains on the sale of servicing rights, which amounted to $677,000 in 1994. The increase in other income from leasing activities is due principally to fees generated by CFX Funding and the amortization of deferred credits relating to an investment in leasehold residuals. The increase in gains on trading securities principally represents capital gains realized from an investment in a money market mutual fund. This investment reflected gains totaling $1,092,000 in 1995 compared to losses of $271,000 in 1994, principally due to a larger investment during 1995. In addition, 1994 had $528,000 in losses associated with a wholesale leverage program. --------------------------------------------------------- OTHER EXPENSE --------------------------------------------------------- Other expense for 1995 totaled $46,202,000, compared to $44,864,000 for 1994. The increase in other expense was primarily attributable to the increase in salaries and employee benefits, losses on the sale of real estate investment properties in the first and second quarters of 1995, and costs incurred in connection with the acquisition of Orange Savings Bank. The higher salaries and employee benefits are the result of normal salary adjustments, higher medical costs, higher profit sharing, and lower deferred salary cost in CFX Mortgage pertaining to loan origination. In addition, contributing to the higher salary and employee benefits was an increase in staff in both commercial and consumer lending, along with new employees hired for the de novo New Hampshire branches opened in Gilford (December 1994) and Manchester (June 1995). 21 23 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- However, the above increase in other expense was offset by lower insurance premiums from the FDIC. The FDIC's Bank Insurance Fund (BIF) surpassed its congressionally mandated reserve ratio of 1.25 percent of insured deposits during the month of May, 1995. The new assessment rate schedule for the BIF, which substantially lowered rates for most banks, thus became effective June 1, 1995, enabling the FDIC to refund excess premiums already paid by BIF insured institutions for the four-month period from June 1, 1995 to September 30, 1995 and charge lower premiums for the fourth quarter of 1995. --------------------------------------------------------- TAXES --------------------------------------------------------- Income taxes for 1995 were 33.7% of pretax income, compared to 37.1% of pretax income for 1994. The effective tax rate for 1995 was lower due principally to the reversal of a $125,000 valuation allowance relating to Orange Savings Bank's capital loss carryforward. - -------------------------------------------------------------------------------- CAPITAL RESOURCES - -------------------------------------------------------------------------------- Total shareholders' equity at December 31, 1996 was $132,953,000, compared to $127,032,000 a year earlier. The increase is primarily due to the retention of 43% of earnings, partially offset by an increase in the net unrealized losses on securities available for sale. The Consolidated Statements of Shareholders' Equity provide details of changes in equity since December 31, 1993. The Company's capital position is an indication of financial performance and stability and provides protection against loss to depositors and creditors. The Company's objective is to maintain an optimum level of capital to provide maximum shareholder return while serving the needs of the depositor and creditor. Federal regulation requires the Company to maintain minimum capital standards. Tier 1 capital is composed primarily of common stock and retained earnings less certain intangibles. The minimum requirements include a 3% Tier 1 leverage capital ratio for the most highly-rated institutions; all other institutions are required to meet a minimum leverage ratio that is at least 1% to 2% above the 3% minimum. In addition, the Company is required to satisfy certain capital adequacy guidelines relating to the risk nature of an institution's assets. These guidelines, established by the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC), are applicable to bank holding companies and state chartered non-member banks, respectively. Under the "risk-based" capital rules, banks and bank holding companies are required to have a level of Tier 1 capital equal to 4% of total risk-weighted assets, as defined. Banks and bank holding companies are also required to have total capital composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter being composed primarily of the allowances for loan and lease losses, equal to 8% of total risk-weighted assets. As of December 31, 1996, the Company's Tier 1 leverage capital ratio was 8.0%. In addition, the Company's Tier 1 risk-based capital ratio and total risk-based capital ratio were 13.5% and 14.8%, respectively. In an effort to optimize the capital level, the Company has leveraged its balance sheet by originating and purchasing loans and leases and funding these assets with deposits and borrowed funds. The tier 1 leverage capital has been reduced from 8.8% at December 31, 1995 to 8.0% at December 31, 1996, still substantially above the minimum level of 6% to be considered well capitalized by the regulatory agencies. The Company will continue this leverage strategy in 1997 to maximize the use of the capital of Portsmouth Bank Shares, Inc., assuming affirmative approval of shareholders and regulators. At December 31, 1996, Portsmouth had a Tier 1 leverage capital ratio of 24.3%. A total of approximately $300 million in interest earning assets and interest bearing liabilities are anticipated to be added to the Company to leverage this higher capital base. These assets will be both loans and leases and investments. - -------------------------------------------------------------------------------- ASSET/LIABILITY MANAGEMENT - -------------------------------------------------------------------------------- The Company's primary objective regarding asset/liability management is to position the Company so that changes in interest rates do not have a materially adverse impact upon forecasted net income and the net fair value of the Company. The Company's primary strategy for accomplishing its asset/liability management objective is achieved by matching the weighted average maturities of assets, liabilities and off-balance-sheet items (duration matching). 22 24 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To measure the impact of interest rate changes, the Company utilizes a comprehensive financial planning model that recalculates the fair value of the Company assuming instantaneous, permanent parallel shifts in the yield curve of both up and down 100 and 200 basis points, or four separate calculations. Larger increases or decreases in forecasted net income and the net market value of the Company as a result of these interest rate changes represent greater interest rate risk than do smaller increases or decreases. The results of the financial planning model are highly dependent on numerous assumptions. These assumptions generally fall into two categories: those relating to the interest rate environment and those relating to general business and economic factors. Assumptions related to the interest rate environment include the prepayment speeds on mortgage-related assets and the cash flows and maturities of financial instruments. Assumptions related to general business and economic factors include changes in market conditions, loan volumes and pricing, deposit sensitivity, customer preferences, competition, and management's financial and capital plans. The assumptions are developed based on current business and asset/liability management strategies, historical experience, the current economic environment, forecasted economic conditions and other analyses. These assumptions are inherently uncertain and subject to change as time passes. Accordingly, the Company adjusts the pro forma net income and net fair values as it believes appropriate on the basis of historical experience and prudent business judgment. The Company endeavors to maintain a position where it experiences no material change in net fair value and no material fluctuation in forecasted net income as a result of assumed 100 and 200 basis point increases and decreases in interest rates. However, there can be no assurances that the Company's projections in this regard will be achieved. Management believes that the above method of measuring and managing interest rate risk is consistent with the FDIC regulation regarding an interest rate risk component of regulatory capital. The following table summarizes the timing of the Company's anticipated maturities or repricing of interest earning assets and interest bearing liabilities as of December 31, 1996. This table has been generated using certain assumptions which the Company believes fairly and accurately represent repricing volumes in a dynamic interest rate environment. Specifically, contractual maturities are used on all time deposits and investments other than asset-backed securities. For asset-backed securities and loans, contractual maturities, repricing and prepayment assumptions are used. The prepayment assumptions are based on current experience and industry statistics. The gap maturity categories for savings deposits (including NOW, savings, and money market accounts) are based on management's philosophy of repricing core deposits in reaction to changes in the interest rate environment. Repricing frequencies will vary at different points in the interest cycle and as supply and demand for credit change. Derivative financial instruments, are reflected in the gap table. For further discussion on strategies for derivatives, see Note R - Derivative Financial Instruments in the "Notes to Consolidated Financial Statements."
-------------------------------------------------------------------------------------------------------------------------------- (In thousands) 0-3 4-12 1-5 5-10 Over 10 December 31, 1996 Months Months Years Years Years Total -------------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Interest bearing deposits with other banks $ 197 $ - $ - $ - $ - $ 197 Investment securities 38,469 39,488 156,694 42,904 439 277,994 Loans and leases 276,610 356,260 391,388 68,525 40,593 1,133,376 ---------- ---------- ---------- ---------- ---------- ---------- Total interest earning assets 315,276 395,748 548,082 111,429 41,032 1,411,567 ---------- ---------- ---------- ---------- ---------- ---------- Interest bearing liabilities: Savings and time deposits 203,994 473,049 275,244 68,045 - 1,020,332 Advances from Federal Home Loan Bank of Boston 149,661 25,014 80 326 - 175,081 Short-term borrowed funds 67,374 - - - - 67,374 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities 421,029 498,063 275,324 68,371 - 1,262,787 ---------- ---------- ---------- ---------- ---------- ---------- Periodic gap $ (105,753) $ (102,315) $ 272,758 $ 43,058 $ 41,032 $ 148,780 ========== ========== ========== ========== ========== ========== Cumulative gap $ (105,753) $ (208,068) $ 64,690 $ 107,748 $ 148,780 $ - ========== ========== ========== ========== ========== ==========
The ability to assess interest rate risk using gap analysis is limited. Gap analysis does not capture the impact of cash flow or balance sheet mix changes over a forecasted future period and it does not measure the amount of price change expected to occur in the various asset and liability categories. Thus, management does not use gap analysis exclusively in its assessment of interest rate risk. The Company's interest rate risk exposure is also measured by the forecasted net income and discounted cash flow market value sensitivities referred to above. 23 25 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIQUIDITY - -------------------------------------------------------------------------------- The Company maintains numerous sources of liquidity in the form of marketable assets and borrowing capacity. Interest bearing deposits with other banks, trading and available for sale securities, regular cash flows from loan and securities portfolios and Federal Home Loan Bank of Boston borrowings are the primary sources of asset liquidity. At December 31, 1996, unrestricted cash equivalents and interest bearing deposits with other banks totaled $22,429,000 and available for sale securities totaled $245,324,000. Because the Company's bank subsidiaries maintain large residential mortgage portfolios, a substantial capability exists to borrow funds from the Federal Home Loan Bank of Boston. Additionally, investment portfolios are predominantly made up of securities which can be readily borrowed against through the repurchase agreement market. Relationships with deposit brokers and correspondent banks are also maintained to facilitate possible borrowing needs. - -------------------------------------------------------------------------------- IMPACT OF INFLATION - -------------------------------------------------------------------------------- The consolidated financial statements and related consolidated financial data herein have been presented in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Inflation can affect the Company in a number of ways, including increased operating costs and interest rate volatility. Management attempts to minimize the effects of inflation by maintaining an approximate match interest rate sensitive assets and interest rate sensitive liabilities and, where practical, by adjusting service fees to reflect changing costs. - -------------------------------------------------------------------------------- SUBSEQUENT ACCOUNTING PRONOUNCEMENT - -------------------------------------------------------------------------------- In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." See Note A - "Significant Accounting Policies," of the Notes to Consolidated Financial Statements for more detail. - -------------------------------------------------------------------------------- YEAR 2000 - -------------------------------------------------------------------------------- The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the year 2000 compliance. It is anticipated that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. To date, confirmations have been received from the Company's primary processing vendors that plans are being developed to address processing of transactions in the year 2000. Management has not yet assessed the year 2000 compliance expense and related potential affect on the Company's earnings. 24 26 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 50,404 $ 44,393 Federal funds sold - 2,500 ----------- ----------- CASH AND CASH EQUIVALENTS 50,404 46,893 Interest bearing deposits with other banks 197 13,475 Securities available for sale 245,324 201,246 Securities held to maturity 32,670 97,093 Mortgage loans held for sale 15,212 7,085 Loans and leases 1,118,164 927,430 Less allowance for loan and lease losses 15,740 15,449 ----------- ----------- NET LOANS AND LEASES 1,102,424 911,981 Premises and equipment 27,386 25,253 Mortgage servicing rights 5,313 4,373 Goodwill and deposit base intangibles 9,235 9,884 Foreclosed real estate 2,223 1,186 Bank-owned life insurance 30,975 - Other assets 25,729 26,411 ----------- ----------- $ 1,547,092 $ 1,344,880 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing $ 1,020,332 $ 932,209 Noninterest bearing 136,875 124,615 ----------- ----------- TOTAL DEPOSITS 1,157,207 1,056,824 Short-term borrowed funds 67,374 44,012 Advances from Federal Home Loan Bank of Boston 175,081 102,814 Other liabilities 14,477 14,198 ----------- ----------- TOTAL LIABILITIES 1,414,139 1,217,848 ----------- ----------- SHAREHOLDERS' EQUITY Preferred stock, par value $1.00 per share--authorized 4,000,000 shares, no shares outstanding in 1996 or 1995 - - Common stock, par value $.66 2/3 per share--authorized 22,500,000 shares, issued 13,008,787 shares in 1996 and 12,078,268 shares in 1995 8,672 8,052 Paid-in capital 97,406 85,902 Retained earnings 28,223 32,488 Net unrealized gains (losses) on securities available for sale, after tax effects (929) 590 Cost of 28,055 shares of common stock in treasury (419) - ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 132,953 127,032 ----------- ----------- $ 1,547,092 $ 1,344,880 =========== ===========
See notes to consolidated financial statements and independent auditors' report. 25 27 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Year Ended December 31 (In thousands, except per share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Interest and dividend income: Interest on loans and leases $ 88,416 $ 76,747 $ 62,546 Interest on investment securities: Taxable 18,239 17,050 15,149 Tax-exempt 821 1,002 847 -------- -------- -------- 19,060 18,052 15,996 Interest and dividends on trading securities - 6 1,725 Dividends on marketable equity securities 326 364 304 Other 623 1,220 1,066 -------- -------- -------- TOTAL INTEREST AND DIVIDEND INCOME 108,425 96,389 81,637 -------- -------- -------- Interest expense: Interest on deposits 40,740 37,279 28,122 Interest on borrowings: Short-term 10,807 7,074 5,507 Long-term 19 10 10 -------- -------- -------- TOTAL INTEREST EXPENSE 51,566 44,363 33,639 -------- -------- -------- NET INTEREST AND DIVIDEND INCOME 56,859 52,026 47,998 Provision for loan and lease losses 2,935 3,037 2,697 -------- -------- -------- NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 53,924 48,989 45,301 -------- -------- -------- Other income: Service charges on deposit accounts 4,001 3,756 3,048 Loan servicing fees 1,671 1,726 1,862 Net gain (loss) on trading securities 564 1,092 (257) Net gain on sale of investment securities 147 204 184 Net gain on sale of loan servicing rights - - 677 Net gain on sale of loans 1,383 648 192 Leasing activities 2,487 1,967 381 Trust fees 2,351 2,246 2,169 Pension settlement gain 877 - - Other 3,346 2,672 2,823 -------- -------- -------- 16,827 14,311 11,079 -------- -------- -------- Other expense: Salaries and employee benefits 23,847 23,138 22,530 Occupancy and equipment 6,991 6,567 6,091 Professional fees 1,963 2,413 2,469 Advertising and marketing 1,711 1,598 1,198 Operation of foreclosed real estate 345 430 620 FDIC deposit insurance 377 1,383 2,244 Goodwill and deposit base intangible amortization 653 714 757 Merger expenses 4,522 - - SAIF special assessment 691 - - Other 10,270 9,959 8,955 -------- -------- -------- 51,370 46,202 44,864 -------- -------- -------- INCOME BEFORE INCOME TAXES 19,381 17,098 11,516 Income taxes 6,740 5,760 4,272 -------- -------- -------- NET INCOME 12,641 11,338 7,244 Preferred stock dividends - 89 268 -------- -------- -------- NET INCOME AVAILABLE TO COMMON STOCK $ 12,641 $ 11,249 $ 6,976 ======== ======== ======== Weighted average common shares outstanding 12,823 12,701 12,052 ======== ======== ======== Earnings per common share $ .99 $ .89 $ .58 ======== ======== ========
See notes to consolidated financial statements and independent auditors' report. 26 28 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Net Unrealized Gains (Losses) Preferred Stock Common Stock on Securities Treasury Stock --------------- ---------------- Paid-in Retained Available -------------- (In thousands, except per share data) Shares Dollars Shares Dollars Capital Earnings for Sale Shares Dollars Total - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 194 $ 194 11,696 $ 7,797 $ 81,749 $ 33,391 $ 1,303 (866) $(7,198) $117,236 Net income - - - - - 7,244 - - - 7,244 Common cash dividends declared--$.31 per share - - - - - (3,731) - - - (3,731) Preferred cash dividends declared--$1.3875 per share - - - - - (268) - - - (268) Issuance of common stock under stock option plan - - 139 93 820 - - - - 913 Issuance of common stock under employee stock purchase plan - - 16 11 139 - - - - 150 Issuance of common stock under dividend reinvestment plan - - 6 4 60 - - - - 64 Preferred stock converted to common stock (1) (1) 1 1 - - - - - - 5% common stock dividend - - 276 184 3,041 (3,245) - - - (20) Change in net unrealized gains (losses) on securities available for sale - - - - - - (4,537) - - (4,537) ---- ------ ------ -------- -------- -------- -------- ------ ------- -------- BALANCE AT DECEMBER 31, 1994 193 193 12,134 8,090 85,809 33,391 (3,234) (866) (7,198) 117,051 Net income - - - - - 11,338 - - - 11,338 Common cash dividends declared--$.50 per share - - - - - (6,341) - - - (6,341) Preferred cash dividends declared--$.4625 per share - - - - - (89) - - - (89) Issuance of common stock under stock option plan - - 110 72 833 - - - - 905 Issuance of common stock under employee stock purchase plan - - 4 3 32 - - - - 35 Issuance of common stock under dividend reinvestment plan - - 22 15 312 - - - - 327 Preferred stock converted to common stock (193) (193) 318 212 (19) - - - - - Fractional shares paid out - - (1) (1) (17) - - - - (18) 5% common stock dividend - - 357 238 5,573 (5,811) - - - Change in net unrealized gains (losses) on securities available for sale - - - - - - 3,824 - - 3,824 Retirement of treasury shares - - (866) (577) (6,621) - - 866 7,198 - ---- ------ ------ -------- -------- -------- ------- ------ ------- -------- BALANCE AT DECEMBER 31, 1995 - - 12,078 8,052 85,902 32,488 590 - - 127,032 Net income - - - - - 12,641 - - - 12,641 Common cash dividends declared--$.55 per share - - - - - (7,171) - - - (7,171) Issuance of common stock under stock option plan and related tax effects - - 296 198 2,058 - - - - 2,256 Issuance of common stock under employee stock purchase plan - - 17 11 148 - - - - 159 Fractional shares paid out - - (2) (1) (25) - - - - (26) 5% common stock dividend - - 620 412 9,323 (9,735) - 1 - - Change in net unrealized gains (losses) on securities available for sale - - - - - - (1,519) - - (1,519) Cost of shares acquired for treasury - - - - - - - 27 (419) (419) ---- ------ ------ -------- -------- -------- -------- ------ ------- -------- BALANCE AT DECEMBER 31, 1996 - $ - 13,009 $ 8,672 $ 97,406 $ 28,223 $ (929) 28 $ (419) $132,953 ==== ====== ====== ======== ======== ======== ======== ====== ======= ========
See notes to consolidated financial statements and independent auditors' report. 27 29 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 12,641 $ 11,338 $ 7,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,532 4,497 4,307 Amortization of deferred credit on leasehold residual (1,412) (1,347) - Provision for loan and lease losses 2,935 3,037 2,697 Provision for foreclosed real estate losses 10 31 373 Loans originated and acquired for sale (100,445) (92,242) (107,366) Principal balance of loans sold 92,317 94,207 122,636 Net (gain) loss on sale of portfolio loans (256) (14) 227 Net gain on sale of foreclosed real estate (102) (51) (257) Net gain on sale of investment securities (147) (204) (184) Net decrease in trading securities - 236 39,595 Net deferred income tax provision 5,822 2,933 232 Increase in cash surrender value of bank-owned life insurance (975) - - Other (2,974) (5,754) (1,744) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,946 16,667 67,760 --------- --------- --------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale 21,805 28,507 33,494 Proceeds from maturities of securities available for sale 115,748 21,651 6,786 Purchase of securities available for sale (103,862) (46,969) (41,567) Proceeds from sales of securities held to maturity - 6,006 - Proceeds from maturities of securities held to maturity 30,102 29,884 71,887 Purchase of securities held to maturity (42,033) (42,457) (118,061) Proceeds from the sale of, or payments on, foreclosed real estate 1,954 1,405 1,553 Proceeds from the sale of portfolio loans 12,287 250 999 Net decrease in interest bearing deposits with other banks 13,278 10,375 11,451 Net increase in loans and leases (211,885) (86,763) (105,804) Purchases of bank-owned life insurance (30,000) - - Purchases of premises and equipment (5,438) (1,520) (4,922) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (198,044) (79,631) (144,184) --------- --------- --------- FINANCING ACTIVITIES Net decrease in noninterest bearing deposits and savings accounts (5,580) (20,840) (13,498) Net increase in time certificates of deposit 105,963 84,275 31,588 Net increase (decrease) in short-term borrowed funds 23,362 (1,284) 12,473 Proceeds from Federal Home Loan Bank of Boston advances with maturities in excess of three months 180,500 68,500 - Payment of Federal Home Loan Bank of Boston advances with maturities in excess of three months (157,000) (6,000) - Net increase (decrease) in Federal Home Loan Bank of Boston advances with maturities of three months or less 48,767 (54,887) 45,400 Common cash dividends paid (7,067) (4,654) (3,642) Preferred cash dividends paid - (89) (268) Proceeds from issuance of common stock 2,109 1,267 1,127 Payments on fractional shares (26) (18) (20) Acquisition of treasury shares (419) - - --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 190,609 66,270 73,160 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,511 3,306 (3,264) Cash and cash equivalents at beginning of year 46,893 43,587 46,851 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 50,404 $ 46,893 $ 43,587 ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid on deposit accounts $ 38,645 $ 36,680 $ 28,091 Interest paid on borrowed funds 10,990 6,765 5,177 Income taxes paid 1,425 3,883 2,684
See notes to consolidated financial statements and independent auditors' report. 28 30 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE A--SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- --------------------------------------------------------- PRINCIPLES OF PRESENTATION AND CONSOLIDATION --------------------------------------------------------- The consolidated financial statements include the accounts of CFX Corporation and its wholly-owned subsidiaries, CFX Bank, Safety Fund National Bank and Orange Savings Bank (collectively referred to as Banks), and the Banks' subsidiaries which engage in investment activities, mortgage banking, and property management. One of the Bank's subsidiaries has a 51% ownership interest in CFX Funding, L.L.C., which engages in the facilitation of lease financing and securitization. All significant intercompany accounts and transactions are eliminated upon consolidation. See Note B - "Mergers and Acquisitions." --------------------------------------------------------- USE OF ESTIMATES --------------------------------------------------------- The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the period. Actual results could differ significantly from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of valuation allowances applicable to loans and leases, foreclosed real estate, and deferred tax assets, and of prepayment speeds used to value mortgage servicing rights. --------------------------------------------------------- BUSINESS --------------------------------------------------------- The Company, through its bank subsidiaries, serves as a financial intermediary, attracting deposits from, and making loans to, consumers and small to mid-sized businesses through its 42 full service offices and two loan production offices in New Hampshire and central Massachusetts. The Company's Trust Division furnishes trust and investment services to individuals, corporations, municipalities and charitable organizations. --------------------------------------------------------- RECLASSIFICATIONS AND RESTATEMENTS --------------------------------------------------------- The consolidated financial statements as of December 31, 1995 and for the years ended December 31, 1995 and 1994 have been restated to reflect the pooling-of-interests with The Safety Fund Corporation and Milford Co/operative Bank. See Note B - "Mergers and Acquisitions." In addition, certain amounts have been reclassified in the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation. Prior period common stock data has been restated to reflect the pooling-of-interests with The Safety Fund Corporation and Milford Co/operative Bank and the Company's 5% stock dividend declared on December 10, 1996 to shareholders of record on December 20, 1996. --------------------------------------------------------- CASH FLOW INFORMATION --------------------------------------------------------- Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. --------------------------------------------------------- TRADING AND INVESTMENT SECURITIES --------------------------------------------------------- Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and reflected on the balance sheet at fair value, with unrealized gains and losses included in earnings. Investments not classified as either of the above are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of related tax effects. Purchase premiums and discounts are amortized to earnings by a method which approximates the interest method over the terms of the investments. Declines in the value of investments that are deemed to be other than temporary are reflected in earnings when identified. Gains and losses on disposition of investments are recorded on the trade date and are computed by the specific identification method. The carrying values of Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock approximate fair value. 29 31 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- DERIVATIVE FINANCIAL INSTRUMENTS --------------------------------------------------------- INTEREST RATE SWAP AGREEMENTS: Interest rate swap agreements are designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities, and are accounted for on the same basis as the underlying asset or liability. Accordingly, interest rate swaps designated as hedges against floating rate loan portfolios (carried at historical cost) are reflected at cost. Interest rate swaps which hedge the Company's trading securities portfolio (carried at fair value) are marked to fair value through net gains (losses) on trading securities included in the consolidated statements of income. The net interest paid or received under swap agreements is recorded in the interest income or expense account related to the asset or liability being hedged. INTEREST RATE FLOOR AGREEMENTS: Interest rate floor agreements are used to manage exposure to interest rate risk. The amounts paid on the floors are accounted for as adjustments to the yield on the hedged assets. The Company applies hedge accounting as the asset being hedged exposes the Company to interest rate risk, and the floor is designated and effective as a hedge of a specific pool of assets. The Company receives an interest payment if the three-month London Interbank Offered Rate (LIBOR) declines below a predetermined rate. This payment would be based upon the rate difference between current LIBOR and the predetermined rate accrued on the notional value of the instrument. The transaction fee paid is amortized over the life of the contract. FINANCIAL FUTURES CONTRACTS: Interest rate futures contracts had been entered into by the Company as hedges against interest rate risk in its trading securities portfolio. These instruments were marked to fair value through net gains (losses) on trading securities included in the consolidated statements of income. No such contracts were in effect during 1996 and 1995. FINANCIAL OPTION CONTRACTS: Option premiums paid or received, and designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities, are accounted for on the same basis as the underlying asset or liability. Accordingly, option contracts designated as hedges against mortgage loans held for sale are carried at the lower of cost or estimated fair value in the aggregate. Option contracts which hedge the Company's available for sale securities are marked to fair value and changes in fair value are reflected in shareholders' equity, net of related tax effects. --------------------------------------------------------- MORTGAGE LOANS HELD FOR SALE --------------------------------------------------------- Mortgage loans originated or purchased and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to earnings when applicable. --------------------------------------------------------- LOANS AND LEASES --------------------------------------------------------- All loans past due 90 days or more as to principal or interest are placed on nonaccrual status. In addition, a loan (including a loan impaired under SFAS No. 114, defined below) is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Cash received on impaired loans is generally allocated to principal and interest based on the contractual terms of the note, unless management believes such receipt should be applied directly to principal based on collection concerns. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the interest method over the contractual life of the related loans. Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method. 30 32 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended in October, 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosure." The Company adopted SFAS No. 114 on January 1, 1995. Under this Statement, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Statement is not applicable to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, and loans that are measured at fair value or the lower of cost or fair value. Accordingly, the Company has not applied SFAS No. 114 to its consumer and residential mortgage loans which are collectively evaluated for impairment, or to loans held for sale. The Company measures impairment on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Collateralized loans are generally measured by fair value of existing collateral, unless market prices or discounted cash flow information is deemed to be more current and reflective of the economies of the lending relationship. At December 31, 1996, the Company had $5,401,000 in impaired loans of which approximately 93% were measured by the fair value of collateral and 7% by discounted cash flow analysis. SFAS No. 114 also limits the classification of loans as in-substance foreclosures to situations where the creditor actually receives physical possession of the debtor's assets. Accordingly, upon adoption of SFAS No. 114, the Company transferred $796,000 of loans previously classified as in-substance foreclosures and $131,000 of the valuation allowance for foreclosed real estate losses to nonperforming loans. The adoption of SFAS No. 114 had no effect on the Company's assessment of the overall adequacy of the allowance for loan and lease losses. The restatement of previously issued financial statements to conform with SFAS No. 114 is expressly prohibited. Loan losses, including those applicable to impaired loans, are charged against the allowance for loan and lease losses when management believes the collectibility of the loan balance is unlikely. The allowance is an estimate and is increased by charges to current income in amounts sufficient to maintain the adequacy of the allowance. The adequacy is determined by management's evaluation of the extent of existing risk in the loan portfolio, prevailing economic conditions and historical loss experience. --------------------------------------------------------- BANK-OWNED LIFE INSURANCE --------------------------------------------------------- During 1996, the Company invested $30 million in bank-owned life insurance (BOLI) to help finance the cost of certain employee benefit plan expenses. The BOLI investment is accomplished through the purchase of life insurance on the lives of certain employees through two insurance companies with a Standard & Poors rating of AA+ or better. The Company, not the employee or family, is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other income, and are not subject to income taxes. 31 33 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- PREMISES AND EQUIPMENT --------------------------------------------------------- Premises and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to income as incurred, and the costs of major additions and improvements are capitalized. The provision for depreciation and amortization is computed on the straight-line method based on the estimated useful lives of the assets or the terms of the leases, if shorter. --------------------------------------------------------- MORTGAGE SERVICING RIGHTS --------------------------------------------------------- Effective January 1, 1995, the Company prospectively adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," whereby rights to service mortgage loans for others are capitalized as separate assets, whether acquired through purchase or origination, if such loans are sold or securitized with servicing rights retained. Accordingly, the total cost of the mortgage loan is allocated to the related servicing right and to the loan based on their relative fair values if it is practicable to estimate those fair values. The Company estimates fair value based on the present value of estimated expected future cash flows using prepayment speeds and discount rates commensurate with the risks involved. Prior to the adoption of SFAS No. 122, the capitalization of originated mortgage servicing rights was not allowed under generally accepted accounting principles. The effect of the accounting change for the year ended December 31, 1995 was to increase net income by $265,000 or $.02 per share. Capitalized mortgage servicing rights are amortized to servicing revenue in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. For purposes of measuring impairment, the rights are stratified based on the following predominant risk characteristics of the underlying loans: loan type (fixed rate, variable rate or state housing programs) and note rate. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. No such impairment was recognized during 1996 or 1995. --------------------------------------------------------- INVESTMENTS IN LEASEHOLD RESIDUALS AND LIMITED PARTNERSHIPS --------------------------------------------------------- Assets acquired in connection with leasehold residual positions have been accounted for using the purchase method of accounting. Resultant deferred credits are amortized to leasing activities income over the period of, and in proportion to, the related tax benefits realized. At December 31, 1996 and 1995, the leasehold residual position of $1,906,000 is included in other assets and deferred credits of $3,184,000 and $4,596,000, respectively, are included in other liabilities in the consolidated balance sheets. Investments in real estate development limited partnerships are accounted for using the equity method. --------------------------------------------------------- INTANGIBLE ASSETS --------------------------------------------------------- Deposit base intangibles, which represent the value attributable to the capacity of deposit accounts of purchased bank subsidiaries to generate future income, are included in other assets and are being amortized on a straight-line basis over a period of five years. The excess of the cost of purchased subsidiaries over the fair value of tangible and intangible net assets acquired has been allocated to goodwill and is being amortized on a straight-line basis over 25 years for banking operations and 15 years for mortgage banking operations. The accumulated amortizations of deposit base intangibles and goodwill were $1,605,000 and $4,087,000, respectively, as of December 31, 1996. --------------------------------------------------------- FORECLOSED REAL ESTATE --------------------------------------------------------- Foreclosed real estate consists of properties that the Company has formally received title to, or has taken possession of, in partial or total satisfaction of loans. Loan losses arising from the write-down of properties to fair value at the time of acquisition are charged against the allowance for loan and lease losses. Valuations are periodically performed by management, and an allowance for losses is established through a charge to earnings if the carrying value of a property exceeds its fair value less estimated costs to sell. Prior to 1995, the Company classified certain loans meeting more extensive in-substance foreclosure criteria as foreclosed real estate. Upon the adoption of SFAS No. 114, the Company reclassified all in-substance foreclosed assets that were not in its possession to loans. Operating expenses of foreclosed real estate and gains and losses upon disposition are reported in earnings. 32 34 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- --------------------------------------------------------- PENSION AND 401(k) PLANS --------------------------------------------------------- The Company and its subsidiaries have defined benefit and defined contribution pension plans which cover substantially all full-time employees. The benefits are based on years of service and the employee's compensation during the years immediately preceding retirement. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company maintains a Section 401(k) savings plan for employees of the Company, Safety Fund National Bank, CFX Bank, and CFX Bank's subsidiaries. Under the plan, the Company makes a matching contribution of one-half to one-third of the amount contributed by each participating employee, up to 6% of the employee's yearly salary. The plan allows for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. --------------------------------------------------------- STOCK COMPENSATION PLANS --------------------------------------------------------- In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied. The disclosure requirements of this statement are effective for the Company's consolidated financial statements for the year ended December 31, 1996. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. See Note O - "Stock Compensation Plans." --------------------------------------------------------- INCOME TAXES --------------------------------------------------------- The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes. --------------------------------------------------------- PARENT-COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS --------------------------------------------------------- In the parent-company-only condensed financial statements, the investment in bank subsidiaries is stated at cost plus equity in the undistributed earnings of the subsidiary. --------------------------------------------------------- EARNINGS PER SHARE --------------------------------------------------------- Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding and common share equivalents with a material dilutive effect. Common share equivalents are shares which may be issuable to employees and non-employee directors upon exercise of outstanding stock options. --------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENT --------------------------------------------------------- In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The accounting and reporting standards of this Statement are based on a financial components approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes only financial and servicing assets it controls and liabilities it has incurred. Liabilities incurred will be initially recognized at fair value, if practicable. Financial assets are derecognized when control has been surrendered, and liabilities are derecognized when extinguished. The determination of whether control over a financial asset has been surrendered is based on meeting specific criteria as defined in the Statement. 33 35 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings, and impacts the accounting for various transactions including the servicing of financial assets, securitizations, securities lending transactions, repurchase agreements, loan participations, and transfers of receivables with recourse. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied on a prospective basis. In December 1996, the FASB voted to defer for one year the provisions of the Statement that relate to secured borrowings and collateral. Management is currently evaluating the impacts of the Statement on its secured borrowings such as repurchase agreements but does not expect, based on the general terms of its current agreements, that the Statement will significantly change its accounting for similar transactions in the future. Other provisions of the Statement will not, in management's opinion, have a significant impact on the consolidated financial statements, except that servicing rights pertaining to lease sales and securitizations will be capitalized prospectively at their estimated fair value, with a corresponding credit to earnings, and amortized over the servicing period. - -------------------------------------------------------------------------------- NOTE B--MERGERS AND ACQUISITIONS - -------------------------------------------------------------------------------- On July 1, 1996, the Company acquired The Safety Fund Corporation (Safety Fund) and the Milford Co/operative Bank (Milford). Each of Safety Fund's 1,665,000 outstanding shares of common stock and Milford's 689,000 outstanding shares of common stock were converted into 1.785 shares and 2.777 shares, respectively, of the Company's common stock, resulting in the issuance of 2,973,000 shares and 1,914,000 shares, respectively, of the Company's common stock to Safety Fund and Milford shareholders. Outstanding stock options were similarly exchanged for CFX stock options. Milford was a state-chartered co/operative bank, headquartered in Milford, New Hampshire. Milford was merged into CFX's New Hampshire banking subsidiary, CFX Bank, as part of the transaction. Safety Fund was a bank holding company headquartered in Fitchburg, Massachusetts. Safety Fund's subsidiary bank, Safety Fund National Bank, continues to operate as a subsidiary of the Company. Both the Safety Fund and Milford mergers were accounted for by the pooling-of-interests method of accounting, and, accordingly, the financial information for all prior periods presented has been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. Expenses directly attributable to the mergers amounted to $4,522,000 and were charged to earnings at the date of combination. Separate financial information of CFX Corporation, Safety Fund, and Milford for periods prior to the acquisition is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- PERIOD ENDED JUNE 30, Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - ----------------------------------------------------------- ----------------------------------- --------------------------------- SAFETY Safety Safety CFX FUND MILFORD CFX Fund Milford CFX Fund Milford (Unaudited) - ----------------------------------------------------------- ----------------------------------- --------------------------------- Net interest and dividend income $18,180 $ 7,102 $ 2,739 $32,881 $13,816 $ 5,329 $31,304 $12,036 $ 4,658 Provision for loan and lease losses 1,500 105 50 1,624 1,300 113 437 2,200 60 Other income 5,222 2,277 325 9,421 4,059 831 6,516 3,823 740 Other expense 14,606 6,518 1,903 28,397 14,016 3,789 27,929 13,424 3,511 Income taxes 2,358 692 394 4,335 706 719 3,548 77 647 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income 4,938 2,064 717 7,946 1,853 1,539 5,906 158 1,180 Preferred dividends - - - 89 - - 268 - - ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income available to common stock $ 4,938 $ 2,064 $ 717 $ 7,857 $ 1,853 $ 1,539 $ 5,638 $ 158 $ 1,180 ======= ======= ======= ======= ======= ======= ======= ======= =======
34 36 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE C--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS - -------------------------------------------------------------------------------- The Federal Reserve Bank requires the Banks to maintain average reserve balances. The average amounts of these reserve balances for the years ended December 31, 1996 and 1995 were approximately $28,172,000 and $26,443,000, respectively. - -------------------------------------------------------------------------------- NOTE D--INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of investment securities, with gross unrealized gains and losses, follows:
------------------------------------------------------------------------------------------------ December 31 (In thousands) 1996 ------------------------------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------------ Securities available for sale: Debt securities: United States Treasury and agency obligations $129,426 $ 798 $ 1,361 $128,863 State and municipal 439 2 - 441 Corporate bonds 3,138 25 - 3,163 Federal agency mortgage pass-through securities 76,068 215 1,130 75,153 Other collateralized mortgage obligations (CMO's) 19,799 15 206 19,608 Marketable equity securities 5,960 104 103 5,961 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 12,135 - - 12,135 -------- -------- -------- -------- Total securities available for sale $246,965 $ 1,159 $ 2,800 $245,324 ======== ======== ======== ======== Securities held to maturity: Debt securities: United States Treasury and agency obligations $ 9,417 $ 18 $ 46 $ 9,389 State and municipal 13,986 118 21 14,083 Federal agency mortgage pass-through securities 7,783 116 25 7,874 Other collateralized mortgage obligations (CMO's) 1,184 1 - 1,185 Other 300 - - 300 -------- -------- -------- -------- Total securities held to maturity $ 32,670 $ 253 $ 92 $ 32,831 ======== ======== ======== ========
At December 31, 1996, the Company pledged debt securities with an amortized cost of $114,891,000, and a fair value of $114,368,000, as collateral to secure public funds and repurchase agreements. See Note J - "Short-Term Borrowed Funds." 35 37 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- --------------------------------------------------------- The amortized cost and estimated fair value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
----------------------------------------------------------------------------------------- December 31 (In thousands) 1996 ----------------------------------------------------------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY ----------------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------------------------------------------------------------------------------------- Within one year $ 11,023 $ 11,079 $ 4,154 $ 4,159 After one year through five years 74,607 74,737 15,580 15,617 After five years through ten years 44,934 44,244 3,969 3,996 After ten years through twenty years 2,439 2,407 - - -------- -------- -------- -------- 133,003 132,467 23,703 23,772 Pass-through securities and CMO's 95,867 94,761 8,967 9,059 -------- -------- -------- -------- $228,870 $227,228 $ 32,670 $ 32,831 ======== ======== ======== ========
Proceeds from the sale of securities available for sale during the years ended December 31, 1996, 1995 and 1994 were $21,805,000, $28,507,000 and $33,494,000, respectively. Gross gains of $220,000, $297,000 and $265,000, respectively, were recognized on such sales. Gross losses of $73,000, $99,000 and $81,000, respectively, were realized on such sales. In the third quarter of 1996, the acquisitions of Safety Fund and Milford (see Note B - "Mergers and Acquisitions") necessitated a transfer of securities held to maturity with an amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In November 1995, the FASB issued guidance allowing a one-time reassessment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, securities held to maturity with an amortized cost of $95,819,000 and a net unrealized loss of $815,000 were transferred to securities available for sale and securities held to maturity with an amortized cost of $6,000,000 were sold at a net realized gain of $6,000. At December 31, 1996 and 1995, net unrealized gains (losses) on securities available for sale included in the shareholders' equity section of the consolidated balance sheets, included net unrealized gains (losses) of $126,000 and $(138,000), respectively, on securities transferred from available for sale to held to maturity during 1994 and 1995. 36 38 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------- December 31 (In thousands) 1995 ---------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------------------------------------------------------------------------------------- Securities available for sale: Debt securities: United States Treasury and agency obligations $100,966 $ 1,720 $ 155 $102,531 Corporate bonds 5,002 70 - 5,072 Federal agency mortgage pass-through securities 55,953 28 274 55,707 Other collateralized mortgage obligations (CMO's) 24,345 75 262 24,158 Marketable equity securities 5,565 28 139 5,454 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 8,324 - - 8,324 Total securities available -------- -------- -------- -------- for sale $200,155 $ 1,921 $ 830 $201,246 ======== ======== ======== ======== Securities held to maturity: Debt securities: United States Treasury and agency obligations $ 48,323 $ 647 $ 90 $ 48,880 State and municipal 19,229 154 38 19,345 Federal agency mortgage pass-through securities 21,243 406 147 21,502 Other collateralized mortgage obligations (CMO's) 8,098 167 22 8,243 Other 200 - 28 172 -------- -------- -------- -------- Total securities held to maturity $ 97,093 $ 1,374 $ 325 $ 98,142 ======== ======== ======== ========
37 39 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE E--LOANS AND LEASES - --------------------------------------------------------------------------------
Loans and leases consist of the following: ------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ------------------------------------------------------------------------------- Real estate: Residential $ 711,440 $ 586,074 Construction 8,099 9,194 Commercial 143,179 141,833 Commercial, financial and agricultural 120,114 104,308 Warehouse lines of credit to leasing companies 18,393 12,906 Consumer lease financing 76,343 27,457 Other consumer 48,182 48,497 ---------- ---------- 1,125,750 930,269 Unearned income (10,045) (3,604) Deferred origination costs, net 2,459 765 ---------- ---------- $1,118,164 $ 927,430 ========== ==========
The following is a summary of information pertaining to impaired and nonaccrual loans:
------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ------------------------------------------------------------------------------- Loans with a valuation allowance $ 2,816 $ 7,383 Loans without a valuation allowance 2,585 3,212 ------- ------- Total impaired loans $ 5,401 $10,595 ======= ======= Valuation allowance allocated to impaired loans $ 934 $ 2,884 ======= ======= Nonaccrual loans $ 8,299 $ 9,840 ======= =======
---------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 ---------------------------------------------------------------------- Average investment in impaired loans $ 7,262 $13,526 ======= ======= Interest income recognized on impaired loans $ 613 $ 1,087 ======= ======= Interest income recognized on cash basis $ 497 $ 1,002 ======= =======
The Company is not committed to lend additional funds to borrowers whose loans have been modified in connection with troubled debt restructurings or whose loans have been classified as impaired. The primary geographic concentration of credit risk for loans originated by the Company is the State of New Hampshire and central Massachusetts. The remainder of the portfolio is distributed principally throughout the other New England states. 38 40 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE F--ALLOWANCE FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- Changes in the allowance for loan and lease losses are as follows:
---------------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 ---------------------------------------------------------------------------------------------- Balance at beginning of year $ 15,449 $ 14,401 $ 16,168 Provision for loan and lease losses 2,935 3,037 2,697 Loans and leases charged-off (3,301) (2,934) (5,467) Recoveries of loans and leases previously charged-off 657 945 1,003 -------- -------- -------- Balance at end of year $ 15,740 $ 15,449 $ 14,401 ======== ======== ========
- -------------------------------------------------------------------------------- NOTE G--PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- The following is a summary of premises and equipment:
---------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ---------------------------------------------------------------------- Land $ 3,616 $ 3,683 Buildings and leasehold improvements 22,641 24,246 Furniture and equipment 17,490 15,585 ------- ------- 43,747 43,514 Less accumulated depreciation and amortization 16,361 18,261 ------- ------- $27,386 $25,253 ======= =======
Depreciation and amortization expense was $3,305,000, $3,267,000 and $2,944,000, for the years ended December 31, 1996, 1995 and 1994, respectively. - -------------------------------------------------------------------------------- NOTE H--FORECLOSED REAL ESTATE - -------------------------------------------------------------------------------- Foreclosed real estate is presented net of a valuation allowance as follows:
------------------------------------------------ December 31 (In thousands) 1996 1995 ------------------------------------------------ Foreclosed real estate $2,233 $1,236 Less allowance for losses 10 50 ------ ------ $2,223 $1,186 ====== ======
An analysis of the allowance for losses on foreclosed real estate follows:
-------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 -------------------------------------------------------------------------- Balance at beginning of year $ 50 $ 367 $ 407 Reclassification to non-performing loans upon adoption of SFAS No. 114 - (131) - Provision for losses 10 31 373 Charge-offs, net of recoveries (50) (217) (413) ----- ----- ----- Balance at end of year $ 10 $ 50 $ 367 ===== ===== =====
The following table presents the components of the operation of foreclosed real estate:
------------------------------------------------------------------------ Year Ended December 31 (In thousands) 1996 1995 1994 ------------------------------------------------------------------------ Operating expenses, net of rental income $ 437 $ 450 $ 504 Provision for losses 10 31 373 Net gain on sales of real estate (102) (51) (257) ----- ----- ----- $ 345 $ 430 $ 620 ===== ===== =====
39 41 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE I--DEPOSITS - -------------------------------------------------------------------------------- Total deposits consist of the following:
------------------------------------------------------------ December 31 (In thousands) 1996 1995 ------------------------------------------------------------ Noninterest bearing $ 136,875 $ 124,615 Savings: Regular savings 167,465 173,345 NOW accounts 134,467 132,562 Money market accounts 133,555 147,420 ---------- ---------- Total savings 435,487 453,327 Time certificates of deposit 584,845 478,882 ---------- ---------- Total deposits $1,157,207 $1,056,824 ========== ==========
Time deposits with a minimum balance of $100,000 at December 31, 1996 and 1995 totaled $137,248,000 and $70,343,000, respectively. Brokered certificates of deposit at December 31, 1996 and 1995 amounted to $69,760,000 and $20,666,000, respectively. A summary of time certificates, by maturity, is as follows:
---------------------------------------------------------------------------------------- December 31 (Dollars in thousands) 1996 1995 ---------------------------------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------------------------------------------------------------------------------------- Within one year $462,180 5.55% $337,969 5.68% After one year through three years 96,803 5.69 99,870 5.84 After three years through five years 25,862 6.25 41,043 6.20 -------- -------- $584,845 5.61% $478,882 5.76% ======== ========
40 42 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE J--SHORT-TERM BORROWED FUNDS - -------------------------------------------------------------------------------- The following summarizes short-term borrowed funds:
----------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ----------------------------------------------------------------------- Securities sold under agreement to repurchase: Retail $44,165 $28,591 Wholesale 23,160 14,264 Treasury tax and loan 49 1,157 ------- ------- Total short-term borrowed funds $67,374 $44,012 ======= =======
Retail securities sold under agreement to repurchase at December 31, 1996 and 1995 mature within three months at a weighted average interest rate of 4.28% and 4.30%, respectively. Wholesale repurchase agreements mature within three months at a weighted average interest rate of 5.50% and 5.83% at December 31, 1996 and 1995, respectively. Short-term borrowed funds are secured by investment securities. See Note D - "Investment Securities." - -------------------------------------------------------------------------------- NOTE K--ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON - -------------------------------------------------------------------------------- Advances from the Federal Home Loan Bank of Boston (FHLBB) consist of the following:
----------------------------------------------------------------- December 31 (In thousands) 1996 1995 ----------------------------------------------------------------- Short-term $174,657 $102,613 Long-term: 5.00% (fixed rate) due January, 2003 201 201 5.00% (fixed rate) due March, 2006 223 - -------- -------- Total advances $175,081 $102,814 ======== ========
Short-term advances mature within six months and have a weighted average interest rate of 5.88% and 6.16% at December 31, 1996 and 1995, respectively. The Banks have available lines of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the lines are limited to $30,000,000 as of December 31, 1996. Additional credit may be available upon written request to the FHLBB. All borrowings from the FHLBB are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property and 90% of the fair value of U.S. Government and federal agency securities. 41 43 - -------------------------------------------------------------------------------- CFX Corporation and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note L--Preferred Stock - -------------------------------------------------------------------------------- The Company's preferred stock was converted to common stock on April 30, 1995, the mandatory conversion date. - -------------------------------------------------------------------------------- NOTE M--INCOME TAXES - -------------------------------------------------------------------------------- The components of the provision for income taxes are as follows:
------------------------------------------------------------------------------ Year Ended December 31 (In thousands) 1996 1995 1994 ------------------------------------------------------------------------------ Current tax provision: Federal $ 1,037 $ 2,590 $ 3,490 State 320 414 550 Federal tax credits (439) (177) - ------- ------- ------- Total current 918 2,827 4,040 ------- ------- ------- Deferred tax provision (benefit): Federal 5,438 2,785 110 State 926 463 (133) Effect of tax law change - 10 17 Effect of change in valuation allowance (542) (325) 238 ------- ------- ------- Total deferred 5,822 2,933 232 ------- ------- ------- Provision for income taxes $ 6,740 $ 5,760 $ 4,272 ======= ======= =======
The components of the net deferred tax asset included in other assets are as follows:
------------------------------------------------------------- December 31 (In thousands) 1996 1995 ------------------------------------------------------------- Deferred tax assets: Federal $ 10,624 $ 10,746 State 1,497 1,852 Valuation allowance - (542) -------- -------- Total deferred tax assets, net 12,121 12,056 -------- -------- Deferred tax liabilities: Federal 8,521 3,864 State 836 555 -------- -------- Total deferred tax liabilities 9,357 4,419 -------- -------- Net deferred tax asset $ 2,764 $ 7,637 ======== ========
A summary of the change in the net deferred tax asset is as follows:
----------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 ----------------------------------------------------------------------------------------- Balance at beginning of year $ 7,637 $ 5,270 $ 3,399 Deferred tax provision (5,822) (2,933) (232) Purchase accounting effects of leasehold residual acquisition - 6,907 - Tax effects of net unrealized losses on investment securities reflected in shareholders' equity 949 (1,607) 2,103 ------- ------- ------- Balance at end of year $ 2,764 $ 7,637 $ 5,270 ======= ======= =======
42 44 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The tax effects of each type of income and expense item that give rise to deferred tax assets and liabilities are as follows:
---------------------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ---------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and lease losses $ 5,454 $ 5,301 Investment in leasehold residual 4,354 5,654 Alternative minimum tax credit carryforward 1,079 282 State net operating loss carryforward 40 261 Capital loss carryforwards - 208 Severance accrual 368 96 Net unrealized losses on investment securities available for sale 586 - Book reserves 185 520 Other 55 276 -------- -------- 12,121 12,598 Valuation allowance - (542) -------- -------- Total deferred tax assets, net 12,121 12,056 -------- -------- Deferred tax liabilities: Depreciation 513 891 Deferred point income 752 141 Mortgage servicing rights 1,009 1,041 Consumer lease financing 5,986 1,368 Net unrealized gains on investment securities available for sale - 363 Other 1,097 615 -------- -------- Total deferred tax liabilities 9,357 4,419 -------- -------- Net deferred tax asset $ 2,764 $ 7,637 ======== ========
The change in the valuation allowance applicable to deferred tax assets is as follows:
------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 ------------------------------------------------------------------------------- Balance at beginning of year $ 542 $ 946 $ 708 Benefits generated by current year's operations (542) (325) 238 Benefits lost - (79) - ----- ----- ----- Balance at end of year $ - $ 542 $ 946 ===== ===== =====
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In prior years, the Company believed that uncertainty existed with respect to future realization of a portion of its capital loss carryforwards and with respect to deferred Massachusetts state tax assets. Therefore, the Company had established a valuation allowance relating to net operating and capital loss carryforwards. The valuation allowance was reversed to the extent that capital gains and ordinary income for state tax purposes in certain subsidiaries were realized. 43 45 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- For CFX Bank and Orange Savings Bank, the base amounts of federal income tax reserves for loan losses are permanent differences for which there is no recognition of deferred tax liabilities. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable. At December 31, 1996, retained earnings include tax loan loss reserves of approximately $7,038,000 at the base year for which no provision for income taxes has been made. If, in the future, such amounts are used for any purpose other than to absorb loan losses, the Company will incur a tax liability at the current applicable income tax rates. The Company anticipates that the $7,038,000 of retained earnings will not be used for any purpose that would result in the payment of income taxes. The unrecognized deferred tax liability on such amount at December 31, 1996 is approximately $2,800,000. The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting income, with the effective income tax rate provided in the consolidated statements of income:
- --------------------------------------------------------------------------------------------------------------------- Year Ended December 31 (Dollars in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Income tax expense at the statutory rate $ 6,590 34% $ 5,813 34% $ 3,915 34% Increase (decrease) resulting from: Tax-exempt interest income (427) (2) (477) (2) (388) (3) Goodwill and deposit base intangible amortization 199 1 212 1 232 2 Nondeductible merger expenses 863 5 56 - - - State income taxes, net of federal income tax benefit 797 4 589 3 278 2 Cash surrender value (332) (2) - - - - Low income housing tax credits (439) (2) (177) (1) - - Change in valuation allowance (542) (3) (325) (2) 238 2 Other, net 31 - 69 1 (3) - ------- -- ------- -- ------- -- Income tax expense $ 6,740 35% $ 5,760 34% $ 4,272 37% ======= == ======= == ======= ==
- -------------------------------------------------------------------------------- NOTE N--PENSION AND 401(k) PLANS - -------------------------------------------------------------------------------- The Company's defined benefit pension plans and 401(k) savings plan are summarized in the following tables: -------------------------------------------------------- MULTI-EMPLOYER PENSION PLAN -------------------------------------------------------- During 1996, CFX Corporation and its subsidiaries, excluding Orange Savings Bank, terminated their defined benefit pension plans, and transferred plan assets to a multi-employer plan in amounts that would effectively settle the plans' accumulated benefit obligations as of January 1, 1996. As a result, the Company recognized settlement and curtailment gains totaling $877,000 in 1996. Orange Savings Bank maintained its single-employer defined benefit plan in the Savings Banks Employees Retirement Association (SBERA) during 1996. The multi-employer plan is a defined benefit pension plan that covers all eligible employees of CFX Corporation and its wholly-owned subsidiaries, excluding Orange Savings Bank. Pension expense attributable to the plan in 1996 was $479,000. 44 46 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- --------------------------------------------------------- SINGLE-EMPLOYER PENSION PLANS --------------------------------------------------------- The following table sets forth the funded status of single-employer defined benefit plans and amounts recognized in the Company's consolidated balance sheets:
-------------------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 -------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $592,000 in 1996 and $4,608,000 in 1995 $ (595) $(4,997) ======= ======= Projected benefit obligation for service rendered to date $(1,031) $(6,844) Plan assets at fair value 866 5,309 ------- ------- Projected benefit obligation in excess of plan assets (165) (1,535) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (167) 316 Prior service cost not yet recognized in net periodic pension cost - 114 Unrecognized net assets at end of year (17) (97) ------- ------- Accrued pension cost included in other liabilities $ (349) $(1,202) ======= =======
Net pension expense attributable to these plans includes the following components:
------------------------------------------------------------------------------ Year Ended December 31 (In thousands) 1996 1995 1994 ------------------------------------------------------------------------------ Service cost--benefits earned during the period $ 74 $ 524 $ 553 Interest cost on projected benefit obligation 71 469 493 Actual return on plan assets (108) (70) (56) Net amortization and deferral 48 (383) (361) ----- ----- ----- Net pension expense $ 85 $ 540 $ 629 ===== ===== =====
Assumptions used in determining the actuarial present value of the projected benefit obligation under these plans, and the expected long-term rate of return on plan assets, are as follows:
------------------------------------------------------------------------------------------------ Year Ended December 31 1996 1995 1994 ------------------------------------------------------------------------------------------------ Weighted average discount rates 7.5% 7.25%-8.0% 8.0% Annual salary increases 6.0% 5.0%-6.0% 5.0%-6.0% Expected return on plan assets 8.0% 7.5%-8.0% 7.0%-8.0%
--------------------------------------------------------- 401(k) PLAN --------------------------------------------------------- The following table sets forth the Company's 401(k) plan expense:
-------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 -------------------------------------------------------------------- Matching contribution $264 $272 $129 Supplemental profit sharing contribution 326 318 328 ---- ---- ---- $590 $590 $457 ==== ==== ====
45 47 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE O--STOCK COMPENSATION PLANS - -------------------------------------------------------------------------------- At December 31, 1996, the Company has three stock-based compensation plans which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for the plans. Accordingly, no compensation cost has been recognized for the option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
------------------------------------------------------------------------------------------------ Year Ended December 31 (In thousands, except per share data) 1996 1995 ------------------------------------------------------------------------------------------------ Net income available to common stock: As reported $12,641 $11,249 Pro forma 12,472 10,619 Earnings per share: As reported $ .99 $ .89 Pro forma .97 .84
-------------------------------------------------------- FIXED STOCK OPTION PLANS -------------------------------------------------------- The Company has a 1996 and a 1995 stock option plan (the Option Plans) whereby options may be granted to certain key employees and directors of the Company and its subsidiaries to purchase shares of common stock of the Company at a price not less than fair value at the date of grant. Both incentive stock options and nonqualified stock options may be granted pursuant to the Option Plans. A total of 658,000 shares of authorized but unissued common stock of the Company has been reserved for issuance pursuant to incentive stock options granted under the Option Plans, and 443,000 shares of authorized but unissued common stock have been reserved for issuance pursuant to nonqualified stock options granted. The options are exercisable over a period not to exceed ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black - Scholes option-pricing model with the following weighted average assumptions used in 1996 and 1995, respectively: dividend yield of 5.5% and 5.2%; expected volatility of 29%; risk-free interest rates of 5.8% and 5.4%; and expected lives of 6.9 years for both periods. Changes in the status of options are summarized as follows:
------------------------------------------------------------------------------------------------------ December 31 (Options in thousands) 1996 1995 1994 ------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------------------------------ Outstanding at beginning of year $ 961 $ 9.36 728 $ 7.26 794 $ 6.63 Granted 88 13.89 352 13.12 134 8.21 Exercised (312) 6.25 (119) 7.50 (151) 6.02 Cancelled (3) 12.07 - - (49) 9.86 ------- ------- ------ Outstanding at end of year 734 $ 11.24 961 $ 9.36 728 $ 7.26 ======= ======= ======= ======= ====== ====== Exercisable at end of year 713 $ 11.37 928 $ 9.37 715 $ 7.29 ======= ======= ======= ======= ====== ====== Weighted average fair value of options granted during the year $ 17.01 $16.05 N/A
Information pertaining to options outstanding at December 31, 1996 is as follows:
----------------------------------------------------------------------------------------------- (Options in thousands) Options Outstanding Options Exercisable ----------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Remaining Exercise Exercise Exercise Prices Number Contractual Life Price Number Price ----------------------------------------------------------------------------------------------- $4.49 - $8.91 293 4.84 years $ 7.86 272 $ 7.95 9.27 - 13.61 217 7.50 12.65 217 12.65 14.29 224 8.94 14.29 224 14.29 ------- ------- 734 6.88 years $11.24 713 $11.37 ======= =======
--------------------------------------------------------- EMPLOYEE STOCK PURCHASE PLAN --------------------------------------------------------- The Company has an employee stock purchase plan (the Stock Purchase Plan) whereby employees of the Company and its subsidiaries with more than one-half year of continuous service, except for certain employees with substantial stock interests in the Company or with substantial rights to purchase common stock, may purchase up to an aggregate of 183,000 shares of the Company's common stock. Eligible employees have the right to purchase common stock by authorizing payroll deductions of up to seven percent of their base salary. The Stock Purchase Plan provides for periodic offerings at a purchase price which would not be less than the lesser of (1) 90% of the fair value per share on the offering date or (2) 90% of the fair value per share on the date of exercise. The Board of Directors of the Company may change the option price for subsequent offerings by increasing the percentage of fair value to a percentage not greater than 100% or decreasing the percentage of fair value to a percentage not less than 85%. Purchase discounts have not been material to date and, accordingly, no compensation cost has been recognized. 46 48 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE P--COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- In the ordinary course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements. --------------------------------------------------------- EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS --------------------------------------------------------- The Company has entered into employment agreements with three senior executives. The agreements provide for automatic one-year extensions unless either party elects to limit the agreement to its then existing term, and generally provide for a specified minimum annual compensation and the continuation of benefits currently received, including provisions following a "Change of Control." However, such employment may be terminated for cause, as defined, without incurring any continuing obligations. In addition to the above agreements, the Company has entered into special termination agreements with certain additional senior executives. The agreements generally provide for certain lump sum or periodic severance payments following a "Change in Control" as defined in the agreements. --------------------------------------------------------- INVESTMENT IN LIMITED PARTNERSHIPS --------------------------------------------------------- At December 31, 1996, the Company was committed to invest $4,098,000 in seven real estate development limited partnerships. At December 31, 1996 and 1995, the Company had $2,493,000 and $937,000, respectively, invested in such partnerships, which are included in other assets. --------------------------------------------------------- LEASE SECURITIZATION --------------------------------------------------------- In connection with the lease securitization transactions completed by CFX Funding, the Company has guaranteed a portion of the loss reserve accounts by executing letters of credit arrangements with third party banks. At December 31, 1996, the letters of credit amounted to $1,716,000 and will reduce monthly and expire during the period April 1998 through December 1998. The Company's guarantees are secured by the equipment giving rise to the securitizations. --------------------------------------------------------- MORTGAGE SERVICING RIGHTS --------------------------------------------------------- At December 31, 1996, the Company was committed to purchase servicing rights for approximately $105,000,000 in mortgage loans for $1,300,000. --------------------------------------------------------- OPERATING LEASE COMMITMENTS --------------------------------------------------------- Pursuant to the terms of noncancelable lease agreements in effect at December 31, 1996, pertaining to banking premises and equipment, future minimum rent commitments are as follows:
--------------------------------------------------------- Year Ending December 31 (In thousands) --------------------------------------------------------- 1997 $ 816 1998 673 1999 589 2000 449 2001 253 Thereafter 197 ------ $2,977 ======
Certain of the leases include options to renew for periods ranging from 5 to 15 years. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to $640,000, $594,000 and $365,000, respectively. --------------------------------------------------------- OTHER CONTINGENCIES --------------------------------------------------------- Various legal claims also arise from time to time in the ordinary course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial statements. 47 49 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE Q--RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- In the ordinary course of business, the Company makes loans to directors, officers and their associates and affiliated companies (related parties) at substantially the same terms, including interest rates and collateral, as those prevailing at the time of origination for comparable transactions with other borrowers. The total amounts due from directors, officers and their associates were $3,560,000 and $11,344,000 at December 31, 1996 and 1995, respectively. During the year ended December 31, 1996, new loans totaling $285,000 were made, and reductions were made to outstanding loan balances totalling $8,069,000, of which $1,054,000 was from repayments and $7,015,000 was attributable to directors no longer being affiliated with the Company. During the year ended December 31, 1996, payments amounting to $695,000 were made by the Company to a construction company in which a director holds a 100% ownership interest, for renovations to banking facilities. In addition, at December 31, 1996, the Company was committed to pay $500,000 to this company for further construction services. - -------------------------------------------------------------------------------- NOTE R--DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The Company uses certain derivative financial instruments in managing the interest rate risk included in the consolidated balance sheet. Derivative instruments are monitored regularly to assess market price changes. On at least a monthly basis, rate change analyses are done in order to assess potential market risk in changing interest rate environments. When the price volatility of derivative instruments varies from the price volatility of assets being hedged, positions are adjusted to maintain an appropriate match. The Company includes all off-balance sheet and derivative positions in its analysis of interest rate risk. Increases and decreases of both 100 and 200 basis points are analyzed in order to determine anticipated changes in earnings and market values. The detail on the specific financial instruments used is as follows: --------------------------------------------------------- INTEREST RATE AGREEMENTS --------------------------------------------------------- Interest-rate swaps generally involve the exchange of fixed and floating-rate interest obligations without the exchange of the underlying principal amounts. The Company typically becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to loss should one of the parties default. The Company minimizes this risk by performing normal credit reviews on its swap counterparties. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Interest rate floor agreements provide for the receipt of interest to the extent that the three-month LIBOR is the specified rate. At December 31, 1996 and 1995, interest rate agreements were comprised of the following:
--------------------------------------------------------------------------------------------- (Dollars in thousands) --------------------------------------------------------------------------------------------- Assets Interest Interest Notional Maturity Unrealized Hedged Received Paid Amount Date Gain --------------------------------------------------------------------------------------------- December 31, 1996 --------------------------------------------------------------------------------------------- Variable rate Fixed - 7.95% Variable - $ 5,000 12/16/97 $ 99 commercial loans 3 mo. LIBOR Variable rate Variable - N/A $10,000 02/15/00 $174 commercial loans LIBOR floor(6.25%) Variable rate Variable - N/A $10,000 06/03/99 $ 74 commercial loans LIBOR floor(5.75%)
--------------------------------------------------------------------------------------------- December 31, 1995 --------------------------------------------------------------------------------------------- Variable rate Fixed - 7.95% Variable - $5,000 12/16/97 $254 commercial loans 3 mo. LIBOR Variable rate Variable - N/A $10,000 02/15/00 $400 commercial loans LIBOR floor(6.25%)
48 50 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- --------------------------------------------------------- FINANCIAL OPTION CONTRACTS --------------------------------------------------------- The Company periodically uses financial options to hedge interest rate exposure generally on secondary mortgage market operations. Options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price within a specified period of time. For most options transactions, the Company uses recognized and centralized exchanges for execution. These exchanges act as the counterparty to all transactions, thereby minimizing the credit risk of market participants. Option contracts are used explicitly for hedge purposes and are not undertaken for speculation. The Company's intent and general practice is to liquidate option contract obligations before stated exercise or delivery dates through established market transactions. The Company does not generally intend to deliver or receive the securities underlying option contracts, but may execute delivery or receipt if it is financially prudent to do so. At December 31, 1996, to hedge mortgage loans held for sale, the Company held put options (the option to sell securities at a stated price within a specified term) on 30-year treasury obligations totaling $4,000,000 and covered call options on 5-year treasury obligations totaling $10,000,000 extending through March 1997. The unrealized gain on the option contracts at December 31, 1996 was $189,000. --------------------------------------------------------- TRADING ACTIVITIES --------------------------------------------------------- In 1994, as mortgage-backed securities were purchased for the trading portfolio, the Company assessed their price volatility under varying interest rates. A hedge using a combination of interest rate swap agreements, financial futures contracts and financial option contracts was constructed to closely resemble the volatility of the underlying security. Derivatives held for trading purposes, as well as the overall program for which they were used, were liquidated in October, 1994. Net gains (losses) on trading securities, included separately in the consolidated statements of income, are summarized as follows:
----------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 ----------------------------------------------------------------- Mortgage-backed securities $ - $ - $(2,985) Other debt securities - - (4) Equity securities 564 1,092 271 Futures, options and swaps - - 2,461 ------- ------- ------- $ 564 $ 1,092 $ (257) ======= ======= =======
49 51 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE S--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK - -------------------------------------------------------------------------------- In addition to using derivative financial instruments to manage interest rate risk (see Note R), the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and forward delivery contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheet. The Company's exposure to credit loss for commitments to extend credit and standby letters of credit is represented by the contractual amount of these specific instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. At December 31, 1996 and 1995, the following financial instruments were outstanding:
----------------------------------------------------------------------------------------------- Contract or Notional Amount ----------------------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ----------------------------------------------------------------------------------------------- Financial instruments for which contract amounts represent credit risk: Commitments to originate and purchase loans $ 56,043 $ 63,298 Unadvanced funds on lines of credit 115,978 78,205 Standby letters of credit 1,840 2,566 Financial instruments for which contract amounts exceed credit risk: Outstanding forward delivery contracts 94,888 128,182
A commitment to extend credit is an agreement to provide financing to a customer contingent upon compliance with all conditions established in the contract. A commitment generally has a fixed expiration date or other termination clause and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on an individual basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's evaluation of the counterparty. The collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and residential real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These commitments are primarily issued to support private borrowing arrangements on a short-term basis. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Forward delivery contracts are contracts for delayed delivery of mortgage loans or mortgage- backed securities in which the Company agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Credit risk to the Company arises from the possible inability of counterparties to meet the terms of their contracts. In the event of nonacceptance by the counterparty, the Company would be subject to the credit risk of the loans retained. These loans would have been originated in the ordinary course of business complying with the Company's standard credit evaluation and collateral requirements. Failure to fulfill delivery requirements for these contracts may result in payment of fees to certain investors. 50 52 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE T--FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts of cash and short-term instruments approximate fair values. INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying values of interest bearing deposits with other banks approximate fair values. RESTRICTED SECURITIES: The carrying values of Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock approximate fair value, based on redemption provisions. INVESTMENT SECURITIES: Fair values of all other investment securities are based on quoted market prices. MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage loans held for sale are determined taking into consideration commitments on hand from investors and prevailing market prices. LOANS AND LEASES (LOANS): Fair values of variable-rate loans that reprice frequently and have no significant change in credit risk, are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses which use interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. DEPOSITS: Fair values disclosed for demand deposits (non-interest bearing deposits, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWED FUNDS: The carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate their fair values. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON: The carrying amounts of advances from the Federal Home Loan Bank of Boston maturing within 90 days approximate their fair values. The fair values of other advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of advances. ACCRUED INTEREST: The carrying amounts of accrued interest approximate fair value. OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options, swaps and interest rate agreements are based on quoted market prices. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 51 53 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The estimated fair values, and related carrying amounts or notional amounts, of the Company's financial instruments are as follows:
- -------------------------------------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 50,404 $ 50,404 $ 46,893 $ 46,893 Interest bearing deposits with other banks 197 197 13,475 13,475 Securities available for sale 245,324 245,324 201,246 201,246 Securities held to maturity 32,670 32,831 97,093 98,142 Mortgage loans held for sale 15,212 15,302 7,085 7,196 Loans and leases, net 1,102,424 1,096,876 911,981 919,184 Accrued interest receivable 9,741 9,741 10,218 10,218 Financial liabilities: Deposits 1,157,207 1,159,738 1,056,824 1,058,869 Short-term borrowed funds 67,374 67,374 44,012 44,012 Advances from the Federal Home Loan Bank of Boston 175,081 175,050 102,814 102,877 Accrued interest payable 3,834 3,834 1,908 1,908
- -------------------------------------------------------------------------------------------------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------- Unrecognized financial instruments: Commitments to originate and purchase loans 56,043 (260) 63,298 (145) Standby letters of credit 1,840 (2) 2,566 (15) Unadvanced funds on lines of credit 115,978 (558) 78,205 (304) Interest-rate swap agreements 5,000 99 5,000 254 Financial option contracts (long position) 4,000 37 - - Financial option contracts (short position) 10,000 152 - - Interest-rate floor agreements 20,000 248 10,000 400
52 54 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE U--REGULATORY CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS - -------------------------------------------------------------------------------- The Company (on a consolidated basis) and each Bank (on a consolidated basis) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notifications from the Federal Reserve Board and the Federal Deposit Insurance Corporation categorized the Company and the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, they must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notifications that management believes have changed these categories. The Company's and the Banks' actual capital amounts and ratios are also presented in the table.
------------------------------------------------------------------------------------------------ Minimum To Be Well Minimum Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------------------------ December 31, 1996 (In thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------ Total capital to risk-weighted assets: Consolidated $136,210 14.8% $ 73,875 8.0% $ 92,344 10.0% CFX Bank 86,845 12.2 57,110 8.0 71,388 10.0 Safety Fund National Bank 24,345 13.9 14,048 8.0 17,560 10.0 Orange Savings Bank 10,108 20.9 3,859 8.0 4,823 10.0 ------------------------------------------------------------------------------------------------ Tier 1 capital to risk-weighted assets: Consolidated 124,615 13.5 36,938 4.0 55,407 6.0 CFX Bank 78,912 11.0 28,555 4.0 42,833 6.0 Safety Fund National Bank 22,090 12.6 7,024 4.0 10,536 6.0 Orange Savings Bank 9,503 19.7 1,929 4.0 2,894 6.0 ------------------------------------------------------------------------------------------------ Tier 1 capital to average assets: Consolidated 124,615 8.0 62,323 - 4.0 - 77,903 5.0 77,903 5.0 CFX Bank 78,912 6.8 46,406 - 4.0 - 58,008 5.0 58,008 5.0 Safety Fund National Bank 22,090 7.0 12,568 - 4.0 - 15,710 5.0 15,710 5.0 Orange Savings Bank 9,503 9.8 3,870 - 4.0 - 4,837 5.0 4,837 5.0
Certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans and advances. Applicable rules prohibit the payment of a cash dividend by the Banks if the effect thereof would cause the net worth of the Banks to be reduced below applicable net worth requirements. Accordingly, $62,844,000 of the Company's equity in the net assets of the Banks was restricted at December 31, 1996. Under Federal Reserve regulations, the Banks are also limited as to the amount they may loan to the Company, unless such loans are collateralized by specified obligations. At December 31, 1996, the maximum amount available for transfer from the Banks to the Company in the form of loans approximated $12,625,000. 53 55 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE V-- MORTGAGE LOAN SERVICING - -------------------------------------------------------------------------------- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $765,000,000 and $672,000,000 at December 31, 1996 and 1995, respectively. Substantially all loans serviced for others were sold without recourse provisions. The following is an analysis of the changes in mortgage servicing rights:
-------------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 -------------------------------------------------------------------------------------------- Balance at beginning of year $ 4,373 $ 4,207 $ 4,557 Additions 1,826 682 406 Sales - - (126) Amortization (886) (516) (630) ------- ------- ------- Balance at end of year $ 5,313 $ 4,373 $ 4,207 ======= ======= =======
At December 31, 1996 and 1995, the fair value of capitalized mortgage servicing rights was $7,848,000 and $5,696,000, respectively. There was no activity in the valuation allowances for mortgage servicing rights for the years ended December 31, 1996 and 1995. - -------------------------------------------------------------------------------- NOTE W--SUBSEQUENT EVENT - -------------------------------------------------------------------------------- On February 13, 1997, the Company signed a definitive agreement to acquire all of the outstanding capital stock of Portsmouth Bank Shares, Inc. (Portsmouth), a New Hampshire bank holding company, headquartered in Portsmouth, NH. Pursuant to the definitive agreement each of Portsmouth's outstanding shares of common stock has the potential to be converted into .95 shares of the Company's common stock. The actual number of shares of the Company's common stock issuable in the transaction is subject to adjustment based on the average price of the Company's common stock for the ten trading days immediately before the Company receives the last regulatory approval required to consummate the transaction. In the event that the average price of the Company's common stock is below $15.70, the exchange ratio becomes 1.05 shares; and the exchange ratio floats between .95 and 1.05 shares if the average price of the Company's common stock is between $17.375 and $15.70. Portsmouth has the right to terminate the agreement if the average price of the Company's common stock is below $14.20 per share unless the Company agrees to increase the exchange ratio. The transaction is tax free to the owners of Portsmouth and is subject to regulatory approval and the approval of both the Company's and Portsmouth's shareholders. It is anticipated that the transaction will be accounted for by the pooling-of-interests method of accounting. At December 31, 1996, Portsmouth had (unaudited) total assets of $272 million, deposits of $198 million and stockholders' equity of $66 million. Portsmouth's bank subsidiary, Portsmouth Savings Bank, operates 3 full service offices in Portsmouth, North Hampton and Greenland, New Hampshire. On March 24, 1997, the Company entered into a definitive agreement to acquire all of the outstanding capital stock of Community Bankshares, Inc. (Community), a New Hampshire bank holding company, headquartered in Concord, New Hampshire. Pursuant to the definitive agreement, each outstanding share of Community common stock will be converted into 2.20 shares of CFX common stock. If the average price of CFX common stock for the fifteen days preceding the closing date is between $18.18 and $20.00, the exchange ratio floats between 2.2 and 2.0 shares. Community may terminate the agreement if the average price of CFX common stock is below $13.50 per share unless CFX agrees to increase the exchange ratio. The transaction is tax free to the owners of Community and is subject to regulatory approval and the approval of both the Company's and Community's shareholders. It is anticipated that the transaction will be accounted for by the pooling-of-interests method of accounting. At December 31, 1996, Community had (unaudited) total assets of $550 million, deposits of $396 million and stockholder's equity of $41 million. Community's bank subsidiaries, Concord Savings Bank, headquartered in Concord, New Hampshire and Centerpoint Bank, headquartered in Bedford, New Hampshire, operate 11 branches located in Merrimack, Hillsborough, Belknap and Rockingham Counties. In the event that, prior to the closings, the outstanding shares of the Company's common stock or Portsmouth's common or Community's common stock shall have been increased due to a stock dividend declared on the respective stock with a record date prior to the closings, then appropriate and apportionate adjustments shall be made in the number of shares exchanged. 54 56 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE X--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Balance Sheets ----------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 ----------------------------------------------------------------------------- Assets Cash and due from banks $ 199 $ 1,174 Interest bearing deposits with bank subsidiaries 2,481 2,611 Securities held to maturity 320 577 Receivables from subsidiaries 7,992 8,233 Investment in bank subsidiaries 118,841 116,191 Other assets 5,661 2,670 -------- -------- $135,494 $131,456 ======== ======== Liabilities $ 2,541 $ 4,424 Shareholders' Equity 132,953 127,032 -------- -------- $135,494 $131,456 ======== ========
Statements of Income ---------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 ---------------------------------------------------------------------------------------- Interest and dividend income $ 258 $ 340 $ 289 Dividends from subsidiaries 10,639 4,461 5,490 Gain on sale of investment securities - 28 - -------- -------- -------- 10,897 4,829 5,779 General and administrative expenses 2,020 891 1,022 -------- -------- -------- Income before income taxes and equity in undistributed net income of subsidiaries 8,877 3,938 4,757 Income tax expense (benefit) 38 (141) (345) -------- -------- -------- Income before equity in undistributed net income of subsidiaries 8,839 4,079 5,102 Equity in undistributed net income of subsidiaries 3,802 7,259 2,142 -------- -------- -------- Net Income $ 12,641 $ 11,338 $ 7,244 ======== ======== ========
55 57 - -------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------------------------- Year Ended December 31 (In thousands) 1996 1995 1994 -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 12,641 $ 11,338 $ 7,244 Adjustments to reconcile net income to net cash provided by operating activities: Net deferred income tax provision (benefit) - 7 (111) Gain on sale of investment securities - (28) - Equity in undistributed net income of subsidiaries (3,802) (7,259) (2,142) Net change in other assets and other liabilities (1,789) (2,140) 2,532 -------- -------- -------- Net Cash Provided by Operating Activities 7,050 1,918 7,523 -------- -------- -------- INVESTING ACTIVITIES Capital contribution to subsidiary - (200) - Net decrease (increase) in interest bearing deposits with bank subsidiaries 130 8,775 (3,630) Decrease (increase) in receivables from subsidiaries 241 (7,940) 110 Purchases of securities available for sale - - (1,027) Proceeds from sales of securities available for sale - 1,075 - Purchases of securities held to maturity - - (3,002) Proceeds from maturities of securities held to maturity 257 18 3,275 Purchase of bank-owned life insurance (3,250) - - NET CASH PROVIDED (USED) -------- -------- -------- BY INVESTING ACTIVITIES (2,622) 1,728 (4,274) -------- -------- -------- FINANCING ACTIVITIES Common cash dividends paid (7,067) (4,654) (3,642) Preferred cash dividends paid - (89) (268) Proceeds from issuance of common stock 2,109 1,267 1,127 Payments on fractional shares (26) (18) (20) Acquisition of treasury shares (419) - - NET CASH USED -------- -------- -------- BY FINANCING ACTIVITIES (5,403) (3,494) (2,803) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (975) 152 446 Cash and cash equivalents at beginning of year 1,174 1,022 576 CASH AND CASH EQUIVALENTS -------- -------- -------- AT END OF YEAR $ 199 $ 1,174 $ 1,022 ======== ======== ========
56 58 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE Y--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------- The following is a summary of the consolidated quarterly results of operations for the years ended December 31, 1996 and 1995:
---------------------------------------------------------------------------------------- Three Months Ended March 31 June 30 Sept. 30 Dec. 31 ---------------------------------------------------------------------------------------- (In thousands, except per share data) ---------------------------------------------------------------------------------------- 1996 ---------------------------------------------------------------------------------------- Interest and dividend income $ 25,740 $ 26,892 $ 27,416 $ 28,377 Interest expense 12,039 12,573 13,005 13,949 -------- -------- -------- -------- Net interest and dividend income 13,701 14,319 14,411 14,428 Provision for loan and lease losses 905 750 680 600 Trading securities gains, net 153 - - 411 Investment securities gains, net 57 146 (13) (43) Other income (2 & 3) 3,622 3,846 4,428 4,220 Other expenses (1) 11,577 11,450 16,587 11,756 -------- -------- -------- -------- Income before income taxes 5,051 6,111 1,559 6,660 Income taxes 1,496 2,098 1,108 2,038 ======== ======== ======== ======== Net income $ 3,555 $ 4,013 $ 451 $ 4,622 ======== ======== ======== ======== Earnings per common share $ .28 $ .31 $ .04 $ .36 ======== ======== ======== ======== ---------------------------------------------------------------------------------------- 1995 ---------------------------------------------------------------------------------------- Interest and dividend income $ 22,875 $ 23,963 $ 24,499 $ 25,053 Interest expense 10,262 11,100 11,460 11,542 -------- -------- -------- -------- Net interest and dividend income 12,613 12,863 13,039 13,511 Provision for loan and lease losses 705 953 625 754 Trading securities gains, net 224 294 273 301 Investment securities gains, net 3 106 73 22 Other income 2,938 3,440 3,354 3,283 Other expenses (4) 11,677 11,589 11,261 11,675 -------- -------- -------- -------- Income before income taxes 3,396 4,161 4,853 4,688 Income taxes 1,204 1,406 1,624 1,526 -------- -------- -------- -------- Net income 2,192 2,755 3,229 3,162 Preferred stock dividends 67 22 - - -------- -------- -------- -------- Net income available to common stock $ 2,125 $ 2,733 $ 3,229 $ 3,162 ======== ======== ======== ======== Earnings per common share $ .17 $ .21 $ .26 $ .25 ======== ======== ======== ========
(1) For the quarter ended September 30, 1996, the Company recorded costs related to the mergers of Safety Fund and Milford totaling $4,522,000, and costs associated with a SAIF special assessment of $691,000. (2) For the quarter ended September 30, 1996, the Company terminated CFX Corporation's and Safety Fund's pension plans and transferred the assets and liabilities to a multi-employer pension plan. A gain from the settlement of the pension plan was recorded totaling $877,000. (3) For the quarter ended December 31, 1996, the Company recorded $411,000 in gains on trading securities on an investment purchased and sold during the same quarter. (4) For the quarter ended September 30, 1995, the Company received a $424,000 insurance premium refund from the Federal Deposit Insurance Corporation (FDIC). In addition, for the quarter ended December 31, 1995 the insurance premiums paid to the FDIC were significantly reduced. 57 59 - -------------------------------------------------------------------------------- Report of Management--Assessment of Internal Controls Over Financial Reporting - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Management is responsible for establishing and maintaining an effective internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and the Federal Financial Institutions Examination Council instructions for Consolidated Reports of Condition and Income (call report instructions). The structure contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any structure of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control structure may vary over time. Management assessed the Company's internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and call report instructions as of December 31, 1996. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 1996, CFX Corporation and subsidiaries maintained an effective internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and call report instructions. Peter J. Baxter Mark A. Gavin Gregg R. Tewksbury President and Chief Chief Operating Officer Chief Financial Officer Executive Officer
58 60 - -------------------------------------------------------------------------------- REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of CFX Corporation: We have audited the accompanying consolidated balance sheets of CFX Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements as of December 31, 1995, and for the years ended December 31, 1995 and 1994 have been restated to reflect the pooling of interests with The Safety Fund Corporation and Milford Co/operative Bank as described in Note B to the consolidated financial statements. We did not audit the 1995 and 1994 financial statements of The Safety Fund Corporation, which statements reflect total assets of $287,483,000 as of December 31, 1995 and net interest and dividend income of $13,816,000 and $12,036,000 for the years ended December 31, 1995 and 1994, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for The Safety Fund Corporation as of December 31, 1995 and for the years ended December 31, 1995 and 1994 is based solely on the reports of other auditors. The consolidated financial statements as of and for the year ended December 31, 1994 reflect the pooling of interests with Orange Savings Bank. We did not audit the 1994 financial statements of Orange Savings Bank, which statements reflect total assets of $83,268,000 as of December 31, 1994 and net interest and dividend income of $3,255,000 for the year ended December 31, 1994. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Orange Savings Bank as of and for the year ended December 31, 1994 is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CFX Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," effective January 1, 1995. Boston, Massachusetts January 29, 1997, except for Note W as to which the date is March 24, 1997 59 61 - -------------------------------------------------------------------------------- REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of CFX Corporation: We have examined management's assertion that CFX Corporation and subsidiaries maintained an effective internal control structure over financial reporting as of December 31, 1996, included in the accompanying report on Assessment of Internal Controls Over Financial Reporting, presented in conformity with both generally accepted accounting principles and call report instructions. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control structure over financial reporting, testing and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that CFX Corporation and subsidiaries maintained an effective internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and call report instructions as of December 31, 1996, is fairly stated, in all material respects, based on Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Boston, Massachusetts January 29, 1997 60 62 - -------------------------------------------------------------------------------- DIRECTORS AND OFFICERS OF CFX CORPORATION - -------------------------------------------------------------------------------- Directors Eugene E. Gaffey Chairman of the Board Retired Justice, Hinsdale Municipal Court Richard F. Astrella President, Orange Savings Bank William E. Aubuchon, III Chairman of the Board and CEO W.E. Aubuchon Company, Inc. Peter J. Baxter President and Chief Executive Officer, CFX Corporation and CFX Bank Richard B. Baybutt Chairman of the Board, Baybutt Construction Christopher V. Bean Attorney, Bean Law Offices Christopher W. Bramley President and CEO Safety Fund National Bank P. Kevin Condron President Central Supply Company, Inc. Calvin L. Frink Retired David R. Grenon Chairman of Advisory Board & Asst. Clerk The Protector Group Insurance Agency, Inc. Elizabeth Sears Hager New Hampshire State Representative Douglas S. Hatfield, Jr. President and Treasurer, Hatfield, Moran & Barry, P.A Philip A. Mason Attorney, Mason & Martin Walter R. Peterson President Emeritus Franklin Pierce College L. William Slanetz Owner, Cheshire Realty Officers Peter J. Baxter President and Chief Executive Officer Mark A. Gavin, CPA Executive Vice President and Chief Operating Officer Gregg R. Tewksbury, CPA Chief Financial Officer William H. Dennison Treasurer John F. Foley Senior Vice President, Human Resources Laurence E. Babcock Vice President, Data Processing Daniel J. LaPlante Vice President, Investment Manager Philip B. Emma Corporate Controller Donald E. Leroux, CPA Director of Audit Charles B. Troccia Director of Marketing Karen M. Mayo, CPA Director of Compliance Christopher V. Bean Secretary Winifred M. Brooks Assistant Secretary - -------------------------------------------------------------------------------- TRUSTEES AND BANKING PARTNERS OF CFX BANK - -------------------------------------------------------------------------------- Trustees Eugene E. Gaffey Chairman of the Board Retired Justice, Hinsdale Municipal Court Richard B. Baybutt Chairman of the Board, Baybutt Construction Peter J. Baxter President and Chief Executive Officer CFX Bank Delcie D. Bean President, D.D. Bean & Sons, Inc. Richard D. D'Amato Former President, Milford Co/operative Bank William H. Dennison Banking Partner, CFX Bank Calvin L. Frink Retired Emerson H. O'Brien President, Economy Plumbing & Heating J. Justin Pestana, Jr. Chairman of the Board, President, J.P. Chemical Company L. William Slanetz Owner, Cheshire Realty David B. Walters Director of Community Relations, CFX Bank Honorary Trustee Mario G. Farina Chairman of the Board, M.G.F., Inc. Banking Partners Peter J. Baxter President and Chief Executive Officer Daniel J. LaPlante Treasurer Keith D. Armstrong Benoit J. Asselin Judith Avery-Dunning Laurence E. Babcock Susan Martore-Baker A. Jane Beauchamp Claire J. Castanino Kathleen A. Cleveland Martha A. Curtis William H. Dennison Janice P. Dokla Brian P. Donovan Gordon R. Edmonds John F. Foley Carole E. Fredericks Mark A. Gavin, CPA Carol M. Harwood Ellen M. Jones Donald E. Leroux, CPA Karen M. Mayo, CPA William J. McIver Lee K. Robator Larry E. Ruest Gregg R. Tewksbury, CPA Charles B. Troccia Peter T. Whittemore Liane T. Wiley Debra T. Wilner - -------------------------------------------------------------------------------- DIRECTORS OF CFX FINANCIAL SERVICES, INC. - -------------------------------------------------------------------------------- Eugene E. Gaffey Chairman of the Board Retired Justice, Hinsdale Municipal Court Philip A. Mason Attorney, Mason & Martin Peter J. Baxter President and Chief Executive Officer, CFX Corporation and CFX Bank Mark A. Gavin, CPA Executive Vice President and Chief Operating Officer CFX Corporation William C. Mears President CFX Funding L.L.C. Steven T. Platten Vice President CFX Funding L.L.C. - -------------------------------------------------------------------------------- MANAGEMENT OF CFX FUNDING L.L.C. - -------------------------------------------------------------------------------- William C. Mears President Steven T. Platten Vice President Mark A. Gavin, CPA Treasurer James Valz Controller 61 63 - -------------------------------------------------------------------------------- DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC. - -------------------------------------------------------------------------------- Directors Peter J. Baxter President and Chief Executive Officer, CFX Corporation and CFX Bank Paul T. Pouliot, CMB President Mortgage Banking Partner, CFX Mortgage, Inc. Mark A. Gavin, CPA Executive Vice President and Chief Operating Officer CFX Corporation Mortgage Banking Partners Paul T. Pouliot, CMB President Winnie F. Thibault Treasurer Dianne M. Bishop Daniel J. McKenney Pauline D. Tessier - -------------------------------------------------------------------------------- DIRECTORS AND SENIOR OFFICERS OF SAFETY FUND NATIONAL BANK - -------------------------------------------------------------------------------- Directors William E. Aubuchon, III Chairman of the Board and CEO W.E. Aubuchon Company, Inc. Christopher W. Bramley President and CEO Safety Fund National Bank P. Kevin Condron President Central Supply Company, Inc. David R. Grenon Chairman of Advisory Board & Asst. Clerk The Protector Group Insurance Agency, Inc. Donald L. Hall President and Director Higley, Hall & Company, Inc. Directors Douglas S. Hatfield, Jr. President and Treasurer, Hatfield, Moran & Barry, P.A. John E. Howard, CPA Managing Partner William S. Reagan & Company, LLP Philip A. Mason Attorney, Mason & Martin Walter R. Peterson President Emeritus Franklin Pierce College Allen I. Rome President Rome Insurance Agency, Inc. Henri L. Sans, Jr. Attorney LeBlanc and Sans J. Robert Seder Attorney Seder & Chandler Senior Officers Christopher W. Bramley President and Chief Executive Officer James C. Garvey Senior Vice President and Senior Commercial Loan Officer Michael A. L'Ecuyer Senior Vice President - Retail Banking Stephen R. Shirley Senior Vice President and Senior Trust Officer Michael D. Thibeault Senior Vice President Diane Whitten Senior Vice President - Loan Resolution - -------------------------------------------------------------------------------- DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK - -------------------------------------------------------------------------------- Directors Elwyn C. Hayden Chairman of the Board Retired, Hayden Realty & Development Corp. Richard F. Astrella President, Orange Savings Bank Robert G. Allen Sales Engineer, L.S. Starrett, Co. Christopher V. Bean Attorney Bean Law Offices Paul A. Larocque, D.D.S. Semi-Retired, Dentist Thomas S. Mann, III President, T. S. Mann Lumber Company Philip A. Mason Attorney, Mason & Martin Directors Andrea L. Shaughnessy President, Duall Plastics, Inc. John B. Stevenson Accounting & MIS Manager Riveto Manufacturing Company Arlan D. Willard Retired, L. S. Starrett, Co. Banking Partners Richard F. Astrella Connie A. Zani 62 64 - -------------------------------------------------------------------------------- INFORMATION ON COMMON STOCK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At December 31, 1996, there were 4,268 holders of record of CFX Corporation's common stock. The stock is traded on the American Stock Exchange (AMEX) under the symbol "CFX." The following table sets forth cash dividends declared on the Company's common stock and the high and low sale prices as reported by AMEX for the appropriate periods.
------------------------------------------------------------------------------------------------ 1996 First Second Third Fourth Calendar Quarters Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------ Dividends declared per share (1) $ .1714 $ - $ .1905 $ .2095 Stock price (1): High 15 3/8 14 3/8 15 1/4 16 5/8 Low 12 7/8 12 1/4 11 5/8 13 5/8 Last sale 14 12 3/8 14 1/8 15 1/2 ------------------------------------------------------------------------------------------------ 1995 First Second Third Fourth Calendar Quarters Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------ Dividends declared per share (1) $ .1391 $ .1451 $ .1451 $ .3266 Stock price (1): High 11 3/4 15 3/8 16 1/2 16 5/8 Low 9 1/2 11 13 1/2 13 1/4 Last sale 11 1/8 15 16 3/8 14 7/8 ------------------------------------------------------------------------------------------------
(1) Common cash dividends and common stock sale prices have been restated to reflect the Company's 5% common stock dividend declared on December 10, 1996. 63 65 - -------------------------------------------------------------------------------- CORPORATE INFORMATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXECUTIVE OFFICES 102 Main Street Keene, NH 03431 REGISTRAR AND TRANSFER AGENT Chemical Mellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 1-800-288-9541 INDEPENDENT AUDITORS Wolf & Company, P.C. One International Place Boston, MA 02110-9801 COMMON STOCK INFORMATION Listed on AMEX: CFX Shares outstanding as of 12/31/96: 12,980,732 REQUEST FOR INFORMATION For more information on the Company's products and services, call or write: Mark A. Gavin, CPA Chief Operating Officer CFX Corporation P.O. Box 429 102 Main Street Keene, NH 03431 (603) 352-2502 A copy of Form 10-K filed for the year ended December 31, 1996 by the Company with the Securities and Exchange Commission and quarterly financial reports may be obtained without charge by written request to: Gregg R. Tewksbury, CPA Chief Financial Officer CFX Corporation P.O. Box 429 102 Main Street Keene, NH 03431 (603) 352-2502 DIVIDEND REINVESTMENT PLAN CFX Corporation offers a dividend reinvestment plan which permits participating shareholders of record to reinvest dividends in CFX Corporation Common Stock without paying brokerage commissions or service charges. A minimum of fifty shares of common stock owned is required to be eligible for participation in the plan. Participating shareholders may also invest up to $5,000 in additional funds each quarter for the purchase of additional shares. A copy of the dividend reinvestment plan prospectus and application may be requested from the transfer agent at the above address or from Shareholder Services at CFX Corporation. 64 EX-23.1 5 WOLF & COMPANY, P.C. AUDITORS' CONSENT. 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-17071) pertaining to the 1986 Stock Option Plan of CFX Corporation, in the Registration Statement (Form S-8, No. 33-52598) pertaining to the 1992 Employee Stock Purchase Plan of CFX Corporation, and in the Registration Statement (Form S-8, No. 33-61787) pertaining to the 1995 Stock Option Plan for CFX Corporation of our report dated January 29, 1997, except for Note W as to which the date is March 27, 1997, with respect to the consolidated financial statements of CFX Corporation as of December 31, 1996, and for the year then ended, incorporated by reference in the Annual Report on Form 10-K of CFX Corporation for the year ended December 31, 1996. /s/ -------------------------- Wolf & Company, P.C. Boston, Massachusetts March 27, 1997 EX-23.2 6 DELOITTE & TOUCHE LLP AUDITORS'CONSENT. 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-61787, 33-17071, and 33-52598 of CFX Corporation on Forms S-8 of our report on the financial statements of Orange Savings Bank dated January 27, 1995, appearing in the Annual Report on Form 10-K of CFX Corporation and Subsidiaries for the year ended December 31, 1996. /s/ Deloitte & Touche LLP March 27, 1997 EX-23.3 7 KPMG PEAT MARWICK LLP AUDITORS' CONSENT. 1 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Safety Fund Corporation: We consent to the incorporation by reference on Registration Statement Nos. 33-61787, 33-17071 and 33-52598 on Form S-8 filed by CFX Corporation of our report dated January 22, 1996, relating to the consolidated balance sheets of The Safety Fund Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended, which report appears in the December 31, 1995 annual report on For 10-KSB of The Safety Fund Corporation which is included as an exhibit to the December 31, 1996 Form 10-K of CFX Corporation. /s/ ------------------------------------- KPMG Peat Marwick LLP Boston, Massachusetts March 28, 1997 EX-27 8 FINANCIAL DATA SCHEDULE.
9 1,000 12-MOS 12-MOS 12-MOS DEC-31-1994 DEC-31-1995 DEC-31-1996 DEC-31-1994 DEC-31-1995 DEC-31-1996 0 44,393 50,404 0 13,475 197 0 2,500 0 0 0 0 0 201,246 245,324 0 97,093 32,670 0 98,142 32,831 0 927,430 1,118,164 0 15,449 15,740 0 1,344,880 1,547,092 0 1,056,824 1,157,207 0 146,626 242,031 0 14,198 14,477 0 201 424 0 0 0 0 0 0 0 8,052 8,672 0 118,980 124,281 0 1,344,880 1,547,092 62,546 76,747 88,416 17,721 18,058 19,060 1,370 1,584 949 81,637 96,389 108,425 28,122 37,279 40,740 33,639 44,363 51,566 47,998 52,026 56,589 2,697 3,037 2,935 (73) 1,296 711 44,864 46,202 51,370 11,516 17,098 19,381 6,976 11,249 12,641 0 0 0 0 0 0 6,976 11,249 12,641 .58 .89 .99 0 0 0 4.27 4.36 4.24 10,577 8,299 9,840 569 235 0 2,804 1,360 1,895 661 4,852 2,205 16,168 14,401 15,449 5,467 2,934 3,301 1,003 945 657 14,401 15,449 15,740 14,401 15,449 15,740 0 0 0 7,387 6,026 5,213
EX-99.1 9 STOCK OPTION AGREEMENT. 1 EXHIBIT 99.3 STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (this "Option Agreement"), dated as of March 24, 1997, is by and between COMMUNITY BANKSHARES, INC. ("Community"), a New Hampshire corporation, and CFX CORPORATION ("CFX"), a New Hampshire corporation. WITNESSETH WHEREAS, the respective Boards of Directors of Community and CFX have approved a Plan of Share Exchange (the "Plan of Exchange"), and the respective Boards of Directors of Community, Concord Savings Bank ("Concord Bank"), a New Hampshire state-chartered savings bank subsidiary of Community, Centerpoint Bank ("Centerpoint Bank"), a New Hampshire state-chartered commercial bank subsidiary of Community, CFX and CFX Bank, a New Hampshire state-chartered savings bank subsidiary of CFX, have approved an Agreement and Plan of Reorganization (the "Reorganization Agreement") and an Agreement and Plan of Merger (the "Plan of Merger" and, together with the Plan of Exchange, the Reorganization Agreement and certain other agreements contemplated by the Reorganization Agreement, the "Transaction Documents"), providing for certain transactions pursuant to which CFX would acquire all the outstanding capital stock of Community through a share exchange, Community would be merged with and into CFX, and Concord Bank and Centerpoint Bank would be merged with and into CFX Bank (collectively, the "Transactions"); WHEREAS, as a condition to CFX's entry into the Transaction Documents and the Transactions, and to induce such entry, Community has agreed to grant CFX the option set forth herein to purchase authorized but unissued shares of Community Common Stock; NOW, THEREFORE, in consideration of the premises herein contained, the parties agree as follows: 1. Certain Definitions. (a) Capitalized terms used but not defined herein shall have the same meanings as in the Transaction Documents. (b) The term "Effective Date" shall have the meaning specified in the Reorganization Agreement. (c) The term "person" shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act, and shall also include persons (other than Community, any Community subsidiary, CFX, or any CFX affiliate), who have entered into an agreement, arrangement or understanding (whether or not in writing), or who are acting in concert 2 or with conscious parallel behavior, for the purpose of acquiring, holding, voting or disposing of any voting securities of Community (except pursuant solely to a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act and the regulations promulgated thereunder). (d) The term "Purchase Event" shall mean any of the following events or transactions occurring after the date hereof: (1) any person (other than Community, any Community subsidiary, CFX, or any CFX affiliate) shall have commenced (as such term is defined in Rule 14d-2 under the Exchange Act), or shall have filed a registration statement under the Securities Act with respect to, a bona fide tender or exchange offer to purchase shares of Community Common Stock such that upon consummation of such offer such person would own or control 15 percent or more of the outstanding shares of Community Common Stock; (2) any person (other than Community, any Community subsidiary, CFX, or any CFX affiliate), other than in connection with a transaction to which CFX has given its prior written consent, shall have filed an application or notice with any federal or state regulatory agency for clearance or approval, to (i) merge or consolidate, or enter into any similar transaction, with Community or any Community subsidiary, (ii) purchase, lease or otherwise acquire all or substantially all the assets of Community or any Community subsidiary, or (iii) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 15 percent or more of the voting power of Community or any Community subsidiary; (3) any person (other than Community, any Community subsidiary, subsidiaries of Community in a fiduciary capacity, CFX, affiliates of CFX, or subsidiaries of CFX in a fiduciary capacity) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 15 percent or more of the outstanding shares of Community Common Stock (the term "beneficial ownership" for purposes of this Option Agreement having the meaning assigned thereto in Section 13(d) of the Exchange Act and the regulations promulgated thereunder); (4) any person (other than Community, any Community subsidiary, CFX or any CFX affiliate) shall have made a bona fide proposal to Community by public announcement or written communication that is or becomes the subject of public disclosure to (i) acquire Community or any Community subsidiary by merger, consolidation, purchase of all or substantially all its assets or any other similar transaction, or (ii) make an offer described in clause (1) above; or (5) Community shall have willfully breached any Specified Covenant (as defined below), which breach would entitle CFX to - 2 - 3 terminate the Transaction Documents (without regard to the cure periods provided for therein) and such breach shall not have been cured prior to the Notice Date (as defined below). (e) The term "Repurchase Event" shall mean any of the following: (1) any person (other than Community, any Community subsidiary, CFX, or any CFX affiliate) shall have acquired beneficial ownership of 25 percent or more of the outstanding shares of Community Common Stock; or (2) any person (other than CFX or any CFX affiliate) shall have entered into an agreement, arrangement or understanding (whether or not in writing) with Community or any Community subsidiary to (i) merge or consolidate, or enter into any similar transaction, with Community or any Community subsidiary, (ii) purchase, lease or otherwise acquire all or substantially all the assets of Community or any Community subsidiary, or (iii) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 25 percent or more of the voting power of Community or any Community subsidiary. (f) The term "Specified Covenant" shall mean any covenant contained in Sections 4.1, 4.2, 4.3, 4.4 or 4.8 or subsections (2), (3), (4), (5), (6), (7), (11), (16) and, to the extent applicable to the foregoing subsections, (17) of Section 4.7(b) of the Reorganization Agreement. 2. Grant of Option. Subject to the terms and conditions set forth herein, Community hereby grants to CFX an option (the "Option") to purchase up to 493,000 shares of Community Common Stock at a price of $28.50 per share payable in cash as provided in Section 4 hereof; provided, however, that in the event Community issues or agrees to issue any shares of Community Common Stock in breach of its obligations under the Transaction Documents at a price less than $28.50 per share (as adjusted pursuant to Section 6 hereof), the exercise price shall be equal to such lesser price. 3. Exercise of Option. (a) If not then in material breach of the Transaction Documents, CFX may exercise the Option, in whole or part, at any time or from time to time if a Purchase Event shall have occurred and be continuing; provided that, to the extent the Option shall not have been exercised, it shall terminate and be of no further force and effect upon the earliest to occur of (i) the Effective Date, (ii) termination of the Transaction Documents in accordance with the terms of the Reorganization Agreement before the occurrence of a Purchase Event (other than a - 3 - 4 termination resulting from a willful breach by Community, Concord Bank or Centerpoint Bank of any Specified Covenant contained in the Reorganization Agreement) or (iii) six months after the termination of the Transaction Documents if such termination follows the occurrence of a Purchase Event or is due to a willful material breach by Community, Concord Bank or Centerpoint Bank of any Specified Covenant contained in the Reorganization Agreement; and provided further that any such exercise shall be subject to compliance with applicable provisions of law. (b) If more than one of the transactions giving rise to a Purchase Event is undertaken or effected, then all such transactions shall give rise only to one Purchase Event, which Purchase Event shall be deemed continuing for all purposes hereunder until all such transactions are abandoned. (c) In the event CFX wishes to exercise the Option, it shall send to Community a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise, and (ii) a place and date not earlier than three business days nor later than 30 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that, if prior notification to or approval of any federal or state regulatory agency is required in connection with such purchase, CFX shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period shall have passed. 4. Payment and Delivery of Certificates. (a) At the closing referred to in Section 3 hereof, CFX shall pay to Community the aggregate purchase price for the shares of Community Common Stock purchased pursuant to the exercise of the Option in immediately available funds by a wire transfer to a bank account designated by Community. (b) At such closing, simultaneously with the delivery of cash as provided in subsection (a), Community shall deliver to CFX a certificate or certificates representing the number of shares of Community Common Stock purchased by CFX, and CFX shall deliver to Community a letter agreeing that CFX will not offer to sell, pledge or otherwise dispose of such shares in violation of applicable law or the provisions of this Option Agreement. (c) Certificates for Community Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend which shall read substantially as follows: - 4 - 5 "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Community Bankshares, Inc. and to resale restrictions arising under the Securities Act of 1933, as amended, a copy of which agreement is on file at the principal office of Community Bankshares, Inc. A copy of such agreement will be provided to the holder hereof without charge upon receipt by Community Bankshares, Inc. of a written request." It is understood and agreed that the above legend shall be removed by delivery of substitute certificate(s) without such legend if CFX shall have delivered to Community a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance satisfactory to Community, to the effect that such legend is not required for purposes of the Securities Act and any applicable state securities laws and this Option Agreement. 5. Representations. Community hereby represents, warrants and covenants to CFX as follows: (a) Community shall at all times maintain sufficient authorized but unissued shares of Community Common Stock so that the Option may be exercised without authorization of additional shares of Community Common Stock. (b) The shares to be issued upon due exercise, in whole or in part, of the Option, when paid for as provided herein, will be duly authorized, validly issued, fully paid and nonassessable. 6. Adjustment Upon Changes in Capitalization. In the event of any change in Community Common Stock by reason of stock dividends, split-ups, recapitalizations, combinations, exchanges of shares or the like, the type and number of shares subject to the Option, and the purchase price per share, as the case may be, shall be adjusted appropriately. In the event that any additional shares of Community Common Stock are issued or otherwise become outstanding after the date of this Option Agreement (other than pursuant to this Option Agreement), the number of shares of Community Common Stock subject to the Option shall be adjusted so that, after such issuance, it equals 19.99 percent of the number of shares of Community Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 6 shall be deemed to authorize Community to breach any provision of the Transaction Documents. 7. Registration Rights. Community shall, if requested by CFX, as expeditiously as possible file a registration statement on a form of general use and available for use by Community under the Securities Act if necessary in order to permit or assist the sale or other disposition of the shares of Community Common Stock that have been acquired upon exercise of the Option in accordance with the intended method of sale or - 5 - 6 other disposition requested by CFX. CFX shall provide all information reasonably requested by Community for inclusion in any registration statement to be filed hereunder. Community will use its best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 270 days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sales or other dispositions. The obligations of Community hereunder to file a registration statement and to maintain its effectiveness may be suspended for one or more periods of time not exceeding 60 days in the aggregate if the Board of Directors of Community shall have determined that the filing of such registration statement or the maintenance of its effectiveness would require disclosure of non- public information that would materially and adversely affect Community. The first registration statement prepared under this Section 7 shall be at Community's expense except for underwriting commissions and the fees and disbursements of CFX's counsel attributable to the offering of Community Common Stock by CFX. The preparation of a second registration statement may be requested and effected hereunder at CFX's sole expense. In no event shall Community be required to effect more than two registrations hereunder. The filing of any registration statement hereunder may be delayed for such period of time as may reasonably be required to facilitate any public distribution by Community of Community Common Stock. If requested by CFX in connection with any registration, Community will become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements for parties similarly situated. In any such transaction Community and CFX will also agree to indemnify each other on customary terms with respect to any information provided by such party. 8. Repurchase. (a) Subject to the giving of any notices and the receipt of any required approvals, at the request of CFX at any time commencing upon the occurrence of a Repurchase Event and ending nine months thereafter (the "Repurchase Period"), Community shall repurchase the Option (but not later than the termination of the Option pursuant to Section 3(a) hereof) from CFX together with any shares of Community Common Stock purchased by CFX pursuant thereto with respect to which CFX then has beneficial ownership, at a price (per share, the "Per Share Repurchase Price") equal to the sum of: (1) the exercise price paid by CFX for any shares of Community Common Stock acquired pursuant to the Option; (2) the difference between (A) the "market/tender offer" price for shares of Community Common Stock (defined as the higher of (x) the highest price per share at which a tender or exchange offer has been made or (y) the highest reported sale price for shares of - 6 - 7 Community Common Stock within that portion of the Repurchase Period preceding the date CFX gives notice of the required repurchase under this Section 8) and (B) the exercise price as determined pursuant to Section 2 hereof (subject to adjustment as provided in Section 6) multiplied by the number of shares of Community Common Stock with respect to which the Option has not been exercised, but only if the market/tender offer price is greater than such exercise price; (3) the difference between the market/tender offer price (as defined in Section 8(a)(2) hereof) and the exercise price paid by CFX for any shares of Community Common Stock purchased pursuant to the exercise of the Option, multiplied by the number of shares so purchased, but only if the market/tender offer price is greater than such exercise price; and (4) CFX's out-of-pocket expenses incurred in connection with the transactions contemplated by the Transaction Documents, including without limitation legal, accounting and investment banking fees. (b) In the event CFX exercises its rights under this Section 8, Community shall, within thirty business days thereafter, pay the required amount to CFX in immediately available funds and CFX shall surrender to Community the Option and the certificates evidencing the shares of Community Common Stock purchased thereunder and CFX shall warrant that it owns such shares and that the same are then free and clear of all liens, charges, claims, restrictions and encumbrances; provided that, if prior notification to any federal or state regulatory agency is required in connection with such purchase, Community shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period shall have passed. 9. Severability. If any term, provision, covenant or restriction contained in this Option Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Option Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Option will not permit the holder to acquire or Community to repurchase the full number of shares of Community Common Stock provided in Section 2 hereof (as adjusted pursuant to Section 6 hereof), it is the express intention of Community to allow the holder to acquire or to require Community to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. - 7 - 8 10. Miscellaneous. (a) Expenses. Except as otherwise provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. (b) Entire Agreement. Except as otherwise expressly provided herein, this Option Agreement and the Transaction Documents contain the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral. The terms and conditions of this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in this Option Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Option Agreement, except as expressly provided herein. (c) Assignment. Other than as provided in Sections 7 and 8 hereof, neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party. (d) Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by overnight express or by registered or certified mail, postage prepaid, addressed as provided in the Reorganization Agreement. A party may change its address for notice purposes by written notice to the other party hereto. (e) Counterparts. This Option Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. (f) Specific Performance. The parties agree that damages would be an inadequate remedy for a breach of the provisions of this Option Agreement by either party hereto and that this Option Agreement may be enforced by either party hereto through injunctive or other equitable relief. (g) Governing Law. This Option Agreement shall be governed by and construed in accordance with the laws of New Hampshire applicable to agreements made and entirely to be performed within such state and such federal laws as may be applicable. - 8 - 9 IN WITNESS WHEREOF, each of the parties hereto has executed this Option Agreement as of the day and year first written above. CFX CORPORATION By: ------------------------------------- Peter J. Baxter, President and Chief Executive Officer COMMUNITY BANKSHARES, INC. By: ------------------------------------- Douglas Crichfield President and Chief Executive Officer - 9 - EX-99.2 10 PRESS RELEASE. 1 Exhibit 99.2 CFX CORPORATION TO ACQUIRE COMMUNITY BANKSHARES, INC. Keene, N.H., March 24, 1997 - CFX Corporation (AMEX: CFX), headquartered in Keene, New Hampshire and Community Bankshares, Inc. ("Community") (NASDAQ: CBNH), headquartered in Concord, New Hampshire, announced today that they have signed a definitive agreement under which CFX will acquire Community and Community's bank subsidiaries, Concord Savings Bank, headquartered in Concord, New Hampshire and Centerpoint Bank, headquartered in Bedford, New Hampshire. Based on an exchange ratio of 2.2:1 and on the closing price of CFX common stock on March 21, 1997 of $17.25, the indicated value of the transaction would be $37.95 per Community share, for a total aggregate consideration of approximately $96 million. The agreement also provides CFX with an option to acquire up to 19.9% of the outstanding shares of Community common stock under certain circumstances. In connection with the merger, Concord and Centerpoint will be merged into CFX's New Hampshire banking subsidiary, CFX Bank. The addition of these new banks will bolster CFX Bank's position as the largest locally-owned banking enterprise in New Hampshire. The Bank's and consolidated CFX Corporation's total assets will grow to approximately $2.3 and $2.7 billion, respectively, after the mergers of Concord Savings Bank, Centerpoint Bank, the previously announced acquisition of Portsmouth Bank Shares, Inc. (NASDAQ: POBS), and planned increases in the balance sheet leverage associated with the Portsmouth transaction. In announcing the transaction, Peter J. Baxter, President and Chief Executive Officer of CFX Corporation stated, "I am very pleased that CFX will affiliate with such a strong and growing community banking franchise. The markets served by Community provide CFX the number two position in the attractive Merrimack County and enhances our existing position in Belknap, Hillsborough and Rockingham Counties. We anticipate that after 30% ($5 million pre-tax) expense savings, the transaction will be accretive to earnings per share in the first year. Upon consummation of the merger, CFX will take a special charge of approximately $4.8 million to earnings for one-time costs of the transaction." Mr. Baxter added, "I am also pleased to announce that Douglas Crichfield, President and Chief Executive Officer of Community will become the President and Chief Executive Officer of CFX Bank. Doug brings to the Company a wealth of banking experience and is a great addition to the Company's overall management team. - More - Page 1 of 2 2 Doug Crichfield stated, "The combination of Community's affiliates, Concord Savings Bank and Centerpoint Bank with CFX Bank, and the recently announced acquisition of Portsmouth Savings Bank creates a New Hampshire banking company with a strong geographic presence in all of the major banking markets in New Hampshire. It brings together three New Hampshire community banking companies that trace their roots back to the 1800's. Our expanded organization will be the leading community banking franchise based in New Hampshire, with a shared commitment to servicing the needs of our local markets. The many complementary strengths of CFX, Concord Savings and Centerpoint will enable us to significantly enhance the array and quality of our banking products and services. I am particularly pleased with being able to offer CFX's Trust and Investment Services to our customer base." Pursuant to the definitive agreement, each outstanding share of Community will be converted into 2.2 shares of CFX common stock. If the average price of CFX common stock for the fifteen trading days preceding the effective date of the merger is between $18.18 and $20.00, the exchange ratio floats between 2.2 and 2.0 shares. The exchange ratio will be 2.0 shares of CFX common stock for each Community share if the average CFX stock price exceeds $20.00. Community may terminate the agreement if the average price of CFX common stock is below $13.50 per share unless CFX agrees to increase the exchange ratio. Three Community Bankshares Directors will join the CFX Board and three will become Directors of CFX Bank. The transaction is tax free to the shareholders of Community and is subject to regulatory approval and the approval of both CFX's and Community's shareholders. It is anticipated that the transaction will be accounted for by the pooling-of-interests method of accounting. The parties expect to complete the transaction in the third quarter of 1997. CFX Corporation is a multi-bank holding company with total assets of $1.6 billion as of December 31, 1996. The Company's three banking subsidiaries are CFX Bank, headquartered in Keene, New Hampshire, Orange Savings Bank, headquartered in Orange, Massachusetts, and The Safety Fund National Bank, headquartered in Fitchburg, Massachusetts. CFX Mortgage, Inc., CFX Bank's mortgage banking subsidiary, services approximately $765 million in mortgage loans for others. In addition, CFX Funding L.L.C., a 51% owned subsidiary of CFX Bank that engages in the facilitation of lease financing and rated securitizations, now services over $100 million in leases for others. The Company operates 43 full service offices, 2 loan production offices, and 68 automated teller and remote service banking locations in New Hampshire and central Massachusetts, and operates a trust division with assets of approximately $370 million. As of December 31, 1996, Community had total assets of $550 million, eleven branches located in Merrimack, Hillsborough, Belknap and Rockingham Counties, and a distribution of ATM locations throughout the State. Upon completion of the acquisition of Community and Portsmouth Bank Shares, Inc., CFX will have $2.7 billion in assets, 57 full service banking offices, 2 loan production offices and 88 automated teller and remote service locations in New Hampshire and central Massachusetts. The combined Company will have a portfolio of loans serviced for others in excess of $1.1 billion. ### -----END PRIVACY-ENHANCED MESSAGE-----