-----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, LBhZvSkzrYFbfuAqe9FRSlII3ftwfyH1vkpMkdSgHNkPxkVrb3dqQqaiaq6B1DQs kZDhcoIFv8LWlSDeLl/EBw== 0000950109-96-001902.txt : 19960402 0000950109-96-001902.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950109-96-001902 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFETY FUND CORP CENTRAL INDEX KEY: 0000086134 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042532311 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11615 FILM NUMBER: 96542673 BUSINESS ADDRESS: STREET 1: 470 MAIN ST CITY: FITCHBURG STATE: MA ZIP: 01420 BUSINESS PHONE: 5083436406 MAIL ADDRESS: STREET 1: 470 MAIN STREET CITY: FITCHBURG STATE: MA ZIP: 01420 10KSB 1 FORM 10-KSB - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ------------ [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1995 ------------------------------------------------ or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act (No Fee Required) Commission file number 0-20493 - ------------------------------ THE SAFETY FUND CORPORATION ----------------------------- (Name of Small Business Issuer in its Charter) Massachusetts 04-2532311 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 470 Main Street Fitchburg, Massachusetts 01420 - ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (508) 343-6406 -------------- - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $5.00 per share Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 -------- --------. Issuer's revenues for its most recent fiscal year: $25,515,862 ----------- The aggregate market value of voting stock held by non-affiliates (Persons other than Directors and Executive Officers) of the registrant as of February 1, 1996: $5.00 Par Value -- $35,143,944. - ------------------------------- Total number of shares of common stock outstanding at February 1, 1996: $5.00 Par Value -- 1,660,665 shares. - ------------------------------------ DOCUMENTS INCORPORATED BY REFERENCE Part II and Part IV incorporate information by reference from the Company's annual report to shareholders for the year ended December 31, 1995 and the Company's proxy statement for the 1996 Annual Meeting of Shareholders. - -------------------------------------------------------------------------------- PART I Item 1. DESCRIPTION OF BUSINESS The Safety Fund Corporation, a Massachusetts corporation ("the Holding Company" or "Company", organized in 1973), is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Holding Company has two wholly-owned subsidiaries, Safety Fund National Bank, a national banking association ("Bank") and Safety Fund Realty Corporation, which is currently inactive. The Bank has three wholly-owned subsidiaries, The Lenders/Massachusetts, Inc. ("Lenders"), Prichard Plaza Realty Corp. ("Prichard") and Safety Fund Securities Corporation ("Securities Corp."). Through 1993, Lenders originated, packaged and sold residential mortgage loans; in 1994, it ceased such activities but continues to service loans. Prichard operates one commercial real estate property, the principal tenant of which is the Bank. Securities Corp. invests in debt securities for the benefit of the Company. During January 1996 the Company announced it had signed a definitive agreement for the merger of the Company into CFX Corporation of Keene, New Hampshire. Upon consummation of the transaction, Safety Fund National Bank, the Company's bank subsidiary, would operate as a subsidiary of CFX. The Bank provides numerous banking services to industry, commerce and government, including the maintenance of demand, savings and time deposit accounts and the granting of various types of loans, including loans under lines of credit and revolving credit, term loans, real estate mortgage loans and other specialized loans. The services provided by the Bank to individuals include checking accounts, savings and time accounts, mortgage loans, consumer and other installment loans, credit arrangements, and secured and unsecured personal loans. The Bank's Trust Division furnishes a wide range of trust services to individuals, corporations, municipalities and charitable organizations. The Bank acts as trustee of personal, corporate, pension, profit-sharing and other employee-benefit trusts, provides investment, advisory and custody services and acts as executor, administrator and trustee of estates. The business of the Bank is not significantly affected by seasonal factors. COMPETITION Safety Fund National Bank, a national banking association in existence since 1874, services a primary retail banking market within Worcester County, Massachusetts, which includes the cities and towns of Fitchburg, Gardner, Leominster, Lunenburg, Westborough and Worcester. According to the 1990 census, the population of these communities was 293,500 residents occupying 108,300 households. As a secondary market area, the Bank services those towns which are contiguous to the towns in the primary market. To a much lesser degree, the Bank provides retail banking services throughout Worcester County, with a total residential population of approximately 710,000 people and total households of approximately 260,000. On a county-wide basis, the Bank's principal retail competition consists of two super-regional banks with combined assets in excess of $130 billion and a de novo bank consisting of nine branches with headquarters in Burlington, Vermont. In addition, competition exists in selected communities within the primary market as a result of two state-chartered commercial banks with combined assets under $450 million, as well as several local savings institutions, credit unions, insurance companies and brokerage firms. - 1 - COMPETITION (Continued) Operating in a highly competitive business banking environment, Safety Fund National Bank has focused on serving the deposit and borrowing needs of the small and medium size businesses located within the central Massachusetts region. Competition in these market segments is greatest among the community banks; however, the markets continue to receive greater attention by the larger institutions as technology makes servicing these segments more cost effective. The Bank's Investment and Trust Department furnishes a wide range of investment and trust services to individuals, corporations, municipalities and charitable organizations throughout central Massachusetts. Although the principal competitors relative to these markets are the large super-regional banks, investment advisory, brokerage and large law firms have become increasingly more competitive during the last several years. REGULATION OF THE HOLDING COMPANY The Holding Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and files reports with the Federal Reserve Board as required under the Bank Holding Company Act. The Bank Holding Company Act requires prior approval by the Federal Reserve Board of the acquisition by the Holding Company of substantially all the assets or more than five percent of the voting stock of any bank. The Bank Holding Company Act also allows the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the Holding Company can engage in such activities. The Bank Holding Company Act prohibits the Holding Company and the Bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services. There are also restrictions on transactions between the Bank and the Holding Company, or other affiliates. REGULATION OF THE BANK The Bank is a national banking association chartered under the National Bank Act. As such, it is subject to the supervision of the Office of the Comptroller of the Currency. Areas in which the Bank is subject to regulation by federal authorities include, among others, reserves, loans, capital, investments, issuances of various types of securities, participation in mergers and consolidations, and certain transactions with or in the stock of the Holding Company. The Holding Company, as a stockholder of the Bank, may be subject to assessment to restore impaired capital as and to the extent provided in Section 5205 of the Revised Statutes of the United States (12 U.S.C., Section 55). There is no such impairment of capital of the Bank. EMPLOYEES As of December 31, 1995, the Bank had 215 employees, consisting of 151 full-time employees and 64 part-time employees. None of the Bank's employees are represented by a union or other labor organization. The Bank provides its employees with a comprehensive range of employee benefit programs. Management believes that its employee relations are good. - 2 - STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The following table shows the Company's average assets, liabilities and stockholders' equity.
DECEMBER 31 1995 1994 1993 -------------------------------------------- Assets Cash and due from banks........... $ 13,731,710 $ 14,613,442 $ 14,308,499 Federal funds sold................ 4,506,849 4,944,658 7,771,917 Investment securities available for sale......................... 59,543,185 56,157,314 - Investment securities held to maturity......................... 39,858,920 24,608,009 67,523,579 Loans, net of unearned discount... 152,991,386 139,977,398 151,470,970 Less allowance for possible loan losses.................... (7,088,958) (6,658,664) (3,101,131) ------------ ------------ ------------ Net loans................. 145,902,428 133,318,734 148,369,839 ------------ ------------ ------------ Premises and equipment, net....... 10,604,862 11,168,260 11,521,134 Other assets...................... 6,555,786 7,079,677 7,509,089 ------------ ------------ ------------ Total assets...................... $280,703,740 $251,890,094 $257,004,057 ============ ============ ============ Liabilities and stockholders' equity Interest bearing deposits......... $183,744,335 $164,749,217 $171,732,090 Noninterest bearing deposits...... 62,906,594 57,257,080 50,008,901 ------------ ------------ ------------ Total deposits............ 246,650,929 222,006,297 221,740,991 Federal funds purchased and securities sold under repurchase agreements............ 11,685,725 9,226,546 9,282,379 Treasury tax and loan notes....... 2,002,937 1,690,532 1,958,705 Other liabilities................. 760,469 785,166 1,562,386 ------------ ------------ ------------ Total liabilities......... 261,100,060 233,708,541 234,544,461 Total stockholders' equity........ 19,603,680 18,181,553 22,459,596 ------------ ------------ ------------ Total liabilities and stockholders' equity.......... $280,703,740 $251,890,094 $257,004,057 ============ ============ ============
- 3 - Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued) The following tables show the components of net interest differential for the years ended December 31:
1995 --------------------------------------------- Average Interest Avg. Rates Balance Income/Expense Earned/Pd --------------------------------------------- Loans, net of unearned $152,991,386 $14,483,998 9.47% discount/(1,2)/.............. Taxable investment securities. 99,402,105 6,709,485 6.75 Non-taxable investment - - - securities/(2)/.............. Federal funds sold............ 4,506,849 263,506 5.85 ------------ ------------- Total interest earning assets $256,900,340 $21,456,989 8.35 ============ ------------- ---- Interest bearing deposits..... $183,744,335 $ 7,031,330 3.83 Borrowed funds................ 13,688,662 609,929 4.46 ------------ ------------- Total interest bearing liabilities $197,432,997 $ 7,641,259 3.87 ============ ------------- ---- Net interest income $13,815,730 ============= Net interest spread 4.48% ==== Net yield on interest earning assets 5.38% ==== 1994 --------------------------------------------- Average Interest Avg. Rates Balance Income/Expense Earned/Pd --------------------------------------------- Loans, net of unearned discount/(1,2)/.............. $139,977,398 $11,852,620 8.47% Taxable investment securities. 80,725,939 5,211,519 6.46 Non-taxable investment 39,384 1,070 2.72 securities/(2)/.............. Federal funds sold............ 4,944,658 198,832 4.02 ------------ ------------- Total interest earning assets $225,687,379 17,264,041 7.65 ============ ------------- ----- Interest bearing deposits..... $164,749,217 4,864,132 2.95 Borrowed funds................ 10,917,078 363,864 3.33 ------------ ------------- Total interest bearing liabilities $175,666,295 5,227,996 2.98 ============ ------------- ----- Net interest income $12,036,045 ============= Net interest spread 4.67% ===== Net yield on interest earning assets 5.33% ===== 1993 --------------------------------------------- Average Interest Avg. Rates Balance Income/Expense Earned/Pd --------------------------------------------- Loans, net of unearned discount/(1,2)/.............. $151,470,970 $13,438,678 8.87% Taxable investment securities. 67,357,894 4,378,284 6.50 Non-taxable investment securities/(2)/.............. 165,685 4,529 2.73 Federal funds sold............ 7,771,917 239,417 3.08 ------------ ------------- Total interest earning assets $226,766,466 18,060,908 7.96 ============ ------------- ------ Interest bearing deposits..... $171,732,090 5,514,081 3.21 Borrowed funds................ 11,241,084 251,240 2.24 ------------ ------------- Total interest bearing liabilities $182,973,174 5,765,321 3.15 ============ ------------- ------ Net interest income $12,295,587 ============= Net interest spread 4.81% ====== Net yield on interest earning assets 5.42% ======
(1) Includes non-accruing loan balances and interest actually received on such loans. (2) Interest on non-taxable loans and investment securities are not on a tax equivalent basis. The amounts involved are not material. - 4 - Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential (Continued) The following tables show the dollar amount of changes in the interest income, interest expense and changes segregated for each category of interest earning asset and interest-bearing liability into amounts attributable to changes in volume and changes in rate for the years ended December 31, 1995 and 1994:
1995 --------------------------------------------------------------------------- Dollar Changes in Changes in Amount of Volume Rate Changes Inc/(Dec)/(1)/ Inc/(Dec)/(2)/ ---------------------------------------------------------------------------- Loans, net of unearned discount $ 2,631,378 $ 1,102,285 $1,529,093 Taxable investment securities 1,497,966 1,206,480 291,486 Non-taxable investment securities (1,070) (1,070) - Federal funds sold 64,674 (17,600) 82,274 ------------- ------------- ------------ Total interest earning assets 4,192,948 2,290,095 1,902,853 ------------- ------------- ------------ Interest bearing deposits 2,167,198 560,356 1,606,842 Borrowed funds 246,065 92,294 153,771 ------------- ------------- ------------ Total interest bearing liabilities 2,413,263 652,650 1,760,613 ------------- ------------- ------------ Net interest income $ 1,779,685 $ 1,637,445 $ 142,240 ============= ============= ============ 1994 ---------------------------------------------------------------------------- Dollar Changes in Changes in Amount of Volume Rate Changes Inc/(Dec)/(1)/ Inc/(Dec)/(2)/ ---------------------------------------------------------------------------- Loans, net of unearned discount $(1,586,058) $(1,019,480) $ (566,578) Taxable investment securities 833,235 868,923 (35,688) Non-taxable investment securities (3,459) (3,448) (11) Federal funds sold (40,585) (87,080) 46,495 ------------- ------------- ------------ Total interest earning assets (796,867) (241,085) (555,782) ------------- ------------- ------------ Interest bearing deposits (649,949) (224,150) (425,799) Borrowed funds 112,624 (7,258) 119,882 ------------- ------------- ------------ Total interest bearing liabilities (537,325) (231,408) (305,917) ------------- ------------- ------------ Net interest income $ (259,542) $ (9,677) $ (249,865) ============= ============= ============
NOTE: The change due to the volume/rate variance has been allocated to rate. (1) Change in volume times old interest rate (2) Change in interest rate times old volume - 5 - INVESTMENT SECURITY PORTFOLIOS The following table shows the carrying value of the Company's investment portfolios at December 31 for each of the past three years:
1995 1994 1993 ------------- ----------- ----------- Available for Sale at Market: U.S. Government obligations $24,101,410 $32,985,638 $37,663,406 U.S. Government agencies and corporations 39,355,399 21,270,987 33,243,731 Obligations of states/political subdivisions - - 575,000 Other securities 281,100 281,100 351,600 ------------- ----------- ----------- $63,737,909 $54,537,725 $71,833,737 ============= =========== =========== 1995 1994 1993 ------------- ----------- ----------- Held to Maturity at Amortized Cost: U.S. Government obligations $ 3,335,420 $ 3,013,473 $ - U.S. Government agencies and corporations 23,482,316 28,841,901 - Mortgage-backed securities 12,906,342 13,743,265 - Other securities 200,000 - - ------------- ----------- ----------- $39,924,078 $45,598,639 $ - ============= =========== ===========
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the provisions of the new Statement as of the end of 1993. In accordance with the Statement, prior period financial information was not restated to reflect the change in accounting principle. At the time of adoption, investment securities not classified as investment securities held to maturity or trading were classified as investment securities available for sale. Such securities are carried at fair value with unrealized gains and losses, net of income taxes, reported in a separate component of stockholders' equity. Substantial portions of the Company's investment securities portfolio are invested in securities issued by single issuers, other than the United States Government. Those issuers include the Federal Home Loan Bank, the Federal National Mortgage Association, the Federal Home Loan Mortgage Association and other federally sponsored organizations. The contractual maturity distribution at amortized cost and approximate weighted average yield (not on a tax equivalent basis) of the investment portfolios at December 31, 1995 are shown in the following tables. The weighted average yields are calculated on the basis of amortized cost and effective yields weighted for the contractual maturity of each security. Expected maturities on certain obligations may differ from contractual maturities because borrowers have the right to call or prepay. - 6 - INVESTMENT SECURITY PORTFOLIOS (Continued) Available for Sale ------------------
1 Year 1-5 or Less Yield Years Yield -------------------- -------------------- U.S. Government obligations $5,012,318 8.07% $18,551,471 6.79% U.S. Government agencies and corporations 4,010,793 7.48% 33,274,815 6.61% -------------------- -------------------- $9,023,111 7.81% $51,826,286 6.67% ==================== ==================== 5-10 Years Yield Over 10 Years Yield -------------------- -------------------- U.S. Government agencies and corporations $1,297,005 7.48% $ - - Other securities - - 281,100 6.00% -------------------- -------------------- $1,297,005 7.48% $ 281,100 6.00% ==================== ====================
Held to Maturity ----------------
1 Year 1-5 or Less Yield Years Yield --------------------- -------------------- U.S. Government obligations $ - - $1,128,737 8.50% U.S. Government agencies and corporations - - 7,997,046 6.78% --------------------- --------------------- $ - - $9,125,783 6.98% ===================== ===================== 5-10 Years Yield Over 10 Years Yield --------------------- -------------------- U.S. Government obligations $ 2,206,683 7.62% $ - - U.S. Government agencies and corporations 15,485,270 6.73% - - Mortgage-backed securities 4,906,277 6.50% 8,000,065 6.67% Other securities 200,000 7.40% - - --------------------- -------------------- $22,798,230 6.77% $8,000,065 6.67% ===================== ====================
- 7 - LOAN PORTFOLIO TYPES OF LOANS The following table shows the classification of loans by major category at December 31 for each of the past five years:
1995 1994 1993 -------------- ------------ ------------ Commercial and financial $ 46,708,532 $ 54,780,992 $ 62,032,190 Real estate - mortgage 107,096,700 81,282,917 78,521,030 Real estate - construction 2,121,433 477,878 987,306 Installment and other 4,508,787 4,926,135 5,202,399 -------------- ------------ ------------ 160,435,452 141,467,922 146,742,925 Unearned discount (1,621) (9,581) (26,525) -------------- ------------ ------------ $160,433,831 $141,458,341 $146,716,400 ============== ============ ============ 1992 1991 -------------- ------------ Commercial and financial $ 66,225,792 $ 67,878,691 Real estate - mortgage 84,066,606 83,657,465 Real estate - construction 1,244,252 912,960 Installment and other 4,923,202 15,869,845 -------------- ------------ 156,459,852 168,318,961 Unearned discount (34,384) (73,457) -------------- ------------ $156,425,468 $168,245,504 ============== ============
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The maturity schedule for loans, excluding real estate - mortgage and installment loans to individuals, at December 31, 1995 is as follows:
MATURITIES ------------------------------------------ WITHIN 1 YEAR 1-5 YEARS ---------------- ---------------- Commercial and financial $22,095,310 $16,586,223 Real estate - construction 481,500 1,255,760 ---------------- ---------------- $22,576,810 $17,841,983 ================ ================ MATURITIES ------------------------------------------ OVER 5 YEARS TOTAL ---------------- ---------------- Commercial and financial $ 8,026,999 $46,708,532 Real estate - construction 384,173 2,121,433 ---------------- ---------------- $ 8,411,172 $48,829,965 ================ ================
The following table is a presentation of commercial, financial and real estate - construction loans at December 31, 1995 due after one year by predetermined and floating interest rates:
Predetermined Floating Rate Rate ---------------- ------------- Commercial and financial $7,478,912 $17,134,310 Real estate - construction 1,033,574 606,359 ---------------- ------------- $8,512,486 $17,740,669 ================ =============
- 8 - Risk Elements - ------------- Nonaccrual, past due and restructured loans: 1.) Loans are generally placed on nonaccrual status when the obligation is contractually past due 90 days and/or, in the opinion of management, a loss of principal is likely to occur. Information with respect to nonaccrual and past due loans and troubled debt restructurings at December 31, 1991 through 1995 is as follows:
1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Nonaccrual loans $1,975,690 $3,606,869 $9,160,078 $4,682,501 $3,202,577 Loans contractually past due 90 days or more as to interest or principal and still accruing interest $ 40,866 $ 105,022 $2,235,211 $1,583,691 $ 964,799 Troubled debt restructurings accruing interest $1,162,220 $ 979,687 $3,268,222 $6,465,778 $4,357,500
Interest income that would have been recorded during 1995 had the above mentioned loans been still current under original terms was $375,188 (for both nonaccrual loans and troubled debt restructurings). Interest income that was recorded on such loans during 1995 was $103,883. 2.) Potential problem loans, in addition to those included above: $4,842,081 (Commercial, financial and real estate relationships consisting of five (5) borrowers, current as to principal and interest payments, but collateral value less than the existing balance and the borrowers have exhibited clearly defined weaknesses in the past). At December 31, 1995, total impaired loans were $9,875,188, as defined by the Financial Accounting Standards Board's Statements No. 114, "Accounting by Creditors for Impairment of a Loan", and No. 118, "Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosure". Interest income of $877,315 was recognized in 1995 on impaired loans; $1,122,744 of interest income would have been recognized under original terms. 3.) Foreign Outstandings: None 4.) Loan Concentrations: A substantial portion of the Company's loan portfolio is collateralized by assets in the New England region, especially central Massachusetts. While the Company is not overly exposed to credit risk associated with a particular industry, the Company is exposed to geographic trends, both positive and negative. A portion of the risk related to the Company's loans secured by real estate is mitigated by owner occupancy of both residential and commercial properties. - 9 - SUMMARY OF LOAN LOSS EXPERIENCE The historical relationship between loans, loan losses and recoveries, provision for possible losses and the allowance for possible loan losses is shown below:
Years ended December 31 1995 1994 1993 1992 1991 ========================================================================== Amount of loans outstanding at end of period, net of unearned discount $160,433,831 $141,458,341 $146,716,400 $156,425,468 $168,245,504 ========================================================================== Average loans, net of unearned discount $152,991,386 $139,977,398 $151,470,970 $165,050,420 $168,676,453 ========================================================================== Allowance for possible loan losses, at beginning of year $ 6,417,407 $ 7,739,492 $ 3,811,784 $ 3,486,393 $ 2,042,528 Loans charged-off: Commercial and financial 328,708 1,607,140 1,312,831 1,590,521 1,839,656 Real estate - construction -0- 24,897 16,046 -0- -0- Real estate - mortgage 582,415 2,454,297 3,148,334 1,029,538 1,432,783 Installment 11,562 13,973 5,453 9,915 15,327 -------------------------------------------------------------------------- Total loans charged-off 922,685 4,100,307 4,482,664 2,629,974 3,287,766 -------------------------------------------------------------------------- Recoveries: Commercial and financial 276,584 217,416 115,394 71,369 1,739 Real estate - construction -0- -0- -0- -0- -0- Real estate - mortgage 276,801 357,007 10,242 25,844 3,552 Installment 2,043 4,194 1,364 3,334 1,786 -------------------------------------------------------------------------- Total recoveries 555,428 578,617 127,000 100,547 7,077 -------------------------------------------------------------------------- Net charge-offs 367,257 3,521,690 4,355,664 2,529,427 3,280,689 -------------------------------------------------------------------------- Provision for possible loan losses 1,300,000 2,199,605 8,283,372 2,854,818 4,724,554 -------------------------------------------------------------------------- Allowance for possible loan losses, at end of year $ 7,350,150 $ 6,417,407 $ 7,739,492 $ 3,811,784 $ 3,486,393 ========================================================================== Net charge-offs as a percent of average loans .24% 2.52% 2.88% 1.53% 1.94%
- 10 - SUMMARY OF LOAN LOSS EXPERIENCE (Continued) The entire allowance is available to absorb future losses in the portfolio. However, the allowance may be apportioned as follows on this page and the next for analytical purposes at December 31, 1991 through 1995:
December 31, 1995 ------------------------------------------ Percent of Total Loans Allowance for in Category Possible to Loan Losses Total Loans ---------------- ------------- Commercial and financial $1,401,809 29.13% Real estate - construction -0- 1.32% Real estate - mortgage 927,846 66.74% Installment and other 137,380 2.81% Past due interest -0- N/A Unallocated 4,883,115 N/A ---------------- ------------- $7,350,150 100.00% ================ ============= December 31, 1994 ------------------------------------------ Percent of Total Loans Allowance for in Category Possible to Loan Losses Total Loans --------------- -------------- Commercial and financial $ 165,931 38.70% Real estate - construction -0- 0.34% Real estate - mortgage 1,096,913 57.48% Installment and other 9,967 3.48% Past due interest 40,000 NA Unallocated 5,104,596 NA ---------------- ------------- $6,417,407 100.00% ================ ============= December 31, 1993 ------------------------------------------ Percent of Total Loans Allowance for in Category Possible to Loan Losses Total Loans --------------- -------------- Commercial and financial $2,472,829 42.27% Real estate - construction -0- 0.67% Real estate - mortgage 1,455,785 53.51% Installment and other 3,728 3.55% Past due interest 129,500 NA Unallocated 3,677,650 NA ---------------- ------------- $7,739,492 100.00% ================ =============
- 11 - SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
December 31, 1992 ------------------------------------------ Percent of Total Loans Allowance for in Category Possible to Loan Losses Total Loans --------------- -------------- Commercial and financial $1,039,977 42.33% Real estate - construction 50,000 0.80% Real estate - mortgage 757,538 53.73% Installment and other -0- 3.14% Past due interest 100,000 NA Unallocated 1,864,269 NA ---------------- -------------- $3,811,784 100.00% ================ ============== December 31, 1991 ------------------------------------------ Percent of Total Loans Allowance for in Category Possible to Loan Losses Total Loans --------------- -------------- Commercial and financial $ 290,000 40.33% Real estate - construction -0- 0.54% Real estate - mortgage 862,368 49.70% Installment and other 5,000 9.43% Past due interest 50,000 NA Unallocated 2,279,025 NA ---------------- ------------- $3,486,393 100.00% ================ =============
In summarizing the allocation of the allowance for possible loan losses to segments of the portfolio as shown in the above schedule, the Company generally includes only allocations on specific loans rather than assigning significant portions of the unallocated allowance to portfolio segments on some other basis. The provision for possible loan losses charged to operating expense is determined by management's evaluation of potential losses in the portfolio, prevailing and anticipated economic conditions, and regular reviews and examination of the portfolio conducted by loan officers, the Company's independent loan review officer and other members of management. - 12 - DEPOSITS The following table shows the classification of the Company's average deposits for the past three years:
Years ended December 31 1995 1994 -------------------------- -------------------------------- Average Average Average Average Balance Rate Paid Balance Rate Paid -------------- ---------- -------------------------------- Noninterest bearing demand $ 62,906,594 - $ 57,257,080 - Interest bearing demand 49,009,056 1.77% 53,467,906 1.83% Savings 51,894,132 3.45% 46,279,667 2.48% Time 82,841,147 5.28% 65,001,644 4.20% -------------- -------------- $246,650,929 3.83% (A) $222,006,297 2.95% (A) ============== ============= ============== ============ 1993 ----------------------------- Average Average Balance Rate Paid -------------- ------------- Noninterest bearing demand $ 50,008,901 - Interest bearing demand 56,194,141 2.42% Savings 51,921,941 2.64% Time 63,616,008 4.37% -------------- $221,740,991 3.21% (A) ============== ==========
(A) This represents the average rate paid on interest bearing deposits. The following table sets forth, by time remaining to maturity, time certificates of deposit in amounts of $100,000 or more at December 31, 1995: TIME REMAINING TO MATURITY: Three months or less $ 5,147,705 Three to six months 2,974,058 Six to twelve months 1,988,928 More than twelve months 1,762,767 ------------- $11,873,458 =============
- 13 - RETURN ON EQUITY AND ASSETS The following table reflects various ratios for each of the past three years:
Years ended December 31 1995 1994 1993 --------------------------- OPERATING RATIOS Net income (loss) as a % of: Average total assets 0.66% 0.06% (1.21%) Average stockholders' equity 9.72% 0.90% (13.84%) Dividend pay-out ratio - - - Average stockholders' equity to assets ratio 6.81% 7.01% 8.74%
The 1995 and 1994 ratios reflected above include the effect of recording unrealized gains and losses on the Company's investment securities available for sale portfolio. SHORT-TERM BORROWINGS The Bank had varying amounts of federal funds purchased and securities sold under repurchase agreements during the three years ended December 31, 1995, 1994 and 1993. The following is an analysis of short-term borrowings during those three years (dollars in thousands):
1995 1994 1993 --------- -------- -------- Amount outstanding at December 31 $11,120 $15,637 $ 7,444 Maximum amount borrowed at any month end $15,389 $15,637 $10,264 Average amount borrowed $11,686 $ 9,227 $ 9,282 Average interest rate during year 3.97% 3.33% 2.13% Average interest rate at December 31 4.09% 4.52% 1.94%
- 14 - Item 2. DESCRIPTION OF PROPERTY The principal offices of the Holding Company and the Bank are located in the main business district of Fitchburg, Massachusetts at 470 Main Street. In addition to its banking office at 470 Main Street, Fitchburg, the Bank operates eleven other banking offices. One other office is located in the City of Fitchburg, two in the City of Gardner, four in the City of Worcester, two in the City of Leominster, one in the Town of Westborough and one in the Town of Lunenburg. Most of the offices are owned, with the exception of the office at 200 Commercial Street in Worcester, the office at 21 East Main Street, Westborough, the office inside the Big Y Supermarket at Southwest Commons Shopping Plaza, Worcester, the office inside the Shaw's Superstore at Watertower Plaza, Leominster and the office inside the Shop'n Save Supermarket at Lunenburg Crossing Plaza, Lunenburg. The lease on the Worcester office expires in the year 2000 with an option to renew. The lease on the Westborough office expires in the year 2119 with an option to cancel at the end of 1997 and 2017. The lease on the office at the Big Y Supermarket expires in February, 1998 with an option to renew. The lease on the office at the Shaw's Superstore expires in December, 1998 with an option to renew. The lease on the office at the Shop'n Save expires in December, 1999 with an option to renew. The Bank owns a commercial building at 473 Main Street, Fitchburg. The Company was notified by the Comptroller of the Currency on March 9, 1993, of the Comptroller's approval for the Company to transfer the property from other real estate owned to bank premises. It currently houses certain operational activities of the Company and is also available for lease to tenants on a long- term basis. In general, all premises occupied by the Bank are considered to be in good condition, suitable for the business of the Bank, and adequate at present for the purposes for which they are being used; however, during 1995, events occurred which caused the Company to consider one of its buildings to be impaired. Due to the re-engineering of a local highway's ramp system, the accessibility of this branch will be significantly impaired during 1996. The Company intends to close and sell the branch during 1996 and relocate to a suitable location in the local market area. Accordingly, in 1995 the Company recorded an impairment write-down of $344,765 which is reflected in the consolidated statement of operations. The $344,765 write-down represents the difference between the property's carrying value and its fair market value based on an independent appraisal performed during the fourth quarter of 1995. At the present, the Company's premises are substantially utilized by the Bank or its tenants. Item 3. LEGAL PROCEEDINGS The Holding Company is not a party to any legal proceeding and there are no pending legal proceedings, other than ordinary routine litigation incidental to the banking business, to which the Bank is a party or of which any of its property is the subject. After reviewing such matters, the Company believes that their resolution will not materially affect its results of operations or financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995. - 15 - PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information pertaining to registrant's securities is included in the annual report to stockholders for the year ended December 31, 1995 (page 26) and is hereby incorporated by reference. For restrictions on the ability of the Bank to pay dividends to the Company, see footnote 13 (page 22) of the annual report to shareholders for the year ending December 31, 1995 which is hereby incorporated by reference. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) Not applicable (b) Management's discussion and analysis of financial condition and results of operations is part of the annual report to stockholders for the year ended December 31, 1995 (pages 27 through 34) and is hereby incorporated by reference. Item 7. FINANCIAL STATEMENTS Consolidated financial statements included on pages 4 through 25 of the 1995 Annual Report to Stockholders are incorporated herein by reference. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 16 - PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by Item 9 is incorporated herein by reference from the Company's proxy statement for the 1996 Annual Meeting of Stockholders. Item 10. EXECUTIVE COMPENSATION The information required by Item 10 is incorporated herein by reference from the Company's proxy statement for the 1996 Annual Meeting of Stockholders. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is incorporated herein by reference from the Company's proxy statement for the 1996 Annual Meeting of Stockholders. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 is incorporated herein by reference from the Company's proxy statement for the 1996 Annual Meeting of Stockholders. - 17 - Item 13. EXHIBITS AND REPORTS ON FORM 8-K INDEX TO FINANCIAL STATEMENTS
Annual Report to Shareholders page reference -------------------- The Safety Fund Corporation: - ---------------------------- Data incorporated by reference from the attached 1995 Annual Report to Shareholders of The Safety Fund Corporation: Reports of Independent Auditors................................. 2-3 Consolidated balance sheets as of December 31, 1995 and 1994.......4 Consolidated statements of operations for the years ended December 31, 1995, 1994 and 1993..............................5 Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1994 and 1993..................6 Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993..............................7 Notes to consolidated financial statements December 31, 1995, 1994 and 1993........................................8-25
The consolidated financial statements listed in the above index which are included in the Annual Report to Shareholders of The Safety Fund Corporation for the year ended December 31, 1995 are hereby incorporated by reference. Certain schedules required by Regulation S-X have been omitted as the items are either not applicable or are presented in the notes to the consolidated financial statements contained in the 1995 Annual Report to Shareholders. (a) EXHIBITS 2.1) Agreement and Plan of Merger between CFX Corporation and The Safety Fund Corporation, dated January 5, 1995, as amended March 28, 1996.................................Filed herewith 3.1) Articles of Organization a. Articles of Organization dated May 24, 1973...............* b. Amendment dated April 25, 1983............................* c. Amendment dated January 13, 1986.............Filed herewith d. Amendment dated April 27, 1987............................* e. Amendment dated April 25, 1988............................* f. Further Amendment dated April 25, 1988.......Filed herewith - 18 - (a) EXHIBITS (Continued) 3.2) Amended and Restated By-Laws......................................*** 4.1) Certificate of Vote of Directors Establishing A Series of A Class of Stock.................................................**** 10.2) The Safety Fund Corporation 1984 Incentive Stock Option Plan for Key Employees, as amended (1)..................................** 10.3) The Safety Fund Corporation 1994 Incentive and Nonqualified Stock Option Plan (1).............................................*** 10.6) Amended and Restated Employment Agreement between The Safety Fund Corporation and Christopher W. Bramley dated as of February 1, 1994 (1)................................Filed herewith 10.7) Employment and Change of Control Agreement between The Safety Fund Corporation and Stephen R. Shirley dated June 1, 1994 (1)....*** 10.8) Employment and Change of Control Agreement between The Safety Fund Corporation and James C. Garvey dated August 4, 1994 (1).....*** 10.9) Incentive Plan for Senior Officers (1)............................*** 10.10) Stock Option Agreement between CFX Corporation and The Safety Fund Corporation, dated January 5, 1995...............**** 10.11) Rights Agreement dated as of January 5, 1996 between The Safety Fund Corporation and Fleet National Bank of Massachusetts........**** 13.1) Annual Report to Shareholders..........................Filed herewith With the exception of the information incorporated by reference into Items 5, 6, and 7, of this form 10-KSB, the 1995 Annual Report to Shareholders is not deemed filed as part of this report. 21) List of Subsidiaries................................................* 27.1) Financial data schedule............................................. 23) Consents of Independent Auditors.......................Filed herewith - ------------------------------------------------------------------------------ (1) Management contract or compensatory plan. * Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1993 - 19 - (a) EXHIBITS (Continued) ** Incorporated by reference from the Exhibit 10.4 to Registration Statement No. 33-19325. *** Incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended December 31, 1994 **** Incorporated by reference to the Company's Current Report on Form 8-K as of January 5, 1996, filed on January 12, 1996. Item 14(b) No Form 8-K was filed during the last quarter of 1995. - 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 Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SAFETY FUND CORPORATION Date: March 25, 1996 By: /s/ Christopher W. Bramley ----------------------------- Christopher W. Bramley President and C.E.O. Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Christopher W. Bramley /s/ Martin F. Connors, Jr. - ---------------------------------- ----------------------------------- Christopher W. Bramley Martin F. Connors,Jr. - Treasurer President, C.E.O. and Director Principal Financial and Principal Executive Officer Accounting Officer /s/ William E. Aubuchon, III /s/ John E. Howard - ---------------------------------- ----------------------------------- Aubuchon, William E., III - Director Howard, John E. - Director 3/25/96 3/25/96 /s/ John R. Clementi ---------------------------------- ----------------------------------- Clementi, John R. - Director 3/25/96 Kelly, Thomas P. - Director 3/25/96 /s/ P. Kevin Condron /s/ Vincent J. Mara - ---------------------------------- ----------------------------------- Condron, P. Kevin - Director 3/25/96 Mara, Vincent J. - Director 3/25/96 /s/ Bigelow Crocker, Jr. /s/ Michael E. Montuori - ---------------------------------- ----------------------------------- Crocker, Bigelow, Jr. - Director Montuori, Michael E. - Director 3/25/96 3/25/96 /s/ David R. Grenon /s/ Allen I. Rome - ---------------------------------- ----------------------------------- Grenon, David R. - Director 3/25/96 Rome, Allen I. - Director 3/25/96 /s/ Donald L. Hall /s/ Henri L. Sans, Jr. - ---------------------------------- ----------------------------------- Hall, Donald L. - Director 3/25/96 Sans, Henri L., Jr. - Director 3/25/96 /s/ Edward H. Hall, Jr. /s/ J. Robert Seder - ---------------------------------- ----------------------------------- Hall, Edward H., Jr. - Director Seder, J. Robert - Director 3/25/96 3/25/96 /s/ Geroge H. Heywood, Jr. /s/ R. L. Yates - ---------------------------------- ----------------------------------- Heywood, George H., Jr. - Director Yates, Richard L. - Director 3/25/96 3/25/96 - 21 - THE SAFETY FUND CORPORATION INDEX TO EXHIBITS FILED HEREWITH Description - -------------------------------------------------------------------------------- 2.1) Agreement & plan of Merger between CFX Corporation and The Safety Fund Corporation, dated January 5, 1995, as amended March 28, 1996 3.1) c. Amendment to Articles of Organization dated January 13, 1986 f. Further Amendment to Articles of Organization dated April 25, 1988 10.6) Amended and Restated Employment Agreement between The Safety Fund Corporation and Christopher W. Bramley dated as of February 1, 1994. 13.1) Annual Report to Shareholders With the exception of the information incorporated by reference into Items 5, 6, and 7 of this form 10-KSB, the 1995 Annual Report to Shareholders is not deemed filed as part of this report. 23) Consents of Independent Auditors - -------------------------------------------------------------------------------- - 22 - EX-2.1 2 AGREEMENT AND PLAN OF MERGER EXHIBIT 2(a) Execution Copy As Amended Agreement and Plan of Merger between CFX Corporation and The Safety Fund Corporation January 5 , 1996 TABLE OF CONTENTS ARTICLE I THE MERGER AND THE BANK MERGER
1.1 THE MERGER.................................................... 1 1.2 EFFECTIVE TIME................................................ 1 1.3 CHARTER AND BY-LAWS........................................... 2 1.4 DIRECTORS AND COMMITTEES OF SURVIVING CORPORATION AND BUYER... 2 1.5 OFFICERS OF SURVIVING CORPORATION............................. 2 1.6 SURVIVING BANK................................................ 2 1.7 ADDITIONAL ACTIONS............................................ 3 1.8 ADDITIONAL AGREEMENTS......................................... 3 1.9 EFFECTS OF THE MERGER......................................... 3 1.10 THE OPTION AGREEMENT......................................... 3 ARTICLE II CONVERSION OF SHARES 2.1 CONVERSION.................................................... 4 2.2 CERTAIN DEFINED TERMS......................................... 4 2.3 DETERMINATION OF APPLICABLE EXCHANGE RATIO.................... 4 2.4 POOLING OF INTERESTS ACCOUNTING EXCHANGE RATIOS............... 5 2.5 PURCHASE ACCOUNTING EXCHANGE RATIOS........................... 5 2.6 CONVERSION OF STOCK........................................... 6 2.7 PROCEDURES FOR EXCHANGE OF SAFETY FUND COMMON STOCK FOR MERGER CONSIDERATION................................................. 7 2.8 BUYER SUB COMMON STOCK........................................ 9 2.9 DISSENTERS' RIGHTS............................................ 9 2.10 STOCK OPTIONS................................................ 9 2.11 TERMINATION, NOTICE AND CURE................................. 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SAFETY FUND 3.1 CORPORATE ORGANIZATION........................................ 11 3.2 CAPITALIZATION................................................ 11 3.3 AUTHORITY..................................................... 12 3.4 NO VIOLATION.................................................. 13 3.5 CONSENTS AND APPROVALS........................................ 13 3.6 REGULATORY APPROVAL........................................... 14 3.7 FINANCIAL STATEMENTS.......................................... 14 3.8 SAFETY FUND REPORTS........................................... 14
3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS....................... 15 3.10 LEGAL PROCEEDINGS......................................... 15 3.11 TAXES AND TAX RETURNS..................................... 16 3.12 PROPERTIES................................................ 17 3.13 CERTAIN CONTRACTS......................................... 17 3.14 CERTAIN DEFAULTS.......................................... 18 3.15 INSURANCE................................................. 18 3.16 EMPLOYEE BENEFIT PLANS.................................... 18 3.17 COMPLIANCE WITH APPLICABLE LAW; REGULATORY EXAMINATIONS... 19 3.18 BROKER'S FEES............................................. 19 3.19 SAFETY FUND INFORMATION................................... 20 3.20 ENVIRONMENTAL ISSUES...................................... 20 3.21 MATERIAL INTERESTS OF CERTAIN PERSONS..................... 20 3.22 CERTAIN TRANSACTIONS...................................... 20 3.23 REGULATORY AGREEMENTS..................................... 20 3.24 LABOR MATTERS............................................. 21 3.25 ADMINISTRATION OF TRUST ACCOUNTS.......................... 21 3.26 INTELLECTUAL PROPERTY..................................... 21 3.27 LOAN PORTFOLIO............................................ 21 3.28 ABSENCE OF UNDISCLOSED LIABILITIES........................ 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 CORPORATE ORGANIZATION..................................... 22 4.2 CAPITALIZATION............................................. 22 4.3 AUTHORITY.................................................. 23 4.4 NO VIOLATION............................................... 23 4.5 CONSENTS AND APPROVALS..................................... 24 4.6 REGULATORY APPROVAL........................................ 24 4.7 FINANCIAL STATEMENTS....................................... 24 4.8 BUYER REPORTS.............................................. 25 4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS....................... 25 4.10 LEGAL PROCEEDINGS......................................... 25 4.11 COMPLIANCE WITH APPLICABLE LAW; REGULATORY EXAMINATIONS... 25 4.12 BROKER'S FEE.............................................. 26 4.13 BUYER INFORMATION......................................... 26 4.14 ENVIRONMENTAL ISSUES...................................... 26 4.15 CAPITAL................................................... 26 4.16 REGULATORY AGREEMENTS..................................... 26 4.17 ABSENCE OF UNDISCLOSED LIABILITIES........................ 27 4.18 BUYER SUB................................................. 27
ARTICLE V COVENANTS OF SAFETY FUND ii 5.1 CONDUCT OF BUSINESS................................................. 27 5.2 NO SOLICITATION..................................................... 30 5.3 CURRENT INFORMATION................................................. 30 5.4 ACCESS TO PROPERTIES AND RECORDS.................................... 30 5.5 FINANCIAL AND OTHER STATEMENTS...................................... 31 5.6 APPROVAL OF SAFETY FUND'S STOCKHOLDERS.............................. 31 5.7 DISCLOSURE SUPPLEMENTS.............................................. 31 5.8 FAILURE TO FULFILL CONDITIONS....................................... 32 5.9 CONSENTS AND APPROVALS OF THIRD PARTIES............................. 32 5.10 ALL REASONABLE EFFORTS............................................. 32 5.11 SAFETY FUND SUBSIDIARIES........................................... 32 ARTICLE VI COVENANTS OF BUYER 6.1 CONDUCT OF BUSINESS................................................. 32 6.2 CERTAIN BUSINESS TRANSACTIONS....................................... 32 6.3 CURRENT INFORMATION................................................. 33 6.4 ACCESS TO PROPERTIES AND RECORDS.................................... 33 6.5 FINANCIAL AND OTHER STATEMENTS...................................... 33 6.6 CONSENTS AND APPROVALS OF THIRD PARTIES............................. 34 6.7 ALL REASONABLE EFFORTS.............................................. 34 6.8 FAILURE TO FULFILL CONDITIONS....................................... 34 6.9 DISCLOSURE SUPPLEMENTS.............................................. 34 6.10 EMPLOYEE BENEFITS.................................................. 34 6.11 DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE............... 35 6.12 STOCK EXCHANGE LISTING............................................. 37 6.13 BUYER SUB.......................................................... 37 ARTICLE VII REGULATORY AND OTHER MATTERS 7.1 PROXY STATEMENT-PROSPECTUS.......................................... 37 7.2 REGULATORY APPROVALS................................................ 38 7.3 AFFILIATES; PUBLICATION OF COMBINED FINANCIAL RESULTS............... 38 ARTICLE VIII CLOSING CONDITIONS 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT......... 39 8.2 CONDITIONS TO THE OBLIGATIONS OF BUYER UNDER THIS AGREEMENT......... 40 8.3 CONDITIONS TO THE OBLIGATIONS OF SAFETY FUND UNDER THIS AGREEMENT... 41
ARTICLE IX iii THE CLOSING 9.1 TIME AND PLACE........................................ 42 9.2 DELIVERIES AT THE CLOSING............................. 42 ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1 TERMINATION.......................................... 42 10.2 EFFECT OF TERMINATION................................ 43 10.3 EXPENSES............................................. 44 10.4 AMENDMENT, EXTENSION AND WAIVER...................... 44 ARTICLE XI CERTAIN DEFINITIONS 11.1 CERTAIN DEFINITIONS.................................. 44 ARTICLE XII MISCELLANEOUS 12.1 CONFIDENTIALITY...................................... 45 12.2 PUBLIC ANNOUNCEMENTS................................. 45 12.3 SURVIVAL............................................. 46 12.4 NOTICES.............................................. 46 12.5 PARTIES IN INTEREST.................................. 47 12.6 COMPLETE AGREEMENT................................... 47 12.7 COUNTERPARTS......................................... 47 12.8 SEVERABILITY......................................... 47 12.9 GOVERNING LAW........................................ 47 12.10 HEADINGS............................................ 47 INDEX OF DEFINED TERMS..................................... I-1
iv AGREEMENT AND PLAN OF MERGER (AS AMENDED) THIS AGREEMENT AND PLAN OF MERGER dated as of January 5, 1996 (this "Agreement"), by and between CFX Corporation, a New Hampshire corporation ---------- ("Buyer"), and The Safety Fund Corporation, a Massachusetts corporation ("Safety ----- ------ Fund"). (Certain capitalized terms used herein shall have the meanings defined - ---- in Section 11.1 hereof.) WHEREAS, Buyer intends to organize a Massachusetts corporation that will be a wholly-owned direct or indirect subsidiary of Buyer ("Buyer Sub"); and --------- WHEREAS, the respective Boards of Directors of Buyer and Safety Fund have approved the acquisition of Safety Fund by Buyer pursuant to the merger of Buyer Sub with and into Safety Fund (the "Merger"); and ------ WHEREAS, the parties hereto desire that, following the consummation of the Merger, Safety Fund will merge with and into Buyer (the "BHC Merger") pursuant ---------- to a merger agreement in a form to be specified by Buyer and reasonably satisfactory to Safety Fund and consistent with the terms of this Agreement, and that Buyer may cause the merger of Orange Savings Bank ("Orange Savings"), a -------------- wholly-owned subsidiary of Buyer, with Safety Fund National Bank ("SFNB"), a ---- wholly-owned subsidiary of Safety Fund (the "Bank Merger"), pursuant to a merger ----------- agreement (the "Bank Merger Agreement") in a form to be specified by Buyer and --------------------- reasonably satisfactory to Safety Fund and consistent with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I THE MERGER AND THE BANK MERGER 1.1 THE MERGER. As promptly as practicable following the satisfaction or waiver of the conditions to the parties' respective obligations hereunder, and subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.2 hereof): (a) unless theretofore done, Buyer shall organize the Buyer Sub in accordance with Massachusetts law; (b) Buyer Sub shall be merged with and into Safety Fund, with Safety Fund as the surviving corporation (the "Surviving Corporation"); and (c) the separate existence of --------------------- Buyer Sub shall cease and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of Buyer Sub shall be vested in and assumed by Safety Fund. 1.2 EFFECTIVE TIME. The Merger shall be effected by the filing of articles of merger (the "Articles of Merger") with the Secretary of State of The ------------------ Commonwealth of Massachusetts (the "Secretary of State") in accordance with ------------------ Massachusetts law to become effective on the day of the closing ("Closing Date") ------------ provided for in Article IX hereof (the "Closing"). The term "Effective Time" ------- -------------- shall mean the time on the Closing Date (or a subsequent date not later than the opening of business on the next business day) when the Merger becomes effective as set forth in the Articles of Merger. 1.3 CHARTER AND BY-LAWS. The Charter and By-laws of the Surviving Corporation shall be the Articles of Organization, as amended (the "Charter"), ------- and By-laws of Buyer Sub as in effect immediately prior to the Effective Time, until thereafter amended as provided therein and by applicable law. 1.4 DIRECTORS AND COMMITTEES OF SURVIVING CORPORATION AND BUYER. (a) The Directors of Buyer Sub immediately prior to the Effective Time shall be the initial Directors of Surviving Corporation, each to hold office in accordance with the Charter and By-Laws of Surviving Corporation. (b) Prior to or at the Effective Time, four directors of Safety Fund to be designated by Buyer after consultation with Safety Fund shall be elected to the Board of Directors of Buyer, to be divided proportionately among the classes. The Board of Directors of Buyer shall nominate such persons for re- election, and support their re-election at the next succeeding annual meeting of shareholders of Buyer to its Board of Directors, to be divided proportionately among the classes of directors. Prior to the Effective Time, Buyer, in consultation with Safety Fund shall reconstitute the committees of its Board of Directors (as well as its joint management-Board committees) so as to achieve substantially proportionate representation, taking into account to the extent practicable the specific skills, education and experience of the various designees, for the directors of Safety Fund designated to become directors of Buyer. 1.5 OFFICERS OF SURVIVING CORPORATION. The officers of Buyer Sub immediately prior to the Effective Time shall be the initial officers of Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. 1.6 SURVIVING BANK. (a) In the event Buyer determines to accomplish the Bank Merger immediately following the Merger and the BHC Merger: (1) The Bank Merger Agreement shall specify which of SFNB and Orange Savings shall be the surviving bank in the Bank Merger ("Surviving --------- Bank"), provided that the name of the Surviving Bank shall include the ---- words "Safety Fund". (2) Buyer agrees, to the extent permitted by applicable law and appropriate federal and state bank regulators, to maintain the Surviving Bank in existence as a separate subsidiary for at least three years following the Effective Time subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of Buyer's directors. (3) The officers of SFNB immediately prior to the Effective Time shall continue to be the officers of the Surviving Bank following the Effective Time, each to hold office in accordance with the Charter and By- Laws of the Surviving Bank. Nine directors of SFNB to be designated by Buyer after consultation with Safety Fund shall continue to be 2 directors of the Surviving Bank following the Effective Time, each to hold office in accordance with the Charter and By-Laws of the Surviving Bank. Buyer intends initially to elect up to three additional directors to serve on the Board of the Surviving Bank. Buyer agrees that, the continuing directors of SFNB will be kept in place for at least three years subject to regulatory considerations, safe and sound banking practices, and the fiduciary duties of Buyer's directors. (4) To the extent any of the Persons designated in this Agreement to serve as a director of Buyer or Surviving Bank is unable or unwilling, as of the Effective Time, to serve in such position, Buyer and Safety Fund shall agree on another member of the SFNB Board to serve as a replacement for such designee. (b) In the event Buyer determines not to accomplish the Bank Merger immediately following the Merger and the BHC Merger, Buyer agrees to take all the measures specified in Sections 1.6(a)(2), (3) and (4) with respect to SFNB to the same extent as they would have been applied to the Surviving Bank. (c) Nothing herein shall be deemed to preclude Buyer from accomplishing the Bank Merger at any time from and after the Effective Time as determined by the Board of Directors of Buyer. 1.7 ADDITIONAL ACTIONS. If, at any time after the Effective Time, Surviving Corporation shall consider or be advised that any further assignments or assurances in law or any other acts are necessary or desirable (a) to vest, perfect or confirm, of record or otherwise, in Surviving Corporation, title to and possession of any property or right of Buyer Sub acquired or to be acquired by reason of, or as a result of, the Merger, or (b) otherwise to carry out the purposes of this Agreement, Buyer Sub and its proper officers and directors shall be deemed to have granted to Surviving Corporation an irrevocable power of attorney to execute and deliver all such proper deeds, assignments and assurances in law and to do all acts necessary or proper to vest, perfect or confirm title to and possession of such property or rights in Surviving Corporation and otherwise to carry out the purposes of this Agreement; and the proper officers and directors of Surviving Corporation are fully authorized in the name of Buyer Sub or otherwise to take any and all such action. 1.8 ADDITIONAL AGREEMENTS. Safety Fund shall cause SFNB to execute and deliver the Bank Merger Agreement as soon as practicable following Buyer's request therefor. Safety Fund shall, and shall cause SFNB to, execute all other documents and take all actions as may be necessary or desirable for consummation of the BHC Merger and the Bank Merger, as described in the recitals hereto. 1.9 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger shall have the effects set forth in Chapter 156B, Section 80 of the General Laws of The Commonwealth of Massachusetts, as amended. 1.10 THE OPTION AGREEMENT. The parties acknowledge that Safety Fund and Buyer have entered into that certain Stock Option Agreement dated as of even date herewith (the "Option Agreement") pursuant to which Safety Fund has granted ---------------- to Buyer the right to purchase certain shares of Safety Fund Common Stock (as defined in Section 2.1 hereof) upon terms and 3 conditions specified in the Option Agreement. ARTICLE II CONVERSION OF SHARES 2.1 CONVERSION. At the Effective Time, each share of common stock, par value $5.00 per share, of Safety Fund (the "Safety Fund Common Stock") issued ------------------------ and outstanding immediately prior to the Effective Time (other than Dissenting Shares (as such term is defined in Section 2.9 hereof) and other than Safety Fund Common Stock then owned by Safety Fund, any Safety Fund Subsidiary, Buyer, or any Buyer Subsidiary (in each case other than in a fiduciary capacity or in connection with debts previously contracted)), including each attached right issued pursuant to the Shareholder Rights Plan (as hereinafter defined), shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and exchangeable for an amount of common stock, par value $0.66 2/3 per share, of Buyer ("Buyer Common Stock") equal to one share ------------------ multiplied by the appropriate Exchange Ratio (rounded to the nearest four decimal places) determined in accordance with Section 2.4 or Section 2.5 hereof, as the case may be (the "Merger Consideration"). -------------------- 2.2 CERTAIN DEFINED TERMS. As used herein, the following capitalized terms shall have the specified values or meanings. (a) "BUYER INDEX PRICE" shall mean $15.54 per share of Buyer Common Stock. (b) "BUYER TRADING PRICE" shall mean the average closing price of Buyer Common Stock on the American Stock Exchange ("Stock Exchange") (as -------------- reported by The Wall Street Journal or, if not reported thereby, another authoritative source) for the ten consecutive trading days ending on the business day before the date on which the last regulatory approval required to consummate the transactions contemplated hereby is obtained. (c) "POOLING DETERMINATION" shall mean either (i) a determination by Buyer that it is permissible under applicable financial and regulatory accounting principles for Buyer to record the Merger under the pooling of interests method of accounting or (ii) a determination that, solely as a result of actions of Buyer in breach of this Agreement, it is impermissible under applicable financial and regulatory accounting principles for Buyer to record the Merger under the pooling of interests method of accounting and that Buyer will be required to use the purchase method of accounting for the Merger. 2.3 DETERMINATION OF APPLICABLE EXCHANGE RATIO. The parties expect the Merger to be accounted for under the pooling of interests method of accounting. In view of the fact that, among other possibilities, a shareholder might take actions so as to preclude pooling treatment for the Merger, the parties have agreed that the Merger Consideration shall be paid as follows. Not later than the second business day preceding the Effective Time, Buyer shall consult with its independent certified public accountants as to whether a Pooling Determination can be made, and shall promptly advise Safety Fund of the determination. If, as of the close of business on the day preceding the Effective Time, a Pooling Determination shall have been made, the Exchange Ratio shall be the Pooling Exchange Ratio and the provisions of Section 2.4 shall apply. If as of such time it shall not have been possible to make a Pooling Determination the Exchange Ratio 4 shall be the Purchase Exchange Ratio and the provisions of Section 2.5 shall apply. 2.4 POOLING OF INTERESTS ACCOUNTING EXCHANGE RATIOS. The "Pooling ------- Exchange Ratio" shall be determined as follows: - -------------- (a) If the Buyer Trading Price is equal to or greater than 85 percent of the Buyer Index Price and is no greater than 115 percent of the Buyer Index Price, the Pooling Exchange Ratio shall be 1.700. (b) If the Buyer Trading Price is greater than 115 percent of the Buyer Index Price and is no greater than 120 percent of the Buyer Index Price, the Pooling Exchange Ratio shall be equal to: Buyer Index Price X 1.955 --------------------------- Buyer Trading Price (c) If the Buyer Trading Price is greater than 120 percent of the Buyer Index Price, the Pooling Exchange Ratio shall be 1.629. (d) If the Buyer Trading Price is less than 85 percent of the Buyer Index Price and is equal to or greater than 80 percent of the Buyer Index Price, the Pooling Exchange Ratio shall be equal to: Buyer Index Price X 1.445 --------------------------- Buyer Trading Price (e) If the Buyer Trading Price is less than 80 percent of the Buyer Index Price, the Pooling Exchange Ratio shall be 1.806 unless the Buyer Trading Price is less than 75 percent of the Buyer Index Price and the Pooling Exchange Ratio is increased or this Agreement is terminated in accordance with the terms of Section 2.11 hereof. (f) Notwithstanding any other provisions of this Section 2.4, in the event that before the Effective Time an announcement is made with respect to a business combination involving the acquisition of Buyer or a substantial portion of its assets, the Pooling Exchange Ratio shall not be less than 1.700. 2.5 PURCHASE ACCOUNTING EXCHANGE RATIOS. The "Purchase Exchange Ratio" ----------------------- shall be determined as follows: (a) If the Buyer Trading Price is equal to or greater than $13.16 and is less than $16.45, the Purchase Exchange Ratio shall be equal to 1.520. (b) If the Buyer Trading Price is equal to or greater than $16.45 and less than $20.84, the Purchase Exchange Ratio shall be equal to: $25.00 ------------------- Buyer Trading Price 5 (c) If the Buyer Trading Price is equal to or greater than $20.84, the Purchase Exchange Ratio shall be equal to 1.200. (d) If the Buyer Trading Price is less than $13.16 and equal to or greater than $12.50, the Purchase Exchange Ratio shall be: $20.00 ------------------- Buyer Trading Price (e) If the Buyer Trading Price is less than $12.50 the Purchase Exchange Ratio shall be 1.600 unless the Purchase Exchange Ratio is increased or this Agreement is terminated in accordance with the terms of Section 2.12 hereof. (f) Notwithstanding any other provisions of this Section 2.5, in the event that before the Effective Time an announcement is made with respect to a business combination involving the acquisition of Buyer or a substantial portion of its assets, the Purchase Exchange Ratio shall not be less than 1.520. 2.6 CONVERSION OF STOCK. (a) All Safety Fund Common Stock converted into Buyer Common Stock pursuant to this Article II shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each certificate (each a "Certificate") previously representing any such Safety Fund Common Stock shall ----------- thereafter represent the right to receive (i) the number of whole shares of Buyer Common Stock, and (ii) cash in lieu of fractional shares into which the Safety Fund Common Stock represented by such Certificate have been converted. Certificates previously representing Safety Fund Common Stock shall be exchanged for certificates representing whole shares of Buyer Common Stock and cash in lieu of fractional shares issued in consideration 6 therefor upon the surrender of such Certificates in accordance with this Section 2.6, without any interest thereon. (b) If prior to the Effective Time Buyer should split or combine its common stock (or other securities which are convertible into such common stock) or pay a dividend or other distribution in such common stock or convertible securities, all without Buyer receiving consideration therefor, then an appropriate and proportionate adjustment shall be made to the Exchange Ratio, the Buyer Index Price and the Buyer Trading Price. (c) At the Effective Time, all shares of Safety Fund Common Stock held in the treasury of Safety Fund other than in a fiduciary capacity or in connection with a debt previously contracted and all shares of Safety Fund Common Stock owned by Buyer or owned beneficially by any subsidiary of Buyer other than in a fiduciary capacity or in connection with debts previously contracted shall be cancelled and no cash, stock or other property shall be delivered in exchange therefor. 2.7 PROCEDURES FOR EXCHANGE OF SAFETY FUND COMMON STOCK FOR MERGER CONSIDERATION. (a) BUYER TO MAKE SHARES AVAILABLE. Buyer shall take all steps necessary on and as of the Effective Time to deliver to the Exchange Agent (as hereinafter defined), for the benefit of the holders of Certificates, for exchange in accordance with this Section 2.7, certificates representing shares of Buyer Common Stock and the cash in lieu of fractional shares to be paid pursuant to this Section 2.7 (such cash and certificates for shares of Buyer Common Stock, together with any dividends or distributions with respect thereto being hereinafter referred to as the "Exchange Fund") to be issued and paid in ------------- exchange for outstanding Safety Fund Common Stock in accordance with this Agreement. The Exchange Agent shall be such banking institution, corporate trust company, or other stock transfer agent appointed by Buyer and reasonably satisfactory to Safety Fund to act as exchange agent hereunder. The Exchange Agent shall act as agent on behalf of record holders (individually, a "Record ------ Holder") of Safety Fund Common Stock at the Effective Time, other than Safety - ------ Fund, any Safety Fund Subsidiary, Buyer, or any Buyer Subsidiary (in each case other than in a fiduciary capacity or in connection with debts previously contracted), or any Person holding Dissenting Shares. (b) EXCHANGE OF CERTIFICATES. Within three business days after the Effective Time, Buyer shall take all steps necessary to cause the Exchange Agent to mail to each Record Holder of a Certificate or Certificates, a form letter of transmittal for return to the Exchange Agent and instructions for use in effecting the surrender of the Certificates for certificates representing the Buyer Common Stock and the cash in lieu of fractional shares into which the Safety Fund Common Stock represented by such Certificates shall have been converted as a result of the Merger. The form letter (which shall be subject to the reasonable approval of Safety Fund) shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent. Upon surrender of a Certificate for exchange and cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate for the number of whole shares of Buyer Common Stock to which such holder of Safety Fund Common Stock shall have become entitled pursuant to the provisions of this Section 2.7 and (y) a check representing the amount of cash in lieu of the fractional shares, if any, which 7 such holder has the right to receive in respect of Certificates surrendered pursuant to the provisions of this Section 2.7, and the Certificates so surrendered shall forthwith be cancelled. In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Buyer, the posting by such person of a bond in such amount as Buyer may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof. Certificates surrendered for exchange by any person who is an "affiliate" of Safety Fund for purposes of Rule 145(c) under the Securities Act of 1933, as amended (the "Securities Act") shall not be exchanged for -------------- certificates representing shares of Buyer Common Stock until Buyer has received the written agreement of such person contemplated by Section 7.3 hereof. (c) RIGHTS OF CERTIFICATE HOLDERS AFTER THE EFFECTIVE TIME. The holder of a Certificate that prior to the Merger represented issued and outstanding Safety Fund Common Stock shall have no rights, after the Effective Time, with respect to such Safety Fund Common Stock except to surrender the Certificate in exchange for the Merger Consideration as provided in this Agreement or to perfect the rights of appraisal as a holder of Dissenting Shares that such holder may have pursuant to the applicable provisions of Massachusetts law. No dividends or other distributions declared after the Effective Time with respect to Buyer Common Stock shall be paid to the holder of any un-surrendered Certificate until the holder thereof shall surrender such Certificate in accordance with this Section 2.7. After the surrender of a Certificate in accordance with this Section 2.7, the record holder thereof shall be entitled to receive any such dividends or other distributions, without any interest thereon, which theretofore had become payable with respect to shares of Buyer Common Stock represented by such Certificate. (d) FRACTIONAL SHARES. Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of Buyer Common Stock shall be issued upon the surrender for exchange of Certificates, no dividend or distribution with respect to Buyer Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a stockholder of Buyer. In lieu of the issuance of any such fractional share, Buyer shall pay to each former holder of Safety Fund Common Stock who otherwise would be entitled to receive a fractional share of Buyer Common Stock, an amount in cash determined by multiplying the closing sale price of Buyer Common Stock on the Stock Exchange as reported by The Wall Street Journal for the trading day immediately preceding the date of the Effective Time (the "Last Closing Price") by the fraction of a share of Buyer Common Stock ------------------ which such holder would otherwise be entitled to receive pursuant to Section 2.7(b) hereof. No interest will be paid on the cash which the holders of such fractional shares shall be entitled to receive upon such delivery. (e) SURRENDER BY PERSONS OTHER THAN RECORD HOLDERS. If the Person surrendering a Certificate and signing the accompanying letter of transmittal is not the Record Holder thereof, then it shall be a condition of the payment of the Merger Consideration that such Certificate is properly endorsed to such Person or is accompanied by appropriate stock powers, in either case signed exactly as the name of the Record Holder appears on such Certificate, and is otherwise in proper form for transfer, or is accompanied by appropriate evidence of the authority of the Person surrendering such Certificate and signing the letter of transmittal to do so on behalf of the Record Holder and that the person requesting such exchange shall pay to the Exchange Agent in 8 advance any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (f) CLOSING OF TRANSFER BOOKS. From and after the Effective Time, there shall be no transfers on the stock transfer books of Safety Fund of the Safety Fund Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented for transfer to the Exchange Agent, they shall be ex- changed for the Merger Consideration and cancelled as provided in this Section 2.7. (g) RETURN OF EXCHANGE FUND. At any time following the 12-month period after the Effective Time, Buyer shall be entitled to require the Exchange Agent to deliver to it any portions of the Exchange Fund which had been made available to the Exchange Agent and not disbursed to holders of Certificates (including, without limitation, all interest and other income received by the Exchange Agent in respect of all funds made available to it), and thereafter such holders shall be entitled to look to Buyer (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any Merger Consideration that may be payable upon due surrender of the Certificates held by them. Notwithstanding the foregoing, neither Buyer nor the Exchange Agent shall be liable to any holder of a Certificate for any Merger Consideration delivered in respect of such Certificate to a public official pursuant to any abandoned property, escheat or other similar law. 2.8 BUYER SUB COMMON STOCK. Each share of common stock of Buyer Sub issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation at the Effective Time. 2.9 DISSENTERS' RIGHTS. Notwithstanding anything in this Agreement to the contrary and unless otherwise provided by applicable law, Safety Fund Common Stock which is issued and outstanding immediately prior to the Effective Time and which is owned by stockholders who, pursuant to applicable law, (a) deliver to Safety Fund in the manner provided by law, before the taking of the vote of Safety Fund's stockholders on the Merger, a written objection to the Merger and a written demand for the appraisal of their shares if the Merger is effected and (b) whose shares are not voted in favor of the Merger, nor consented thereto in writing (the "Dissenting Shares"), shall not be converted into the right to ----------------- receive, or be exchangeable for, the Merger Consideration, but, instead, the holders thereof shall be entitled to payment of the appraised value of such Dissenting Shares in accordance with the provisions of Chapter 156B, (S)(S)86-98 of the Massachusetts Business Corporation Law (as amended, the "MBCL"). If any ---- such holder shall have failed to perfect or shall have effectively withdrawn or lost such right of appraisal, the Safety Fund Common Stock of such holder shall thereupon be deemed to have been converted into and be exchangeable for, at the Effective Time, the right to receive the Merger Consideration. Buyer shall have the right to participate in any proceeding involving dissenters' rights. 2.10 STOCK OPTIONS. (a) At the Effective Time, each holder of a then outstanding stock option to purchase Safety Fund Common Stock ("Safety Fund ----------- Option") pursuant to the 1984 Incentive Stock Option Plan or the 1994 Incentive - ------ and Nonqualified Stock Option Plan (collectively, the "Safety Fund Stock Option ------------------------ Plans") (it being understood that the aggregate number of shares of Safety Fund - ----- Common Stock subject to purchase pursuant to the exercise of such Safety 9 Fund Options is not and shall not be more than 65,850), whether vested or unvested, will be assumed by Buyer. Each Safety Fund Option so assumed by Buyer under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Safety Fund Stock Option Plans immediately prior to the Effective Time, except that (i) such Safety Fund Option shall be exercisable (when vested) for that number of whole shares of Buyer Common Stock equal to the product of the number of shares of Safety Fund Common Stock covered by the Safety Fund Option multiplied by the Exchange Ratio, provided that any fractional share of Buyer Common Stock resulting from such multiplication shall be rounded down to the nearest share; and (ii) the exercise price per share of Buyer Common Stock shall be equal to the exercise price per share of Safety Fund Common Stock of such Safety Fund Option, divided by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent. (b) After the Effective Time, Buyer shall issue to each holder of an outstanding Safety Fund Option a document evidencing the foregoing assumption of such Safety Fund Option by Buyer. (c) It is the intention of the parties that the Safety Fund Options assumed by Buyer qualify following the Effective Time as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to the extent that the Safety Fund Options qualified as incentive stock ---- options immediately prior to the Effective Time. (d) Buyer shall not issue or pay for any fractional share otherwise issuable upon exercise of a Safety Fund Option. Prior to the Effective Time, Buyer shall reserve for issuance (and, if not previously registered pursuant to the Securities Act, register) the number of shares of Buyer Common Stock necessary to satisfy Buyer's obligations with respect to the issuance of Buyer Common Stock pursuant to the exercise of Safety Fund Options. (e) The provisions of this Section 2.10 are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each holder of a Safety Fund Option and his or her heirs and representatives. 2.11 TERMINATION, NOTICE AND CURE. (a) If (i) the Buyer Trading Price is less than $11.65 and a Pooling Determination can be made or (ii) the Buyer Trading Price is less than $12.50 and a Pooling Determination cannot be made, Safety Fund may elect by giving written notice to Buyer prior to the third business day immediately preceding the Closing Date to terminate this Agreement pursuant to Section 1.01. Within two business days thereafter: (1) in the event the Exchange Ratio is a Pooling Exchange Ratio, Buyer may elect to increase the Exchange Ratio to: $21.06 ------------------- Buyer Trading Price and (2) in the event the Exchange Ratio cannot be a Pooling Exchange Ratio, Buyer may elect either to (X) increase the Exchange Ratio to that Exchange Ratio which when 10 multiplied by the Buyer Trading Price has a value of $20.00 or (Y) offer an Exchange Ratio of 1.600 plus an amount of cash which when added to the product of 1.600 and the Buyer Trading Price has an aggregate value of $20.00 per share of Safety Fund Common Stock; (b) In the event Buyer makes an election referred to in the preceding Section 2.11(a), this Agreement shall not terminate and the Exchange Ratio shall be determined in accordance with such Section 2.11(a). In the event Buyer does not elect to increase the Exchange Ratio, this Agreement shall terminate on the date established as the Closing Date with the consequences specified in Section 10.2 hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SAFETY FUND Safety Fund hereby represents and warrants to Buyer as follows: 3.1 CORPORATE ORGANIZATION. (a) Safety Fund is a corporation, duly organized and validly existing and in good standing under the laws of The Commonwealth of Massachusetts, and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The subsidiaries ---- listed in Exhibit 21 of Safety Fund's Annual Report on Form 10-KSB for the year ended December 31, 1994 constitute all of Safety Fund's subsidiaries (the "Safety Fund Subsidiaries"). Except as set forth in Schedule 3.1 of the Safety - ------------------------- ------------ Fund Disclosure Schedules (the "Schedules"), each of the Safety Fund --------- Subsidiaries is a bank or corporation, in each case duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. SFNB is a national banking association organized under the National Bank Act. Each of Safety Fund and the Safety Fund Subsidiaries has the power and authority to own or lease all of its properties and assets and to conduct its business as it is now being conducted, and, except as set forth in Schedule 3.1, is duly licensed or qualified to do busi ness and is in good - ------------ standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing does not or would not have a Material Adverse Effect (as defined in Section 11.1) on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. (b) Neither Safety Fund nor any of the Safety Fund Subsidiaries owns, controls or holds with the power to vote, directly or indirectly of record, beneficially or otherwise, any capital stock or any equity or ownership interest in any corporation, partnership, association, joint venture or other entity, other than not more than five percent of any equity security regis tered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than ------------ as disclosed on Schedule 3.1 hereto and except, in the case of Safety Fund, for ------------ stock of the Safety Fund Subsidiaries. 3.2 CAPITALIZATION. (a) The authorized capital stock of Safety Fund consists solely of 3,200,000 shares of Safety Fund Common Stock and 100,000 shares of preferred stock, $10.00 11 par value ("Safety Fund Preferred Shares"). There are 1,660,665 shares of ---------------------------- Safety Fund Common Stock issued and outstanding, no shares of Safety Fund Common Stock held in its treasury and no Safety Fund Preferred Shares issued and outstanding or held in its treasury. In connection with the shareholder rights plan ("Shareholder Rights Plan") adopted by Safety Fund as of the date of this Agreement, an aggregate 3,200 shares of its Series A Participating Cumulative Preferred Stock (the "Series A Preferred") have been created and have been reserved for issuance. All issued and outstanding Safety Fund Common Stock has been, and the Series A Preferred upon issuance will be, duly authorized, validly issued, fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. The authorized, issued and outstanding capital stock of each Safety Fund Subsidiary is set forth in Schedule 3.2 hereto. All issued and outstanding shares of each of the Safety - ------------ Fund Subsidiaries have been duly authorized and validly issued and are fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. All issued and outstanding shares or interests of each of the Safety Fund Subsidiaries are owned by Safety Fund and are held by Safety Fund free and clear of any security interest, pledge, lien, claim or other encumbrance or restriction on voting or transfer. (b) Except for the Option Agreement, the shareholder rights plan ("Shareholder Rights Plan") in the form previously discussed with Buyer and ----------------------- options to acquire not more than 50,850 shares of Safety Fund Common Stock pursuant to stock options outstanding as of the date hereof under the Safety Fund Stock Option Plans, neither Safety Fund nor any of the Safety Fund Subsidiaries has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase or issuance of, or representing the right to purchase, subscribe for or otherwise receive, any shares of its capital stock or any securities convertible into or representing the right to receive, purchase or subscribe for any such shares of Safety Fund, or shares of any of the Safety Fund Subsidiaries. The names of the optionees, the date of grant of each option to purchase Safety Fund Common Stock, the number of shares subject to each such option, the expiration date of each such option, and the price at which each such option may be exercised under the Safety Fund Stock Option Plans are set forth on Schedule 3.2. Except as set forth on Schedule 3.2 and except for ------------ ------------ restrictions on transferability of rights granted pursuant to the Shareholder Rights Plan (as set forth in such Shareholder Rights Plan), there are no agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares to which Safety Fund is a party, nor does Safety Fund have knowledge of any such agreements or understandings to which Safety Fund is not a party with respect to the voting of any such shares or which restrict the transfer of such shares. The Safety Fund Common Stock is listed on the Nasdaq small-cap market. 3.3 AUTHORITY. Safety Fund has full corporate power and authority to execute and deliver this Agreement and the Option Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Option Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by at least a majority of Safety Fund's directors. The Board of Directors of Safety Fund has directed that this Agreement and the transactions contemplated hereby be submitted to Safety Fund's stockholders for approval at a meeting of such stockholders and has recommended approval of this Agreement by Safety Fund's stockholders. Except for the adoption of this Agreement by a vote of the holders of a majority of the outstanding shares of Safety Fund Common Stock and except for any actions required or appropriate to be taken by Safety Fund with respect to the rights of any dissenting shareholders under Chapter 156B, (S)(S)86-98 of the MBCL, no other corporate proceedings on the part of Safety Fund are necessary to consummate the transactions contemplated by this Agreement. Each of this Agreement and the Option Agreement has been duly and validly executed and delivered by Safety Fund, constitutes a valid and binding obligation of Safety Fund, and is enforceable against Safety Fund in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, moratorium and similar laws 12 affecting the rights and remedies of creditors generally and (ii) general principles of equity, regardless of whether enforcement is sought in proceedings in equity or at law. 3.4 NO VIOLATION. Neither the execution and delivery of this Agreement or the Option Agreement by Safety Fund, nor the consummation by Safety Fund of the transactions contemplated hereby or thereby, nor the compliance by Safety Fund with any of the terms or provisions hereof, does or will: (a) violate any provision of the Charter or By-laws of Safety Fund or any of the Safety Fund Subsidiaries, (b) assuming that the consents and approvals referred to in Section 3.5 hereof are duly obtained, violate any statute, code, ordinance, permit, authorization, registration, rule, regulation, judgment, order, writ, decree or injunction applicable to Safety Fund or any of the Safety Fund Subsidiaries or any of their respective properties, securities or assets, except for violations which would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole, or (c) assuming that the consents and approvals referred to in Section 3.5 hereof are duly obtained and except as set forth on Schedule 3.4 hereto, ------------ violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the respective properties or assets of Safety Fund or any of the Safety Fund Subsidiaries under, any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, deed of trust, license, lease, contract, agreement or other instrument or obligation to which Safety Fund or any of the Safety Fund Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except for violations, conflicts, breaches or defaults which would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. 3.5 CONSENTS AND APPROVALS. Neither the execution, delivery and performance of this Agreement or the Option Agreement by Safety Fund nor consummation of the transaction contemplated hereby or thereby requires any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative agency or commission or other governmental or regulatory authority or instrumentality, domestic or foreign, including, without limitation, any Bank Regulator (as hereinafter defined), except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act, state takeover laws, and filing and recordation of appropriate merger documents as required by Massachusetts, New Hampshire and Federal law, (ii) for consents and approvals of or filings or registrations with the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Office of the Comptroller of --------------- the Currency (the "OCC"), the Massachusetts Board of Bank Incorporation (the --- "BBI"), the Massachusetts Commissioner of Banks ("Massachusetts Commissioner"), - ---- -------------------------- and the Massachusetts Housing Partnership Fund ("MHP") (each of the foregoing, a --- "Bank Regulator"), and (iii) where failure to obtain any such consent, approval, -------------- authorization or permit, or to make any such filing or notification, would not prevent or significantly delay consummation of the Merger, the BHC Merger or the Bank Merger or otherwise prevent Safety Fund from performing its obligations 13 under this Agreement, or would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole, or on Buyer. 3.6 REGULATORY APPROVAL. Safety Fund is not aware of any reason why the conditions set forth in Section 8.1(c) hereof would not be satisfied without significant delay. Safety Fund is not aware of any reason why the Merger cannot qualify as a "pooling of interests" for accounting purposes. 3.7 FINANCIAL STATEMENTS. (a) The consolidated balance sheets of Safety Fund as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1994, 1993 and 1992, certified by KPMG Peat Marwick LLP for 1994 and by Ernst & Young LLP for 1993 and 1992 in the form delivered to Buyer prior to execution and delivery of this Agreement (all of the above being collectively referred to as the "Safety Fund Audited Financial Statements"), ---------------------------------------- have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in the ---- footnotes thereto and except as required or permitted by SFAS 109 and 115) and present fairly in all material respects the consolidated financial position of and results of operations of Safety Fund at the dates, and for the periods, stated therein. (b) The consolidated balance sheets of Safety Fund as of September 30, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the nine months ended September 30, 1995 and 1994 in the form delivered to Buyer prior to execution and delivery of this Agreement (hereinafter referred to collectively as the "Safety Fund Interim ------------------- Financial Statements") present fairly, and the financial statements referred to - -------------------- in Section 5.5 hereof will present fairly, in all material respects the consolidated financial position and results of operations of Safety Fund for the periods indicated thereon and have been, and the financial statements referred to in Section 5.5 hereof will be, prepared in accordance with GAAP applied on a consistent basis (except for the omission of notes to the Safety Fund Interim Financial Statements and year-end adjustments to interim results, which adjustments will not be material, and except as required or permitted by SFAS 109 and 115) with all prior periods and throughout the periods indicated. (c) The Safety Fund Audited Financial Statements and the Safety Fund Interim Financial Statements are herein referred to together as the "Safety Fund ----------- Financial Statements." - -------------------- (d) The books and records of Safety Fund and each Safety Fund Subsidiary fairly reflect in all material respects the transactions to which it is a party or by 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 Safety Fund and the Safety Fund Subsidiaries contain records which are accurate in all material respects of all corporate actions of the respective shareholders and Board of Directors (including committees of its Board of Directors). 3.8 SAFETY FUND REPORTS. Since January 1, 1991, Safety Fund and the Safety Fund Subsidiaries have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed (except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Safety 14 Fund and the Safety Fund Subsidiaries, taken as a whole), with (i) the Securities and Exchange Commission ("SEC") pursuant to the Securities Act or the --- Exchange Act, (ii) the OCC, (iii) the Federal Reserve, and (iv) any applicable state securities or banking authorities (all such reports and statements are collectively referred to herein as the "Safety Fund Reports"). As of their ------------------- respective dates, no such Safety Fund Reports 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 and except that Safety Fund has corrected a scrivener's error with a filing of an amended Form 10-QSB, for the quarter ended September 30, 1995. 3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on Schedule -------- 3.9 hereto, since December 31, 1994, Safety Fund and the Safety Fund - --- Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any change or event which, individually or in the aggregate with other changes and events, has had a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole; (b) except as permitted by Section 5.1 with respect to actions that occur after the date hereof and as set forth in Schedule 3.9 hereto or in the ------------ ordinary course of business consistent with past practice with respect to actions that occurred prior to the date hereof, any increase in the compensation payable or to become payable to any of the officers, directors or employees of Safety Fund or any of the Safety Fund Subsidiaries or any bonus payment or arrangement made to or with any of them; (c) any agreement, contract or commitment entered into or agreed to be entered into except for those in the ordinary course of business (none of which, individually or in the aggregate, is reasonably expected to have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole); (d) any change in any of the accounting methods or practices of Safety Fund or any of the Safety Fund Subsidiaries other than changes required by applicable law or by GAAP; (e) any change in the credit policies or procedures of Safety Fund or any Safety Fund Subsidiary, the effect of which was or is to make any such policy or procedure less restrictive in any material respect; or (f) any material election made by Safety Fund or any Safety Fund Subsidiary for federal or state income tax purposes. 3.10 LEGAL PROCEEDINGS. (a) Except as set forth on Schedule 3.10 hereto ------------- and except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole, neither Safety Fund nor any of the Safety Fund Subsidiaries is a party to any, and there are no pending or, to the best of Safety Fund's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against Safety Fund or any of the Safety Fund Subsidiaries; and neither Safety Fund nor any of the Safety Fund Subsidiaries is a party to or 15 subject to any order, judgment or decree. (b) Schedule 3.10 lists, as of the date of this Agreement, all ------------- pending litigation involving any claim against Safety Fund or any Safety Fund Subsidiary, whether directly or by counterclaim, involving a "lender liability" cause of action . (c) There are no actions, suits or proceedings instituted, pending or, to the knowledge of Safety Fund, threatened (and which if asserted would be reasonably likely to have an unfavorable outcome) against any present or former director or officer of Safety Fund or any Safety Fund Subsidiary that might give rise to a claim for indemnification against Safety Fund or any Safety Fund Subsidiary that is reasonably likely to have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. 3.11 TAXES AND TAX RETURNS. (a) Safety Fund, all Safety Fund Subsidiaries, and all predecessors of Safety Fund have timely filed all federal, state, and local tax returns required by applicable law to be filed except for filings which are filed pursuant to routine extensions permitted by law or the failure to file which or the late filing of which would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. Such returns were accurate and complete in all material respects except where the failure to be accurate or complete would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. (b) Safety Fund, all Safety Fund Subsidiaries, and all predecessors of Safety Fund have paid or, where payment is not required to have been made, have set up adequate reserves or accruals in the Safety Fund Financial Statements for the payment of all taxes required to be paid in respect of the periods covered by such returns and as of the date hereof, including but not limited to accruals or withholdings relating to any tax withholding, social security or unemployment provisions of the applicable federal, state and local laws except where the failure to do so would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. As of the respective dates of the Safety Fund Financial Statements in which such reserves or accruals are established and the date hereof, neither Safety Fund nor any Safety Fund Subsidiary had any liability for any such taxes in excess of the amounts so paid or reserved or accruals so established which was material to Safety Fund and the Safety Fund Subsidiaries, taken as a whole. Except for taxes which are being contested in good faith and for which adequate reserves or accruals are reflected in the Safety Fund Financial Statements, neither Safety Fund nor any of the Safety Fund Subsidiaries is delinquent in the payment of any material tax, assessment or governmental charge the failure to pay which would have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole, and none of them has requested any extension of time within which to file any tax returns in respect of any fiscal year which have not since been filed. (c) No material deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or definitively) against Safety Fund or any of the Safety Fund Subsidiaries which have not been settled and paid or adequately reserved against in the Safety Fund Financial Statements and no requests for waivers of the time to assess any tax are pending. Safety Fund and the Safety Fund Subsidiaries file consolidated federal income tax returns. Safety Fund's consolidated federal income tax returns have not been audited by the IRS since prior to 1988. 16 (d) None of the transactions contemplated hereby or the termination of the employment of any employee of Safety Fund or any Safety Fund Subsidiary prior to or following consummation of the transactions contemplated hereby could result in Buyer or any Buyer Subsidiary making or being required to make any "excess parachute payment" as that term is defined in Section 280G of the Code. 3.12 PROPERTIES. Except (i) as may be reflected in the Safety Fund Financial Statements, (ii) for any lien for current taxes not yet delinquent, (iii) for pledges to secure deposits, (iv) for liens on real estate acquired by foreclosure or substantively repossessed, and (v) for such other liens, security interests, claims, charges, options or other encumbrances and imperfections of title that do not have a Material Adverse Effect on the value of personal or real property reflected in the Safety Fund 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, Safety Fund and the Safety Fund Subsidiaries have good title, free and clear of any liens, claims, charges, options or other encumbrances, to all of the personal and real property reflected in the consolidated balance sheets of Safety Fund included in the Safety Fund Financial Statements and all personal and real property acquired since such date, except such personal and real property as has been disposed of in the ordinary course of business. 3.13 CERTAIN CONTRACTS. Except as set forth in Schedule 3.13 hereto and ------------- except for agreements, indentures, arrangements and contracts which are exhibits to Safety Fund's Annual Report on Form 10-KSB for the year ended December 31, 1994, accurate copies of which have been made available to Buyer, neither Safety Fund nor any of the Safety Fund Subsidiaries is a party to, is bound by, owns properties subject to, or receives benefits under: (a) any agreement, arrangement or other contract not made in the ordinary course of business that (x) would be required to be filed as an exhibit to a Form 10-K or 10-KSB under the Exchange Act or (y) is or may reasonably be expected to be material to the financial condition, business or results of operations of Safety Fund and the Safety Fund Subsidiaries, taken as a whole, (b) any agreement, indenture or other instrument relating to the borrowing of money by Safety Fund or any Safety Fund Subsidiary or the guarantee by Safety Fund or any Safety Fund Subsidiary of any such obligation (other than instruments relating to transactions entered into in the ordinary course of the business of Safety Fund or in the ordinary course of business of any Safety Fund Subsidiary), (c) any agreement, arrangement or commitment which cannot be terminated at will relating to the employment of a consultant or the employment, election or retention of any present or former director, officer or employee, (d) any contract, agreement or understanding with a labor union, (e) any agreement (other than any agreement (x) with a banking customer entered into by any Safety Fund Subsidiary in the ordinary course of business under which any Safety Fund Subsidiary provides banking services to such banking customer or (y) relating to the sale of mortgage loans, including forward commitments) that involves a payment or series of payments of more than $100,000 from or to Safety Fund or any Safety Fund Subsidiary, or 17 (f) any agreement containing covenants that limit the ability of Safety Fund or any Safety Fund Subsidiary to compete in any line of business or with any person, or that involve any restriction on the geographic area in which, or method by which, Safety Fund or any Safety Fund Subsidiary may carry on its business. 3.14 CERTAIN DEFAULTS. Except as set forth in Schedule 3.14 hereto, ------------- neither Safety Fund nor any Safety Fund Subsidiary, nor, to the knowledge of Safety Fund, any other party thereto, is in default in any material respect under any material lease, contract, mortgage, promissory note, deed of trust, loan or other commitment or arrangement pursuant to which Safety Fund or any Safety Fund Subsidiary has borrowed funds or is otherwise the obligor, which default would have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. 3.15 INSURANCE. (a) The deposit accounts of any Safety Fund Subsidiary which are of an insurable type are insured by the FDIC to the extent permitted by the Bank Insurance Fund of the FDIC. (b) Safety Fund has made available to Buyer correct and complete copies of all material policies of insurance of Safety Fund and the Safety Fund Subsidiaries currently in effect. Neither Safety Fund nor any of the Safety Fund Subsidiaries has any liability for unpaid premiums or premium adjustments not properly reflected on Safety Fund's financial statements included in Safety Fund's Quarterly Report on Form 10-QSB for the period ended September 30, 1995, except for any such liability that would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. Except as set forth on Schedule 3.15 hereto, neither Safety Fund nor any Safety Fund ------------- Subsidiary has received any notice of termination of any such insurance coverage or material increase in the premiums therefor or has any reason to believe that any such insurance coverage will be terminated or the premiums therefor materially increased. 3.16 EMPLOYEE BENEFIT PLANS. (a) Except as described on Schedule 3.16 ------------- hereto, neither Safety Fund nor any of the Safety Fund Subsidiaries has any obligation, contingent or otherwise, under any employment, consulting, retirement or severance agreement which would require Safety Fund or any Safety Fund Subsidiary to make payments exceeding $100,000 for any employee or former employee. (b) SCHEDULE 3.16 hereto sets forth a complete list of all ERISA Plans (as defined below). Except as set forth in Schedule 3.16, neither Safety ------------- Fund nor any Safety Fund Subsidiary maintains or contributes to any "multi- employer plan" as that term is defined at Section 4001(a)(3) of ERISA, and neither Safety Fund nor any Safety Fund Subsidiary has incurred any material liability under Section 4062, 4063 or 4201 of ERISA. To the knowledge of Safety Fund, each pension plan, as defined at Section 3(2) of ERISA, maintained by Safety Fund or any Safety Fund Subsidiary (each, a "Pension Plan") which is ------------ intended to be qualified under Section 401(a) of the Code is so qualified. Except as set forth in Schedule 3.16 hereto, to the knowledge of Safety Fund, ------------- since January 1, 1991, (i) each welfare plan, as defined at Section 3(1) of ERISA, maintained by Safety Fund or a Safety Fund Subsidiary (each, a "Welfare ------- Plan"), and each Pension Plan (the Pension Plans and Welfare Plans being - ---- hereinafter referred to as "ERISA Plans"), has been administered substantially ----------- in accordance with the terms of such plan and the provisions of ERISA, (ii) nothing has been done or omitted to be done with respect to any ERISA Plan that would result in any material liability on the part of Safety Fund or any Safety 18 Fund Subsidiary, including the loss of any material tax deduction, under ERISA or the Code, (iii) no "reportable event" as defined at Section 4043 of ERISA, other than any such event for which the thirty-day notice period has been waived, has occurred with respect to any Pension Plan subject to Title IV of ERISA, and (iv) except for continuation of health coverage to the extent required under Section 4980B of the Code, there are no unfunded obligations under any ERISA Plan providing benefits after termination of employment. (c) Schedule 3.16 hereto sets forth a complete list of all material ------------- employment, consulting, retirement and severance agreements with individuals and all material incentive, bonus, fringe benefit and other employee benefit arrangements of Safety Fund and the Safety Fund Subsidiaries, covering employees or former employees of Safety Fund and the Safety Fund Subsidiaries. (d) Safety Fund has made available to Buyer copies of all ERISA Plans, copies of all agreements and arrangements referred to in (c) above that have been reduced to writing, and a written summary of the material terms of all such agreements or arrangements that have not been reduced to writing. 3.17 COMPLIANCE WITH APPLICABLE LAW; REGULATORY EXAMINATIONS. (a) Safety Fund and each of the Safety Fund Subsidiaries holds, and has at all times held, all licenses, franchises, permits, approvals, consents, qualifications and authorizations material for the lawful conduct of its business under and pursuant to, and has complied with, and is not in default under, any applicable law, statute, order, rule, regulation, policy, ordinance, reporting or filing requirement and/or guideline of any federal, state or local governmental authority relating to Safety Fund or any of the Safety Fund Subsidiaries, except as set forth on Schedule 3.17 hereto and except for violations which, either ------------- individually or in the aggregate, do not or would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries taken as a whole, and neither Safety Fund or any of the Safety Fund 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 Safety Fund and the Safety Fund Subsidiaries and except as set forth on Schedule 3.17 hereto, no regulatory ------------- agency has initiated any proceeding or, to the best knowledge of Safety Fund, investigation into the business or operations of Safety Fund or any of the Safety Fund Subsidiaries since prior to December 31, 1991. Safety Fund has not received any objection from any regulatory agency to Safety Fund's response to any violation, criticism or exception with respect to any report or statement relating to any examinations of Safety Fund or any of the Safety Fund Subsidiaries. 3.18 BROKER'S FEES. Neither Safety Fund, any Safety Fund Subsidiary, nor any of its officers or directors has employed any broker, finder or investment advisor, or incurred any liability for any broker's fees, commissions, finder's fees or investment advisory fees in connection with any of the transactions contemplated by this Agreement, except that Safety Fund has engaged, and will pay a fee to McConnell, Budd & Downes, Inc. (the "Safety Fund Investment ---------------------- Advisor"). The Safety Fund Investment Advisor has delivered an opinion to the - ------- Board of Directors of Safety Fund stating its opinion that the consideration to be received by Safety Fund's stockholders pursuant to the Merger is fair to such stockholders, from a financial point of view. 19 3.19 SAFETY FUND INFORMATION. The information relating to Safety Fund and the Safety Fund Subsidiaries to be contained in the Proxy Statement-Prospectus -------------------------- (as defined in Section 7.1) and any application to any Bank Regulator, or any other statement or application filed with any other governmental body in connection with the Merger, the BHC Merger, the Bank Merger, and the other transactions contemplated by this Agreement, will not contain as of the date of such Proxy Statement-Prospectus and as of the date of the Special Meeting (defined in Section 5.6) any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, Safety Fund makes and will make no representation or warranty with respect to any information supplied by Buyer which is contained in any of the foregoing documents. The Proxy Statement-Prospectus (except for such portions thereof that relate only to Buyer and its subsidiaries) will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. 3.20 ENVIRONMENTAL ISSUES. Except as set forth on Schedule 3.20 hereto ------------- and except where such violation, liability or noncompliance would not have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole: (i) neither Safety Fund nor any of the Safety Fund Subsidiaries has violated during the last five years or is in violation of any Environmental Law (as defined in Section 11.1); (ii) none of the properties owned or leased by Safety Fund or any Safety Fund Subsidiary (including, without limitation, soils and surface and ground waters) are contaminated with any Hazardous Substance (as defined in Section 11.1); (iii) neither Safety Fund nor any of the Safety Fund Subsidiaries is liable for any off-site contamination; (iv) neither Safety Fund nor any of the Safety Fund Subsidiaries is liable under any Environmental Law; and (v) Safety Fund and each of the Safety Fund Subsidiaries is, and has during the last five years been, in compliance with, all of their respective Environmental Permits (as defined in Section 11.1). For purposes of the foregoing, all references to "properties" include, without limitation, any owned real property or leased real property. 3.21 MATERIAL INTERESTS OF CERTAIN PERSONS. Except as set forth on Schedule 3.21 or in the proxy statement for Safety Fund's 1995 Annual Meeting of - ------------- Stockholders, to the knowledge of Safety Fund, no officer or director of Safety Fund, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any material interest in any material contract or property (real or personal), tangible or intangible, used in or pertaining to the business of Safety Fund or any of the Safety Fund Subsidiaries that would be required to be disclosed in a proxy statement to stockholders under Regulation 14A of the Exchange Act. 3.22 CERTAIN TRANSACTIONS. Since December 31, 1994, neither Safety Fund nor any Safety Fund Subsidiary has entered into any material transactions involving interest rate and currency swaps, options and futures contracts, or any other similar transactions, except as disclosed in Schedule 3.22 hereto. 3.23 REGULATORY AGREEMENTS. Neither Safety Fund nor any Safety Fund Subsidiary is a party to any assistance agreement, supervisory agreement, memorandum of understanding, consent order, cease and desist order, or condition of any regulatory order or decree with or by the OCC, the Federal Reserve or any other financial services regulatory agency that relates to the conduct of the business of Safety Fund or any Safety Fund Subsidiary, nor has Safety Fund or any of the Safety Fund Subsidiaries been advised by any such regulatory agency or other governmental entity that it is considering issuing or requesting any such agreement, order or decree. 20 3.24 LABOR MATTERS. With respect to their employees, neither Safety Fund nor any Safety Fund Subsidiary has engaged in any unfair labor practice as defined under applicable federal law. Since January 1, 1994, Safety Fund and the Safety Fund Subsidiaries have not experienced any attempt by organized labor or its representatives to make Safety Fund or any Safety Fund Subsidiary conform to demands of organized labor relating to their employees or to enter into a binding agreement with organized labor that would cover the employees of Safety Fund or any Safety Fund Subsidiary. There is no unfair labor practice charge or other complaint by any employee or former employee of Safety Fund or any Safety Fund Subsidiary against any of them pending before any governmental agency arising out of Safety Fund's or such Safety Fund Subsidiary's activities, 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 Safety Fund and the Safety Fund Subsidiaries, taken as a whole; there is no labor strike or labor disturbance pending or threatened against any of them; and neither Safety Fund nor any Safety Fund Subsidiary has experienced a work stoppage or other labor difficulty since January 1, 1994. 3.25 ADMINISTRATION OF TRUST ACCOUNTS. Each Safety Fund Subsidiary has properly administered all accounts for which it acts as a fiduciary or agent, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable state and federal law and regulation and common law, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. None of Safety Fund, any Safety Fund Subsidiary, or any director, officer or employee of Safety Fund or any Safety Fund Subsidiary acting on behalf of Safety Fund or a Safety Fund Subsidiary, has committed any breach of trust with respect to any such fiduciary or agency account, and the accountings for each such fiduciary or agency account are true and correct in all material respects and accurately reflect the assets of such fiduciary or agency account, except for such breaches and failures to be true, correct and accurate as would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. 3.26 INTELLECTUAL PROPERTY. Safety Fund and each Safety Fund Subsidiary owns the entire right, title and interest in and to, or has valid licenses with respect to, all of the Intellectual Property, as hereinafter defined, necessary in all material respects to conduct the business and operations of Safety Fund and the Safety Fund Subsidiaries as presently conducted, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. 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, settlement, lien, charge, encumbrance or attachment would have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. For purposes of this Section 3.26, the term "Intellectual Property" means all domestic and foreign letters patent, patents, patent applications, patent licenses, software licensed or owned, 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. 3.27 LOAN PORTFOLIO. Schedule 3.27 sets forth all of the loans in ------------- original principal 21 amount in excess of $200,000 of Safety Fund or any Safety Fund Subsidiary that as of the date of this Agreement are classified by Safety Fund or any Bank Regulator 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 the OCC or any other Bank Regulator would agree with the loan classifications contained in Schedule 3.27. ------------- 3.28 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Safety Fund nor any Safety Fund Subsidiary has any liability (contingent or otherwise), excluding contractually assumed contingencies, except (i) as set forth on the consolidated balance sheet of Safety Fund and its subsidiaries as at December 31, 1994 contained in the Safety Fund Reports, including the notes thereto, (ii) for liabilities and obligations incurred in the ordinary course of business consistent with past practice since December 31, 1994, and (iii) liabilities which would not, individually or in the aggregate, have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Safety Fund as follows: 4.1 CORPORATE ORGANIZATION. Buyer is a corporation, duly organized, validly existing and in good standing under the laws of the State of New Hampshire. Buyer has the power and authority to own or lease all of its properties and assets and to conduct its business as it is now being conducted, and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing does not or would not, either individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. Buyer is registered as a bank holding company under the BHCA. Buyer has previously made available to Safety Fund for inspection true and complete copies as amended to date of the Charter and By- laws of Buyer. 4.2 CAPITALIZATION. (a) As of the date hereof, the authorized capital stock of Buyer consists solely of 22,500,000 shares of common stock ("Buyer ----- Common Shares") and 3,000,000 shares of preferred stock ("Buyer Preferred - ------------- --------------- Shares"). As of the date hereof, there were 7,087,550 Buyer Common Shares - ------ issued and outstanding, no Buyer Common Shares held in its treasury, and no Buyer Preferred Shares issued and outstanding. All issued and outstanding Buyer Common Shares have been duly authorized and validly issued and are fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. The shares of Buyer Common Stock to be issued pursuant to the Merger will be duly authorized and validly issued and (at the Effective Time) will be fully paid, nonassessable, and free of preemptive rights, with no personal liability attaching to the ownership thereof. (b) As of the date hereof, except for the options to acquire not more than 732,000 Buyer Common Shares pursuant to stock options under the CFX Stock Option Plan (the "Buyer Stock Option Plan"), Buyer is not bound by any ----------------------- outstanding subscriptions, options, warrants, 22 calls, commitments or agreements of any character calling for the transfer, purchase or issuance of, or representing the right to purchase, subscribe for or otherwise receive, any shares of its capital stock or any securities convertible into or representing the right to receive, purchase or subscribe for any such shares of Buyer. There are no agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares to which Buyer is a party, nor does Buyer have knowledge of any such agreements or understandings to which Buyer is not a party with respect to the voting of any such shares or which restrict the transfer of such shares. Buyer Common Shares are listed on the Stock Exchange. 4.3 AUTHORITY. Buyer has full corporate power and authority to execute and deliver this Agreement and the Option Agreement, and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Option Agreement, and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of Buyer. No corporate proceedings on the part of Buyer are necessary to consummate the transactions contemplated by this Agreement, except that the affirmative vote of the holders of a majority of the votes cast by the holders of Buyer Common Stock eligible to vote thereon is required to authorize the issuance of Buyer Common Stock pursuant to this Agreement in accordance with Stock Exchange policy. Each of this Agreement and the Option Agreement has been duly and validly executed and delivered by Buyer, constitutes a valid and binding obligation of Buyer, and is enforceable against Buyer in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally and (ii) general principles of equity, regardless of whether enforcement is sought in proceedings in equity or at law. 4.4 NO VIOLATION. Neither the execution and delivery of this Agreement or the Option Agreement by Buyer, nor the consummation by Buyer of the transactions contemplated hereby or thereby, nor the compliance by Buyer with any of the terms or provisions hereof or thereof, does or will (a) violate any provision of the Charter or By-laws of Buyer, (b) assuming that the consents and approvals referred to in Section 4.5 hereof are duly obtained, violate any statute, code, ordinance, permit, authorization, registration, rule, regulation, judgment, order, writ, decree or injunction applicable to Buyer or any of its subsidiaries or any of their respective properties, securities or assets, except for violations which would not, individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole, or (c) assuming that the consents and approvals referred to in Section 4.5 hereof are duly obtained and except as set forth on Schedule 4.4 hereto, ------------ violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the respective properties or assets of Buyer or any of its subsidiaries under, any of the terms, conditions or provisions of any note, bond, debenture, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Buyer or any of its subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except for violations, conflicts, breaches or defaults which would not, 23 individually or in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 4.5 CONSENTS AND APPROVALS. The execution, delivery and performance of this Agreement and the Option Agreement by Buyer does not require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative agency or other governmental or regulatory authority or instrumentality, domestic or foreign, including, without limitation, any Bank Regulator, except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act or the laws of certain states under which a "blue sky" filing or consent may be required, state takeover laws, and filing and recordation of appropriate merger documents as required by Massachusetts and New Hampshire law, (ii) for consents and approvals of or filings or registrations with the Bank Regulators, and (iii) where failure to obtain any such consent, approval, authorization or permit, or to make any such filing or notification, would not prevent or significantly delay consummation of the Merger, the BHC Merger, or the Bank Merger or otherwise prevent Buyer from performing its obligations under this Agreement, or would not have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 4.6 REGULATORY APPROVAL. Buyer is not aware of any reason why the conditions set forth in Section 8.1(c) hereof would not be satisfied without significant delay. Buyer is not aware of any reason why the Merger cannot qualify as a "pooling of interests" for accounting purposes. 4.7 FINANCIAL STATEMENTS. (a) The consolidated balance sheets of Buyer as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in stockholders' equity, cash flows and changes in financial position for the years ended December 31, 1994 and 1993, certified by Wolf & Company, P.C., and for the year ended December 31, 1992, certified by Ernst & Young LLP, in the form delivered to Safety Fund prior to execution and delivery of this Agreement (all of the above being collectively referred to as the "Buyer Audited Financial Statements"), have been prepared in accordance with ---------------------------------- GAAP applied on a consistent basis (except as may be indicated in the footnotes thereto and except as required or permitted by SFAS 109 and 115) and present fairly in all material respects the consolidated financial position of and results of operations of Buyer at the dates, and for the periods, stated therein. (b) The consolidated balance sheets of Buyer as of September 30, 1995 and 1994, and the related consolidated statements of income for the nine months ended September 30, 1995 and 1994 in the form delivered to Safety Fund prior to execution and delivery of this Agreement (hereinafter referred to collectively as the "Buyer Interim Financial Statements") present fairly, and the financial ---------------------------------- statements referred to in Section 6.5 hereof will present fairly, in all material respects the consolidated financial position and results of operations of Buyer at the dates and for the periods indicated thereon and are prepared in accordance with GAAP applied on a consistent basis (except for the omission of notes to the Buyer Interim Financial Statements and year-end adjustments to interim results, which adjustments will not be material, and except as required or permitted by SFAS 109 and 115) with all prior periods and throughout the periods indicated. (c) The Buyer Audited Financial Statements and the Buyer Interim Financial State ments are herein referred to together as the "Buyer Financial --------------- Statements." - ---------- 24 (d) The books and records of Buyer and each Buyer Subsidiary fairly reflect in all material respects the transactions to which it is a party or by 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 Buyer and the Buyer Subsidiaries contain records which are accurate in all material respects of all corporate actions of the respective shareholders and Board of Directors (including committees of its Board of Directors). 4.8 BUYER REPORTS. Buyer has previously made available to Safety Fund a true and complete, in all material respects, copy of each (a) final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1991 by Buyer with the SEC pursuant to the Securities Act or the Exchange Act (the "Buyer Reports") and (b) communication mailed by Buyer to ------------- its shareholders since January 1, 1991, and, as of their respective dates, no such Buyer Reports contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, except that information as of a later date shall be deemed to modify information as of an earlier date. 4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on Schedule -------- 4.9 hereto, since December 31, 1994, there has not been: - --- (a) any change or event which, individually or in the aggregate with other changes and events, has had a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole; (b) any change in any of the accounting methods or practices of Buyer or any of its subsidiaries other than changes required by applicable law or by GAAP; or (c) any incurrence by Buyer of any liability that has had, or to the knowledge of Buyer, could reasonably be expected to have, a Material Adverse Effect upon Buyer and its subsidiaries, taken as a whole. 4.10 LEGAL PROCEEDINGS. Except as set forth on Schedule 4.10 hereto and ------------- except for matters which, individually or in the aggregate, would not have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole, neither Buyer nor any of its subsidiaries is a party to any, and there are no pending or, to the best of Buyer's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental investigations of any nature by or against Buyer or any of its subsidiaries; and neither Buyer nor any of its subsidiaries is a party to or subject to any order, judgment or decree. 4.11 COMPLIANCE WITH APPLICABLE LAW; REGULATORY EXAMINATIONS. (a) Buyer and each of its subsidiaries holds, and has at all times held, all licenses, franchises, permits, approvals, consents, qualifications and authorizations material for the lawful conduct of its business under and pursuant to, and has complied with, and is not in default under, any applicable law, statute, order, rule, regulation, policy, ordinance, reporting or filing requirement and/or guideline of any federal, state or local governmental authority relating to Buyer or any of its subsidiaries, except for violations which, either individually or in the aggregate, do not or would not have a Material Adverse Effect on Buyer and its subsidiaries taken as a whole, and neither Buyer or any of its subsidiaries has knowledge of any violation of any of the above. 25 (b) Except for normal examinations conducted by a regulatory agency in the regular course of the business of Buyer and its subsidiaries, no regulatory agency has initiated any proceeding or, to the best knowledge of Buyer, investigation into the business or operations of Buyer or any of its subsidiaries since prior to December 31, 1991. Buyer has not received any objection from any regulatory agency to Buyer's response to any violation, criticism or exception with respect to any report or statement relating to any examinations of Buyer or any of its subsidiaries. 4.12 BROKER'S FEE. Neither Buyer, any subsidiary, nor any of its officers or directors has employed any broker, finder or investment advisor, or incurred any liability for any broker's fees, commissions, finder's fees or investment advisory fees in connection with any of the transactions contemplated by this Agreement, except that Buyer has engaged, and will pay a fee or commission to Alex, Brown & Sons Incorporated (the "Buyer Investment Advisor"). ------------------------ 4.13 BUYER INFORMATION. The information relating to Buyer to be contained in the Proxy Statement-Prospectus (as contemplated by Section 7.1) and any application to any Bank Regulator, or any other statement or application filed with any governmental body in connection with the Merger, the BHC Merger, the Bank Merger and the other transactions contemplated by this Agreement will not contain as of the date of such Proxy Statement-Prospectus or filing any untrue statement of a material fact or omit to state a material fact necessary to make such information not misleading. Notwithstanding the foregoing, Buyer makes and will make no representation or warranty with respect to any information supplied by Safety Fund which is contained in any of the foregoing documents. The Proxy Statement-Prospectus (except for such portions thereof that relate only to Safety Fund or the Safety Fund Subsidiaries) will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. 4.14 ENVIRONMENTAL ISSUES. Except where such violation, liability or noncompliance would not have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole: (i) neither Buyer nor any of its subsidiaries has violated during the last five years or is in violation of any Environmental Law; (ii) none of the properties owned or leased by Buyer or any subsidiary (including, without limitation, soils and surface and ground waters) are contaminated with any Hazardous Substance; (iii) neither Buyer nor any of its subsidiaries is liable for any off-site contamination; (iv) neither Buyer nor any of its subsidiaries is liable under any Environmental Law; and (v) Buyer and each of its subsidiaries is, and has during the last five years been, in compliance with, all of their respective Environmental Permits. For purposes of the foregoing, all references to "properties" include, without limitation, any owned real property or leased real property. 4.15 CAPITAL. As of September 30, 1995, Buyer'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." 4.16 REGULATORY AGREEMENTS. Neither Buyer nor any of its subsidiaries is a party to any assistance agreement, supervisory agreement, memorandum of understanding, consent order, cease and desist order, or condition of any regulatory order or decree with or by the FDIC, the Federal Reserve, the New Hampshire Bank Commissioner, or other financial services regulatory 26 agency that restricts Buyer's ability to perform its obligations hereunder, nor has Buyer or any of its subsidiaries been advised by any such regulatory agency or other governmental entity that it is considering issuing or requesting any such agreement, order or decree. 4.17 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Buyer nor any Buyer Subsidiary has any liability (contingent or otherwise), excluding contractually assumed contingencies, except (i) as set forth on the consolidated balance sheet of Buyer and its subsidiaries as at December 31, 1994 contained in the Buyer Reports, including the notes thereto, (ii) for liabilities and obligations incurred in the ordinary course of business consistent with past practice since December 31, 1994, and (iii) liabilities which would not, individually or in the aggregate, have a Material Adverse Effect on Buyer and the Buyer Subsidiaries, taken as a whole. 4.18 BUYER SUB. (a) Upon its formation, Buyer Sub will be a corporation, duly organized, validly existing and in good standing under the laws of Massachusetts, all of the outstanding capital stock of which is, or will be prior to the Effective Time, owned directly or indirectly by Buyer free and clear of any lien, charge or other encumbrance. From and after its incorporation, Buyer Sub has not and will not engage in any activities other than in connection with or as contemplated by this Agreement. (b) Buyer Sub has, or will have prior to the Effective Time, all corporate power and authority to consummate the transactions contemplated hereunder and carry out all of its obligations with respect to such transactions. The consummation of the transactions contemplated hereby has been, or will have been prior to the Closing, duly and validly authorized by all necessary corporate action in respect thereof on the part of Buyer Sub. ARTICLE V COVENANTS OF SAFETY FUND 5.1 CONDUCT OF BUSINESS. (a) AFFIRMATIVE COVENANTS. During the period from the date of this Agreement to the Effective Time, except with the written consent of Buyer, Safety Fund will operate its business, and it will cause each of the Safety Fund Subsidiaries to operate its business, only in the usual, regular and ordinary course of business; use reasonable efforts to preserve intact its business organization and assets and maintain its rights and franchises; and to take no action which would (i) materially adversely affect the ability of Buyer or Safety Fund to obtain any necessary approvals of governmental authorities required for the transactions contemplated hereby or materially increase the period of time necessary to obtain such approvals, or (ii) materially adversely affect its ability to perform its covenants and agreements under this Agreement. (b) NEGATIVE COVENANTS. Safety Fund agrees that from the date of this Agreement to the Effective Time, except as otherwise specifically permitted or required by this Agreement, or consented to by Buyer in writing, Safety Fund will not, and will cause each of the Safety Fund Subsidiaries not to: (1) change or waive any provision of its Charter or By-laws; 27 (2) change the number of shares of its authorized or issued capital stock (except (i) as may be required by the Option Agreement, (ii) for the issuance of Safety Fund Common Stock pursuant to the exercise of outstanding stock options under the Safety Fund Stock Option Plans, as contemplated by Section 3.2(b) hereof, and (iii) in connection with its adoption of the Shareholder Rights Plan; (3) except in connection with its adoption of the Shareholder Rights Plan or as described in Schedule 6.10, issue or grant any option, warrant, ------------- call, commitment, sub scription, right to purchase or agreement of any character relating to the authorized or issued capital stock of Safety Fund or any of the Safety Fund Subsidiaries, or any securi ties convertible into shares of such stock; except that (i) Safety Fund may issue shares of Safety Fund Common Stock or permit treasury shares to become outstanding in accor dance with the terms of the Safety Fund Stock Option Plans, and (ii) Safety Fund may issue shares of Safety Fund Common Stock to Buyer in accordance with the terms of the Option Agreement; (4) except pursuant to the Shareholder Rights Plan, 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; (5) declare or pay any dividends or other distributions with respect to its capital stock except pursuant to the Shareholder Rights Plan and except for a quarterly cash dividend not in excess of $.05, $.06, $.07, $.08 and $.09 per share in the first, second, third and fourth quarters of 1996 and the first quarter of 1997, respectively, declared and paid in accordance with applicable law, regulation and contractual and regulatory commitments and for dividends paid by any Safety Fund Subsidiary to Safety Fund, provided, however, that Safety Fund's then-current quarterly cash dividend may be increased to the Increased Dividend (as defined below) per share of Safety Fund Common Stock beginning in the first quarter of 1997, and (ii) that the parties agree (x) to consult with respect to the amount of the last Safety Fund quarterly dividend payable prior to the Effective Time with the objective of assuring that the shareholders of Safety Fund do not receive a shortfall, or dividend or distribution from both Safety Fund and Buyer, for such quarter based on the record and payment dates of their last dividend prior to the Merger and the record and payment dates of the first dividend of Buyer following the Merger and (y) that Safety Fund may pay a special dividend to holders of record of Safety Fund Common Stock immediately prior to the Effective Time consistent with the objective described in clause (x) above. The parties agree that Buyer dividends paid in any calendar quarter are paid with respect to the then-preceding calendar quarter and that Safety Fund dividends to be paid in any calendar quarter will be paid with respect to the then-preceding calendar quarter. The quarterly "Increased Dividend" shall be determined by multiplying the ------------------ quarterly dividend then being paid by Buyer with respect to each share of Buyer Common Stock by 1.700; (6) enter into, amend in any material respect or terminate any contract or agreement (including without limitation any settlement agreement with respect to litigation) that is or may reasonably be expected to have a Material Adverse Effect on Safety Fund and the Safety Fund Subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice; 28 (7) except in the ordinary course of business consistent with past practice, incur any material liabilities or material obligations, whether directly or by way of guaranty, including any obligation for borrowed money whether or not evidenced by a note, bond, debenture or similar instrument, or acquire any equity, debt, or other investment securities; (8) make any capital expenditures other than in the ordinary course of business or as necessary to maintain existing assets in good repair; (9) except as described on Schedule 5.1, grant any increase in rates ------------ of compensation to its employees, except merit increases in accordance with past practices and general increases to employees as a class in accordance with past practice or as required by law; grant any increase in rates of compensation to its directors; adopt or amend in any material respect or terminate any employee benefit plan, pension plan or incentive plan except as required by law, or permit the vesting of any material amount of benefits under any such plan other than pursuant to the provisions thereof as in effect on the date of this Agreement; or enter into any employment, severance or similar agreements or arrangements with any directors or officers; (10) make application for the opening or closing of any, or open or close any, branches or automated banking facility except as previously disclosed to Buyer; (11) make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclo sures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business consistent with customary banking practices; (12) merge into, consolidate with, affiliate with, or be purchased or acquired by, any other Person, or permit any other to be merged, consolidated or affiliated with it or be purchased or acquired by it, or, except to realize upon collateral in the ordinary course of its business, acquire a significant portion of the assets of any other Person, or sell a significant portion of its assets; (13) make any material change in its accounting methods or practices, except changes as may be required by GAAP or by regulatory requirements; (14) take or cause to be taken any action which would disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code; (15) enter into any transactions involving interest rate and currency swaps, options and futures contracts, or any other similar off-balance sheet transactions; (16) take any action that would result in the representations and warranties of Safety Fund contained in this Agreement not being true and correct on the date of this Agreement or at any future date on or prior to the Closing Date; or (17) agree to do any of the foregoing. 29 5.2 NO SOLICITATION. Safety Fund shall not authorize or permit any of its officers, directors, employees or agents to directly or indirectly solicit, initiate or encourage any inquiries relating to, or the making of any proposal which constitutes, a "takeover proposal" (as defined below), or, except to the extent legally required for the discharge of the fiduciary duties of its Board of Directors, recommend or endorse any takeover proposal, or participate in any discussions or negotiations, or provide third parties with any non-public information, relating to any such inquiry or proposal. Nothing contained in this Section 5.2 shall prohibit Safety Fund or Safety Fund's Board from taking and disclosing to Safety Fund's 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 Safety Fund's stockholders which, in the judgment of the Safety Fund Board, based upon the advice of outside counsel, may be required under applicable law, or making disclosure to the Safety Fund's stockholders of the absence of an opinion from the Safety Fund Investment Advisor as to the fairness of the Merger Consideration dated the date of the Proxy Statement. Safety Fund will take all reasonable actions necessary or advisable to inform the appropriate individuals or entities referred to in the first sentence hereof of the obligations undertaken herein. Safety Fund will notify Buyer immediately if any such inquiries or takeover proposals are received by, any such information requested from, or any such negotiations or discussions are sought to be initiated or continued with, Safety Fund, indicating in reasonable detail the identity of the person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. As used in this Agreement, "takeover proposal" shall mean any tender or exchange offer, proposal for a merger, consolidation or other business combination involving Safety Fund or any of its Subsidiaries or any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the assets of, Safety Fund or any of its Subsidiaries other than the transactions contemplated or permitted by this Agreement or the Option Agreement. 5.3 CURRENT INFORMATION. During the period from the date of this Agreement to the Effective Time, Safety Fund will cause one or more of its representatives to confer with representatives of Buyer and report the general status of its ongoing operations at such times as Buyer may reasonably request. Safety Fund will promptly notify Buyer of any material change in the normal course of its business or in the operation of its properties and, to the extent permitted by applicable law, of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of material litigation involving Safety Fund. Safety Fund will also provide Buyer such information with respect to such events as Buyer may reasonably request from time to time. 5.4 ACCESS TO PROPERTIES AND RECORDS. Safety Fund shall permit Buyer reasonable access to its properties and those of the Safety Fund Subsidiaries, and shall disclose and make available to Buyer during normal business hours all of its books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including the general ledger), tax records, minute books of directors' and stockholders' meetings, organizational documents, by- laws, material contracts and agreements, filings with any regulatory authority, litigation files, plans affecting employees, and any other business activities or prospects in which Buyer may have a reasonable interest; provided, however, that Safety Fund shall not be required to take any action that would provide access to or to disclose information where such access or disclosure would violate or prejudice the rights or business interests or confidences of any customer or other person or would result in the waiver by it of the privilege protecting communications between it and any of its counsel. 30 Safety Fund shall provide and shall request its auditors to provide Buyer with such historical financial information regarding it (and related audit reports and consents) as Buyer may reasonably request for securities disclosure purposes. 5.5 FINANCIAL AND OTHER STATEMENTS. (a) Promptly upon receipt thereof, Safety Fund will furnish to Buyer copies of each annual, interim or special audit of the books of Safety Fund and the Safety Fund Subsidiaries made by its independent accountants and copies of all internal control reports submitted to Safety Fund by such accountants in connection with each annual, interim or special audit of the books of Safety Fund and the Safety Fund Subsidiaries made by such accountants. (b) As soon as practicable, Safety Fund will furnish to Buyer copies of all such financial statements and reports as it shall send to its stockholders, the SEC, the OCC or any other regulatory authority, except as legally prohibited thereby. (c) Safety Fund will advise Buyer promptly of Safety Fund's receipt of any examination report of any federal or state regulatory or examination authority with respect to the condition or activities of Safety Fund or any of the Safety Fund Subsidiaries. (d) With reasonable promptness, Safety Fund will furnish to Buyer such additional financial data as Buyer may reasonably request, including without limitation, detailed monthly financial statements and loan reports. 5.6 APPROVAL OF SAFETY FUND'S STOCKHOLDERS. Safety Fund will take all reasonable steps necessary to duly call, give notice of, solicit proxies for, convene and hold a special meeting (the "Special Meeting") of its stockholders --------------- as soon as practicable for the purpose of approving this Agreement and the transactions contemplated hereby. The date of the Special Meeting shall occur as soon as practicable following the effectiveness of the Registration Statement on Form S-4 (as more fully described in Section 7.1) filed with the SEC. The Board of Directors of Safety Fund will recommend to Safety Fund's stockholders the approval of this Agreement and the transactions contemplated hereby and will use all reasonable efforts to obtain, as promptly as practicable, the necessary approvals by Safety Fund's stockholders of this Agreement and the transactions contemplated hereby, provided, however, that nothing contained herein shall prohibit the Board of Directors of Safety Fund from failing to make such a recommendation or modifying or withdrawing its recommendation, if such Board shall have concluded in good faith with the advice of counsel that such action is required to prevent such Board from breaching its fiduciary duties to the stockholders of Safety Fund, and no such action shall constitute a breach of this Agreement. 5.7 DISCLOSURE SUPPLEMENTS. From time to time prior to the Effective Time, Safety Fund will promptly supplement or amend the Schedules delivered in connection herewith pursuant to Article III with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Schedules or which is necessary to correct any information in such Schedules which has been rendered inaccurate thereby. No supplement or amendment to such Schedules shall have any effect for the purpose of determining satisfaction of the conditions set forth in Article VIII or the compliance by Safety Fund with the covenants set forth in Section 5.1 hereof. 31 5.8 FAILURE TO FULFILL CONDITIONS. In the event that Safety Fund determines that a condition to its obligation to complete the Merger cannot be fulfilled and that it will not waive that condition, it will promptly notify Buyer. 5.9 CONSENTS AND APPROVALS OF THIRD PARTIES. Safety Fund shall use all reasonable efforts to obtain as soon as practicable all consents and approvals of any other Persons necessary or desirable for the consummation of the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, Safety Fund may utilize the services of a professional proxy soliciting firm to help obtain the shareholder vote required to be obtained by it hereunder. 5.10 ALL REASONABLE EFFORTS. Subject to the terms and conditions herein provided, Safety Fund agrees to use all reasonable efforts to take, or cause to be taken, all corporate or other action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 5.11 SAFETY FUND SUBSIDIARIES. Safety Fund undertakes and agrees that, if so requested by Buyer, it shall take all necessary action to facilitate the merger of Safety Fund Subsidiaries (other than SFNB) with subsidiaries of Buyer effective on or after the Effective Time; provided, however, that in no event shall the Closing be delayed in order to facilitate any such merger and provided further, however, that Safety Fund shall not be required to take any action that could adversely affect the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code or the treatment of the Merger as a pooling of interests for accounting purposes. ARTICLE VI COVENANTS OF BUYER 6.1 CONDUCT OF BUSINESS. During the period from the date of this Agreement to the Effective Time, except with the written consent of Safety Fund and except as provided below, Buyer will take no action which would (i) materially adversely affect the ability of Buyer or Safety Fund to obtain any necessary approvals of governmental authorities required for the transactions contemplated hereby or materially increase the period of time necessary to obtain such approvals, or (ii) materially adversely affect its ability to perform its covenants and agreements under this Agreement, or (iii) disqualify the Merger as a "pooling of interests" for accounting purposes or a tax free reorganization under Section 368 of the Code, or (iv) result in the representations and warranties of Buyer contained in this Agreement not being true and correct on the date of this Agreement or at any future date on or prior to the Closing Date; provided that nothing herein contained shall preclude Buyer from exercising its rights under the Option Agreement or from taking any action described on Schedule 6.1 hereto. ------------ 6.2 CERTAIN BUSINESS TRANSACTIONS. Buyer will not enter into any agreement with respect to an Acquisition of another Person without the prior written consent of Safety Fund if such Acquisition would (i) require the approval of Buyer's shareholders; or (ii) involve Buyer's payment of consideration having a value that equals or exceeds $30 million; or (iii) be reasonably likely to result in a delay in the consummation of the Merger in any material respect; or (iv) be reasonably likely to reduce in any material respect the chances that the Merger will be consum- 32 mated in accordance with the terms of this Agreement. Safety Fund agrees not to withhold unreasonably or delay any response to a request by Buyer for consent under this Section 6.2. The term "Acquisition" shall mean Buyer's purchase or other acquisition (including by way of merger, consolidation, share exchange or any similar transaction) of securities representing 50% or more of the voting power of a Person other than Safety Fund; or Buyer's purchase or other acquisition of assets of another Person as a going concern, but shall not include: (i) internal reorganizations or consolidations involving subsidiaries, (ii) foreclosures in the ordinary course of business, (iii) acquisitions of control by a banking subsidiary in its fiduciary capacity, or (iv) the creation of new subsidiaries other than in the context of a purchase or acquisition of assets from another Person. 6.3 CURRENT INFORMATION. During the period from the date of this Agreement to the Effective Time, Buyer will cause one or more of its representatives to confer with representatives of Safety Fund and report the general status of its ongoing operations at such times as Safety Fund may reasonably request. Buyer will promptly notify Safety Fund of any material change in the normal course of its business or in the operation of its properties and, to the extent permitted by applicable law, of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of material litigation involving Buyer. Buyer will also provide Safety Fund such information with respect to such events as Safety Fund may reasonably request from time to time. 6.4 ACCESS TO PROPERTIES AND RECORDS. Buyer shall permit Safety Fund reasonable access to its properties and those of its subsidiaries, and shall disclose and make available to Safety Fund during normal business hours all of its books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including the general ledger), tax records, minute books of directors' and stockholders' meetings, organizational documents, by- laws, material contracts and agreements, filings with any regulatory authority, litigation files, plans affecting employees, and any other business activities or prospects in which Safety Fund may have a reasonable interest; provided, however, that Buyer shall not be required to take any action that would provide access to or to disclose information where such access or disclosure would violate or prejudice the rights or business interests or confidences of any customer or other person or would result in the waiver by it of the privilege protecting communications between it and any of its counsel. 6.5 FINANCIAL AND OTHER STATEMENTS. (a) Promptly upon receipt thereof, Buyer will furnish to Safety Fund copies of each annual, interim or special audit of the books of Buyer and its subsidiaries made by its independent accountants and copies of all internal control reports submitted to Buyer by such accountants in connection with each annual, interim or special audit of the books of Buyer and its subsidiaries made by such accountants. (b) As soon as practicable, Buyer will furnish to Safety Fund copies of all such financial statements and reports as it shall send to its stockholders, the SEC, the OCC or any other regulatory authority, except as legally prohibited thereby. (c) Buyer will advise Safety Fund promptly of Buyer's receipt of any examination report of any federal or state regulatory or examination authority with respect to the condition or activities of Buyer or any of its subsidiaries. 33 (d) With reasonable promptness, Buyer will furnish to Safety Fund such additional financial data as Safety Fund may reasonably request, including without limitation, detailed monthly financial statements and loan reports. 6.6 CONSENTS AND APPROVALS OF THIRD PARTIES. Buyer shall use all reasonable efforts to obtain as soon as practicable all consents and approvals of any other Persons necessary or desirable for the consummation of the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, Buyer may utilize the services of a professional proxy soliciting firm to help obtain the shareholder vote required to be obtained by it hereunder. 6.7 ALL REASONABLE EFFORTS. Subject to the terms and conditions herein provided, Buyer agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 6.8 FAILURE TO FULFILL CONDITIONS. In the event that Buyer determines that a condition to its obligation to complete the Merger, the BHC Merger, or the Bank Merger cannot be fulfilled and that it will not waive that condition, it will promptly notify Safety Fund. 6.9 DISCLOSURE SUPPLEMENTS. From time to time prior to the Effective Time, Buyer will promptly supplement or amend the Schedules delivered in connection herewith pursuant to Article with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Schedules or which is necessary to correct any information in such Schedules which has been rendered inaccurate thereby. No supplement or amendment to such Schedules shall have any effect for the purpose of determining satisfaction of the conditions set forth in Article VII. 6.10 EMPLOYEE BENEFITS. (a) All employees of Safety Fund and its Subsidiaries as of the Effective Time shall become employees of Buyer or a Subsidiary as of the Effective Time. Nothing in this Agreement shall give any employee of Safety Fund or its Subsidiaries a right to continuing employment with Buyer after the Effective Time. Any employee of Safety Fund whose employment with Buyer is terminated after the Effective Time shall be entitled to the same severance benefits generally available to employees of Buyer, provided, however, that for purposes of determining eligibility for and vesting of such severance benefits, service with Safety Fund or any Safety Fund Subsidiary prior to the Effective Time shall be treated as service with an "employer" to the same extent as if such persons had been employees of Buyer. A copy of Buyer's severance policy has previously been made available to Safety Fund. (b) As soon as practicable after the Effective Time, Buyer shall provide or cause to be provided to all employees of Safety Fund and any Safety Fund Subsidiary who remain employed by Buyer or any of Buyer's Subsidiaries after the Effective Time with employee benefits which, in the aggregate, are no less favorable than those generally afforded to other employees of Buyer or Buyer's Subsidiaries holding similar positions, subject to the terms and conditions under which those employee benefits are made available to such employees, provided, however, that (i) for purposes of determining eligibility for and vesting of such employee benefits only (and not for pension benefit accrual purposes), service with Safety Fund or any Safety Fund Subsidiary prior to the Effective Time shall be treated as service with an "employer" to the same extent as if such persons had been employees of Buyer, (ii) this Section 6.10 shall not be 34 construed to limit the ability of Buyer and its Subsidiaries to terminate the employment of any employee or to review employee benefits programs from time to time and to make such changes as they deem appropriate, and (iii) neither Buyer nor any of its Subsidiaries shall be required to provide any employees or former employees of Safety Fund with post-retirement medical benefits more favorable than those provided to new hires of Buyer. (c) Safety Fund has listed certain employment and change of control agreements and a tin parachute plan in Schedule 6.10 hereto. Following the ------------- Effective Time, Buyer shall honor or cause its Subsidiaries to honor in accordance with their terms all such employment and change of control agreements and the tin parachute plan and assume or cause its Subsidiaries to assume all duties, liabilities and obligations under such agreements and arrangements. Buyer agrees that the consummation of the transactions contemplated hereby constitutes a "Change in Control" as defined in the change of control agreements entered into between Safety Fund or any Safety Fund Subsidiary and certain officers as disclosed in Schedule 6.10 hereto. The provisions of this Section ------------- 6.10 are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each director, officer, employee and former employee covered hereby and his or her heirs and representatives. 6.11 DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE. (a) CONTRACTUAL INDEMNIFICATION. In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, administrative or criminal, including, without limitation, any such claim, action, suit, proceeding or investigation in which any Person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, a director or officer of Safety Fund or any Safety Fund Subsidiary (the "Indemnified Parties") is, or is threatened to be, made a party, based in whole - --------------------- or in part on, or arising in whole or in part out of, or pertaining to, this Agreement or any of the transactions contemplated hereby, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use their reasonable efforts to defend against and respond to such claim, action, suit, proceedings or investigation. It is understood and agreed that from and after the Effective Time, Buyer shall indemnify and hold harmless, as and to the fullest extent permitted by applicable law, each Indemnified Party against any and all losses, claims, damages, liabilities and fines, and amounts paid in settlement, in connection with any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time). In connection with any such claim, action, suit, proceeding or investigation, (x) Buyer shall pay expenses (including without limitation reasonable attorney fees) in advance of the final disposition of any such claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by applicable law upon receipt of any undertaking required by applicable law, and (y) Buyer shall use all reasonable efforts to assist in the vigorous defense of any such matter; provided, however, that (1) Buyer shall have the right to assume the defense thereof and upon such assumption Buyer shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by any Indemnified Party in connection with the defense thereof, except that if Buyer does not assume such defense or counsel for the Indemnified Parties reasonably advises that there are issues which raise conflicts of interest between Buyer and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with Buyer, and Buyer shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (2) Buyer shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified 35 Parties, (3) Buyer shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld) and (4) Buyer shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. (b) PROCEDURAL LIMITATIONS. Any Indemnified Party wishing to claim indemnification under Section 6.11 shall, upon learning of any such claim, action, suit, proceeding or investigation, notify Buyer thereof, provided that the failure so to notify shall not affect the obligations of Buyer under Section 6.11 except to the extent such failure materially prejudices it. As a condition to receiving indemnification under Section 6.11, the party claiming indemnification shall assign, by separate writing, to Buyer all right, title and interest to and in proceeds of any insurance maintained or provided by Safety Fund or Buyer or any of their respective affiliates for the benefit of claimant, to the extent of indemnification actually received from Buyer hereunder. Any Person entitled to indemnification pursuant to Section 6.11 shall be required to cooperate in the defense and investigation of any claim as to which indemnification may be made and shall send such notices as Buyer may reasonably request under any applicable directors and officers liability or bankers blanket bond insurance coverage to preserve claims of which the claiming party is aware. No person shall be entitled to indemnification under Section 6.11 if such Person is seeking indemnification based on a claim (other than a claim arising as a supplier to, customer of or borrower from Buyer or the Buyer Subsidiaries or Safety Fund or the Safety Fund 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 or entity 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. (c) CHARTER AND BY-LAWS. All rights to indemnification and all limitations of liability existing in favor of the Indemnified Parties as provided in Safety Fund's Charter and By-laws, or similar governing documents of any Safety Fund Subsidiary, as in effect as of the date hereof with respect to claims or liabilities arising from facts or events existing or occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six (6) years from the Effective Time; provided, however, that all rights to indemnification in respect of any claim asserted or made within such period shall continue until the final disposition of such claim. Buyer shall indemnify, defend and hold harmless the Indemnified Parties pursuant to the rights surviving pursuant to the preceding sentence to the full extent permitted under applicable law. (d) PURCHASE OF INSURANCE. Buyer, from and after the Effective Time, will cause the persons who served as directors or officers of Safety Fund on or before the Effective Time to be covered by Safety Fund's existing directors' and officers' liability insurance policy (provided that Buyer may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not less advantageous than such policy) but in no event shall any insured person be entitled under this Section 6.11 to insurance coverage more favorable than that provided to him or her in such capacities at the date hereof with respect to acts or omissions resulting from their service as such on or prior to the Effective Time. 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 Time; provided, however, that in no event shall Buyer be required to expend 36 in any year more than 150% of the current per annum amount expended by Safety Fund to maintain or procure insurance coverage pursuant hereto. Safety Fund agrees to renew any such existing insurance or to purchase any "discovery period" insurance provided for thereunder at Buyer's request. (e) SUCCESSORS OR ASSIGNS. To the extent not otherwise provided by applicable law, contract or otherwise, and to the extent necessary under the circumstances for Buyer's successors or assigns to be bound, in the event Buyer or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, proper provision shall be made so that the successors and assigns of Buyer assume the obligations set forth in this Section 6.11. (f) THIRD PARTY BENEFICIARY. The provisions of this Section 6.11 are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each director or officer covered hereby and his or her heirs and representatives. 6.12 STOCK EXCHANGE LISTING. Buyer shall apply for approval to list the shares of Buyer Common Stock to be issued in the Merger on the Stock Exchange, subject to official notice of issuance, prior to the Effective Time. 6.13 BUYER SUB. Prior to the Effective Time, Buyer will take any and all necessary action to cause (i) Buyer Sub to be organized, (ii) Buyer Sub to become a direct or indirect wholly-owned subsidiary of Buyer, (iii) the directors and stockholder or stockholders of Buyer Sub to approve the transactions contemplated by this Agreement ARTICLE VII REGULATORY AND OTHER MATTERS 7.1 PROXY STATEMENT-PROSPECTUS. For the purposes (x) of registering Buyer's Common Stock to be issued to holders of Safety Fund's Common Stock in connection with the Merger with the SEC under the Securities Act and applicable state securities laws and (y) of holding the Safety Fund shareholders' meeting, Buyer and Safety Fund shall cooperate in the preparation of a registration statement (such registration statement, together with all and any amendments and supplements thereto, being herein referred to as the "Registration Statement"), ---------------------- including a proxy statement/prospectus or statements satisfying all applicable requirements of applicable state securities and banking laws, and of the Securities Act and the Exchange Act, and the rules and regulations thereunder (such proxy statement/prospectus in the form mailed by Safety Fund to the Safety Fund shareholders, together with any and all amendments or supplements thereto, being herein referred to as the "Proxy Statement-Prospectus"). Buyer shall -------------------------- file the Registration Statement with the SEC. Each of Buyer and Safety Fund shall use their best efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing, and Safety Fund shall thereafter promptly mail the Proxy Statement-Prospectus to its stockholders. Buyer shall also use its best efforts to obtain all necessary state securities law or "Blue Sky" permits and approvals required to carry out the transactions contemplated by this Agreement, and Safety Fund shall furnish all information concerning Safety Fund and the holders of Safety Fund Common Stock as may be reasonably requested in connection with any such 37 action. Safety Fund and Buyer shall each promptly notify the other if at any time it becomes aware that the Proxy Statement-Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. In such event, Safety Fund and Buyer shall cooperate in the preparation of a supplement or amendment to the Proxy Statement-Prospectus, which corrects such misstatement or omission, and shall cause the same to be filed with the SEC and distributed to stockholders of Safety Fund. 7.2 REGULATORY APPROVALS. Each of Safety Fund and Buyer will cooperate with the other and use all reasonable efforts to prepare all necessary documentation, to effect all necessary filings and to obtain all necessary permits, consents, approvals and authorizations of all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement, including without limitation the Merger, the BHC Merger, and the Bank Merger. Safety Fund and Buyer will furnish each other and each other's counsel with all information concerning themselves, their subsidiaries, directors, officers and stockholders and such other matters as may be necessary or advisable in connection with the Proxy Statement-Prospectus and any application, petition or any other statement or application made by or on behalf of Safety Fund or Buyer to any governmental body in connection with the Merger, the BHC Merger, the Bank Merger, and the other transactions contemplated by this Agreement. Safety Fund and Buyer shall have the right to review and approve in advance all characterizations of the information relating to Buyer or Safety Fund, as the case may be, and any of their respective subsidiaries, which appear in any filing made in connection with the transactions contemplated by this Agreement with any governmental body. In addition, Safety Fund and Buyer shall each furnish to the other a final copy of each such filing made in connection with the transactions contemplated by this Agreement with any governmental body. 7.3 AFFILIATES; PUBLICATION OF COMBINED FINANCIAL RESULTS. (a) Each of Buyer and Safety Fund shall use all reasonable efforts to cause each director, executive officer and other person who is an "affiliate" (for purposes of Rule 145 under the Securities Act and for purposes of qualifying the Merger for "pooling of interests" accounting treatment) of such party to deliver to the other party hereto, as soon as practicable after the date of this Agreement, and prior to the date of the shareholders meeting called by Safety Fund to approve this Agreement, a written agreement, in the form of Exhibit 7.3 hereto, ----------- providing that such person will not sell, pledge, transfer or otherwise dispose of any shares of Buyer Common Stock or Safety Fund Common Stock held by such "affiliate", and, in the case of the "affiliates" of Safety Fund, the shares of Buyer Common Stock to be received by such "affiliate" in the Merger: (1) otherwise than in compliance with the applicable provisions of the Securities Act and the rules and regulations thereunder or (2) unless the parties shall have agreed that it will be impossible to obtain pooling treatment for the Merger, during the period commencing 30 days prior to the Merger and ending at the time of the publication of financial results covering at least 30 days of combined operations of Buyer and Safety Fund. (b) Buyer shall use its best efforts to publish no later than twenty- five (25) days after the end of the first calendar quarter in which there are at least thirty (30) days of post-Merger combined operations (which calendar quarter may be the calendar quarter in which the Effective Time occurs), combined sales and net income figures as contemplated by and in accordance with the terms of SEC Accounting Series Release No. 135. 38 ARTICLE VIII CLOSING CONDITIONS 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT. The respective obligations of each party under this Agreement shall be subject to the fulfillment at or prior to the Effective Time of the following conditions, none of which may be waived: (a) STOCKHOLDER APPROVAL. This Agreement and the transactions contemplated hereby shall have been approved in accordance with applicable law and Stock Exchange policy by the requisite vote of the stockholders of Safety Fund and Buyer. (b) INJUNCTIONS. None of the parties hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the transactions contemplated by this Agreement. (c) REGULATORY APPROVALS. All necessary approvals, authorizations and consents of all governmental bodies required to consummate the transactions contemplated by this Agreement shall have been obtained and shall remain in full force and effect and all waiting periods relating to such approvals, authorizations or consents shall have expired; and no such approval, authoriza- tion or consent shall include any condition or requirement, not reasonably foreseen as of the date of this Agreement, that would, in the good faith reasonable judgment of the Board of Directors of either Buyer or Safety Fund, materially and adversely affect the business, operations, financial condition, property or assets of the combined enterprise or of Safety Fund or SFNB or otherwise materially impair the value of Safety Fund or SFNB to Buyer; provided, however, that no condition or requirement that relates primarily to regulatory matters existing at the date hereof with respect to Buyer's pre-Merger business or activities shall be deemed to affect the business, operations, financial condition, property or assets of the combined enterprise or of Safety Fund or otherwise materially impair the value of Safety Fund to Buyer. (d) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) STOCK EXCHANGE LISTING. The shares of Buyer Common Stock to be issued in the Merger shall have been authorized for listing on the Stock Exchange, subject to official notice of issuance. (f) TAX OPINION. On the basis of facts, representations and assumptions which shall be consistent with the state of facts existing at the Effective Time, each of Buyer and Safety Fund shall have received an opinion of Arnold & Porter reasonably acceptable in form and substance to Buyer and Safety Fund dated as of the Closing Date, substantially to the effect that, for federal income tax purposes: (1) The Merger, when consummated in accordance with the terms hereof, either will constitute a reorganization within the meaning of Section 368(a) of the Code or will be treated as part of a reorganization within the meaning of Section 368(a) of the Code, 39 (2) The exchange of Safety Fund Common Stock to the extent exchanged for Buyer Common Stock will not give rise to recognition of gain or loss for federal income tax purposes to the shareholders of Safety Fund, (3) The basis of the Buyer Common Stock to be received (including any fractional shares deemed received for tax purposes) by a Safety Fund shareholder will be the same as the basis of the Safety Fund Common Stock surrendered pursuant to the Merger in exchange therefor, and (4) The holding period of the shares of Buyer Common Stock to be received by a shareholder of Safety Fund will include the period during which the shareholder held the shares of Safety Fund Common Stock surrendered in exchange therefor, provided the Safety Fund Common Stock surrendered is held as a capital asset at the Effective Time. Each of Buyer and Safety Fund shall provide Arnold & Porter with a letter setting forth the facts, assumptions and representations on which Arnold & Porter may rely in rendering its opinion. 8.2 CONDITIONS TO THE OBLIGATIONS OF BUYER UNDER THIS AGREEMENT. The obligations of Buyer under this Agreement shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Safety Fund set forth in Article III hereof shall be true and correct in all material respects as of the date of this 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 by this Agreement or consented to in writing by Buyer; provided, however, that (i) in determining whether or not the condition contained in this Section 8.2 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 Section 8.2 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 Safety Fund and the Safety Fund Subsidiaries, taken as a whole; and Safety Fund shall have delivered to Buyer a certificate of Safety Fund to such effect signed by the Chief Executive Officer and the Chief Financial Officer of Safety Fund as of the Effective Time. (b) AGREEMENTS AND COVENANTS. Safety Fund shall have performed in all material respects all obligations and complied in all material respects with all agreements or covenants of Safety Fund to be performed or complied with by it at or prior to the Effective Time under this Agreement and Buyer shall have received a certificate signed on behalf of Safety Fund by the Chief Executive Officer and Chief Financial Officer of Safety Fund to such effect dated as of the Effective Time. (c) PERMITS, AUTHORIZATIONS, ETC. Safety Fund and the Safety Fund Subsidiaries shall have obtained any and all material permits, authorizations, consents, waivers, clearances or approvals required for the lawful consummation of the Merger by Safety Fund, the lawful consummation of the BHC Merger by the Surviving Corporation, and the lawful consummation of the Bank Merger by SFNB, the failure to obtain which would have a Material Adverse Effect 40 on Safety Fund and the Safety Fund Subsidiaries, taken as a whole. (d) LEGAL OPINION. Buyer shall have received an opinion, dated the Closing Date, from Foley, Hoag & Eliot, counsel to Safety Fund as to such matters as Buyer may reasonably request with respect to the transactions contemplated hereby. In rendering any such opinion, such counsel may require and, to the extent they deem necessary or appropriate may rely upon, opinions of other counsel and upon representations made in certificates of officers of Safety Fund, Buyer, Affiliates of the foregoing, and others. (e) ACCOUNTANTS' LETTER. Buyer shall have received a "comfort" letter from the independent certified public accountants for Safety Fund, dated (i) the effective date of the Registration Statement and (ii) the Closing Date, with respect to certain financial information regarding Safety Fund, each in form and substance which is customary in transactions of the nature contemplated by this Agreement. Safety Fund will furnish Buyer with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 8.2 as Buyer may reasonably request. 8.3 CONDITIONS TO THE OBLIGATIONS OF SAFETY FUND UNDER THIS AGREEMENT. The obliga tions of Safety Fund under this Agreement shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer set forth in Article III hereof shall be true and correct in all material respects as of the date of this 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 by this Agreement or consented to in writing by Safety Fund; provided, however, that (i) in determining whether or not the condition contained in this Section 8.3(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 Section 8.3(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 Buyer; and Buyer shall have delivered to Safety Fund a certificate of Buyer to such effect signed by the Chief Executive Officer and the Chief Financial Officer of Buyer as of the Effective Time; (b) AGREEMENTS AND COVENANTS. Buyer shall have performed in all material respects all obligations and complied in all material respects with all agreements or covenants of Buyer to be performed or complied with by it at or prior to the Effective Time under this Agreement and Safety Fund shall have received a certificate signed on behalf of Buyer by the Chief Executive Officer and Chief Financial Officer of Buyer to such effect dated as of the Effective Time. (c) PERMITS, AUTHORIZATIONS, ETC. Buyer and its subsidiaries shall have obtained any and all material permits, authorizations, consents, waivers, clearances or approvals required for the lawful consummation of the Merger and the Bank Merger by Buyer, the failure to obtain which would have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 41 (d) LEGAL OPINION. Safety Fund shall have received an opinion from Devine, Millimet & Branch, counsel to Buyer, dated the Closing Date, as to such matters as Safety Fund may reasonably request with respect to the transactions contemplated hereby. In rendering any such opinion, such counsel may require and, to the extent they deem necessary or appropriate may rely upon, opinions of other counsel and upon representations made in certificates of officers of Buyer, Safety Fund, Affiliates of the foregoing, and others. Buyer will furnish Safety Fund with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 8.3 as Safety Fund may reasonably request. ARTICLE IX THE CLOSING 9.1 TIME AND PLACE. Subject to the provisions of Articles VIII and X hereof, the Closing of the transactions contemplated hereby shall take place at the offices of Foley, Hoag & Eliot, One Post Office Square, Boston, Massachusetts at 10:00 a.m. on a date specified by Buyer at least three business days prior to such date. The Closing Date shall be as soon as practicable after the last required approval for the Merger, the BHC Merger and the Bank Merger has been obtained and the last of all required waiting periods under such approvals have expired, or at such other place, date or time as Buyer and Safety Fund may mutually agree upon. 9.2 DELIVERIES AT THE CLOSING. At the Closing there shall be delivered to Buyer and Safety Fund the opinions, certificates, and other documents and instruments required to be delivered under Article VII hereof. ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of Safety Fund: (a) At any time by the mutual written agreement of Buyer and Safety Fund; (b) By either Safety Fund or Buyer (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein), if there has been a material breach on the part of the other party of any representation, warranty or agreement contained herein which cannot be or has not been cured within 30 days after written notice by the Buyer to Safety Fund (or by Safety Fund to Buyer) of such breach; (c) At the election of either Buyer or Safety Fund, if the Closing shall not have occurred on or before January 5, 1997 (the "Termination Date"), ---------------- or such later date as shall have been agreed to in writing by Buyer and Safety Fund; provided, that no party may terminate this Agreement pursuant to this Section 10.1 if the failure of the Closing to have occurred on or before said date was due to such party's breach of any of its obligations under this Agreement, and provided, further, that the Termination Date may be extended until April 5, 1997 by either 42 party by written notice to the other party (given not later than December 5, 1996) if the Closing shall not have occurred because of failure to have obtained approval from one or more regulatory authorities whose approval is required in connection with this Agreement and the transactions contemplated hereby under circumstances in which neither party has the right to terminate this Agreement pursuant to Section 10.1 hereof; (d) By either Safety Fund or Buyer if the stockholders of Safety Fund or Buyer shall have voted at the Annual or Special Meeting on the transactions contemplated by this Agreement and such vote shall not have been sufficient to approve such transactions; (e) By either Safety Fund or Buyer if final action has been taken by a regulatory authority whose approval is required in connection with this Agreement and the transactions contemplated hereby, which final action (i) has become unappealable and (ii) does not approve this Agreement or the transactions contemplated hereby; or (f) By Safety Fund, in accordance with the provisions of Section 2.11 hereof. 10.2 EFFECT OF TERMINATION. (a) In the event of termination of this Agreement pursuant to any provision of Section 10.1, this Agreement shall forthwith become void and have no further force, except that (i) the provisions of Sections 10.3, 11.1, 12.1, 12.6, 12.9, and 12.10 (and of this Section 10.2) shall survive such termination of this Agreement and remain in full force and effect and (ii) notwithstanding anything to the contrary contained in this Agreement, each party shall remain liable (in an action at law or otherwise) for any liabilities or damages arising out of its gross negligence or its wilful breach of any provision of this Agreement. (b) If this Agreement is terminated, expenses of the parties hereto shall be determined as follows: (1) Any termination of this Agreement pursuant to Sections 10.1, (a), 10.1(c), 10.1(d), 10.1(e), or 10.1(f) hereof (other than as a result of a wilful breach or gross negligence by a party hereto) shall be without cost or expense on the part of any party to the other; and (2) In the event of a termination of this Agreement pursuant to Section 10.1(b) hereof as a result of a breach of a representation, warranty or covenant which is caused by the wilful conduct or gross negligence of a party, such party shall (while remaining liable for any liabilities or damages arising out of such wilful breach or gross negligence) be obligated to reimburse the other party for all out-of-pocket costs and expenses, including, without limitation, reasonable legal, accounting and investment banking fees and expenses, incurred by such other party in connection with the entering into of this Agreement and the carrying out of any and all acts contemplated hereunder (collectively referred to as "Expenses"). -------- (c) The payment of Expenses is not an exclusive remedy, but is in addition to any other rights or remedies available to the parties hereto at law or in equity and notwithstanding anything to the contrary contained herein, no party shall be relieved or released from any liabilities or damages arising out of its gross negligence or wilful breach of any provision of this Agreement. 43 (d) In no event shall any officer, agent or director of Safety Fund, any Safety Fund Subsidiary, Buyer or any Buyer subsidiary, be personally liable thereunder for any default by any party in any of its obligations hereunder unless any such default was intentionally caused by such officer, agent or director. 10.3 EXPENSES. Except as provided in Section 10.2 hereof, whether or not the Merger is consummated, all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such costs and expenses, provided, however, that the Expenses of printing and mailing the Proxy Statement-Prospectus and all filings with the SEC in connection therewith shall be shared by Buyer and by Safety Fund in accordance with the procedures set forth in Schedule 10.3 hereto, provided, ------------- further, however, that nothing contained herein shall limit either party's rights under Section 10.2 hereof, including but not limited to the right to recover any liability or damages arising out of the other party's gross negligence or wilful breach of this Agreement. 10.4 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law, at any time prior to the Effective Time (whether before or after approval thereof by the stockholders of Safety Fund), the parties hereto may (a) amend this Agreement, (b) extend the time for the performance of any of the obligations or other acts of any other party hereto, (c) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (d) waive compliance with any of the agreements or conditions contained herein; provided, however, that after any approval of this Agreement and the transactions contemplated hereby by the stockholders of Safety Fund, there may not be, without further approval of such stockholders, any amendment of this Agreement which reduces the amount or changes the form of consideration to be delivered to Safety Fund's stockholders pursuant to this Agreement. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party, but such waiver or failure to insist on strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE XI CERTAIN DEFINITIONS 11.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following meanings (unless the context otherwise requires, both here and throughout this Agreement, references to Articles and Sections refer to Articles and Sections of this Agreement). (a) "AFFILIATE" of a specified Person shall mean a Person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified Person, including, without limitation, any partnership or joint venture in which a Person (either alone, or through or together with any subsidiary) has, directly or indirectly, an interest of 5% or more. (b) "ENVIRONMENTAL LAWS" shall mean any federal, state or local law relating to (A) releases or threatened releases of Hazardous Substances or materials containing Hazardous Substances, (B) the manufacture, handling, transport, use, treatment, storage or disposal of 44 Hazardous Substances or materials containing Hazardous Substances, or (C) otherwise relating to pollution of the environment. (c) "ENVIRONMENTAL PERMITS" means all permits, licenses and other authorizations referred to under any Environmental Law. (d) "HAZARDOUS SUBSTANCES" means (A) those substances defined in or regulated under the Comprehensive Environmental Response, Compensation and Liability Act, and its state counterparts, as each may be amended from time to time, and all regulations thereunder, (B) petroleum and petroleum products including crude oil and any fractions thereof, (C) natural gas, synthetic gas, and any mixtures thereof, (D) radon, (E) any other contaminant, and (F) any substance with respect to which a federal, state or local agency requires environmental investigation, monitoring, reporting or remediation. (e) "MATERIAL ADVERSE EFFECT", when used with respect to any Person, shall mean a material adverse effect on the financial condition, business, or results of operations of such Person; provided, however, that the following matters shall not constitute or contribute to a Material Adverse Effect: (i) changes in the financial condition, business, or results of operations of a person resulting directly or indirectly from (x) changes in interest rates (provided that Safety Fund is in compliance with its asset/liability management policy as disclosed to Buyer prior to the date of this Agreement, as the same may be revised thereafter with Buyer's concurrence) or (y) changes in regulations or legislation affecting Massachusetts 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. (f) "PERSON" shall mean any individual, corporation, partnership, joint venture, association, trust, unincorporated organization or government or any agency or political subdivision thereof. (g) "SUBSIDIARY" or "SUBSIDIARY" of any Person shall mean an Affiliate controlled by such Person, directly or indirectly, through one or more intermediaries, except as otherwise defined herein. ARTICLE XII MISCELLANEOUS 12.1 CONFIDENTIALITY. Except as specifically set forth herein, Buyer and Safety Fund mutually agree to be bound by the terms of the Confidentiality Agreement previously executed by the parties hereto, which Agreement is hereby incorporated herein by reference. The parties hereto agree that such Confidentiality Agreement shall continue in accordance with its respective terms, notwithstanding the termination of this Agreement. 12.2 PUBLIC ANNOUNCEMENTS. Safety Fund and Buyer shall cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement or any of the transactions contemplated hereby, except as may be otherwise required by law, and neither Safety Fund nor Buyer shall issue any joint news releases with respect to this Agreement or any of the transactions contemplated hereby, unless such news 45 releases have been mutually agreed upon by the parties hereto. 12.3 SURVIVAL. All representations, warranties and covenants in this Agreement 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. 12.4 NOTICES. All notices or other communications hereunder shall be in writing and shall be deemed given if delivered by receipted hand delivery or mailed by prepaid registered or certified mail (return receipt requested) or by cable, telegram, telex or telecopy addressed as follows: If to Buyer to: CFX Corporation 102 Main Street Keene, New Hampshire 03431 Attn: Mark A. Gavin Chief Financial Officer Fax: (603 358-5028 Copy to: Steven Kaplan, Esq. Arnold & Porter 555 Twelfth Street, N.W. Washington, D.C. 20004 Fax: (202) 942-5999 If to Safety Fund, to: The Safety Fund Corporation 470 Main Street Fitchburg, Massachusetts 01420 Attention: President Fax: (508) 342-9795 Copy to Peter W. Coogan, Esq. Carol Hempfling Pratt, Esq. Foley, Hoag & Eliot One Post Office Square Boston, Massachusetts 02109 Fax: (617) 832-7000 or such other address as shall be furnished in writing by any party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 46 12.5 PARTIES IN INTEREST. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, and that (except as otherwise expressly provided in this Agreement) nothing in this Agreement is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement. 12.6 COMPLETE AGREEMENT. This Agreement and the Option Agreement, including the Exhibits and Schedules hereto and the documents and other writings referred to herein or therein or delivered pursuant hereto or thereto, contains the entire agreement and understanding of the parties with respect to its subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties other than those expressly set forth herein or therein. This Agreement supersedes all prior agreements and understandings (other than the Confidentiality Agreement referred to in Section 12.1 hereof) between the parties, both written and oral, with respect to its subject matter. 12.7 COUNTERPARTS. This Agreement may be executed in one or more counterparts all of which shall be considered one and the same agreement and each of which shall be deemed an original. 12.8 SEVERABILITY. In the event that any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties shall use their reasonable efforts to substitute a valid, legal and enforceable provision which, insofar as practical, implements the purposes and intents of this Agreement. 12.9 GOVERNING LAW. This Agreement shall be governed by the laws of Massachusetts, without giving effect to its principles of conflicts of laws. 12.10 HEADINGS. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. * * * * * 47 IN WITNESS WHEREOF, Buyer and Safety Fund have caused this Agreement to be executed under seal by their duly authorized officers as of the date first set forth above. CFX CORPORATION [SEAL] By:/s/ Peter J. Baxter ------------------------- Peter J. Baxter President and CEO THE SAFETY FUND CORPORATION [SEAL] By:/s/ Christopher W. Bramley ------------------------------ Christopher W. Bramley President and CEO [SEAL] By:/s/ Martin F. Connors, Jr. ------------------------------- Martin F. Connors, Jr. Treasurer 48 INDEX OF DEFINED TERMS
Affiliate............................................................... 44 Agreement................................................................ 1 Articles of Merger....................................................... 1 Bank Merger.............................................................. 1 Bank Merger Agreement.................................................... 1 Bank Regulator.......................................................... 13 BBI..................................................................... 13 BHC Merger............................................................... 1 BHCA.................................................................... 11 Buyer.................................................................... 1 Buyer Audited Financial Statements...................................... 24 Buyer Common Shares..................................................... 22 Buyer Common Stock....................................................... 4 Buyer Financial Statements.............................................. 24 Buyer Index Price........................................................ 4 Buyer Interim Financial Statements...................................... 24 Buyer Investment Advisor................................................ 26 Buyer Preferred Shares.................................................. 22 Buyer Reports........................................................... 25 Buyer Stock Option Plan................................................. 22 Buyer Sub................................................................ 1 Buyer Trading Price...................................................... 4 Closing.................................................................. 1 Closing Date............................................................. 1 Code.................................................................... 10 Dissenting Shares........................................................ 9 Effective Time........................................................... 1 Environmental Laws...................................................... 44 Environmental Permits................................................... 45 ERISA Plans............................................................. 18 Excess parachute payment................................................ 17 Exchange Act............................................................ 11 Exhibit A............................................................... 41 Expenses................................................................ 43 FDIC.................................................................... 13 Federal Reserve......................................................... 13 GAAP.................................................................... 14 Hazardous Substances.................................................... 45 Increased Dividend...................................................... 28 Indemnified Parties..................................................... 35 Investment Advisor...................................................... 19 Last Closing Price....................................................... 8 Massachusetts Commissioner.............................................. 13 MBCL..................................................................... 9 Merger................................................................... 1
I-1 Merger Consideration........................................................ 4 MHP........................................................................ 13 Option Agreement............................................................ 3 Orange Savings.............................................................. 1 Pension Plan............................................................... 18 Person..................................................................... 45 Pooling Determination....................................................... 4 Pooling Exchange Ratio...................................................... 5 Proxy Statement-Prospectus................................................. 37 Purchase Exchange Ratio..................................................... 5 Registration Statement..................................................... 37 Schedules.................................................................. 11 SEC........................................................................ 15 Secretary of State.......................................................... 1 Securities Act.............................................................. 8 SFNB........................................................................ 1 Shareholder Rights Plan.................................................... 12 Special Meeting............................................................ 31 Stock Exchange.............................................................. 4 Subsidiaries............................................................... 45 Subsidiary................................................................. 45 Surviving Bank.............................................................. 2 Surviving Corporation....................................................... 1 Termination Date........................................................... 42 Welfare Plan............................................................... 18
I-2 EX-3.1(C) 3 AMEND. ARTICLES OF ORGANIZATION JAN. 13, 1986 Exhibit 3.1(c) THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, Secretary FEDERAL IDENTIFICATION ONE ASHBURTON PLACE, BOSTON, MASS. 02108 NO. 04-2532311 ------------------- ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws. Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. ----------- We, Herbert E. Dunnington, President/ and Francis H. LeBlanc, Clerk/ of The Safety Fund Corporation - ------------------------------------------------------------------------------- (Name of Corporation) located at 470 Main Street, Fitchburg, Massachusetts 01420 --------------------------------------------------------------------- Name do hereby certify that the following amendment to the articles of Approved organization of the corporation was duly adopted at a meeting held on January 13, 1986, by vote of 144,373 shares of Common Stock out of 174,653 shares outstanding, - ----------- -------------- --------- (Class of Stock) shares of out of shares outstanding, and - ----------- -------------- --------- (Class of Stock) shares of out of shares outstanding, - ----------- -------------- --------- (Class of Stock) being at least a majority of each class outstanding and entitled to vote thereon./1/ CROSS OUT INAPPLICABLE CLAUSE C [_] P [_] M [_] /1/For amendments adopted pursuant to Chapter 156B, Section 70. /2/For amendments adopted pursuant to Chapter 156B, Section 71. Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is:
- ----------------------------------------------------------------------- NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ----------------------------------------------------------------------- COMMON None 400,000 $10 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- PREFERRED None 100,000 $10 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
CHANGE the total to:
- ----------------------------------------------------------------------- NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ----------------------------------------------------------------------- COMMON None 800,000 $5 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- PREFERRED None 100,000 $10 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B. Section 5 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 13th day of January, in the year 1986. /s/ Herbert E. Dunnington President .............................................. /s/ Francis H. LeBlanc Clerk .............................................. THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) I hereby approve the within articles of amendment and, the filing fee in the amount of $75.00 having been paid, said articles are deemed to have been filed with me this 14th day of January, 1986. /s/ Michael Joseph Connolly MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTO COPY OF AMENDMENT TO BE SENT TO: John C. Craig, Esquire Craig and Macauley Professional Corporation ................................... One Post Office Square ................................... Boston, Massachusetts 02109 ................................... Telephone (617) 426-8220 [A TRUE COPY ......................... ATTEST STAMP APPEARS HERE] EX-3.1(F) 4 FUTHER AMEND. TO ARTICLES OF ORGANIZATION APRIL 25 Exhibit 3.1(f) FORM CD-72-30M-4/B6-808391 - ------------ The Commonwealth of Massachusetts Examiner OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE FEDERAL IDENTIFICATION MICHAEL JOSEPH CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASS. 02108 No. 04-2532311 ------------------- ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stock- holders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B. Section 114. Make check payable to the Commonwealth of Massachusetts. ---------------- We, Herbert E. Dunnington, President and William R. Freeman, Clerk The Safety Fund Corporation .................................................................... (Name of Corporation) located at 470 Main Street, Fitchburg, Massachusetts 01420 ........................................................ - ------------do hereby certify that the following amendment to the articles of Name Approved organization of the corporation was duly adopted at a meeting held on April 25 , 1988 , by vote of 867,561 shares of Common out of 1,055,967 shares outstanding, ............. .......... ........... (Class of Stock) shares of out of shares outstanding, and ............. .......... ......... (Class of Stock) shares of out of shares outstanding, ............. .......... ........... (Class of Stock) being at least a majority of each class outstanding and entitled to vote thereon:/1/ CROSS OUT INAPPLICABLE CLAUSE C [ ] P [ ] M [ ] /1/For amendments adopted pursuant to Chapter 156B, Section 70. /2/For amendments adopted pursuant to Chapter 156B, Section 71. Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for - ----------- binding. Additions to more than one Amendment may be continued on a P.C. single sheet so long as each Amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is:
- ----------------------------------------------------------------------- NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ----------------------------------------------------------------------- COMMON 1,600,000 $5.00 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- PREFERRED 100,000 $10. - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
CHANGE the total to:
- ----------------------------------------------------------------------- NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ----------------------------------------------------------------------- COMMON 3,200,000 $5.00 - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- PREFERRED 100,000 $10. - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 25th day of April, in the year 1988. /s/ Herbert E. Dunnington President/ - ------------------------------------------------------------ /s/ William R. Freeman Clerk/ - ------------------------------------------------------------ THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) I hereby approve the within articles of amendment and, the filing fee in the amount of $4,000.00 having been paid, said articles are deemed to have been filed with me this 26th day of April, 1988. /s/ Michael J. Connolly MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTO COPY OF AMENDMENT TO BE SENT TO: John C. Craig, Esquire ................................... Craig and Macauley Professional Corporation Federal Reserve Plaza ................................... [A TRUE COPY ATTEST 600 Atlantic Avenue STAMP APPEARS HERE] Boston, Massachusetts 02210 ................................... Telephone (617) 367-9500 .......................... EX-10.6 5 AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.6 SAFETY FUND NATIONAL BANK THE SAFETY FUND CORPORATION 470 Main Street Fitchburg, Massachusetts 01420 As of February 1, 1994 Christopher W. Bramley 199 West Main Street Westborough, Massachusetts 01581 Re: Amended and Restated Employment Agreement ----------------------------------------- Dear Mr. Bramley: In recognition of your contribution to the growth and success of The Safety Fund Corporation (the "Holding Company") and its banking subsidiary Safety Fund --------------- National Bank (the "Bank"), the Holding Company and the Bank desire to amend and ---- restate your Employment Agreement, dated as of February 1, 1994, in the manner set forth below. This Amended and Restated Employment Agreement shall be effective as of February 1, 1994 (the "Effective Date"). ARTICLE I: Employment; Duties, etc. 1.1 Employment. The Bank hereby agrees to employ you for the purpose of serving as its President and Chief Executive Officer. In your capacity as such officer of the Bank, you shall have the duties, responsibilities, authority and powers set forth in the Bank's By-Laws and charter, shall carry out such duties and responsibilities reasonably appropriate to that office as may from time to time be assigned by the Board of Directors (the "Board") or Executive Committee ----- of the Board (the "Executive Committee") and shall report from time to time or ------------------- routinely, upon request, to the Board or Executive Committee as to the current status of any of your assigned duties and responsibilities. You shall also serve as President and Chief Executive Officer of the Holding Company without further or additional compensation, and in such capacity shall carry out such duties and responsibilities reasonably appropriate to that office as may from time to time be assigned by the Board of Directors of the Holding Company (the "Holding Company Board"). --------------------- 1.2 Term of Employment. Your employment hereunder shall initially be for two years from the Effective Date. The parties intend that, at any point in time during your employment hereunder, the then-remaining term of your employment under this Letter Agreement shall be two years. Accordingly, the term of your employment shall be automatically extended by one day for each day that you remain employed by the Bank or the Mr. Christopher W. Bramley As of February 1, 1994 Page 2 Holding Company. (The last day of such term of your employment, as so extended from time to time, is herein sometimes referred to as the "Expiration Date"). --------------- ARTICLE II: Compensation and Benefits 2.1 Compensation. The Bank shall pay you an annual salary at the rate of not less than $200,000 per year during each year of your employment, or at such higher rate as shall be determined from time to time by the Board. In addition, if the Board increases your annual base salary at any time before the Expiration Date, such increased annual base salary shall become a floor below which your annual base salary shall not fall (other than concurrently with across-the-board salary reductions based on the Bank's financial performance similarly affecting all senior management personnel of the Bank) at any future time during the term of your employment without your written consent. Your salary shall be payable in periodic installments in accordance with the Bank's usual practice for its senior executives. 2.2 Certain Specific Employee Benefits. (a) Life Insurance. The Bank will provide without cost to you term life insurance with a face amount equal to five times your base salary. (b) Retirement Benefits. The Bank will contribute $30,000 during each calendar year you are employed pursuant to this Letter Agreement to fund retirement benefits for you. Such contributions shall be made in accordance with your written instructions to the Bank. To the extent permitted by applicable law and regulations, all your benefits under such plans shall be fully vested as of the date your employment with the Bank first commenced. (c) Health Insurance. You and your dependents shall be covered from and after the commencement of your employment hereunder by the Safety Fund health plan; to the extent there is any kind of waiting period for eligibility to join such plan or for preexisting conditions, the Bank shall pay the cost of your COBRA coverage during any interim period. (d) Grant of Stock Options. The Holding Company shall grant to you five options ("Stock Options") exercisable for the purchase of an aggregate of ------------- 25,000 shares (the "Option Shares") of Holding Company Common Stock ("Common ------------- ------ Stock"). Each such Stock Option shall be for 5,000 Option Shares, shall be - ----- granted at the fair market value of the Common Stock as of the date of such grant, and shall remain exercisable for a period of 10 years after the date of such grant. Your right to exercise the Stock Option for the first 5,000 Option Shares shall vest as of January 18, 1994. Stock Options for an additional 5,000 Option Shares shall be granted at the regular January meeting of the Holding Company Board held in each of 1995, 1996, 1997 and 1998. For purposes of this Letter Agreement, the term "Option Shares" shall refer to both to any shares of ------------- Common Stock which you have obtained upon exercise of the Stock Options and to any shares of Common Stock which you Mr. Christopher W. Bramley As of February 1, 1994 Page 3 have the right to obtain pursuant to exercise of the Stock Options. (e) Club Dues. In addition to other compensation payable to you hereunder the Bank shall pay to you an amount which shall be sufficient, after you have paid state and federal taxes on such amount, to fully compensate you for the cost of your dues as a member of each of the Worcester Country Club and the Fay Club in Fitchburg. 2.3 "Standard" Employee Benefits. In addition to the benefits set forth in Section 2.2 hereof, you shall be entitled to participate in the Bank's other employee fringe benefit plan(s) and arrangements as in effect as of the date hereof and from time to time during the term of your employment (including, but not limited to, participation in any pension, profit sharing or stock bonus plan adopted by the Bank or the Holding Company, and all group life, health, disability and other insurance) and any substitute or additional plans, policies or arrangements made available in the future to the executives and other senior management employees of the Bank or the Holding Company, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, policies and arrangements. Nothing paid to you under any plan, policy or arrangement currently in effect or made available in the future shall be deemed to be in lieu of other compensation to you as described in this Letter Agreement. 2.4 Incentive Compensation. As of the Effective Date, neither the Bank nor the Holding Company had any formal incentive compensation plan. However, you have indicated that you intend to submit to the Board an incentive plan for senior management. Payments under the proposed incentive compensation plan may be tied to return on equity, return on assets, or other measures of Bank or Holding Company performance. The Board commits to negotiate in good faith the terms of an incentive compensation plan upon your submission of such a plan. The details of any such plan shall be remitted to the discretion of the Board. If the Bank or the Holding Company adopts a program of incentive compensation for its senior officers generally, you shall be entitled to receive, in addition to a basic salary payable under Section 2.1, payments under such incentive compensation bonus program (as in effect from time to time), in such amounts as are approved by the Board based on recommendations of the Human Resources Committee. 2.5 Reimbursement of Expenses; Automobile. You shall be reimbursed by the Bank for reasonable business expenses incurred by you incident to your employment hereunder upon presentation of appropriate vouchers, receipts and other supporting documents required by the Bank. In addition the Bank shall pay to you an automobile allowance of $1,000 per month and shall reimburse you for gasoline and other operating and maintenance expenses for the automobile, as well as expenses relating to a cellular telephone for such automobile. 2.6 Vacations; Holidays; Sick Time. You shall be entitled to vacation in accordance with the Bank's standard policy for its senior executive officers but no less than four Mr. Christopher W. Bramley As of February 1, 1994 Page 4 (4) weeks' vacation during each year of your employment, such vacation to be taken at such times and intervals as shall be mutually agreed by you and the Bank. You shall continue to receive your full salary during such times as you may be on vacation. You shall be entitled to paid legal holidays in accordance with the existing policies of the Bank, as in effect from time to time. You shall be entitled to sick leave in accordance with the existing policies of the Bank for senior executive officers, as in effect from time to time (but in no event fewer than the number of days of sick leave per year to which you were entitled as of the Effective Date). ARTICLE III: Death and Disability 3.1 Death. In the event of your death during the term of your employment under this Letter Agreement, the Bank shall immediately pay to your designated beneficiary any salary accrued but unpaid as of the date of your death. In addition, for a period of one year after your death, the Bank shall continue to provide the medical insurance coverage which was in effect at the time of your death (subject only to revisions to such coverage which apply to all covered employees and their families) and shall pay to your designated beneficiary compensation, at a rate equal to 100% of the compensation which would otherwise be payable to you pursuant to Section 2.1 hereof during the first six months of such one year period and at a rate equal to 50% of the compensation which would otherwise be payable to you pursuant to Section 2.1 hereof during the remaining months of such period. Upon payment of the aforementioned sums, all obligations of the Bank and the Holding Company to make further salary payments shall terminate. This provision shall not be construed to negate any rights you may have to death benefits under any employee benefit or welfare plan of the Bank in which you may from time to time be a participant or under any other written agreement with the Bank or the Holding Company which specifically provides for such benefits. 3.2 Disability. If during the term of your employment you become disabled for such period of time and under circumstances which entitle you to receive disability benefits under the terms of the long-term disability insurance policy then maintained for you by the Bank or the Holding Company, then all obligations of the Bank and the Holding Company to pay you your salary and provide you with other employment related fringe benefits hereunder shall cease as of the date benefits first become payable under such disability policy ("Long Term --------- Disability Date"), except that you shall continue to be covered by the Bank's - --------------- medical insurance and life insurance policies until the first anniversary of the Long Term Disability Date. Prior to the Long Term Disability Date, the Bank shall continue to pay you your annual salary in usual installments and you shall continue to receive all other employment related fringe benefits due to you in accordance with this Letter Agreement. At any time from and after the Long Term Disability Date, each of the Board and the Holding Company Board, each acting in its discretion, may elect to terminate your employment hereunder by reason of such disability; provided, however that (i) any such termination shall not affect the Bank's obligation to continue to provide you with medical and life insurance benefits in Mr. Christopher W. Bramley As of February 1, 1994 Page 5 accordance with the first sentence of this Section 3.2, and (ii) in the event that your employment has been terminated pursuant to this Section 3.2 and, before the first anniversary of the Long Term Disability Date, the long-term insurance carrier discontinues making disability payments to you because of a determination that you are no longer disabled, the Bank shall, as of the date such payments ceased, resume paying you the full amount of the compensation which would have been payable to you under Section 2.1 if your employment hereunder had not been terminated because of disability, such payments to continue until the first anniversary of the Long Term Disability Date. ARTICLE IV: Certain Conditions of Employment 4.1 Duty to Perform Services. You shall devote your full business and productive time, ability and attention to rendering services hereunder to the Bank, the Holding Company and their respective subsidiaries and affiliates (collectively, the "Holding Company Affiliates"), and shall exert your best -------------------------- reasonable efforts in the rendering of such services. This provision shall not prohibit you from: (a) making passive investments; (b) serving on the board of directors of any charitable or civic organization, provided that you shall not render any material services with respect to the operations or affairs of any such company other than those typically rendered by a director; or (c) engaging in religious, charitable or other community or non- profit activities which do not impair your ability to fulfill your duties and responsibilities under this Letter Agreement. You agree that in the rendering of all services to the Holding Company Affiliates and in all aspects of your employment, in connection with your duties as an officer of any Holding Company Affiliate, you will comply with all reasonable directives, policies, standards and regulations from time to time established by the Holding Company Affiliates. 4.2 Confidential Information. Unless you shall first secure the Bank's consent, you shall not disclose or use, at any time either during or subsequent to the term of your employment under this Letter Agreement, except as required by your duties to the Bank or the Holding Company, any secret or confidential information of the Bank or any Holding Company Affiliate of which you become informed during your employment, whether or not developed by you. The term "confidential information" includes, without limitation, financial information, ------------------------ business plans, customer lists, prospects and opportunities (such as lending relationships, financial product developments, or possible acquisitions or dispositions of business or facilities) which have been discussed or considered by the management and/or the Board of the Bank or any Holding Company Affiliate, but does not include any information which has become part of the public domain by means other than your non-observance of Mr. Christopher W. Bramley As of February 1, 1994 Page 6 your obligations hereunder. 4.3 Ethical Behavior. Upon termination of your employment for any reason, you shall act at all times in an ethical manner with respect to the Bank and the Holding Company Affiliates. Without limiting the generality of the foregoing, you will not make any disparaging comments about any Holding Company Affiliates, the Bank or any of their customers, officers, directors, employees, agents, affiliates, operations or financial condition. ARTICLE V: Termination and Termination Benefits 5.1 Termination of Employment for Cause. Your employment by each of the Bank and the Holding Company hereunder may be terminated for "Cause" forthwith at any time by a vote of a majority of the members of the Board or the Holding Company Board then in office, and after fourteen days' written notice and opportunity to be heard by the such board. All obligations of the Bank and the Holding Company to pay your salary and other compensation and benefits (other than accrued salary and benefits) shall terminate on the effective date of any termination of your employment for Cause. For purposes of this Letter Agreement a termination shall be a termination for "Cause" only if the termination is for one or more of the following: (a) willful or gross neglect of duties for which employed (other than on account of a medically determinable disability which renders you incapable of performing such services); (b) committing fraud, misappropriation or embezzlement in the performance of duties as an employee of the Bank or the Holding Company; (c) conviction of a felony involving a crime of moral turpitude; (d) willfully engaging in violations of material banking regulations; or (e) willfully engaging in conduct materially injurious to the Bank or the Holding Company in violation of the covenants contained in this Letter Agreement. Termination pursuant to this Section 5.1 shall be without prejudice to any other right or remedy to which the Bank or the Holding Company may be entitled either at law, in equity or under this Letter Agreement. 5.2 Termination by Executive. You shall have the right to terminate your employment hereunder effective immediately by written notice to the Board and the Holding Company Board and, from and after the effective date of such termination, to receive the benefits described in Section 5.4 if any of the following events shall occur: Mr. Christopher W. Bramley As of February 1, 1994 Page 7 (a) Failure of the Board to elect you to the office of Chief Executive Officer of the Bank or to continue you in such office (other than a failure to elect or to continue you in such office by reason of your disability, as described in Section 3.2 and other than a failure to elect or to continue you in such office by reason of your termination for Cause); or (b) Failure of the Holding Company Board to elect you to the office of Chief Executive Officer of the Holding Company or to continue you in such office (other than a failure to elect or to continue you in such office by reason of your disability, as described in Section 3.2 and other than a failure to elect or to continue you in such office by reason of your termination for Cause); or (c) Failure by the Bank or the Holding Company to comply with the provisions of Section 2.1, or material breach by the Bank or the Holding Company of any other provision of this Letter Agreement. 5.3 Termination Without Cause. (a) The Board, by a vote of a majority of the members then in office, may terminate your employment with the Bank without cause on written notice to you. The Holding Company Board, by a vote of a majority of the members then in office, may terminate your employment with the Holding Company without cause upon written notice to you. From and after the effective date of any such termination, you shall be entitled to receive the benefits described in Section 5.4. Termination by reason of disability shall be governed solely by the provisions of Section 3.2 hereof and not by the provisions of this Section 5.3(a). (b) You may voluntarily terminate your employment with the Bank and the Holding Company upon written notice to the Board and the Holding Company Board. 5.4 Certain Termination Benefits. In the event of termination of your employment pursuant to Sections 5.2 or 5.3(a), you shall be entitled to the following benefits: (a) The Bank shall continue to pay you your annual salary pursuant to Section 2.1 in usual installments to for the period subsequent to the date of termination of your employment until the Expiration Date. (b) For the period subsequent to the date of termination of your employment until the Expiration Date, you shall continue to receive all benefits described in Sections 2.2, 2.3 and 2.4 above existing on the date of termination (except for payments under any cash bonus plans, which shall be pro-rated through the date of termination). For purposes of application of such benefits you shall be treated as if you had remained in the employ of the Bank, with an annual salary at the rate in effect on the date of termination, and service credits will continue to accrue during such period as if you had remained in the employ of Mr. Christopher W. Bramley As of February 1, 1994 Page 8 the Bank. (c) If, in spite of the provisions of Section 5.4(b) above, benefits or service credits under any benefit plan shall not be payable or provided under any such plan to you, or to your dependents, beneficiaries or estate, because you are no longer deemed to be an employee of the Bank, the Bank itself shall pay or provide for payment of such benefits and service credits for such benefits to you, or to your dependents, beneficiaries or estate. ARTICLE VI: Payment of Benefits After Certain Changes in Control 6.1 Purpose. In order to allow you to consider the prospect of a Change in Control (as defined in Section 6.3) in an objective manner and in consideration of the services rendered and to be rendered by you to the Bank, the Bank is willing to provide, subject to the terms of this Letter Agreement, certain severance benefits to protect you from the consequences of a Terminating Event (as defined in Section 6.4) occurring subsequent to a Change in Control. 6.2 Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Bank shall pay to you an amount equal to $400,000. 6.3 "Change in Control" Defined. For the purposes of this ARTICLE VI, Change in Control shall mean the occurrence of one or more of the following events: (a) after the Effective Date, any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) becomes a "beneficial owner" (as such term is defined in Rule -------- 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Holding Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Holding Company or the Bank, as the case may be; (b) within two years after a tender offer or exchange offer for voting securities of the Holding Company (other than by the Holding Company), the individuals who were directors of the Holding Company immediately prior thereto shall cease to constitute a majority of the Holding Company Board; (c) within two years after a merger, consolidation or sale of assets involving the Holding Company, or a contested election of a Holding Company director, or any combination of the foregoing, the individuals who were directors of the Holding Company immediately prior thereto shall cease to constitute a majority of the Holding Company Board; (d) the stockholders of the Holding Company or the Bank approve a merger or consolidation of the Holding Company or the Bank with any other bank or corporation, other than (X) a merger or consolidation which would result in the voting securities of the Mr. Christopher W. Bramley As of February 1, 1994 Page 9 Holding Company or the Bank (as the case may be) outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Holding Company or the Bank or such surviving entity outstanding immediately after such merger or consolidation, or (Y) a merger or consolidation effected to implement a recapitalization of the Holding Company or the Bank (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power then-outstanding securities of the Holding Company or the Bank, as the case may be; (e) if there has occurred a change in control which the Holding Company would be required to report in response to Item 1 of Form 8-K promulgated under the 1934 Act, or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission pursuant to the 1934 Act which are intended to serve similar purposes; (f) the stockholders of the Holding Company approve a plan of complete liquidation of the Holding Company or an agreement for the sale or disposition by the Holding Company of all or substantially all of the Holding Company's assets, other than a corporate reorganization in which the Holding Company is dissolved or liquidated and the shareholders of the Holding Company receive in exchange for their interests in the Holding Company equity interests in the Bank in the same relative proportions as they held in the Holding Company; or (g) after a dissolution of the Bank in which the shareholders of the Holding Company receive in exchange for their interests in the Holding Company equity interests in the Bank in the same relative proportions as they held in the Holding Company, the stockholders of the Bank approve a plan of complete liquidation of the Bank or an agreement for the sale or disposition by the Bank of all or substantially all of the Bank's assets, other than a corporate reorganization in which the Bank is dissolved or liquidated and the shareholders of the Bank receive in exchange for their interests in the Bank equity interests in a corporation to which has been transferred substantially all of the assets and liabilities of the Bank in the same relative proportions as they held in the Bank. 6.4 "Terminating Event" Defined. A "Terminating Event" shall mean any of the following: (a) termination by the Bank or the Holding Company of your employment with the Bank or the Holding Company for any reason other than (i) death, disability, or Cause (as defined in Section 5.1), or (b) your resignation from the employ of the Bank and the Holding Company while you are not receiving payments or benefits hereunder by reason of your disability, subsequent to the occurrence of any of the following events: Mr. Christopher W. Bramley As of February 1, 1994 Page 10 (1) a reduction of your annual compensation (as described in Section 2.1 above) except for across-the-board salary reductions based on the Bank's financial performance similarly affecting all senior management personnel of the Bank and all senior management personnel of any person in control of the Bank; (2) a significant change in the nature or scope of your responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by you immediately prior to the Change in Control; or (3) a reasonable determination by you that, as a result of a Change in Control, you are unable to exercise the responsibilities, authorities, powers, functions or duties exercised by you immediately prior to such Change in Control; or (4) the failure by the Bank or the Holding Company to continue in effect any material compensation, incentive, bonus or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Bank or the Holding Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control; or (5) the failure by the Bank or the Holding Company to continue to provide you with benefits substantially similar to those available to you under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which you were participating at the time of the Change in Control, or the taking of any action by the Bank or the Holding Company which would directly or indirectly materially reduce any of such benefits (it being understood that increases in co-payment requirements for health and similar benefit plans shall not be deemed to be material reductions in benefits if such increases are imposed in a similar manner on all senior officers), or the failure by the Bank to provide you with the number of paid vacation days to which are entitled on the basis of years of service with the Bank in accordance with the Bank' normal vacation policy in effect at the time of the Change in Control; (6) the failure of the Holding Company or the Bank to obtain a satisfactory agreement from any successor to assume and agree to perform this Letter Agreement; or (7) the occurrence of any of the events specified in Section 5.2. 6.5 Limitation on Benefits. (a) It is the intention of the parties that no payments to Mr. Christopher W. Bramley As of February 1, 1994 Page 11 or for your benefit under this Letter Agreement or any other agreement or plan pursuant to which you are entitled to receive payments or benefits shall be non- deductible to the Bank or the Holding Company (as the case may be) by reason of the operation of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") relating to parachute payments. Accordingly, and notwithstanding ---- any other provision of this Letter Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Bank or the Holding Company for Federal income tax purposes, such payments shall be reduced to the maximum amount which can be deducted by the Bank or the Holding Company. To the extent that payments exceeding such maximum deductible amount have been made to or your beneficiary, you or your beneficiary shall refund such excess payments to the Bank or the Holding Company (as applicable) with interest thereon at the Applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non- deductible to the Bank or the Holding Company by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, you shall determine which method shall be followed, provided that if you fail to make such determination within forty-five days after the Bank or the Holding Company has sent you written notice of the need for such reduction, the Bank or the Holding Company may determine the method of such reduction in its sole discretion. (b) If any dispute between the Bank or the Holding Company and you as to any of the amounts to be determined under Section 6.5(a), or the method of calculating such amounts, cannot be resolved by you and the Bank (or the Holding Company), either the Bank (or the Holding Company, as applicable) or you after giving three days written notice to the other, may refer the dispute to a partner of a firm of independent certified public accountants selected jointly by you and the Bank or the Holding Company (other than the independent certified public accountants then engaged to audit the books of the Bank or the Holding Company). The determination of such partner as to the amount to be determined under Section 6.5(a) and the method of calculating such amounts shall be final and binding on all parties to this Letter Agreement. The Bank shall bear the costs of any such determination. 6.6 Applicability of Change in Control Provisions. (a) If there is a Change in Control while you remain actively employed by the Bank or the Holding Company (or by any successor to the liabilities or obligations thereof) pursuant to the terms of this Letter Agreement, the provisions of this ARTICLE VI shall apply and shall continue to apply for a three year period following the Change in Control, and the provisions of this ARTICLE VI shall continue to apply regardless of whether this Letter Agreement is terminated. (b) The provisions of this ARTICLE VI shall terminate upon the earliest of (i) the termination of your employment by the Bank or the Holding Company because of death, disability or for Cause (as defined in Section 5.1), (ii) your resignation or termination of employment with the Bank or the Holding Company for any reason prior to a Change in Mr. Christopher W. Bramley As of February 1, 1994 Page 12 Control, and (iii) your resignation or termination of employment after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 6.4 of this Letter Agreement. ARTICLE VII: Miscellaneous 7.1 Assignment. You may not make any assignment of this Letter Agreement or any interest herein without the prior written consent of the Bank and the Holding Company, and without such consent any attempted transfer shall be null and void and of no effect. The Holding Company shall have the right to assign this Letter Agreement to another Holding Company Affiliate provided that the Holding Company remains liable to you for the obligations of such Affiliate. 7.2 Withholding. All payments to be made by the Bank or the Holding Company to you under this Letter Agreement shall be reduced by any tax or other amounts required to be withheld by the Bank or the Holding Company under applicable law. 7.3 Notices. Any notices, requests, demands and other communications provided for by this Letter Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to you at the last address you have filed in writing with the Bank or, in the case of the Bank or the Holding Company, at its main office, attention of the Chairman of the Board, with a copy to Peter W. Coogan, Foley, Hoag & Eliot, One Post Office Square, Boston, Massachusetts 02109. 7.4 Arbitration of Disputes. Any dispute, controversy or claim arising out of or relating to this Letter Agreement or the breach or performance thereof shall be settled by arbitration in accordance with the laws of The Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Bank, one by you, and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in Boston, Massachusetts. Such arbitration shall be conducted in the City of Boston in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 7.4. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for you to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of your rights under this Letter Agreement, the Bank shall pay (or you shall be entitled to recover from the Bank, as the case may be) your reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by you of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to the calculation to be made in accordance with the procedure set Mr. Christopher W. Bramley As of February 1, 1994 Page 13 forth in Section 6.5(b), except in the event that the Bank and you cannot agree on the selection of the accounting partner described in said Section. In no event shall the arbitrators have any authority to award damages other than the payment to you of amounts which should have been paid over to you under this Letter Agreement plus reasonable legal fees and other costs and expenses provided for under this Section 7.4. Without limiting the generality of the foregoing, the arbitrators shall have no authority to award consequential, punitive, multiple or exemplary damages. 7.5 Governing Law; Binding Effect. This Letter Agreement shall be construed under the laws of The Commonwealth of Massachusetts, and it shall bind and inure to the benefit of the successors, assigns, executors, administrators or personal representatives of the parties. 7.6 Interpretation. In case any one or more of the provisions contained in this Letter Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Letter Agreement, but this Letter Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 7.7 Amendment and Waiver. This Letter Agreement may not be amended, supplemented or waived except by a writing signed by the party against which such amendment or waiver is to be enforced. In the case of the Bank and the Holding Company no amendment, supplement or waiver shall be effective unless it shall have been approved by the Board of the Bank. The waiver by any party of a breach of any provision of this Letter Agreement shall not operate to, or be construed as a waiver of, any other breach of that provision nor as a waiver of any breach of another provision. 7.8 Non-Duplication. We do not intend the termination benefits payable under Sections 5.4 and 6.2 to be cumulative. To the extent that, but for this Section 7.8, you would be entitled at any time to receive compensation under both of such Sections, you shall inform the Bank of the Section pursuant to which you wish to be compensated and you shall forfeit any entitlement to receive compensation pursuant to any other Section hereunder. 7.9 Operation of Law on Bank's Obligations. In the event that the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, or any other governmental entity promulgates any statute, rule, regulation, policy or order which restricts or prohibits the Bank or the Holding Company from making payments to you under this Letter Agreement, then the obligations of the affected party to make payments to you (or your beneficiary) hereunder shall terminate or be restricted or suspended (consistent with such law, regulation, policy or order) for so long as such restriction or prohibition rule continues to apply to such party. Nothing in this Letter Agreement is intended to require or shall be construed as requiring the Bank or the Holding Company to do or fail to do any act in violation of any applicable law, regulation, policy or order. Mr. Christopher W. Bramley As of February 1, 1994 Page 14 7.10 Co-Payments. Notwithstanding any other provision of this Agreement, the Bank shall have the right to increase the co-payments it requires you to pay for health and similar benefit plans so long as similar increases are imposed in a similar manner on all senior officers. 7.11 Effect on Prior Understandings. This Letter Agreement is intended to supersede and replace in its entirety all previous understandings among the parties with respect to your employment. 7.12 Counterparts. This Letter Agreement may be executed in two counterparts, each of which is an original but which shall together constitute one and the same instrument. I would appreciate your executing and returning to me the enclosed copy of this Letter Agreement to confirm that the foregoing represents our mutual understanding. Very truly yours, THE SAFETY FUND CORPORATION By: Thomas P. Kelley ------------------------------------------ Title: Chairman, Board of Directors --------------------------------------- SAFETY FUND NATIONAL BANK By: Thomas P. Kelley ------------------------------------------ Title: Chairman, Board of Directors --------------------------------------- Accepted and Agreed to: Christopher W. Bramley - ----------------------------- Christopher W. Bramley EX-13.1 6 ANNUAL REPORT TO SHAREHOLDER 1995 [LOGO APPEARS HERE] Annual Report The Safety Fund Corporation Safety Fund National Bank 1995 Letter to Shareholders - -------------------------------------------------------------------------------- Dear Shareholders: It is with great satisfaction that we report to you that The Safety Fund Corporation earned a net profit of $1,852,889 or $1.12 per share for 1995. This performance represents a substantial improvement over 1994, at which time the Company reported a year end net profit of $158,048 or $0.10 per share (adjusted for 1995 stock split in the form of a stock dividend). During the fourth quarter, the Company earned a net profit after taxes of $602,384 or $0.36 per share, compared with a net profit of $326,008 or $0.20 per share (adjusted for 1995 stock split in the form of a stock dividend) for the corresponding quarter in 1994, an increase of $276,376. The improvement in 1995 earnings performance was attributable to a large increase in net interest income and a substantial reduction in the loan loss provision. Net interest income increased $1,779,685 or 14.8% compared to 1994, primarily due to above average loan growth and a favorable interest rate environment. The level of nonaccrual loans, troubled debt restructurings accruing interest, other real estate owned and loans contractually past due 90 days and still accruing interest declined by $1,996,272 or 38.2% to $3,228,776. This decline contributed to the reduction of $899,605 or 40.9% in the loan loss provision from $2,199,605 in 1994 to $1,300,000 in 1995. Further reduction in the level of troubled assets will remain an important strategic initiative in the coming year. With the quality of our overall loan portfolio improving, management was able to focus on growing the Company during 1995. Total deposits grew $17,313,955 or 7.4%, with the majority of the growth occurring in retail deposits. Total loans grew $18,975,490 or 13.4%, primarily due to more aggressive marketing of our commercial loans, residential real estate loans and home equity lines of credit. The growth in noninterest expense was $591,052 or 4.4%. However, this growth includes a fourth quarter valuation write-down of $344,765 for one of the Company's premises. 1995 was certainly a significant year in the history of The Safety Fund Corporation and an important year for our shareholders. We expect the coming year and our proposed partnership with CFX Corporation of Keene, N.H. to be even better. Sincerely, /s/ Thomas P. Kelly /s/ Christopher W. Bramley Thomas P. Kelly Christopher W. Bramley Chairman of the Board President and Chief Executive Officer 1 Report of Independent Auditors - -------------------------------------------------------------------------------- [LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE] ----------------------------------------------------------------- KPMG Peat Marwick LLP Certified Public Accountants 99 High Street Boston, MA 02110-2371 The Board of Directors and Stockholders The Safety Fund Corporation: We have audited the accompanying 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. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Safety Fund Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 22, 1996 2 Report of Independent Auditors - -------------------------------------------------------------------------------- [LOGO OF ERNST & YOUNG LLP APPEARS HERE] The Board of Directors and Stockholders The Safety Fund Corporation We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of The Safety Fund Corporation for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of The Safety Fund Corporation for the year ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 28, 1994 3 Consolidated Balance Sheets - --------------------------------------------------------------------------------
December 31, ----------------------------- Assets 1995 1994 ------------ ------------ Cash and due from banks (Note 12) $ 13,305,505 $ 15,223,830 Federal funds sold 2,500,000 3,300,000 Investment securities available for sale (amortized cost of $62,427,502 in 1995 and $56,788,854 in 1994) (Notes 2 and 7) 63,737,909 54,537,725 Investment securities held to maturity (market value of $41,024,069 in 1995 and $43,213,908 in 1994) (Notes 2 and 7) 39,924,078 45,598,639 Loans (Note 3) 160,433,831 141,458,341 Less allowance for possible loan losses (Note 4) (7,350,150) (6,417,407) ------------ ------------ Net loans 153,083,681 135,040,934 ------------ ------------ Premises and equipment, net (Note 5) 9,638,596 10,842,035 Accrued interest receivable 2,473,884 2,194,161 Other real estate owned, net (Note 4) 50,000 533,470 Deferred income tax asset, net (Note 8) 1,665,799 2,376,167 Other assets 1,103,800 1,413,796 ------------ ------------ Total assets $287,483,252 $271,060,757 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposits (Note 6): Interest bearing $184,897,462 $169,893,349 Noninterest bearing 67,891,000 65,581,158 ------------ ------------ Total deposits 252,788,462 235,474,507 Securities sold under repurchase agreements (Note 7) 11,119,611 15,637,436 Treasury tax and loan notes 1,156,804 2,342,166 Other liabilities 1,031,315 954,004 ------------ ------------ Total liabilities 266,096,192 254,408,113 ------------ ------------ Commitments and contingencies (Notes 5, 11 and 12): Stockholders' equity (Notes 10 and 13): Preferred stock, $10 par value; 100,000 shares authorized, none issued Common stock, $5 par value; 3,200,000 shares authorized, 1,660,665 issued and outstanding in 1995 and 1,657,120 in 1994 8,303,325 5,523,735 Surplus 7,584,846 10,326,436 Retained earnings 4,815,433 2,964,004 Net unrealized gain (loss) on investment securities available for sale (Note 2) 683,456 (2,161,531) ------------ ------------ Total stockholders' equity 21,387,060 16,652,644 ------------ ------------ Total liabilities and stockholders' equity $287,483,252 $271,060,757 ============ ============
See Accompanying Notes to Consolidated Financial Statements. 4 Consolidated Statements of Operations - --------------------------------------------------------------------------------
Years ended December 31, --------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Interest income: Interest on loans $14,483,998 $11,852,620 $13,438,678 Interest and dividends on investment securities: Available for sale 3,207,288 3,604,177 - Held to maturity 3,502,197 1,608,412 4,382,813 Interest on federal funds sold 263,506 198,832 239,417 ----------- ----------- ----------- Total interest income 21,456,989 17,264,041 18,060,908 ----------- ----------- ----------- Interest expense: Interest on deposits 7,031,330 4,864,132 5,514,081 Interest on borrowed funds 609,929 363,864 251,240 ----------- ----------- ----------- Total interest expense 7,641,259 5,227,996 5,765,321 ----------- ----------- ----------- Net interest income 13,815,730 12,036,045 12,295,587 Provision for possible loan losses (Note 4) 1,300,000 2,199,605 8,283,372 ----------- ----------- ----------- Net interest income after provision for possible loan losses 12,515,730 9,836,440 4,012,215 ----------- ----------- ----------- Noninterest income: Trust fees 2,246,165 2,169,426 2,250,298 Service fees 1,138,865 1,057,408 1,000,601 Gains (losses) on loans sold, net 13,974 (318,257) (206,417) Gains on sales of investment securities available for sale, net (Note 2) 781 75,062 - Gains on sales of investment securities, net (Note 2) - - 677,545 Other 659,088 839,831 542,288 ----------- ----------- ----------- Total noninterest income 4,058,873 3,823,470 4,264,315 ----------- ----------- ----------- Noninterest expense: Salaries and wages 6,124,988 5,856,673 5,212,249 Employee benefits 1,369,471 1,500,044 1,602,512 Occupancy, net 940,020 829,416 865,889 Equipment 1,204,756 1,074,252 1,008,868 Professional fees 854,609 1,073,404 967,316 Marketing 738,260 477,305 457,268 Deposit insurance 330,090 538,801 558,988 Other real estate owned, net 56,284 352,992 187,850 Directors' fees 240,497 255,667 327,358 Branch impairment write-down (Note 5) 344,765 - - Other 1,811,974 1,466,108 1,426,054 ----------- ----------- ----------- Total noninterest expense 14,015,714 13,424,662 12,614,352 ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of change in accounting principle 2,558,889 235,248 (4,337,822) Income tax expense (benefit) (Note 8) 706,000 77,200 (1,410,000) ----------- ----------- ----------- Income (loss) before cumulative effect of change in accounting principle 1,852,889 158,048 (2,927,822) Cumulative effect of change in accounting principle related to income taxes (Note 1) - - (180,000) ----------- ----------- ----------- Net income (loss) $ 1,852,889 $ 158,048 $(3,107,822) =========== =========== =========== Per share amounts: Income (loss) before change in accounting principle $ 1.12 $ .10 $(1.82) Cumulative effect of change in accounting principle - - (.11) ------ ----- ------ Net income (loss) $ 1.12 $ .10 $(1.93) ====== ===== ====== Weighted average shares outstanding 1,657,420 1,613,466 1,605,281
See Accompanying Notes to Consolidated Financial Statements. 5 Consolidated Statements of Stockholders' Equity - --------------------------------------------------------------------------------
Common Retained Stock Surplus Earnings Other Total ----------- ----------- ----------- ----------- ----------- Balance, January 1, 1993 $ 5,350,935 $10,047,734 $ 6,127,815 $ - $21,526,484 Net loss - - (3,107,822) - (3,107,822) Cash dividends ($ .13 per share) - - (214,037) - (214,037) Unrealized gain on investment securities available for sale, net of income taxes - - - 1,469,103 1,469,103 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1993 5,350,935 10,047,734 2,805,956 1,469,103 19,673,728 Net income - - 158,048 - 158,048 Issuance of 34,560 shares in connection with the exercise of employee stock 172,800 278,702 - - 451,502 options (Note 10) Decline in fair value of investment securities available for sale, net of income taxes - - - (3,630,634) (3,630,634) ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1994 5,523,735 10,326,436 2,964,004 (2,161,531) 16,652,644 Net income - - 1,852,889 - 1,852,889 Issuance of 3,600 shares in connection with the exercise of employee stock options (Note 10) 18,000 20,000 - - 38,000 Stock split 2,761,590 (2,761,590) - - - Cash paid in lieu of partial shares related to stock split - - (1,460) - (1,460) Increase in fair value of investment securities available for sale, net of income taxes - - - 2,844,987 2,844,987 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1995 $ 8,303,325 $ 7,584,846 $ 4,815,433 $ 683,456 $21,387,060 =========== =========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements. 6 Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
Years ended December 31, ---------------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Cash flows provided (used) by operating activities: Net income (loss) $ 1,852,889 $ 158,048 $ (3,107,822) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Proceeds from sales of mortgage loans 1,340,169 12,075,924 23,172,121 Principal reductions on mortgage loans held for sale - 5,402,930 1,405,863 Origination of mortgage loans held for sale (1,117,505) (5,436,828) (5,100,800) Repurchase of mortgage loans previously sold (253,609) (3,902,992) (25,054,968) (Gains) losses on loans sold, net (13,974) 318,257 206,417 Depreciation and amortization 1,194,372 1,180,392 1,131,439 Branch impairment 344,765 - - Gains on sales of investment securities available for sale, net (781) (75,062) - Gains on sales of investment securities, net - - (677,545) Amortization (accretion) of bond premiums and discounts, net (72,209) (13,200) 146,077 Provision for possible losses on loans and other real estate owned 1,331,237 2,365,231 8,422,685 Deferred income tax expense (benefit) (381,049) 289,556 (1,421,400) Decrease (increase) in accrued interest receivable (279,723) (126,931) 96,280 Decrease in other assets and OREO, net 999,842 625,340 329,346 Increase in other liabilities 77,311 273,417 20,145 ------------ ------------ ------------ Net cash provided (used) by operating activities 5,021,735 13,134,082 (432,162) ------------ ------------ ------------ Cash flows provided (used) by investing activities: Purchase of investment securities available for sale - (10,796,441) - Purchase of investment securities (20,096,250) (40,446,512) (23,701,180) Proceeds from sales of investment securities available for sale 6,632,345 13,108,090 - Proceeds from sales of investment securities - - 18,953,011 Proceeds from maturities of investment securities available for sale 3,000,000 4,649,064 - Proceeds from maturities of investment securities 10,947,676 - 6,020,847 (Increase) decrease in federal funds sold 800,000 8,100,000 (4,900,000) Net (increase) decrease in loans outstanding (19,535,441) (6,720,922) 11,434,413 (Purchases) disposals of premises and equipment (335,698) (903,834) (701,504) ------------ ------------ ------------ Net cash provided (used) by investing activities (18,587,368) (33,010,555) 7,105,587 ------------ ------------ ------------ Cash flows provided (used) by financing activities: Increase (decrease) in securities sold under repurchase agreements (4,517,825) 8,193,217 (2,842,235) Increase (decrease) in treasury tax and loan notes (1,185,362) (2,154,280) 3,468,049 Increase (decrease) in deposits 17,313,955 15,678,535 (7,427,190) Cash dividends paid - - (214,037) Proceeds from exercise of stock options 38,000 451,502 - Payments in lieu of partial shares related to stock split (1,460) - - ------------ ------------ ------------ Net cash provided (used) by financing activities 11,647,308 22,168,974 (7,015,413) ------------ ------------ ------------ Increase (decrease) in cash and due from banks (1,918,325) 2,292,501 (341,988) Cash and due from banks, beginning of year 15,223,830 12,931,329 13,273,317 ------------ ------------ ------------ Cash and due from banks, end of year $ 13,305,505 $ 15,223,830 $ 12,931,329 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during year for: Interest $ 7,501,517 $ 5,175,195 $ 5,782,150 Income taxes 1,119,109 27,846 369,000 Non-cash transactions: Transfers from loans to other real estate owned 237,613 1,016,830 481,000 Transfer of property from other real estate owned to premises - - 5,098,745 Transfer of investment securities available for sale to investment securities held to maturity 4,126,119 5,357,472 - Transfer of investment securities held to maturity to investment securities available for sale 19,491,445 - -
See Accompanying Notes to Consolidated Financial Statements. 7 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Significant accounting policies Basis of presentation and consolidation--The accounting and reporting policies of The Safety Fund Corporation (the "Company") conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for possible loan losses. The Company, a Massachusetts corporation, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and files reports with the Federal Reserve Board as required under the Bank Holding Company Act. The Company has two wholly-owned subsidiaries, Safety Fund National Bank, a national banking association (the "Bank"), and Safety Fund Realty Corporation which is currently inactive. The Bank provides numerous services to industry, commerce and government, including the maintenance of demand, savings and time deposit accounts and the granting of various types of mortgage loans and other specialized loans. The services provided by the Bank to individuals include checking accounts, savings and time accounts, mortgage loans, consumer and other installment loans, credit arrangements, and secured and unsecured personal loans. The Bank's Trust Division furnishes a wide range of trust services to individuals, corporations, municipalities and charitable organizations. The Bank acts as trustee of personal, corporate, pension, profit-sharing and other employee-benefit trusts, provides investment, advisory and custody services and acts as executor, administrator and trustee of estates. The primary market area of the Bank is Worcester County, Massachusetts, particularly the communities of Fitchburg, Worcester, Leominster, Gardner, Westborough and Lunenburg. The Bank is a national banking association chartered under the National Bank Act. As such, it is subject to the supervision of the Office of the Comptroller of the Currency. The Bank has three wholly-owned subsidiaries, The Lenders/Massachusetts, Inc. ("Lenders"), Prichard Plaza Realty Corp. ("Prichard") and Safety Fund Securities Corporation ("Securities Corp."). Through 1993, Lenders originated, packaged and sold residential mortgage loans; in 1994, it ceased such activities but continues to service loans. Prichard operates one commercial real estate property, the principal tenant of which is the Bank. Securities Corp. invests in debt securities for the benefit of the Company. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Investment securities--Management determines the appropriate classification of investment securities at the time of purchase. Investment securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Investment securities that are bought and held principally for the purpose of selling in the near term are classified as trading and reported at fair value. Prior to December 31, 1993, investment securities not classified as held to maturity or trading were classified as held for sale and carried at the lower of cost or market value, with unrealized losses charged to earnings. In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the provisions of the new Statement as of the end of 1993. In accordance with SFAS 115, prior period financial information was not restated to reflect the change in accounting principle. At the time of adoption, investment securities not classified as investment securities held to maturity or trading were classified as investment securities available for sale. Such securities are carried at fair value with unrealized gains and losses, net of income taxes, reported in a separate component of stockholders' equity. As a result of adoption, stockholders' equity was increased by $1,469,103 at December 31, 1993, representing the net unrealized gain in investment securities available for sale, less applicable income taxes. Transfers of investment securities from the available for sale category to the held to maturity category are recorded at the fair value of the investment securities at the time of transfer. Any unrealized gains or losses associated with such transfers remain in a separate component of stockholders' equity and are amortized over the remaining life of the securities as an adjustment to their yield. Premiums and discounts on debt securities are amortized and accreted on a straight-line method, the result of which is not materially different than that derived by use of the interest method. Realized gains and losses from sales and declines in value judged to be other than temporary on all investment securities are included in earnings. The cost of securities sold is based on the specific identification method. Loans--Loans are generally placed on nonaccrual status when the obligation is contractually past due 90 days and/or, in the opinion of management, a loss of principal is likely to occur. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period income and amortization of deferred loan fees is discontinued. Loans may be removed from nonaccrual when they become current as to principal and interest due and when concern no longer exists as to the collectibility of principal and interest. Interest received on nonaccruing loans is normally applied against principal. On an exception basis, such interest received may be reported as income if, in management's judgment, full collection of principal is likely. 8 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Discounts and premiums on loans are accreted over the remaining estimated lives of the related loans using a method which approximates the interest method. Loan origination and commitment fees and certain incremental loan origination costs are deferred and amortized over the contractual lives of the related loans, using a method which approximates the interest method. In May 1993, the Financial Accounting Standards Board issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), which was amended in October, 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosure" ("SFAS 118"). On January 1, 1995 the Company adopted SFAS No. 114 and 118 which require changes in both the disclosure and impairment measurement of certain loans. Adoption of these statements has no material impact on the Company's financial position or results of operations because, prior to the adoption of the statement, the Company had assessed and still does assess, the adequacy of the allowance for possible loan losses and identified potential problem loans considering, among other factors, the fair market value of the collateral securing the loan. At December 31, 1995, the Company had $9,875,188 of impaired loans as defined under SFAS No. 114 and 118. Impaired loans are commercial, commercial real estate, and individually significant mortgage or consumer loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. Nonaccrual loans are included in impaired loans and are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan using the original contractual interest rate and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage and consumer loans, which are not individually significant are measured for impairment collectively. 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. Restructured, accruing loans entered into prior to the adoption of these statements are not required to be reported as impaired unless such loans are not performing according to the restructured terms at adoption of SFAS No. 114. Loan restructurings entered into after adoption of SFAS No. 114 are reported as impaired loans, and impairment is measured as described above using the loan's pre-modification rate of interest. It's the Company's policy to charge to the allowance for possible loan losses all loans or portions of loans as they are judged to be uncollectible. This policy is applicable to all segments of the Company's loan portfolio, including impaired loans. A loan is judged to be uncollectible when it is inadequately supported by the borrower's demonstrated capability to repay, there is permanent impairment to the collateral and there is a reasonable probability that the loan is otherwise uncollectible. Loan sales--Gains and losses on sales of mortgage loans are recognized at the time of sale based upon the difference between the selling price and the carrying value of the related loans sold. Such gains and losses are increased or decreased by the present value of the difference between the average interest rate on the loans sold and the agreed upon yield to the buyers, net of repurchase provisions for loans sold with recourse and servicing fees, and after consideration of estimated prepayment experience. The resulting excess service fee receivable, if any, is amortized as a reduction of service fee income using a method which approximates the interest method over the estimated life of the loans and adjusted for estimated prepayments. Mortgage loans held for sale are carried at the lower of aggregate cost or estimated market, based upon current market conditions. Prepayment experience is reviewed periodically and, when actual prepayments exceed estimated prepayments, the balance of the excess service fees receivable is adjusted accordingly by a charge to earnings. In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which was adopted by the Company on January 1, 1996. This Statement requires the Company to recognize as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired. A mortgage banking enterprise that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and that sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The Statement also requires the assessment of capitalized servicing rights for impairment based on fair value of the rights. The adoption of SFAS 122 is not expected to have a material impact on the Company's consolidated financial statements. 9 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Allowance for possible loan losses--The allowance for possible loan losses is based upon management's evaluation of inherent losses in the portfolio, current economic conditions and other pertinent factors. Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Additions to the allowance are charged to operations; realized losses, net of recoveries, are charged to the allowance. Loans are charged-off in whole or in part when, in management's opinion, collectibility is not probable. In addition, various regulatory agencies, as part of their examination process, periodically review the Company's allowance for possible loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Other real estate owned--Other real estate owned ("OREO") includes foreclosed properties where the Bank has actually received title. OREO is recorded at the lower of the carrying value of the loan or the fair value of the property received, less estimated costs to sell ("fair value"). Losses arising from the acquisition of such properties are charged against the allowance for possible loan losses. Operating expenses are charged to current period earnings. Gains upon disposition are reflected in earnings as realized. An allowance for losses on other real estate owned is maintained for declines in the fair value of OREO. Additions to the allowance are charged to current period income and realized losses are charged to the allowance. Premises and equipment--Premises and equipment are stated at cost, less accumulated depreciation and amortization which are computed using both straight-line and accelerated methods over the estimated useful lives of the related assets or the terms of the related leases, whichever is shorter. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which was adopted on January 1, 1995. This Statement establishes the accounting standards for the impairment of long- lived assets, certain identifiable intangible assets, and goodwill related to such assets being held and used and for such assets and certain identifiable intangibles to be disposed of. The implementation of this Statement did not have a material effect on the Company's results of operations or financial condition. Income taxes--Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, the Company adopted SFAS 109 and reported the $180,000 cumulative effect of that change in the 1993 statement of operations. As permitted under SFAS 109, the Company elected not to restate the financial statements of prior years. Trust fees--Fees from trust and agency services are generally recorded on the accrual method. Property held in trust for customers is not the property of the Company and is, accordingly, excluded from the consolidated balance sheet. However, trust assets may include funds on deposit with the Bank. Interest rate swap agreement--In 1994, the Company entered into an interest rate swap to manage exposure to interest rate risk. The net differential to be paid or received on the swap is accounted for as an adjustment 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 swap is designated and effective as a hedge of a specific pool of assets. If an interest rate swap is terminated, the gain or loss is deferred and amortized over the shorter of the remaining contract life or the maturity of the hedged item. Interest rate floor agreement--In 1995, the Company entered into an interest rate floor agreement to manage exposure to interest rate risk. The amount paid on the floor is accounted for as an adjustment 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. If an interest rate floor is terminated, the gain or loss is deferred and amortized over the shorter of the remaining contract life or the maturity of the hedged item. 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. 10 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Stock options--In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective on January 1, 1996. This Statement establishes a fair value based method of accounting for stock-based compensation plans under which compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. However, the Statement allows a company to continue to measure compensation cost for such plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB 25, no compensation cost is recorded if, at the grant date, the exercise price of the options is equal to the fair market value of the company's common stock. The Company has elected to continue to follow the accounting provided for in APB Opinion No. 25. SFAS 123 requires companies which elect to continue to follow the accounting in APB 25 to disclose in the notes to their financial statements pro forma net income and earnings per share as if the fair value based method of accounting had been applied. The adoption of SFAS 123 is not expected to have a material impact on the Company's consolidated financial statements. Share data--Earnings per share computations are based on the weighted average number of shares outstanding during the periods. The dilutive impact of outstanding stock options is not material. Share amounts have been adjusted for the November 1995 three-for-two stock split in the form of a stock dividend. 2. Investment securities Investment securities at December 31, 1995 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Available for sale: U.S. Government obligations $23,563,789 $ 543,589 $ 5,968 $24,101,410 U.S. Government agencies and corporations 38,582,613 846,996 74,210 39,355,399 Other securities 281,100 - - 281,100 ----------- ----------- ----------- ----------- $62,427,502 $ 1,390,585 $ 80,178 $63,737,909 =========== =========== =========== =========== Held to maturity: U.S. Government obligations $ 3,335,420 $ 8,650 $ - $ 3,344,070 U.S. Government agencies and corporations 23,482,316 600,808 1,746 24,081,378 Mortgage-backed securities 12,906,342 520,729 - 13,427,071 Other securities 200,000 - 28,450 171,550 ----------- ----------- ----------- ----------- $39,924,078 $ 1,130,187 $ 30,196 $41,024,069 =========== =========== =========== ===========
Investment securities at December 31, 1994 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Available for sale: U.S. Government obligations $33,882,187 $ 11,288 $ 907,837 $32,985,638 U.S. Government agencies and corporations 22,625,567 18,518 1,373,098 21,270,987 Other securities 281,100 - - 281,100 ----------- ----------- ----------- ----------- $56,788,854 $ 29,806 $ 2,280,935 $54,537,725 =========== =========== =========== =========== Held to maturity: U.S. Government obligation $ 3,013,473 $ - $ 25,283 $ 2,988,190 U.S. Government agencies and corporations 28,841,901 - 1,845,686 26,996,215 Mortgage-backed securities 13,743,265 - 513,762 13,229,503 ----------- ----------- ----------- ----------- $45,598,639 $ - $ 2,384,731 $43,213,908 =========== =========== =========== ===========
11 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- U.S. Government agencies and corporations consist of securities issued by single issuers other than the U.S. Government. Those issuers include the Federal Home Loan Bank, the Federal National Mortgage Association, the Federal Home Loan Mortgage Association and other federally sponsored organizations. The amortized cost and estimated market value of investment securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities of certain obligations may differ from contractual maturities because borrowers have the right to call or prepay.
Available for Sale Held to Maturity --------------------------- --------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ----------- ----------- ----------- ----------- Due in one year or less $ 9,023,111 $ 9,124,380 $ - $ - Due after one year through five years 51,826,286 53,016,930 9,125,783 9,133,215 Due after five years through ten years 1,297,005 1,315,499 22,798,230 23,552,533 Due after ten years 281,100 281,100 8,000,065 8,338,321 ----------- ----------- ----------- ----------- $62,427,502 $63,737,909 $39,924,078 $41,024,069 =========== =========== =========== ===========
Proceeds from sales of investment securities during 1995, 1994 and 1993 were $6,632,345, $13,108,090 and $18,953,011, respectively. During 1995, gross gains realized were $23,315 and gross losses realized were $22,534. During 1994, gross gains realized were $138,421 and gross losses realized were $63,359. During 1993, gross gains realized were $718,170 and gross losses realized were $40,625. Investment securities with an amortized cost of approximately $49,400,000 and $44,400,000 at December 31, 1995 and 1994, respectively, were pledged to secure public funds on deposit and for other purposes. During 1994, the Company transferred securities with a fair value of $5,357,472 from its available for sale portfolio to its held to maturity portfolio. The transfer was the result of a strategic decision made in conjunction with the engagement of a new investment advisor, to hold a larger percentage of the Company's securities to maturity. At the time of transfer, the securities had an unrealized loss of $599,596. This unrealized loss is being amortized over the life of the securities transferred, which is approximately nine years. In 1995, the FASB allowed a one-time reassessment of the classifications of all securities held at the time. Accordingly, the Company reclassified $19,491,445 from held to maturity to available for sale and $4,126,119 from available for sale to held to maturity. Securities transferred from the available for sale portfolio to the held to maturity portfolio had an unrealized gain of $308,246 at the time of transfer. The unrealized gain will be accreted over the life of the securities transferred, which is approximately seven years. The "net unrealized gain on investment securities available for sale" included in the stockholders' equity section of the Company's balance sheet as of December 31, 1995, consists of three components: Net unrealized gain on investment securities available for sale, net of deferred income taxes of $515,432 $ 794,975 Net unrealized loss related to investment securities transferred during 1994 from the available for sale portfolio to the held to maturity portfolio, net of deferred income taxes of $192,704 (301,408) Net unrealized gain related to investment securities transferred during 1995 from the available for sale portfolio to the held to maturity portfolio, net of deferred income taxes of $118,357 189,889 --------- $ 683,456 =========
12 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3. Loans The composition of the loan portfolio at December 31 was as follows:
1995 1994 ------------ ------------ Commercial and financial $ 46,708,532 $ 54,780,992 Real estate--mortgage (commercial) 49,351,760 34,191,352 Real estate--mortgage (residential) 57,744,940 47,091,565 Real estate--construction 2,121,433 477,878 Installment and other 4,508,787 4,926,135 ------------ ------------ 160,435,452 141,467,922 Unearned discount (1,621) (9,581) ------------ ------------ $160,433,831 $141,458,341 ============ ============
The Company's loan portfolio included $530,685 of mortgage loans held for sale at December 31, 1995. There were no loans held for sale at December 31, 1994. A substantial portion of the Company's loan portfolio is collateralized by assets in the New England region, most especially Central Massachusetts. While the Company is not overly exposed to credit risk associated with a particular industry, the Company is exposed to geographic trends, both positive and negative. A portion of the risk related to the Company's loans secured by real estate is mitigated by owner occupancy of both residential and commercial properties. Information with respect to nonaccrual loans and troubled debt restructurings at December 31 is as follows:
1995 1994 1993 ----------- ----------- ----------- Nonaccrual loans $ 1,975,690 $ 3,606,869 $ 9,160,078 Troubled debt restructurings accruing interest 1,162,220 979,687 3,268,222 Loans contractually past due 90 days and still accruing interest 40,866 105,022 2,235,211 Interest income that would have been recorded under original terms (for both nonaccrual loans and troubled debt restructurings) 375,188 764,156 1,456,392 Interest income recorded during the period 103,883 220,699 661,898
At December 31, 1995, the recorded investment in loans that are considered to be impaired under SFAS Statement 114 was $9,875,188 (of which $1,635,840 was on a nonaccrual basis). Included in total impaired loans are $6,199,613 of impaired loans with specific valuation allowances aggregating to $2,031,195. All impaired loan relationships in excess of $100,000 were measured using either the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, $1,871,029, or the difference between the fair value of collateral and the recorded amount of the loan, $6,508,247. Impaired loan relationships less than $100,000 totaled $1,495,912. The average recorded investment in impaired loans during the twelve months ended December 31, 1995 was approximately $9,923,618. For the twelve months ended December 31, 1995, the Bank recognized interest income on impaired loans of $877,315. $1,122,744 of interest income would have been recognized under the original terms. Directors and officers of the Company and their associates were customers of, and have transactions with, Safety Fund National Bank in the ordinary course of business. All outstanding loans and commitments are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unrelated persons and do not involve more than normal risk of collectibility or other unfavorable features. Activity regarding loans to related parties during 1995 and 1994 was as follows:
New Loans Balance January 1 and Advances Payments Balance December 31 ----------------- ------------ ---------- ------------------- 1995 $4,213,851 $2,086,374 $ 991,907 $5,308,318 1994 5,384,082 1,567,749 2,737,980 4,213,851
13 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. Allowances for possible losses Activity in the allowances for possible losses for the years ended December 31, 1995, 1994 and 1993 was as follows:
Other Real Loans Estate Owned Total ----------- ------------ ----------- Balance, January 1, 1993 $ 3,811,784 $ 65,000 $ 3,876,784 Provision 8,283,372 139,313 8,422,685 Charge-offs (4,482,664) (181,313) (4,663,977) Recoveries 127,000 - 127,000 ----------- ----------- ----------- Balance, December 31, 1993 7,739,492 23,000 7,762,492 Provision 2,199,605 165,626 2,365,231 Charge-offs (4,100,307) (146,626) (4,246,933) Recoveries 578,617 - 578,617 ----------- ----------- ----------- Balance, December 31, 1994 6,417,407 42,000 6,459,407 Provision 1,300,000 31,236 1,331,236 Charge-offs (922,685) (73,236) (995,921) Recoveries 555,428 - 555,428 ----------- ----------- ----------- Balance, December 31, 1995 $ 7,350,150 $ - $ 7,350,150 =========== =========== ===========
5. Premises and equipment The composition of premises and equipment at December 31 was as follows:
1995 1994 Estimated Life ------------ ------------ -------------- Premises $ 11,186,777 $ 11,601,270 3-50 years Equipment 5,750,681 6,606,042 3-15 years ------------ ------------ 16,937,458 18,207,312 Less accumulated depreciation and 7,298,862 7,365,277 amortization ------------ ------------ $ 9,638,596 $ 10,842,035 ============ ============
During 1995, events occurred which caused the Company to consider one of its buildings to be impaired. Due to the re-engineering of a local highway's ramp system, the accessibility of this branch will be significantly impaired during 1996. The Company intends to close and sell the branch during 1996 and relocate to a suitable location in the local market area. Accordingly, in 1995 the Company recorded an impairment write-down of $344,765 which is reflected in the consolidated statement of operations. The $344,765 write-down represents the difference between the property's carrying value and its fair market value based on an independent appraisal performed during the fourth quarter of 1995. In 1993, the Company transferred a parcel of property from other real estate owned to bank premises. The carrying value of this property at the time of transfer was $5,098,745. The property is a commercial building in downtown Fitchburg that houses certain operational activities of the Company and is available for lease to tenants on a long-term basis. The Company occupies certain premises under noncancellable operating leases which expire at various dates through 2119. Aggregate minimum future rental commitments under noncancellable operating leases as of December 31, 1995 are as follows:
1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- $241,000 $218,000 $141,000 $108,000 $42,000
Some of the leases for premises include options to renew for periods ranging from 5 to 15 years and some leases include an option to cancel at the end of 10 and 20 years. Total rent expense for premises and equipment charged to operations were approximately $245,000, $207,000 and $165,000 during 1995, 1994 and 1993, respectively. 14 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. Deposits The composition of deposits at December 31 was as follows:
1995 1994 ------------ ------------ Interest bearing: NOW and money market deposits $ 76,781,029 $ 72,748,225 Savings deposits 24,226,320 22,560,457 Time certificates of deposit in denominations of $100,000 or more 11,873,458 10,263,383 Time deposits 72,016,655 64,321,284 ------------ ------------ Total interest bearing 184,897,462 169,893,349 Noninterest bearing demand 67,891,000 65,581,158 ------------ ------------ $252,788,462 $235,474,507 ============ ============
7. Securities sold under repurchase agreements The Company sells securities under open-ended repurchase agreements with certain customers and institutions. The principal balance of the repurchase agreements may change daily. Specific securities are not sold and securities are not transferred to the name of the other party. Instead, the party has an interest in a portion of the securities held in the Company's investment portfolio in safekeeping. Amounts outstanding at December 31, 1995, 1994 and 1993 carried various maturity dates of 90 days or less. U.S. Government and agency securities with a total book value of $25,142,000, $25,271,000, and $18,757,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 1995, 1994 and 1993, respectively. The approximate market values of the collateral at those dates were $26,650,000, $24,025,000, and $19,542,000, respectively. Information concerning securities sold under repurchase agreements at December 31 was as follows (dollars in thousands):
1995 1994 1993 ------- ------- ------- Average rate at December 31 4.09% 4.52% 1.94% Average rate during the year 3.97 3.33 2.13 Average balance outstanding during the year $11,686 $ 9,227 $ 9,282 Maximum amount outstanding at any month-end 15,389 15,637 10,264 Amount outstanding at December 31 11,120 15,637 7,444
15 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. Income taxes As discussed in Note 1, the Company adopted SFAS 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes of $180,000 was determined as of January 1, 1993 and is reported separately in the consolidated statement of operations for the year ended December 31, 1993. Prior years' financial statements have not been restated to apply the provisions of SFAS 109. Income tax expense (benefit) consisted of the following for the years ended December 31:
1995 1994 1993 ----------- ----------- ----------- Current income tax expense (benefit): Federal $ 710,607 $ (156,482) $ (226,926) State 376,442 (55,874) 20,300 ----------- ----------- ----------- Total current income tax expense (benefit) 1,087,049 (212,356) (206,626) ----------- ----------- ----------- Deferred income tax expense (benefit): Federal (14,024) 169,345 (1,460,953) State (167,025) (118,031) 257,579 Change in valuation allowance (200,000) 238,242 - ----------- ----------- ----------- Total deferred income tax expense (benefit) (381,049) 289,556 (1,203,374) ----------- ----------- ----------- $ 706,000 $ 77,200 $(1,410,000) =========== =========== ===========
A reconciliation of the Company's income tax provision to the federal statutory rate is as follows:
1995 1994 1993 ----- ----- ----- Expected income tax expense (benefit) at federal statutory rate 34.00% 34.00% (34.00%) State income taxes, net of federal income tax benefit 5.40 (48.79) 4.23 Tax exempt interest, net (7.04) (55.21) (3.85) Change in valuation allowance (7.82) 101.34 - Other, net 3.05 1.47 1.12 ----- ----- ----- Income tax expense (benefit) attributable to continuing operations 27.59% 32.81% (32.50%) ===== ===== =====
16 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1995 1994 ----------- ----------- Deferred income tax assets: Allowance for possible loan losses $ 2,347,450 $ 1,976,050 Alternative minimum tax credit carryforward 281,999 663,971 Unrealized loss on investment securities available for sale - 956,033 State net operating loss carryforward 260,700 244,421 Branch impairment write-down 143,888 - Employee benefits - 20,943 Other 84,935 29,656 ----------- ----------- Total deferred income tax assets 3,118,972 3,891,074 Valuation allowance (499,059) (1,004,761) ----------- ----------- 2,619,913 2,886,313 ----------- ----------- Deferred income tax liabilities: Unrealized gain on investment securities available for sale 441,086 - Depreciation 477,200 484,780 Other 35,828 25,366 ----------- ----------- Total deferred income tax liabilities 954,114 510,146 ----------- ----------- Net deferred income tax asset $ 1,665,799 $ 2,376,167 =========== ===========
The realization of the Company's net deferred tax assets is dependent upon the ability to generate taxable income in future periods. The Company has evaluated the available evidence supporting the realization of its net deferred federal tax asset of $1,457,770 at December 31, 1995, including the amount and timing of future taxable income, and determined it is more likely than not that the asset will be realized. Deferred state tax assets, net of related federal tax, totaled $707,088 at December 31, 1995 and were reduced by a valuation allowance of $499,059. Given the nature of Massachusetts tax laws, the Company believes that uncertainty remains concerning the realization of various state tax benefits. These benefits may, however, be recorded in the future as realized or as it becomes more likely than not, in management's best judgment, that such tax benefits or portions thereof will be realized. The valuation allowance equals the amount of the net deferred income tax asset not recognized in the financial statements. Included in the 1994 valuation allowance of $1,004,761 is $305,701 which was attributable to the unrealized loss on investment securities available for sale and consequently was reflected in the statement of stockholders' equity. The subsequent decrease in the unrealized loss on investment securities classified as available for sale resulted in a decrease in the related deferred income tax asset and the related valuation allowance was reduced and recorded in stockholders' equity. Any other changes in the valuation allowance resulting from changes in circumstances that cause a change in judgment about the realizability of deferred income tax assets are recorded in the statement of operations. 17 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. Regulatory matters Following the 1992 examination by the Office of the Comptroller of the Currency, the Bank entered into an informal Memorandum of Understanding. The Memorandum related to certain aspects of the Bank's operations, including asset quality monitoring and other administrative matters. During the third quarter of 1995, the Bank was subject to a regular safety and soundness examination by the Office of the Comptroller of the Currency. The Bank was notified that, as a result of that examination, the OCC removed the Memorandum of Understanding. The Company and the Bank are subject to capital adequacy standards. Although the Company's capital position is in full compliance with applicable regulatory guidelines, the Office of the Comptroller of the Currency has requested that the Bank endeavor to maintain a leverage ratio of at least 6% and the Board of Directors has adopted a resolution to that effect. 10. Employee benefits The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's highest five years of compensation. 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 accumulated benefits earned attributed to service but also for those expected to be earned in the future. The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheets at December 31.
1995 1994 ---------- ---------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,498,297 ($1,346,197 in 1994) $1,652,707 $1,417,594 ========== ========== Projected benefit obligation for service rendered to date $2,493,754 $2,278,096 Plan assets at fair value (primarily U.S. Government obligations and various stocks and bonds) 1,978,824 1,409,151 ---------- ---------- Projected benefits in excess of plan assets (514,930) (868,945) Unrecognized net asset at December 31, being recognized over 12 years (75,952) (98,884) Unrecognized net loss from past experience different from that assumed 616,081 918,291 ---------- ---------- Prepaid (accrued) pension cost $ 25,199 $ (49,538) ========== ==========
Assumptions used in determining the actuarial present value of the projected benefit obligation as of December 31 are as follows:
1995 1994 1993 ----- ----- ----- Discount rate 7.50% 8.00% 7.50% Rate of increase in future compensation levels 5.00 5.00 5.00
Net periodic pension cost for the years ended December 31 included the following components:
1995 1994 1993 -------- -------- -------- Service cost-benefits earned during the period $187,336 $149,078 $207,777 Interest cost on projected benefit obligation 167,664 176,724 238,432 Actual return on plan assets (327,368) 68,906 (175,082) Net amortization and deferral 213,833 (198,342) (56,788) -------- -------- -------- Net periodic pension cost $241,465 $196,366 $214,339 ======== ======== ========
In addition to the net periodic pension cost stated above, the Company sustained settlement related expenses of $183,423 and $229,525 for 1994 and 1993, respectively. These expenses were the result of lump-sum pension payments made in those years to certain employees who left the Company. There were no settlement related expenses during 1995. 18 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Assumptions used in determining the net pension expense were as follows:
1995 1/1/94-6/30/94 7/1/94-12/31/94 1993 ---- -------------- --------------- ---- Rate of return on plan assets 8.00% 8.00% 8.00% 9.00% Discount rate 8.00 7.50 8.00 8.00 Rate of increase in future compensation levels 5.00 5.00 5.00 5.00
A 401(k) plan is available to employees offering a program of savings and investment by their contributions and those of the Company. The cost to the Company was approximately $97,000 in 1995 and $47,000 in 1994 and 1993. The Company's contribution is made on a discretionary basis. The Company does not maintain any formalized post-retirement benefit plans other than the pension plan described above. The Company had previously adopted a stock plan ("Old Plan") which expired in March 1994. Options to purchase 3,600 shares of common stock remained outstanding under the Old Plan at December 31, 1995 and options for 3,600 shares were exercised during 1995 at $10.55 per share. Options for 27,300 shares were cancelled during 1994. There were no options granted during 1994 or 1993. During 1994, as part of a settlement with the former chief executive officer, the Company agreed to extend to December 31, 1994 the date for exercise of 38,160 options which were previously reported in 1993 as cancelled options. The revised amount cancelled in 1993 is 24,990. During 1994, options for 51,840 shares were exercised at prices between $8.21 and $10.55 per share. During 1994, the Company adopted an incentive stock option plan ("New Plan") under which 150,000 shares were reserved for issuance. Options are granted at the fair market value as of the date of the grant. The options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date they are granted. During 1995, options to purchase 23,250 shares were granted under the New Plan (16,500 during 1994). At December 31, 1995, there were 110,250 shares remaining for issuance under the New Plan. At December 31, 1995, options for 3,600 shares under the Old Plan and 39,750 shares under the New Plan were outstanding. Such options are exercisable according to various vesting schedules and expire during years ranging from 1996 to 2005 at the following per share exercise prices:
Number of shares* Options exercisable as of* Per share* subject to option December 31, 1995 exercise price ----------------- --------------------------- -------------- 16,500 11,100 $10.33 3,600 3,600 10.55 7,500 7,500 11.50 15,750 3,150 12.67 ------ ------ 43,350 25,350 ====== ======
* All share amounts and per share prices reflect the November 1995 three-for- two stock split in the form of a stock dividend. 19 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 11. Contingencies The Company is involved in legal proceedings arising in the normal course of business. After reviewing such matters, the Company believes that their resolution will not materially affect its results of operations or financial position. 12. Financial instruments with off-balance sheet risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments primarily consist of commitments to extend credit and standby letters of credit. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to guarantee other customer obligations. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. Collateral typically is obtained based on management's credit assessment of the customer. Loan commitments and standby letters of credit generally have fixed expiration dates or other termination clauses. Some commitments and letters of credit expire without being drawn upon. Accordingly, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company's maximum exposure to credit loss for loan commitments and standby letters of credit outstanding at December 31 were as follows:
Contract Amount ------------------------- 1995 1994 ----------- ----------- Commitments to extend credit: Fixed-rate $ 3,919,255 $ 1,259,500 Adjustable-rate 27,869,221 20,807,392 Standby letters of credit 704,910 883,155
The Company has also sold mortgage loans with recourse in the event of default by the borrower. Loans sold with recourse are accounted for as sales in the accompanying financial statements, with provision made for anticipated possible losses under recourse provisions. At December 31, 1995 and 1994, the outstanding balance of such mortgages was approximately $1,599,000 and $2,100,000, respectively. The Company also services mortgage loans for others without recourse in the event of default. At December 31, 1995 and 1994, the outstanding principal balance on such mortgages was approximately $907,000 and $1,509,000, respectively. The Company's involvement with derivative financial instruments has been limited to an interest rate swap agreement and an interest rate floor agreement used solely for management of interest rate risk. The Company has outstanding a $5,000,000 interest rate swap agreement whereby, for a three year period ending December 1997, the Company receives a fixed payment of 7.95% on the amount of the agreement in exchange for a variable rate payment indexed to the three-month London Interbank Offered Rate (LIBOR) on the same agreement amount. The variable-rate payment on December 31, 1995 was 5.81%. As of December 31, 1995 the Company would have received $254,188 if it had terminated the agreement. The Company has outstanding a $10,000,000 interest rate floor agreement pursuant to which, for a five-year period, ending February 2000, the Company receives an interest payment if the three-month LIBOR declines below 6.25%. This payment would be based upon the rate difference between current LIBOR and 6.25% accrued on the notional value of $10,000,000. The transaction fee paid of $88,000 is currently being amortized over the life of the contract. Included in cash and due from banks are amounts on deposit with the Federal Reserve which are subject to withdrawal restrictions of $2,153,179 for 1995 and $3,822,322 for 1994. 20 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. Parent Company only financial information The following information discloses certain Parent Company only financial information at December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995. Balance Sheets
December 31, -------------------------------- 1995 1994 ------------ ------------ Assets: Cash $ 1,042,819 $ 921,796 Investment in subsidiaries, at equity: Safety Fund National Bank 20,298,146 15,618,823 Safety Fund Realty Corporation 46,095 44,561 Other assets - 67,464 ------------ ------------ Total assets $ 21,387,060 $ 16,652,644 ============ ============ Liabilities and Stockholders' Equity: Liabilities $ - $ - Stockholders' equity: Preferred stock, $10 par value; 100,000 shares authorized, none issued Common stock, $5 par value; 3,200,000 shares authorized, 1,660,665 issued and outstanding in 1995 and 1,657,120 in 1994 8,303,325 5,523,735 Surplus 7,584,846 10,326,436 Retained earnings 4,815,433 2,964,004 Net unrealized gain (loss) on investment securities available for sale 683,456 (2,161,531) ------------ ------------ Total stockholders' equity 21,387,060 16,652,644 ------------ ------------ Total liabilities and stockholders' equity $ 21,387,060 $ 16,652,644 ============ ============
21 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Statements of Operations
Years ended December 31, ----------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Income: Dividend from subsidiary bank $ - $ - $ 214,037 Other income 39,285 12,540 9,213 ----------- ----------- ----------- Total income 39,285 12,540 223,250 Expenses 22,266 9,257 4,975 ----------- ----------- ----------- Income before equity in undistributed earnings (losses) of subsidiaries 17,019 3,283 218,275 Equity in undistributed earnings (losses) of subsidiaries 1,835,870 154,765 (3,326,097) ----------- ----------- ----------- Net income (loss) $ 1,852,889 $ 158,048 $(3,107,822) =========== =========== ===========
Statements of Cash Flows
Years ended December 31, ----------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) $ 1,852,889 $ 158,048 $(3,107,822) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Equity in undistributed (earnings) loss of subsidiaries (1,835,870) (154,765) 3,326,097 Net change in other assets and liabilities 67,464 2,200 (31,537) ----------- ----------- ----------- Net cash provided by operating activities 84,483 5,483 186,738 ----------- ----------- ----------- Cash flows used for investing activities: - - - Cash flows used for financing activities: Proceeds from exercise of stock options 38,000 451,502 - Payments in lieu of partial shares related to stock split (1,460) - - Cash dividends paid - - (214,037) ----------- ----------- ----------- Net cash provided (used) by financing activities 36,540 451,502 (214,037) ----------- ----------- ----------- Increase (decrease) in cash 121,023 456,985 (27,299) Cash, beginning of year 921,796 464,811 492,110 ----------- ----------- ----------- Cash, end of year $ 1,042,819 $ 921,796 $ 464,811 =========== =========== ===========
The Parent Company's Statements of Stockholders' Equity are identical to those presented earlier as the Consolidated Statements of Stockholders' Equity. The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the Bank's net profit (as defined) for that year combined with its retained net profits for the preceding two calendar years. 22 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 14. Fair value of financial instruments The following estimates and assumptions were used by the Company in estimating the fair value of its financial instruments where it is practicable to estimate that value: Cash and federal funds sold: Cash and due from banks, together with federal funds sold, have a carrying amount that approximates fair value. Investment securities held to maturity and available for sale: For investment securities, fair values are based on quoted market prices or dealer quotes. Loans: For variable-rate loans that reprice frequently and with no significant credit risk, fair values are based on carrying values. The fair value of other loans is calculated taking into account estimates and assumptions pertaining to expected maturities, prepayment experience, discount rates and credit quality. The estimates and assumptions are derived from the Company's historical experience together with industry-wide trends in order to determine the discounted present value of those loans where no quoted market prices exist. Incremental credit risk for non-performing loans has been considered. Accrued interest receivable and payable: The carrying values for accrued interest receivable and payable approximate fair value because of the short term nature of these financial instruments. Deposits: The carrying value of demand deposits, NOW, savings and money market deposits approximates fair value. The fair value for fixed-rate time deposits is estimated using discounted cash flow methods that apply interest rates currently being offered on time deposits with similar terms of maturity to a schedule of aggregated expected monthly cash outflows on time deposits. Borrowings: The carrying amounts of securities sold under repurchase agreements and other borrowed funds with variable-interest rates or payable in three months or less approximate their fair values. Hedging instruments: For hedging instruments, fair values are based upon quoted market prices or dealer quotes. At December 31, 1995, the Company would have received $254,188 if it had terminated its interest rate swap agreement and $400,000 if it had terminated its interest rate floor agreement. Other off balance-sheet instruments: The fair value of the Company's unused lines of credit, commitments to originate and sell loans and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. At December 31, 1995 and 1994, the Company estimated the fair values of these financial instruments to be immaterial. 23 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The estimated fair values of the Company's financial instruments at December 31 are as follows (in thousands):
1995 1994 ------------------------ ------------------------- Carrying Estimated Carrying Estimated Amounts Fair Value Amounts Fair Value -------- ---------- -------- ---------- Financial assets: Cash and due from banks $13,306 $13,306 $15,224 $15,224 Federal funds sold 2,500 2,500 3,300 3,300 Investment securities available for sale 63,738 63,738 54,538 54,538 Investment securities held to maturity 39,924 41,024 45,599 43,214 Loans, net of allowance for possible loan losses 153,084 153,892 135,041 132,862 Accrued interest receivable 2,474 2,474 2,194 2,194 Financial liabilities: Deposits 252,788 253,280 235,475 233,633 Securities sold under repurchase agreements and other borrowed funds 12,276 12,276 17,980 17,980 Accrued interest payable 462 462 322 322
Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for some of the Bank's financial instruments, fair value estimates are based on judgements regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. 15. Subsequent event During January 1996 the Company announced it had signed a definitive agreement for the merger of the Company into CFX Corporation of Keene, New Hampshire. Upon consummation of the transaction, Safety Fund National Bank, the Company's bank subsidiary, would operate as a subsidiary of CFX. Pursuant to the definitive agreement and in the event that the transaction is accounted for as a pooling-of-interests, each of the outstanding shares of common stock has the potential to be converted into 1.7 shares of CFX's common stock. The actual number of shares of CFX's common stock issuable in the transaction is subject to adjustment based on the average price of CFX common stock for the ten trading days immediately before CFX receives the last regulatory approval required to consummate the transaction. In the event that the average price of CFX common stock is below $12.43, the exchange ratio becomes 1.806 shares; and if the average price of CFX common stock is above $18.65, the exchange ratio becomes 1.629 shares. Safety Fund has the right to terminate the agreement if the average price of CFX common stock is below $11.66 per share unless CFX agrees to increase the exchange ratio. The transaction is expected to be tax free to the holders of Safety Fund common stock and is subject to regulatory approval and the approval of both CFX's and Safety Fund's shareholders. It is anticipated that the transaction will be accounted for by the pooling-of-interests method of accounting. However, if the transaction is required to be accounted for under the purchase method of accounting, the stock exchange ratio would be 1.52 shares, subject to adjustments based on the average price of CFX common stock. The agreement also provides CFX with an option to acquire up to 19.9% of the outstanding Safety Fund common stock under certain circumstances. The parties expect to complete the transaction in the second half of 1996. Separately, the Board of Directors of Safety Fund also approved a shareholder rights plan that is designed to provide protection from a number of tactics that third parties could use to disrupt the proposed merger of CFX and Safety Fund and gain control of Safety Fund without offering a fair price to all shareholders. 24 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Under the rights plan, each Safety Fund shareholder of record as of January 5, 1996, will receive a dividend of one non-voting right for each share of the Company's common stock owned. Initially, the rights are attached to the Company's common shares, are not exercisable and do not represent any significant value to shareholders. The rights become exercisable and valuable if any person (other than CFX Corporation) acquires 15% or more of Safety Fund's common stock. At that time, all holders of Safety Fund common stock (including CFX but excluding any other person acquiring 15% or more of Safety Fund's common stock) will be entitled to purchase common stock at a substantial discount. The exercise of the rights would have a substantial dilutive effect on any person (other than CFX) who acquires 15% or more of Safety Fund's common stock. The Board may redeem the rights at $.01 per right at any time prior to the acquisition by a person or group of beneficial ownership of 15% or more of Safety Fund's common stock. 25 Selected Financial Data - -------------------------------------------------------------------------------- Selected financial data at or for the year ended December 31:
1995 1994 1993 1992 1991 ------------ ------------ ------------ ------------ ------------ Total assets $287,483,252 $271,060,757 $252,090,952 $260,724,939 $270,022,251 Total loans 160,433,831 141,458,341 146,716,400 155,055,551 167,691,752 Total allowance for possible losses on loans and other real estate owned 7,350,150 6,459,407 7,762,492 3,876,784 3,486,393 Total deposits 252,788,462 235,474,507 219,795,972 227,223,162 226,790,111 Securities sold under repurchase agree- ments and other borrowed funds 12,276,415 17,979,602 11,940,665 11,314,851 21,996,097 Total stockholders' equity 21,387,060 16,652,644 19,673,728 21,526,484 20,471,853 Net interest income 13,815,730 12,036,045 12,295,587 12,867,780 12,048,433 Provision for possible loan losses 1,300,000 2,199,605 8,283,372 2,854,818 5,039,362 Other income 4,058,873 3,823,470 4,264,315 4,020,620 5,207,754 Other expense 14,015,714 13,424,662 12,614,352 12,646,270 11,197,607 Net income (loss) 1,852,889 158,048 (3,107,822) 1,046,712 782,218 Weighted average shares outstanding 1,657,420 1,613,466 1,605,281 1,585,589 1,585,480 Income (loss) per share before change in accounting principle $1.12 $.10 $(1.82) $.66 $ .49 Net income (loss) per share 1.12 .10 (1.93) .66 .49 Book value per share 12.88 10.05 12.26 13.41 12.91 Dividends per share - - .13 .13 .56
Stock Information Stock Information The following table sets forth the range of high bid and low bid quotations in the Over-the-Counter securities market, based on transactions known to management during the year, and the dividends paid on the common stock of the Company for each quarter in 1995 and 1994 (adjusted for 1995 stock split).
1995 High bid Low bid Dividend paid ----------- -------- ------- ------------- 1st quarter $12.67 $10.33 $ - 2nd quarter 14.00 12.67 - 3rd quarter 15.33 13.33 - 4th quarter 26.00 15.50 - 1994 High bid Low bid Dividend paid ----------- -------- ------- ------------- 1st quarter $13.33 $12.00 $ - 2nd quarter 12.00 11.33 - 3rd quarter 10.67 9.33 - 4th quarter 10.33 9.33 -
As of February 5, 1996, the approximate number of holders of record of the Company's common stock was 380. 26 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- General The Safety Fund Corporation (the "Company") earned a net profit of $1,852,889 or $1.12 per share for 1995. This performance represents a substantial improvement over 1994, at which time the Company reported a year end net profit of $158,048 or $0.10 per share (adjusted for 1995 stock split in the form of a stock dividend). The improvement in 1995 earnings performance was attributable to a large increase in net interest income and a substantial reduction in the loan loss provision. Net interest income increased $1,779,685 or 14.8% over year-end 1994, primarily due to loan growth and a favorable interest rate environment. The level of nonaccrual loans, troubled debt restructurings accruing interest, other real estate owned and loans contractually past due 90 days and still accruing interest declined by $1,996,272 or 38.2% to $3,228,776. This decline contributed to a reduction in the loan loss provision of $899,605 or 40.9% from $2,199,605 in 1994 to $1,300,000 in 1995. Further reduction in the level of troubled assets remains an important strategic initiative in the coming year. With the quality of the overall loan portfolio improving, management focused on growing the Company during 1995. Total deposits grew $17,313,955 or 7.4%, with the majority of the growth occurring in retail deposits. Total loans grew $18,975,490 or 13.4%, primarily due to more aggressive marketing of our commercial loans, residential real estate loans and home equity lines of credit. The growth in noninterest expense was $591,052 or 4.4%. However, this increase includes a fourth quarter valuation write-down of $344,765 relating to one of the Company's premises. Asset quality Information with respect to nonaccrual and past due loans, other real estate owned and troubled debt restructurings at December 31 is as follows:
1995 1994 1993 ----------- ----------- ----------- Nonaccrual loans $ 1,975,690 $ 3,606,869 $ 9,160,078 Troubled debt restructurings accruing interest 1,162,220 979,687 3,268,222 Loans contractually past due 90 days and still accruing interest 40,866 105,022 2,235,211 Other real estate owned 50,000 533,470 299,673 ----------- ----------- ----------- $ 3,228,776 $ 5,225,048 $14,963,184 =========== =========== ===========
Nonperforming loans, consisting of nonaccrual loans, troubled debt restructuring and loans contractually past due 90 days and still accruing interest, have improved steadily from 10.0% of total loans at December 31, 1993 to 3.3% at December 31, 1994 and to 2.0% at December 31, 1995. Nonperforming loans have also trended down as a percent of the Company's capital plus allowance for possible loan losses. Nonperforming loans were 53.5% of capital plus allowance for possible loan losses at December 31, 1993 and have since been reduced to 20.3% at December 31, 1994 and to 11.1% at December 31, 1995. The decrease in nonaccrual loans was due primarily to the collection of principal on past due accounts and to a return of several loans to accrual status. The decrease in loans past due 90 days and still accruing interest has been brought about through a combination of charge-offs, sales and payoffs. Loans on nonaccrual plus loans past due 90 days and still accruing interest has been reduced from 7.8% of total loans at December 31, 1993 to 2.6% at December 31, 1994 and to 1.3% total loans at December 31, 1995. A substantial portion of the Company's loan portfolio is collateralized by assets in the New England region, especially central Massachusetts. While the Company is not overly exposed to credit risk associated with a particular industry, the Company is exposed to geographic trends, both positive and negative. A portion of the risk related to the Company's loans secured by real estate is mitigated by owner occupancy of both residential and commercial properties. The Company benefited from an improving local economy during 1993 and 1994 which facilitated an improvement in its nonperforming loans with over $1.5 million in loans returned to accrual status during 1995. Recovery in the local economy during these years, however, has generally trailed national economic growth based upon employment information compiled by the U.S. Bureau of Labor Statistics. The Company recognizes a continued slowdown in the regional economy and has considered its potential effect on the quality of the loan portfolio and on the adequacy of the allowance for possible loan losses. Lending policies and procedures were strengthened in 1994. Policies covering commercial loans, commercial real estate, real estate appraisals and nonaccrual were revised. Revisions address loan structure, terms and conditions, analysis of repayment capability and analysis of collateral values and include more detailed and specific instructions and guidelines in areas such as debt service coverage ratios, expanded use of loan covenants and lower individual lending authorities. Changes in senior lending personnel and the addition of credit analysts and a loan workout specialist contributed to the improvement in nonperforming assets. The Bank's risk rating program was revised by adding a watch category and by expanding rating criteria to ensure clarity. Additional training was provided to the lending staff. Training covered several topics including 27 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- cash flow analysis and collateral evaluation. During the period of 1989 through 1993, the Bank's subsidiary, The Lenders/Massachusetts, Inc., originated, packaged and sold (with and without recourse) residential mortgage loans. The Company executed a plan during 1993 and 1994 whereby loans previously sold to investors, with the right of recourse, were repurchased from investors and subsequently sold to a third party, without the right of recourse. During the period 1993 through 1995, net charge-offs related to loans previously sold with recourse and subsequently repurchased were $3.3 million. The provision for possible loan losses related to this subsidiary during the same period was $4.0 million. During 1995, the Company continued to reduce its exposure on loans sold with recourse in the event of default by the borrower from $2,068,732 at December 31, 1994 to $1,598,891 at December 31, 1995. Allowance for possible loan losses The Company recognizes the slowdown in the regional economy and has considered its potential effect on the quality of the loan portfolio and on the adequacy of the allowance for possible loan losses. The allowance for possible loan losses takes into account specific credit reviews, past loan loss experience, current economic conditions and trends, the volume, growth, and composition of the loan portfolio and the Company's nonaccrual loan balances and loans contractually past due 90 days and still accruing interest. The allowance for possible loan losses is the result of calculations in accordance with the Company's reserve methodology. The Company has a grading system whereby loan officers are required to assess the appropriateness of loan gradings and specific reserves on classified loans and report any changes they deem necessary on a quarterly basis. The Company's loan review department, which is independent of the loan origination process, reviews loans on an established cycle to assess the adequacy of specific reserves and the appropriateness of loan gradings as determined by the loan officers. All large nonclassified loans are reviewed annually, at a minimum, or more frequently if warranted as a result of credit deterioration. The grading changes and specific reserves are presented to a committee consisting of members of senior management and then to the Audit Committee of the Board of Directors as part of the process to evaluate the adequacy of the Company's allowance for possible loan losses. Credits on the Company's internal loan "watchlist" are evaluated to estimate potential losses. The total reserves resulting from this analysis are "allocated" reserves. The allocated reserves provided for individual loans are supplemented by an unallocated amount for loan losses. This unallocated amount is determined based on judgments regarding risk of error in the specific allocations as well as an analysis of various components of the loan portfolio, pools of risk, historical loss experience, economic conditions and trends and other factors. The composition of the allowance for possible loan losses at December 31 is as follows:
1995 1994 1993 ---------- ---------- ---------- Commercial and financial $1,401,809 $ 165,931 $2,472,829 Real estate-mortgage 927,846 1,096,913 1,455,785 Installment and other 137,380 9,967 3,728 Past due interest - 40,000 129,500 Unallocated 4,883,115 5,104,596 3,677,650 ---------- ---------- ---------- $7,350,150 $6,417,407 $7,739,492 ========== ========== ==========
The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Activity in the allowance for possible loan losses for the past three years was as follows:
1995 1994 1993 ----------- ----------- ----------- Allowance for possible loan losses, beginning of year $ 6,417,407 $ 7,739,492 $ 3,811,784 Loans charged-off: Commercial and financial 328,708 1,607,140 1,312,831 Real estate--mortgage 582,415 2,454,297 3,148,334 Real estate--construction -- 24,897 16,046 Installment loans to individuals 11,562 13,973 5,453 ----------- ----------- ----------- Total loans charged-off 922,685 4,100,307 4,482,664 ----------- ----------- ----------- Recoveries: Commercial and financial 276,584 217,416 115,394 Real estate--mortgage 276,801 357,007 10,242 Installment loans to individuals 2,043 4,194 1,364 ----------- ----------- ----------- Total recoveries 555,428 578,617 127,000 ----------- ----------- ----------- Net charge-offs 367,257 3,521,690 4,355,664 Provision for possible loan losses 1,300,000 2,199,605 8,283,372 ----------- ----------- ----------- Allowance for possible loan losses, end of year $ 7,350,150 $ 6,417,407 $ 7,739,492 =========== =========== ===========
The Company's allowance for possible loan losses as a percent of nonperforming loans increased from 52.8% at December 31, 1993 to 231.2% at December 31, 1995. During 1993, the Company made a significant provision to its allowance for possible loan losses in conjunction with a strategic decision to reduce aggressively its marginally performing and nonperforming loans. Provisions for 1994 and 1995 were based on management's quarterly analysis of the reserve's adequacy. Included in the analysis is consideration of not only the level of nonperforming loans but also the level of watch list loans and anticipated loan growth. During 1994 and 1995, the Company experienced lower losses than expected and higher recoveries than expected. The Company expects the reduction in charge-offs experienced since 1993 to continue during 1996. A projection of charge-offs is based on estimates and subjective judgements by management and is not necessarily indicative of charge-offs that may actually occur. Watch list loans are loans identified by management to have clearly defined weaknesses and are considered vulnerable to the anticipated regional economic slow down. The rate of reduction of watch list loans has not kept pace with the reduction in nonperforming assets. Included in watch list loans are five loans totaling $4.8 million which are current as to principal and interest but which have collateral values less than existing balances and the borrowers exhibit clearly defined weaknesses. Regulatory matters and capital resources Following the 1992 examination by the Office of the Comptroller of the Currency, Safety Fund National Bank (the "Bank") entered into an informal Memorandum of Understanding. The Memorandum related to certain aspects of the Bank's operations, including asset quality monitoring and other administrative matters. During the third quarter of 1995, the Bank was subject to a regular safety and soundness examination by the Office of the Comptroller of the Currency. The Bank was notified that, as a result of that examination, the OCC removed the Memorandum of Understanding. The Federal Reserve Board has established risk-based standards for measuring capital adequacy for U.S. banking organizations. In general, the standards require banks and bank holding companies to maintain capital based on "risk-adjusted" assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower credit risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments and contingencies. The Federal Reserve Board standards classify capital into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital generally consists of common stockholders' equity and certain preferred stock. Tier 2 capital generally consists of other types of equity instruments and the allowance for loan and lease losses. All banks are required to meet a minimum ratio of 8% of qualifying total capital to risk-adjusted total assets with at least 4% Tier 1 capital. For most banks, including the Company's subsidiary bank, the minimum Tier 1 leverage ratio is to be 3.00% plus an additional cushion of at least 1.00% to 3.00% depending upon risk profiles and other factors. The Office of the Comptroller of the Currency has requested that the Bank endeavor to maintain a leverage ratio of at least 6% and the Board of Directors 29 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- has adopted a resolution to that effect. As shown below, all regulatory ratios exceed the minimum required.
Company Bank --------- -------- Tier 1 Risk-Based Capital Ratio 13.16% 12.46% Total Risk-Based Capital Ratio 14.45 13.76 Leverage Ratio 7.28 6.86
The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the Bank's net profit (as defined) for that year combined with its retained net profits for the preceding two calendar years. Liquidity and interest rate sensitivity management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. As a holding company, the Company's primary sources of liquidity are dividends from the Bank and interest earned on repurchase agreements with the Bank. The Company uses its liquidity to pay cash dividends to shareholders, fund operating expenses and pay income taxes. Marketable investment securities, particularly those of shorter maturities, are a principal source of liquidity for the Bank. Available for sale securities maturing or likely to be called in two years or less amounted to approximately $20.3 million at December 31, 1995, representing 32.5% of the available for sale portfolio. Assets such as federal funds sold and maturing loans are also sources of liquidity. During 1994, the Company transferred securities with a fair value of $5,357,472 from its available for sale portfolio to its held to maturity portfolio. The transfer was the result of a strategic decision, made in conjunction with the engagement of a new investment advisor, to hold a larger percentage of the Company's securities to maturity. At the time of transfer, the securities had an unrealized loss of $599,596. This unrealized loss is being amortized over the life of the securities transferred, which is approximately nine years. In 1995, the FASB allowed a one-time reassessment of the classifications of all securities held at the time. Accordingly, the Company reclassified $19,491,445 from the held to maturity portfolio to available for sale and $4,126,119 from the available for sale portfolio to the held to maturity portfolio. Securities transferred from the available for sale portfolio to the held to maturity portfolio had an unrealized gain of $308,246 at the time of transfer. The unrealized gain will be accreted over the life of the securities transferred, which is approximately seven years. Historically, the overall liquidity of the Company has been enhanced by a high level of core deposits. Maintaining an ability to acquire large denomination time deposits and money fund accounts is a key to assuring liquidity. This involves maintenance of an appropriate maturity distribution of purchased funds as well as diversification of sources through various money markets. During 1995, deposits and securities sold under repurchase agreements increased $12.8 million or 5.1%. During the same period, the Company increased total loans $19.0 million or 13.4% during the period. Management believes the liquidity of the Bank is sufficient to meet future needs. The Bank does not currently accept brokered deposits. Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight federal funds on which rates change daily and loans which are indexed to the base rate differ considerably from longer term investment securities and fixed rate loans. Similarly, time deposits are much more interest sensitive than deposits such as savings accounts. The shorter term interest rate sensitivities are key to measuring the interest sensitivity gap, which is the difference between the total of interest sensitive earning assets and interest bearing liabilities. Generally, a financial institution with an excess of interest sensitive assets would have a higher net interest income in times of increasing market interest rates and lower net interest income in times of decreasing market interest rates. 30 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- The following table shows the interest sensitivity gaps for five different time intervals as of December 31, 1995, based upon the Company's earliest repricing opportunity according to contractual terms. Loan balances do not take into account normal principal amortization or prepayments. During the first 365 days, there is an excess of interest bearing liabilities over interest earning assets.
Interest Rate Sensitivity Gaps as of December 31, 1995 (in millions): 2-90 91-365 1-2 Over 2 Immediate Days Days Years Years Total --------- ------- --------- ------- ------- --------- Interest earning assets: Federal funds sold $ 2.5 $ - $ - $ - $ - $ 2.5 Investment securities available for sale - 2.0 7.0 11.3 42.1 62.4 Investment securities held to maturity - - - - 39.9 39.9 Loans 82.5 0.2 0.6 2.5 74.6 160.4 ------- ------- ------- ------- ------- ------ Total interest earning assets 85.0 2.2 7.6 13.8 156.6 265.2 ------- ------- ------- ------- ------- ------ Interest bearing liabilities: Deposits: Savings, N.O.W. and money market (98.8) (2.5) - - - (101.3) Time - (20.6) (41.6) (15.4) (6.0) (83.6) Securities sold under repurchase agreements (10.3) (0.8) - - - (11.1) Treasury tax and loan notes - (1.2) - - - (1.2) ------- ------- ------- ------- ------- ------ Total interest bearing liabilities (109.1) (25.1) (41.6) (15.4) (6.0) (197.2) ------- ------- ------- ------- ------- ------ Interest sensitivity gap $ (24.1) $ (22.9) $ (34.0) $ (1.6) $ 150.6 $ 68.0 ======= ======= ======= ======= ======= ====== Cumulative gap $ (24.1) $ (47.0) $ (81.0) $ (82.6) $ 68.0 $ - ======= ======= ======= ======= ======= ======
One of the objectives of the Company's asset/liability management strategy is to effectively manage its interest rate sensitivity gap. In 1994, the Company entered into an interest rate swap to manage exposure to interest rate risk. At December 31, 1995, the Company had outstanding a $5,000,000 interest rate swap agreement pursuant to which, for a three year period, ending December 1997, the Company receives a fixed payment of 7.95% on the amount of the agreement in exchange for a variable-rate payment indexed to the three-month London Interbank Offered Rate (LIBOR) on the same agreement amount. The variable-rate payment on December 31, 1995 was 5.81%. During 1995, the Company earned $93,176 net, under this agreement, which is included in interest income. During 1995, the Company entered into an interest rate floor agreement to manage exposure to interest rate risk. At December 31, 1995, the Company had outstanding a $10,000,000 interest rate floor agreement pursuant to which, for a five-year period, ending February 2000, the Company receives an interest payment if the three-month LIBOR declines below 6.25%. This payment would be based upon the rate difference between current LIBOR and 6.25% accrued on the notional value of $10,000,000. The transaction fee paid of $88,000 is currently being amortized over the life of the contract. Interest earned during 1995 totalled $17,569 on this agreement. 31 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- 1995 Compared to 1994 The Company had net income of $1,852,889 ($1.12 per share) in 1995 compared to net income of $158,048 ($.10 per share) in 1994. The following discussion summarizes the major components of the increase in earnings. Net interest income The largest component of the Company's operating income is net interest income. Changes in net interest income generally occur due to fluctuations in the balances and/or mixes of interest earning asset and interest bearing liabilities, and changes in their corresponding interest yields and costs. Changes in nonperforming assets, together with interest lost and recovered on those assets, also impact comparisons of net interest income. Net interest income increased $1,779,685 or 14.8% during 1995 compared to 1994. Growth in earning assets favorably affected the year-to-year comparison as average earning assets in 1995 reached $256.9 million, up $31.2 million or 13.8% from 1994, with growth in average investment securities and federal funds sold accounting for 58.3% of this increase and loans accounting for 41.7%. A portion of the revenue gains generated by asset growth in 1995 was offset by mix and rate changes in the Company's liability structure. Overall, the Company's net yield on interest earning assets increased slightly from 5.3% in 1994 to 5.4% in 1995. Income from interest on loans was higher during 1995 than 1994 by $2,631,378 or 22.2%. During 1995, the Company's average loans outstanding was $153.0 million compared to $140.0 million in 1994. The net growth in the loan portfolio has been accomplished primarily through the origination of residential and commercial mortgage loans. The average yield on loans outstanding increased from 8.5% to 9.5% due to a higher prime lending rate throughout all of 1995 and a lower level of nonaccrual loans during 1995 as compared to 1994. Total interest income from investment securities available for sale and investment securities held to maturity increased $1,496,896 or 28.7% during 1995. The average balance in the overall investment security portfolio increased $18.6 million to 23.1% compared to 1994. The increased portfolio was due primarily to the usage of excess liquidity generated by increased deposits, both interest bearing and noninterest bearing. The average yields on the portfolios increased from 6.5% to 6.8%. Market rates were generally higher during 1995 than 1994 giving the Company the opportunity to reinvest maturity proceeds at higher rates. Interest expense on deposits was also higher during 1995 than 1994 by $2,167,198 or 44.6%. Average interest bearing deposits increased $19.0 million or 11.5%, from $164.7 million in 1994 to $183.7 million in 1995. The increase was primarily in personal certificate of deposit products and a money fund product designed especially for funeral home pre-need arrangements. The Company's average rate paid on interest bearing deposits increased from 3.0% in 1994 to 3.8% during 1995 as overall market rates increased due to Federal Reserve Bank rate tightening and also due to increased competitiveness among financial institutions for deposit customers. Interest expense on borrowed funds also increased by $246,065 due primarily to higher rates and increased issuance of securities sold under repurchase agreements during the period. Provision for possible loan losses The provision for possible loan losses decreased during 1995 as compared to 1994 by $899,605 or 40.9%. The amount provided during the period is the result of applying the Company's allowance methodology and management's assessment as to the adequacy of the allowance. That assessment takes into account specific credit reviews, past loan loss experience, current economic conditions and trends, the volume, growth, and composition of the loan portfolio and the Company's nonaccrual loan balances and loans contractually past due 90 days and still accruing interest. Noninterest income Gains on loans sold were $13,974 during 1995 compared to a net loss of $318,257 during 1994. During 1994 the Company sold several under-performing loans, including a bulk sale at a discount. The 1994 loss included a $300,000 first quarter write-down relating to certain loans which the Company anticipated selling. Other income decreased $180,743 or 21.5% during 1995 as compared to 1994. Other income in 1994, included proceeds from the settlement of a lawsuit in the amount of $134,215. Noninterest expense Salary expense increased $268,315 or 4.6% during 1995 as compared to 1994. The increase was due to severance related costs associated with internal restructuring of $140,401 and increased expenses related to incentive compensation plans of $215,237. Benefit expense decreased during 1995 as compared to 1994 by $130,573 or 8.7%. During 1994, the Company incurred a noncash pension settlement expense of $167,656 relating to former employees who took lump-sum pension distributions during the third quarter of 1994. Occupancy and equipment expenses increased $241,108 or 12.7% during 1995 as compared to 1994. The increase was due primarily to the full-year of operation of two additional branches and also the upgrade of certain computer systems software. Professional fees decreased during 1995 as compared to 1994 by $218,795 or 20.4%. The decrease was due primarily to 32 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- reduced legal, consulting and appraisal expenses associated with troubled assets. Marketing expenses increased during 1995 by $260,955 or 54.7%. The Company initiated several new marketing campaigns during 1995. The Company also increased the frequency of radio and newspaper advertising, and incurred costs associated with product development and production of advertising materials. Deposit insurance expense decreased during 1995 by $208,711 or 38.7%. The Federal Deposit Insurance Corporation reduced its premium on insured deposits as of June 1, 1995. Other real estate owned expense decreased $296,708 or 84.1% due primarily to a decrease in provisions for losses on other real estate owned and the reduced operating expenses associated with fewer properties. Other expense increased during 1995 as compared to 1994 by $345,866 or 23.6%. During the first quarter of 1995, the Company sustained a theft of customer checks being transported from a branch office to the Company's main office. The Company accrued $100,000 which represents the amount not recoverable through insurance claims. Also, the Company incurred increased telephone, automated teller machine, training, supplies and postage charges associated with increased customers and two additional branches operating throughout the 1995 period. During 1995, events occurred which caused the Company to consider one of its buildings to be impaired. Due to the re-engineering of a local highway's ramp system, the accessibility of this branch will be significantly impaired during 1996. The Company intends to close and sell the branch during 1996 and relocate to a suitable location in the local market area. Accordingly, in 1995 the Company recorded an impairment write-down of $344,765 which is reflected in the consolidated statement of operations. The $344,765 write-down represents the difference between the property's carrying value and its fair market value based on an independent appraisal performed during the fourth quarter of 1995. Income tax expense The Company recorded tax expense of $706,000 during 1995 as compared to $77,200 during 1994. The Company's effective tax rate of 27.6% during 1995 was less than the statutory rate due to two primary factors. First, the Company pays a reduced tax because of the Company's investment in tax exempt assets and the use of its Massachusetts security corporation, which is taxed at a preferential state rate. Secondly, the Company reduced the valuation allowance on its deferred tax asset by $200,000 during the period. The effective rate of 32.8% recorded during 1994 was based on an evaluation of the Company's tax history and status of temporary differences. 33 Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- 1994 Compared to 1993 The Company had net income of $158,048 ($.10 per share) during 1994 compared to a net loss of $3,107,822 ($1.93 per share) during 1993. The following discussion summarizes the major components of the change in results. Net interest income The largest component of the Company's operating income is net interest income. Changes in net interest income generally occur due to fluctuations in the balances and/or mixes of interest earning assets and interest bearing liabilities, and changes in their corresponding interest yields and costs. Changes in nonperforming assets, together with interest lost and recovered on those assets, also impact comparisons of net interest income. Net interest income decreased $259,542 or 2.1% during 1994 compared to 1993. A modest decline in earning assets unfavorably affected the year-to-year comparison as average earning assets in 1994 were down $1.1 million compared to 1993. Average loans declined $11.5 million or 7.6% as the Company focused its efforts on reducing marginally performing and nonperforming loans. The average amount of loans on nonaccrual were also higher during 1994. The Company's net yield on interest earning assets also declined slightly from 5.4% in 1993 to 5.3% in 1994. Income from interest on loans was lower during 1994 than 1993 by $1,586,058 or 11.8%. During 1994, the Company's average loans outstanding was $140.0 million compared to $151.5 million in 1993. In addition to the volume decline discussed above, the average yield on loans outstanding decreased from 8.9% to 8.5% due to a higher level of nonaccrual loans during 1994 as compared to 1993. Total interest income from investment securities available for sale and investment securities held to maturity increased $829,776 or 18.9% during 1994. The average balance in the overall investment security portfolio increased $13.2 million or 19.6% compared to 1993. The increased portfolio was due primarily to the usage of excess liquidity generated by increased noninterest bearing deposits and proceeds from loan maturities, payoffs and sales. The average yields on the taxable portfolio remained flat for 1994 and 1993 at 6.5%. Interest expense on deposits was lower during 1994 than 1993 by $649,949 or 11.8%. Average interest bearing deposits decreased $7.0 million or 4.1%, from $171.7 million in 1993 to $164.7 million in 1994. The decrease was primarily in interest bearing demand and savings products. The Company's average rate paid on interest bearing deposits also decreased from 3.2% in 1993 to 3.0% during 1994 as the Company more aggressively managed its deposit pricing. Provision for possible loan losses The provision for possible loan losses decreased during 1994 as compared to 1993 by $6,083,767 or 73.4%. The amount provided during 1994 is the result of applying the Company's reserve methodology and management's assessment as to the adequacy of the reserve. The amount provided in 1993 was in conjunction with the strategic decision to reduce aggressively marginally performing and nonperforming loans and other real estate owned. The Bank's increased reserves helped to facilitate the accelerated disposition of problem assets during 1994. Noninterest income Net losses on loans sold increased $111,840 or 54.2% during 1994 as the Company sold several under-performing loans, including a bulk sale at a discount. The loss included a $300,000 write-down relating to certain loans which the Company anticipated selling. The Company continued to execute the plan started in 1993 whereby loans previously sold to investors, with the right of recourse, were repurchased from investors and subsequently sold to a third party, without the right of recourse. Gains on investment securities sold declined by $602,483. Due to a less favorable market, the Company had substantially less investment security sales during 1994. Other income increased $297,543 or 54.9% due primarily to the settlement of a lawsuit during the third quarter whereby the Company received $134,215, the receipt of a $51,408 distribution from the Company's ATM network and an increase of $59,550 related to a full year of ATM customer fees. Noninterest expense Salary expense increased $644,424 or 12.4% during 1994. The increase was due primarily to severance related items paid to former senior officers and increased personnel in the credit administration and problem loan resolution areas. Professional fees increased $106,088 or 11.0% due primarily to additional legal, appraisal and consulting services relating to loan issues. Other real estate owned, net increased $165,142 or 87.9% due to insurance, real estate taxes and other expenses associated with other real estate owned. Director fees decreased $71,691 or 21.9% due to a reduced annual stipend and a reduction of Board size. Income tax expense Income tax expense was $77,200 for 1994 as opposed to a benefit of $1,410,000 for 1993. The change was largely the result of the Company generating pretax income in 1994 compared to a loss in 1993. See Note 8 for information regarding income tax matters. 34 Supplemental Financial Data - -------------------------------------------------------------------------------- Average balance sheet The following table shows the average assets, liabilities and stockholders' equity for the years ended December 31:
1995 1994 1993 -------------- ------------- ------------- Assets Cash and due from banks $ 13,731,710 $ 14,613,442 $ 14,308,499 Federal funds sold 4,506,849 4,944,658 7,771,917 Investment securities available for sale 59,543,185 56,157,314 - Investment securities held to maturity 39,858,920 24,608,009 67,523,579 Loans, net of unearned discount 152,991,386 139,977,398 151,470,970 Less allowance for possible loan losses (7,088,958) (6,658,664) (3,101,131) -------------- ------------- ------------- Net loans 145,902,428 133,318,734 148,369,839 -------------- ------------- ------------- Premises and equipment, net 10,604,862 11,168,260 11,521,134 Other assets 6,555,786 7,079,677 7,509,089 -------------- ------------- ------------- Total assets $ 280,703,740 $ 251,890,094 $ 257,004,057 ============== ============= ============= Liabilities and stockholders' equity Liabilities: Deposits: Interest bearing deposits $ 183,744,335 $ 164,749,217 $ 171,732,090 Noninterest bearing deposits 62,906,594 57,257,080 50,008,901 -------------- ------------- ------------- Total deposits 246,650,929 222,006,297 221,740,991 Federal funds purchased and securities sold under repurchase agreements 11,685,725 9,226,546 9,282,379 Treasury tax and loan notes 2,002,937 1,690,532 1,958,705 Other liabilities 760,469 785,166 1,562,386 -------------- ------------- ------------- Total liabilities 261,100,060 233,708,541 234,544,461 Total stockholders' equity 19,603,680 18,181,553 22,459,596 -------------- ------------- ------------- Total liabilities and stockholders' equity $ 280,703,740 $ 251,890,094 $ 257,004,057 ============== ============= =============
35 Supplemental Financial Data - -------------------------------------------------------------------------------- Net Interest Income Information The following table shows the average balances and related interest income and expense for the three years ended December 31:
1995 ----------------------------------------------------- Average Interest Average rates balance income/expense earned/paid ------------ -------------- -------------- Loans, net of unearned discount (1,2) $ 152,991,386 $ 14,483,998 9.47% Taxable investment securities 99,402,105 6,709,485 6.75 Federal funds sold 4,506,849 263,506 5.85 ------------- ------------ Total interest earning assets $ 256,900,340 $ 21,456,989 8.35 ============= ============ ---- Interest bearing deposits $ 183,744,335 $ 7,031,330 3.83 Borrowed funds 13,688,662 609,929 4.46 ------------- ------------ Total interest bearing liabilities $ 197,432,997 $ 7,641,259 3.87 ============= ============ ---- Net interest income $ 13,815,730 ============ Net interest rate spread 4.48% ==== Net yield on interest earning assets 5.38% ==== 1994 ----------------------------------------------------- Average Interest Average rates balance income/expense earned/paid ------------ -------------- -------------- Loans, net of unearned discount (1,2) $ 139,977,398 $ 11,852,620 8.47% Taxable investment securities 80,725,939 5,211,519 6.46 Non-taxable investment securities (2) 39,384 1,070 2.72 Federal funds sold 4,944,658 198,832 4.02 ------------- ------------ Total interest earning assets $ 225,687,379 $ 17,264,041 7.65 ============= ============ ---- Interest bearing deposits $ 164,749,217 $ 4,864,132 2.95 Borrowed funds 10,917,078 363,864 3.33 ------------- ------------ Total interest bearing liabilities $ 175,666,295 $ 5,227,996 2.98 ============= ============ ---- Net interest income $ 12,036,045 ============ Net interest rate spread 4.67% ==== Net yield on interest earning assets 5.33% ==== 1993 ----------------------------------------------------- Average Interest Average rates balance income/expense earned/paid ------------ -------------- -------------- Loans, net of unearned discount (1,2) $ 151,470,970 $ 13,438,678 8.87% Taxable investment securities 67,357,894 4,378,284 6.50 Non-taxable investment securities (2) 165,685 4,529 2.73 Federal funds sold 7,771,917 239,417 3.08 ------------- ------------ Total interest earning assets $ 226,766,466 $ 18,060,908 7.96 ============= ============ ---- Interest bearing deposits $ 171,732,090 $ 5,514,081 3.21 Borrowed funds 11,241,084 251,240 2.24 ------------- ------------ Total interest bearing liabilities $ 182,973,174 $ 5,765,321 3.15 ============= ============ ---- Net interest income $ 12,295,587 ============ Net interest rate spread 4.81% ==== Net yield on interest earning assets 5.42% ====
(1) Includes nonaccruing loan balances and interest actually received on such loans. (2) Interest on non-taxable loans and investment securities are not on a tax equivalent basis. The amounts involved are not material. 36 Supplemental Financial Data - -------------------------------------------------------------------------------- Net interest income information (continued) The following tables show the dollar amount of changes in the interest income, interest expense and changes segregated for each category of interest earning asset and interest bearing liability into amounts attributable to changes in volume and changes in rate for the years ended December 31, 1995 and 1994:
1995 vs. 1994 --------------------------------------------------------------- Dollar Changes in Changes in Amount of Volume Rate Changes Inc./(Dec)/(1)/ Inc./(Dec)/(2)/ -------------- ------------- ----------------- Loans, net of unearned discount $ 2,631,378 $ 1,102,285 $ 1,529,093 Taxable investment securities 1,497,966 1,206,480 291,486 Non-taxable investment securities (1,070) (1,070) - Federal funds sold 64,674 (17,600) 82,274 -------------- ------------- -------------- Total interest earning assets 4,192,948 2,290,095 1,902,853 -------------- ------------- -------------- Interest bearing deposits 2,167,198 560,356 1,606,842 Borrowed funds 246,065 92,294 153,771 -------------- ------------- -------------- Total interest bearing liabilities 2,413,263 652,650 1,760,613 -------------- ------------- -------------- Net interest income $ 1,779,685 $ 1,637,445 $ 142,240 ============== ============= ============== 1994 vs. 1993 --------------------------------------------------------------- Dollar Changes in Changes in Amount of Volume Rate Changes Inc./(Dec)/(1)/ Inc./(Dec)/(2)/ -------------- ------------- ----------------- Loans, net of unearned discount $ (1,586,058) $ (1,019,480) $ (566,578) Taxable investment securities 833,235 868,923 (35,688) Non-taxable investment securities (3,459) (3,448) (11) Federal funds sold (40,585) (87,080) 46,495 -------------- -------------- ------------- Total interest earning assets (796,867) (241,085) (555,782) -------------- -------------- ------------- Interest bearing deposits (649,949) (224,150) (425,799) Borrowed funds 112,624 (7,258) 119,882 -------------- -------------- ------------- Total interest bearing liabilities (537,325) (231,408) (305,917) -------------- -------------- ------------- Net interest income $ (259,542) $ (9,677) $ (249,865) ============== ============== =============
NOTE: The change due to the volume/rate variance has been allocated to rate. (1) Change in volume times old interest rate (2) Change in interest rate times old volume 37 Supplemental Financial Data - -------------------------------------------------------------------------------- Maturities and sensitivities of loans to changes in interest rates The maturity schedule for loans, excluding real estate mortgages and installment loans to individuals, at December 31, 1995 is as follows:
Maturities ---------------------------------------------------------------- Within 1 year 1-5 years Over 5 Years Total ------------- ------------- ------------- ------------- Commercial and financial $ 22,095,310 $ 16,586,223 $ 8,026,999 $ 46,708,532 Real estate-construction 481,500 1,255,760 384,173 2,121,433 ------------- ------------- ------------- ------------- $ 22,576,810 $ 17,841,983 $ 8,411,172 $ 48,829,965 ============= ============= ============= =============
The following table is a presentation of commercial, financial and real estate-construction loans at December 31, 1995 due after one year by predetermined and floating interest rates:
Predetermined Floating Rate Rate ------------ ------------- Commercial and financial $ 7,478,912 $ 17,134,310 Real estate-construction 1,033,574 606,359 ------------ ------------- $ 8,512,486 $ 17,740,669 ============ =============
Deposits The following table shows the classification of the Company's consolidated average deposits for 1995, 1994 and 1993:
1995 1994 1993 ------------------------------ ------------------------------ -------------------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------------- ----------- ------------- ----------- ------------- ----------- Noninterest bearing demand $ 62,906,594 - $ 57,257,080 - $ 50,008,901 - Interest bearing demand 49,009,056 1.77% 53,467,906 1.83% 56,194,141 2.42% Savings 51,894,132 3.45 46,279,667 2.48 51,921,941 2.64 Time 82,841,147 5.28 65,001,644 4.20 63,616,008 4.37 ------------- ------------- -------------- $ 246,650,929 3.83 $ 222,006,297 2.95 $ 221,740,991 3.21 ============= ==== ============= ==== ============== ====
The following table sets forth, by time remaining to maturity, time certificates of deposit in amounts of $100,000 or more at December 31:
1995 1994 ------------ ------------- Time remaining to maturity: Three months or less $ 5,147,705 $ 3,708,322 Three to six months 2,974,058 2,773,498 Six to twelve months 1,988,928 1,730,573 More than twelve months 1,762,767 2,050,890 ------------ ------------- $ 11,873,458 $ 10,263,283 ============ =============
38 Board of Directors - -------------------------------------------------------------------------------- WILLIAM E. AUBUCHON, III Chairman and Chief Executive Officer, W.E. Aubuchon Co., Inc. CHRISTOPHER W. BRAMLEY President and Chief Executive Officer, Safety Fund National Bank JOHN R. CLEMENTI President, Plastican, Inc. and Holiday Housewares, Inc. P. KEVIN CONDRON President, Central Supply Company, Inc. BIGELOW CROCKER, Jr. Retired DAVID R. GRENON Chairman of Advisory Board and Assistant Clerk, The Protector Group Insurance Agency, Inc. DONALD L. HALL President, Treasurer and Director, Higley, Hall and Company, Inc. EDWARD H. HALL, Jr. President and Director, National Perforating Corp., Morey Paper Mill Supply Co., Fitchburg Screen Plate Co., Inc. and Monadnock Screen Plate Co., Inc. GEORGE H. HEYWOOD, Jr. Consultant, Heywood-Wakefield JOHN E. HOWARD Managing Partner, William S. Reagan & Company THOMAS P. KELLY President, Thomas P. Kelly & Associates VINCENT J. MARA President Emeritus, Fitchburg State College MICHAEL E. MONTUORI President, Montuori Oil Corp., Montuori Gasoline Stations, Inc., Montuori Oil Delivery, Inc. and Montuori for Tires, Inc. ALLEN I. ROME President, Rome Insurance Agency, Inc. HENRI L. SANS, Jr. Attorney, LeBlanc and Sans J. ROBERT SEDER Partner, Seder & Chandler, Attorneys RICHARD L. YATES Vice President and Controller, Textron, Inc. Director Emeritus R. ALLEN KEYWORTH Officers--The Safety Fund THOMAS P. KELLY Corporation Chairman of the Board P. KEVIN CONDRON Vice Chairman of the Board CHRISTOPHER W. BRAMLEY President and Chief Executive Officer MARTIN F. CONNORS, Jr. Treasurer JOHN E. HOWARD Clerk 1995 Form 10-KSB The 1995 Safety Fund Corporation Form 10-KSB will be sent free of charge to anyone wishing a copy. Written requests should be directed to: Martin F. Connors, Jr., Treasurer, The Safety Fund Corporation, 470 Main Street, Fitchburg, MA 01420 39 Bank Officers - -------------------------------------------------------------------------------- Executive Officer Independent Loan Review CHRISTOPHER W. BRAMLEY A. CATHERINE WENTZELL President and Chief Executive Officer Senior Vice President, Independent Loan Review Administration and Operations MARY U. THIBEAULT MICHAEL A. L'ECUYER Assistant Vice President, Independent Loan Review Vice President, Branch Administration Investment and Trust Services JOSEPH B. RUTH, III STEPHEN R. SHIRLEY Vice President, Retail Delivery Services Senior Vice President and Senior Trust Officer MARY E. HAGERTY PETER C. ARMBRUSTER Assistant Vice President, Operations Vice President and Trust Officer MAUREEN E. LITTLEFIELD STEPHEN T. CARNEY Assistant Vice President, EDP Vice President, Trust Business Development Officer ELAINE A. CASSELS JAMES D. HOHMAN Assistant Vice President, IRA Administration Vice President and Trust Investment Officer Accounting and Finance STEVEN B. KALLOCH MARTIN F. CONNORS, JR. Vice President and Trust Officer Senior Vice President and Chief Financial Officer TIMOTHY J. O'MALLEY MICHAEL F. FULLER Assistant Vice President and Trust Operations Officer Financial Accounting Officer CHRISTOPHER W. McCARTHY JOHN F. RICE Investor Services Manager Accounting Operations Officer Gardner Human Resources JOSEPH G. SOVA JOYCE M. DANIELSON Vice President, Commercial Loans Senior Vice President MAYANK R. DESAI Corporate and Consumer Services-Fitchburg Commercial Loan Officer JAMES C. GARVEY DOROTHY A. YABLONSKI Senior Vice President and Senior Commercial Loan Officer Assistant Vice President and Manager, Pearson Blvd. Office PAUL D. BUTLER Leominster Vice President, Credit Administration PATRICIA K. WRIGHT ROBERT A. GUERTIN Assistant Vice President and Manager, Leominster Office Vice President, Senior Residential Lending Officer DENISE B. CATALDO ROBERT T. LONG Manager, Water Tower Plaza Office Vice President and Senior Credit Officer Lunenburg PHILIP E. PURCELL GIUSEPPE FERACO Vice President, Commercial Loans Manager, Lunenburg Crossing Office DAVID W. RODGERS Westborough Vice President, Asset Evaluation NANCY E. QUICK PAUL A. WOLF, II Assistant Vice President and Manager, Westborough Office Vice President, Commercial Loans Worcester THOMAS J. ALLAIN MICHAEL D. THIBEAULT Assistant Vice President, Commercial Loans Senior Vice President SANDRA J. MACK WILLIAM H. GREENE Assistant Vice President and Manager, Summer Street Office Vice President, Commercial Loans KAREN E. SACCO DANIEL F. SHIMKUS, Jr. Manager, Main Street Office Vice President, Commercial Loans KATHY A. FRIEND MICHAEL A. OLSON Loan Administration Manager Commercial Loan Officer Special Asset Administration LYNNE B. ELLIS DIANE WHITTEN Assistant Vice President and Manager, Brosnihan Square Office Senior Vice President, Loan Resolution PAULINE M. RICE Marketing Assistant Vice President and Manager, Greendale Office CHARLES B. TROCCIA LISA A. QUERCIO Senior Vice President Manager, Southwest Commons Office MARYELLEN MARA Assistant Marketing Manager
40 Safety Fund National Bank The One You've Been Looking For. Worcester Finchburg Gardner Leominster Lunenburg Westborough 791-6271 343-6406 632-1150 537-6426 582-0321 366-7575 Member FDIC/Equal Opportunity Lender/Equal Housing Lender EX-23 7 AUDITORS CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Safety Fund Corporation We consent to incorporation by reference in the registration statements No. 33-65455 and No. 33-19325 on Forms S-8 of The Safety Fund 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 each of the years in the two-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-KSB of The Safety Fund Corporation. KPMG PEAT MARWICK LLP Boston, Massachusetts March 27, 1996 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to incorporation by reference in this Annual Report (Form 10KSB) of The Safety Fund Corporation of our report dated January 28, 1994, included in the 1995 Annual Report to Shareholders of The Safety Fund Corporation. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-19325) pertaining to the 1984 Incentive Stock Option Plan for Key Employees, as adjusted and amended, and in the related Prospectus, and in the Registration Statement (Form S-8 No. 33-65455) pertaining to the 1994 Incentive and Nonqualified Stock Option Plan, as adjusted and amended, and in the related Prospectus, of our report dated January 28, 1994, with respect to the consolidated financial statements of The Safety Fund Corporation incorporated by reference in the Annual Report (Form 10-KSB) for the year ended December 31, 1995. ERNST & YOUNG LLP Boston, Massachusetts March 25, 1996 EX-27 8 ARTICLE 9 FDS
9 12-MOS 12-MOS DEC-31-1995 DEC-31-1994 JAN-01-1995 JAN-01-1994 DEC-31-1995 DEC-31-1994 13,305,505 15,223,830 184,897,462 0 2,500,000 3,300,000 0 0 63,737,909 54,537,725 39,924,078 45,598,639 41,024,069 43,213,908 160,433,831 141,458,341 7,350,150 6,417,407 287,483,252 271,060,757 252,788,462 235,474,507 12,276,415 17,979,602 1,031,315 954,004 0 0 0 0 0 0 8,303,325 5,523,735 13,083,735 11,128,909 287,483,252 271,060,757 14,483,998 11,852,620 6,709,485 5,212,589 263,506 198,832 21,456,989 17,264,041 7,031,330 4,864,132 7,641,259 5,227,996 13,815,730 12,036,045 1,300,00 2,199,605 781 75,062 14,015,714 13,424,662 2,558,889 235,248 2,558,889 235,248 0 0 0 0 1,852,889 158,048 1.12 .10 1.12 .10 9.47 8.47 1,975,690 3,606,869 40,866 105,022 1,162,220 979,687 4,842,081 500,000 6,417,407 7,739,492 922,685 4,100,307 555,428 578,617 7,350,150 6,417,407 7,350,150 6,417,407 0 0 4,883,115 5,104,596
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