[LOGO]
Bank of Northumberland, Incorporated
December 2, 1997
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Bank of Northumberland, Incorporated ("BNI") to be held at the Northumberland
County Historical Society, 86 Back Street, Heathsville, Virginia on December 29,
1997 at 3:00 p.m.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated as of September 26, 1997 (the "Agreement"),
between BNI, Southside Bank ("SSB") and Eastern Virginia Bankshares, Inc.
("EVB"), pursuant to which, among other things, BNI and SSB each will engage in
a Share Exchange with EVB (the "Reorganization"). Under the terms of the
Agreement, each share of common stock of BNI outstanding immediately prior to
consummation of the Reorganization will be exchanged for 1.0 share of EVB Common
Stock. In addition, each share of common stock of SSB outstanding immediately
prior to consummation of the Reorganization will be exchanged for 2.5984 shares
of EVB Common Stock, with cash being paid in lieu of issuing fractional shares.
As a result, BNI's shareholders will receive approximately 2,541,920 shares, or
49.0% of the outstanding shares of EVB Common Stock, and SSB's shareholders will
receive approximately 2,647,375 shares, or 51.0% of the outstanding shares of
EVB Common Stock. Following the Reorganization, BNI and SSB each will continue
to carry on its banking business as a wholly-owned subsidiary of EVB in
substantially the same manner as before the Reorganization.
The exchange of shares (other than for cash in lieu of any fractional
shares) will be a tax-free transaction for federal income tax purposes. Details
of the proposed Reorganization are set forth in the accompanying Joint Proxy
Statement, which you are urged to read carefully in its entirety. Approval of
the Reorganization requires the affirmative vote of more than two-thirds of the
outstanding shares of BNI common stock.
Your Board of Directors unanimously approved the Reorganization and
believes that it is in the best interests of BNI and its shareholders.
Accordingly, the Board unanimously recommends that you VOTE FOR the
Reorganization.
We hope you can attend the Meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. Your vote is important regardless of the number of shares
you own. We look forward to seeing you at the Meeting.
Sincerely,
Lewis R. Reynolds
President and Chief Executive Officer
Route 360, P.O. Box 9
Heathsville, Virginia 22473-0009
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on December 29, 1997 at 3:00 p.m.
A Special Meeting of Shareholders of Bank of Northumberland,
Incorporated ("BNI") will be held on December 29, 1997 at 3:00 p.m. at the
Northumberland County Historical Society, 86 Back Street, Heathsville, Virginia
for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
September 26, 1997, between BNI, Southside Bank ("SSB") and
Eastern Virginia Bankshares, Inc. ("EVB") and a related Plan of
Share Exchange (collectively, the "Reorganization Agreement"),
providing for a Share Exchange between BNI and EVB (the
"Reorganization") upon the terms and conditions therein,
including among other things that each issued and outstanding
share of BNI common stock will be exchanged for 1.0 share of EVB
Common Stock. The Reorganization Agreement also provides for the
simultaneous exchange of 2.5984 shares of EVB Common Stock for
each issued and outstanding share of SSB Common Stock, with cash
being paid in lieu of issuing fractional shares. The
Reorganization Agreement is enclosed with the accompanying Joint
Proxy Statement as Appendix A. Shareholders are entitled to
assert dissenters' rights under Article 15 of the Virginia Stock
Corporation Act, a copy of which is attached to the Joint Proxy
Statement as Appendix B.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed November 21, 1997 as the record date
for the Meeting, and only holders of record of BNI Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
Lewis R. Reynolds
President and Chief Executive Officer
December 2, 1997
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF BANK OF NORTHUMBERLAND, INCORPORATED
RECOMMENDS THAT THE SHAREHOLDERS VOTE TO APPROVE
THE REORGANIZATION AGREEMENT.
<PAGE>
[LOGO]
Southside Bank
December 2, 1997
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Southside Bank ("SSB") to be held at the Operations Center of SSB, 412 Duke
Street, Tappahannock, Virginia on December 29, 1997 at 3:00 p.m.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated as of September 26, 1997 (the "Agreement"),
between SSB, Bank of Northumberland, Incorporated ("BNI") and Eastern Virginia
Bankshares, Inc. ("EVB"), pursuant to which, among other things, SSB and BNI
each will engage in a Share Exchange with EVB (the "Reorganization"). Under the
terms of the Agreement, each share of common stock of SSB outstanding
immediately prior to consummation of the Reorganization will be exchanged for
2.5984 shares of EVB Common Stock, with cash being paid in lieu of issuing
fractional shares. In addition, each share of common stock of BNI outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.0 share of EVB Common Stock. As a result, SSB's shareholders will receive
approximately 2,647,375 shares, or 51.0% of the outstanding shares of EVB Common
Stock, and BNI's shareholders will receive approximately 2,541,920 shares, or
49.0% of the outstanding shares of EVB Common Stock. Following the
Reorganization, SSB and BNI each will continue to carry on its banking business
as a wholly-owned subsidiary of EVB in substantially the same manner as before
the Reorganization.
The exchange of shares (other than for cash in lieu of any fractional
shares) will be a tax-free transaction for federal income tax purposes. Details
of the proposed Reorganization are set forth in the accompanying Joint Proxy
Statement, which you are urged to read carefully in its entirety. Approval of
the Reorganization requires the affirmative vote of more than two-thirds of the
outstanding shares of SSB common stock.
Your Board of Directors unanimously approved the Reorganization and
believes that it is in the best interests of SSB and its shareholders.
Accordingly, the Board unanimously recommends that you VOTE FOR the
Reorganization.
We hope you can attend the Meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. Your vote is important regardless of the number of shares
you own. We look forward to seeing you at the Meeting.
Sincerely,
Thomas M. Boyd, Jr.
President and Chief Executive Officer
307 Church Lane
P.O. Box 1005
Tappahannock, Virginia 22560-1005
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on December 29, 1997 at 3:00 p.m.
A Special Meeting of Shareholders of Southside Bank ("SSB") will be
held on December 29, 1997 at 3:00 p.m., at the Operations Center of SSB, 412
Duke Street, Tappahannock, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
September 26, 1997, between SSB, Bank of Northumberland,
Incorporated ("BNI") and Eastern Virginia Bankshares, Inc.
("EVB") and a related Plan of Share Exchange (collectively, the
"Reorganization Agreement"), providing for a Share Exchange
between SSB and EVB (the "Reorganization") upon the terms and
conditions therein, including among other things that each issued
and outstanding share of SSB common stock will be exchanged for
2.5984 shares of EVB Common Stock, with cash being paid in lieu
of issuing fractional shares. The Reorganization Agreement also
provides for the simultaneous exchange of 1.0 share of EVB Common
Stock for each issued and outstanding share of BNI Common Stock.
The Reorganization Agreement is enclosed with the accompanying
Joint Proxy Statement as Appendix A. Shareholders are entitled to
assert dissenters' rights under Article 15 of the Virginia Stock
Corporation Act, a copy of which is attached to the Joint Proxy
Statement as Appendix B.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed November 21, 1997 as the record date
for the Meeting, and only holders of record of SSB Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
Thomas M. Boyd, Jr.
President and Chief Executive Officer
December 2, 1997
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF SOUTHSIDE BANK
RECOMMENDS THAT THE SHAREHOLDERS VOTE TO APPROVE
THE REORGANIZATION AGREEMENT.
<PAGE>
SOUTHSIDE BANK
AND
BANK OF NORTHUMBERLAND, INCORPORATED
JOINT PROXY STATEMENT
---------
PROSPECTUS
of
EASTERN VIRGINIA BANKSHARES, INC.
INTRODUCTION
This Joint Proxy Statement is being furnished to shareholders of Bank
of Northumberland, Incorporated ("BNI") and shareholders of Southside Bank
("SSB") in connection with the solicitation of proxies by the Board of Directors
of BNI for use at a Special Meeting of Shareholders (the "BNI Meeting") and by
the Board of Directors of SSB for use at a Special Meeting of Shareholders (the
"SSB Meeting"), and any postponements or adjournments of either meeting.
BNI. At the BNI Meeting, shareholders of BNI will be asked to approve
the Agreement and Plan of Reorganization, dated as of September 26, 1997,
between BNI, SSB and Eastern Virginia Bankshares, Inc. ("EVB") and a related
Plan of Share Exchange (collectively, the "Reorganization Agreement"), which
provides for, among other things, the exchange of common stock of BNI ("BNI
Common Stock") for common stock of EVB ("EVB Common Stock") and the exchange of
common stock of SSB ("SSB Common Stock") for EVB Common Stock (the
"Reorganization"). Upon consummation of the Reorganization, each outstanding
share of BNI Common Stock, other than shares as to which dissenters' rights have
been duly exercised, will be exchanged for 1.0 share of EVB Common Stock.
SSB. At the SSB Meeting, shareholders of SSB will be asked to approve
the Reorganization Agreement, which provides for, among other things, the
exchange of SSB Common Stock for EVB Common Stock and the exchange of BNI Common
Stock for EVB Common Stock. Upon consummation of the Reorganization, each
outstanding share of SSB Common Stock, other than shares as to which dissenters'
rights have been duly exercised, will be exchanged for 2.5984 shares of EVB
Common Stock, with cash being paid in lieu of issuing fractional shares.
In order for a shareholder of BNI or a shareholder of SSB to perfect
dissenters' rights, a notice must be sent to BNI or SSB, as the case may be,
before the vote is taken on the Reorganization Agreement at the BNI Meeting or
the SSB Meeting, as the case may be, and the shareholder must not vote in favor
of the Reorganization by proxy or otherwise. See "Summary - The Reorganization -
Rights of Dissent and Appraisal." See "The Reorganization" for a more complete
description of the Reorganization. A copy of the Reorganization Agreement is
enclosed as Appendix A.
This Joint Proxy Statement also serves as the prospectus of EVB
relating to approximately 2,541,920 shares of EVB Common Stock issuable to the
shareholders of BNI upon consummation of the Reorganization and approximately
2,647,375 shares of EVB Common Stock issuable to the shareholders of SSB upon
consummation of the Reorganization.
This Joint Proxy Statement is first being mailed to shareholders of BNI
and SSB on or about December 2, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF EVB COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
The date of this Joint Proxy Statement is December 2, 1997.
<PAGE>
AVAILABLE INFORMATION
BNI is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as administered by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"), and in
accordance therewith files reports, proxy statements and other information with
the Federal Reserve. Copies of such reports, proxy statements and other
information can be obtained from the Federal Reserve at prescribed rates by
addressing written requests for such copies to the Federal Reserve, Records
Office, 20th and C Streets, N.W., Washington, D.C. 20551, or the Federal Reserve
Bank of Richmond, 701 East Byrd Street, Richmond, Virginia 23219.
SSB is subject to the informational requirements of the Exchange Act,
as administered by the Federal Deposit Insurance Corporation (the "FDIC"), and
in accordance therewith files reports, proxy statements and other information
with the FDIC. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the FDIC, at 1776 F
Street, N.W., Room F-643, Washington, D.C. 20006. Copies of such material can
also be obtained from the FDIC at prescribed rates by addressing written
requests for such copies to the FDIC, Registration and Disclosure Section, 550
17th Street, N.W., Washington, D.C. 20429.
EVB is not subject to the informational requirements of the Exchange
Act and, accordingly, does not file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). EVB
has filed with the Commission a Registration Statement on Form S-4, as amended
(the "Registration Statement"), under the Securities Act of 1933, as amended,
with respect to the shares of EVB Common Stock to be issued in connection with
the Reorganization. This Joint Proxy Statement constitutes a part of the
Registration Statement and does not contain all of the information set forth
therein and in the exhibits thereto, certain items of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to EVB and the shares of EVB Common Stock issuable in
the Reorganization, reference is made to the Registration Statement and
amendments and exhibits thereto, which can be inspected and copied at the
offices of the Commission, at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at regional offices of the Commission at the following locations:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60601 and 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Commission maintains a Web site (address:
http://www.sec.gov) that contains the Registration Statement, and other
information regarding registrants, such as EVB, that file electronically with
the Commission.
-------------------------
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Joint Proxy
Statement, and, if given or made, such information or representation should not
be relied upon as having been authorized. This Joint Proxy Statement does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Joint Proxy Statement in any jurisdiction to or from
any person to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. Neither the delivery of this Joint Proxy Statement nor any
distribution of the securities being offered pursuant to this Joint Proxy
Statement shall, under any circumstances, create an implication that there has
been no change in the affairs of EVB, BNI or SSB or the information set forth
herein since the date of this Joint Proxy Statement.
-------------------------
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<PAGE>
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
both BNI and SSB. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressure in the banking industry
increases significantly; (2) changes in the interest rate environment reduce
margins; (3) general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality; (4) changes occur in the regulatory environment; (5) changes
occur in business conditions and inflation; and (6) changes occur in the
securities markets.
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<PAGE>
TABLE OF CONTENTS
Page
Introduction................................................................ 1
Available Information....................................................... 2
Forward-Looking Statements.................................................. 3
Summary
The Companies.......................................................... 5
The Shareholder Meetings............................................... 5
The Reorganization..................................................... 6
Comparative Per Share Information........................................... 10
Selected Financial Information.............................................. 12
BNI Selected Historical Financial Information.......................... 13
SSB Selected Historical Financial Information.......................... 14
BNI and SSB Selected Pro Forma Combined Financial Information.......... 15
The Shareholder Meetings.................................................... 16
The Reorganization.......................................................... 19
Investment Advisor Opinions................................................. 34
Southside Bank.............................................................. 40
Southside Bank Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 43
Shareholder Proposals....................................................... 64
Bank of Northumberland, Incorporated........................................ 65
Bank of Northumberland, Incorporated Management's Discussion
and Analysis of Financial Condition and Results of Operations.......... 69
Shareholder Proposals....................................................... 89
Eastern Virginia Bankshares, Inc............................................ 90
Description of EVB Capital Stock............................................ 94
Comparative Rights of Security Holders...................................... 95
Supervision and Regulation..................................................102
Legal Opinion...............................................................106
Experts ...................................................................106
Pro Forma Combined Financial Information (Unaudited)........................107
Pro Forma Combined Balance Sheets (Unaudited)..........................107
Pro Forma Combined Statements of Income (Unaudited)....................109
Notes to Pro Forma Combined Financial Information (Unaudited)..........114
Appendices
General
A Agreement and Plan of Reorganization...................................A-1
B Excerpts from the Virginia Stock Corporation Act Relating
to Dissenting Shareholders.............................................B-1
Southside Bank
C Southside Bank Financial Statements
(including audited December 31, 1996 Financial Statements
and unaudited September 30, 1997 Financial Statements)............C-1
D Opinion of Austin Financial Services, Inc..............................D-1
Bank of Northumberland, Incorporated
E Bank of Northumberland, Incorporated Financial Statements
(including audited December 31, 1996 Financial Statements
and unaudited September 30, 1997 Financial Statements)............E-1
F Opinion of Crestar Securities Corporation..............................F-1
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<PAGE>
SUMMARY
The following summary is not intended to be complete and is qualified
in its entirety by the more detailed information and financial statements
contained elsewhere in this Joint Proxy Statement, including the Appendices
hereto and the documents incorporated herein by reference.
THE COMPANIES
EVB. EVB was incorporated under Virginia law on September 5, 1997. It
has no material assets or liabilities and has not conducted any business. Prior
to the Effective Date of the Reorganization, EVB will not acquire any material
assets, incur any material liabilities or conduct any business, except to
perform its obligations under the Reorganization Agreement. EVB has one share of
stock issued and outstanding, held by a nominee shareholder solely to facilitate
the Reorganization. Accordingly, there currently is no market price for EVB
Common Stock.
The Board of Directors of EVB consists of nine individuals, five of
whom are Directors of SSB and four of whom are Directors of BNI. All of the
executive officers of EVB also are either officers of SSB or BNI.
SSB. SSB is a Virginia-chartered bank headquartered in Tappahannock,
Virginia, and operates eight banking offices offering a full range of banking
services to individuals and small businesses. Its trade area covers the Virginia
counties of Essex, Richmond, Middlesex, King and Queen, King William, Caroline,
Hanover and Gloucester. SSB was founded in 1910. At September 30, 1997, SSB had
total assets of $185.7 million, deposits of $164.5 million, and total
stockholders' equity of $18.3 million. SSB's principal executive offices are
located at 307 Church Lane, Tappahannock, Virginia 22560 and its telephone
number is (804) 443-4333. See "Southside Bank," and "Southside Bank Management's
Discussion and Analysis of Financial Condition and Results of Operation."
BNI. BNI is a Virginia-chartered bank and member of the Federal Reserve
System. BNI is headquartered in Heathsville, Virginia, and operates three
banking offices that provide commercial and consumer banking services. Its trade
area covers the Virginia counties of Northumberland, Lancaster, Richmond and
Westmoreland. At September 30, 1997, BNI had total assets of $133.6 million,
deposits of $112.5 million, and stockholders' equity of $20.4 million. The
principal executive offices of BNI are located at Route 360, P.O. Box 9,
Heathsville, Virginia 22473-0009, and its telephone number is (804) 580-3621.
See "Bank of Northumberland, Incorporated" and "Bank of Northumberland,
Incorporated Management's Discussion and Analysis of Financial Condition and
Results of Operation."
THE SHAREHOLDER MEETINGS
EVB. The sole shareholder of EVB has approved the Reorganization
Agreement.
SSB. The SSB Meeting will be held at the Operations Center of SSB, 412
Duke Street, Tappahannock, Virginia on December 29, 1997 at 3:00 p.m. Only
holders of record of SSB Common Stock at the close of business on November
21, 1997, will be entitled to vote at the SSB Meeting. See "The Shareholder
Meetings - The SSB Meeting."
BNI. The BNI Meeting will be held at the Northumberland County
Historical Society, 86 Back Street, Heathsville, Virginia on December 29, 1997
at 3:00 p.m. Only holders of record of BNI Common Stock at the close of business
on November 21, 1997, will be entitled to vote at the BNI Meeting. See "The
Shareholder Meetings The BNI Meeting."
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<PAGE>
THE REORGANIZATION
At the effective date of the Reorganization, each outstanding share of
SSB Common Stock, except for shares as to which dissenters' rights have been
duly exercised, shall be exchanged for 2.5984 shares of EVB Common Stock and
cash in lieu of any fractional share (the "SSB Exchange Ratio"), and each
outstanding share of BNI Common Stock, except for shares as to which dissenters'
rights have been duly exercised, shall be exchanged for 1.0 share of EVB Common
Stock (the "BNI Exchange Ratio"). As a result, SSB's shareholders will receive
approximate 2,541,920 shares of EVB Common Stock (or 51.0% of the outstanding
shares of EVB Common Stock), and BNI's shareholders will receive approximately
2,647,375 shares of EVB Common Stock (or 49.0% of the outstanding shares of EVB
Common Stock). EVB will then serve as the parent bank holding company for both
SSB and BNI, both of which will continue to carry on their respective banking
business in substantially the same manner as before the Reorganization and with
no change in their respective names or management.
Recommendation of the Board of Directors
SSB. The Board of Directors of SSB has unanimously approved the
Reorganization, including the Reorganization Agreement. The Board of Directors
believes that the Reorganization is fair to and in the best interests of
shareholders of SSB and recommends a VOTE FOR the Reorganization. Holders of
voting stock of SSB should be aware that certain members of SSB's Board of
Directors and senior management have certain interests in the Reorganization
that are in addition to the interests of stockholders of SSB generally. The
potential shares of EVB Common Stock that the SSB directors and executive
officers may receive in aggregate pursuant to the Reorganization are 132,071
shares. See "The Reorganization - Interest of Certain Persons in the
Reorganization."
BNI. The Board of Directors of BNI has unanimously approved the
Reorganization, including the Reorganization Agreement. The Board of Directors
believes that the Reorganization is fair to and in the best interests of
shareholders of BNI and recommends a VOTE FOR the Reorganization. Holders of
voting stock of BNI should be aware that certain members of BNI's Board of
Directors and senior management have certain interests in the Reorganization
that are in addition to the interests of stockholders of BNI generally. The
potential shares of EVB Common Stock that the BNI directors and executive
officers may receive in aggregate pursuant to the Reorganization are 488,680
shares. See "The Reorganization - Interest of Certain Persons in the
Reorganization."
EVB. The Board of Directors and the sole shareholder of EVB have
unanimously approved the Reorganization, including the Reorganization Agreement.
Opinion of Financial Advisor
SSB. Austin Financial Services, Inc. has served as financial advisor to
SSB in connection with the Reorganization and has rendered its opinion to the
Board of Directors of SSB that, as of the date of this Joint Proxy Statement and
on the basis of the matters referred to herein, the consideration to be received
pursuant to the Reorganization Agreement is fair, from a financial point of
view, to the SSB shareholders. A copy of the opinion of Austin Financial
Services, Inc. is attached as Appendix D to this Joint Proxy Statement and
should be read in its entirety for information with respect to the assumptions
made and other matters considered by Austin Financial Services, Inc. in
rendering its opinion. See "The Reorganization - Opinion of Financial Advisor of
SSB."
BNI. Crestar Securities Corporation has served as financial advisor to
BNI in connection with the Reorganization and has rendered its opinion to the
Board of Directors of BNI that, as of the date of this Joint Proxy Statement and
on the basis of the matters referred to herein, the consideration to be received
pursuant to the Reorganization Agreement is fair, from a financial point of
view, to the BNI shareholders. A copy of the opinion of Crestar Securities
Corporation is attached as Appendix F to this Joint Proxy Statement and should
be read in its entirety for information with respect to the assumptions made and
other
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<PAGE>
matters considered by Crestar Securities Corporation in rendering its opinion.
See "The Reorganization - Opinion of Financial Advisor of BNI."
Vote Required
SSB. Approval of the Reorganization requires the affirmative vote of
the holders of more than two-thirds of the outstanding shares of SSB Common
Stock. As of the record date for the SSB Meeting, directors and executive
officers of SSB and their affiliates owned beneficially an aggregate of 50,828
shares of SSB Common Stock, or approximately 5.0% of the shares of SSB Common
Stock outstanding on such date. The directors and executive officers of SSB have
indicated their intention to vote their shares of SSB Common Stock in favor of
the Reorganization. See "The SSB Meeting - Vote Required."
BNI. Approval of the Reorganization requires the affirmative vote of
the holders of more than two-thirds of the outstanding shares of BNI Common
Stock. As of the record date for the BNI Meeting, directors and executive
officers of BNI and their affiliates owned beneficially an aggregate of 488,420
shares of BNI Common Stock, or approximately 19.2% of the shares of BNI Common
Stock outstanding on such date. The directors and executive officers of BNI have
indicated their intention to vote their shares of BNI Common Stock in favor of
the Reorganization. See "The BNI Meeting - Vote Required."
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of SSB and BNI, and the applications of EVB to acquire SSB and BNI
pursuant to the Reorganization are approved by the Federal Reserve and the
Virginia State Corporation Commission (the "SCC"), and other conditions to the
Reorganization are satisfied (or waived to the extent permitted by applicable
law), the Reorganization will be consummated and effected on the date and at the
time set forth in Certificates of Share Exchange issued by the SCC pursuant to
the Virginia Stock Corporation Act (the "Effective Date"). The Reorganization
Agreement provides that the acquisitions of both SSB and BNI by EVB will become
effective at the same time. Unless EVB acquires both SSB and BNI, it will not
acquire either SSB or BNI. If the Reorganization is approved by the shareholders
of SSB and BNI, the Federal Reserve and the SCC, it is anticipated that the
Effective Date will be on or about December 31, 1997, or as soon thereafter as
practicable. Under the Reorganization Agreement, either party may terminate the
agreement if the transaction is not consummated by March 31, 1998.
Management and Operations After the Reorganization
On the Effective Date, SSB and BNI will become bank subsidiaries of
EVB, which will then serve as the parent holding company for both SSB and BNI
and will operate under the name "Eastern Virginia Bankshares, Inc." See "The
Reorganization."
The Board of Directors of EVB consists of the following nine
individuals, five of whom are Directors of SSB and four of whom are Directors of
BNI.
Name Affiliation
Robert L. Covington BNI
F.L. Garrett, III SSB
Thomas M. Boyd, Jr. SSB
Lewis R. Reynolds BNI
L. Edelyn Dawson, Jr. BNI
F. Warren Haynie, Jr. BNI
W. Rand Cook SSB
Eric A. Johnson SSB
William L. Lewis SSB
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<PAGE>
The EVB Board of Directors will remain the same after consummation of the
Reorganization. All nine directors will serve as such until the first annual
meeting of EVB's shareholders, or until their successors are elected and
qualify.
The principal executive officers of EVB are Thomas M. Boyd, Jr.,
President and Chief Executive Officer, and Lewis R. Reynolds, Executive Vice
President. Robert L. Covington is Chairman of the Board of EVB, and F.L. Garrett
is Vice Chairman of the Board of EVB. The Boards of Directors, officers and
employees of SSB and BNI will not change as a result of the Reorganization.
Following the Reorganization, SSB and BNI will keep their existing
names and office locations and will continue to carry on their respective
banking businesses in the same manner as before the Reorganization. See "The
Reorganization."
The Bylaws of EVB include several provisions that are intended to
preserve the autonomy of SSB and BNI after the Effective Date, as well as to
preserve the number of Directors of each of SSB and BNI who serve on the Board
of Directors of EVB. The EVB Bylaws provide that in the first five annual
elections of Directors of EVB, beginning in 1998, nominations made by the Board
of EVB will consist of five individuals designated by Directors of EVB who are
also are Directors of SSB and four individuals designated by Directors of EVB
who also are Directors of BNI.
Consistent with the foregoing provision, if a vacancy on the Board of
Directors of EVB arises for any reason before the Annual Meeting of Shareholders
in 2003, the vacancy shall be filled by an individual designated by Directors of
EVB who also are Directors of BNI or an individual designated by Directors of
EVB who also are Directors of SSB, as the case may be, in order that at all
times before the Annual Meeting of Shareholders in 2003, five Directors shall
have been designated by Directors of EVB who also are Directors of SSB and four
Directors shall have been designated by Directors of EVB who also are Directors
of BNI.
The Bylaws of EVB also provide that the affirmative vote of more than a
simple majority of the entire Board of Directors will be required to take
certain actions. So long as the Board of Directors of EVB consists of nine
individuals, at least six votes will be required to (i) amend the Bylaws of EVB,
(ii) submit to the shareholders of EVB any plan of merger or share exchange or
any proposal to dissolve EVB or to sell, lease, exchange or otherwise dispose of
all or substantially all of EVB's property, other than in the usual and regular
course of business; (iii) submit to the shareholders any proposal to change the
name of EVB; (iv) cause SSB or BNI to change its name or amend its Articles of
Incorporation or Bylaws; (v) cause SSB or BNI to appoint, remove or transfer its
Chief Executive Officer; (vi) dispose of any of the stock of SSB or BNI or cause
either of such Banks to dissolve or enter into a plan of merger or share
exchange or to sell, lease, exchange or otherwise dispose of all or
substantially all of its property, other than in the usual and regular course of
business; or (vii) appoint, remove or transfer the Chief Executive Officer of
EVB.
The Bylaws of EVB also provide that the Directors of each of SSB and
BNI shall nominate individuals for election to their respective Boards each
year. The Bylaws of EVB provide that it will not remove any Director of SSB or
BNI or refuse to vote its shares of either of such Bank's common stock in favor
of the election of those nominated unless a Director of either of such Banks
violates a code of conduct that is generally applicable to the Directors of EVB
and its subsidiaries; EVB's Board of Directors determines that either of such
Bank is experiencing business, financial or regulatory difficulties and, as a
result, EVB determines that a change in the Board of Directors of such Bank is
necessary or advisable in order to protect EVB and its investment in such Bank;
or a Director of either of such Banks acts in a manner inconsistent with his
fiduciary duty to such Bank.
Distribution of Stock Certificates and Payment for Fractional Shares
As soon as practicable after the Effective Date, SSB, as the exchange
agent, will mail to each SSB shareholder and each BNI shareholder (other than
dissenting shareholders) a letter of transmittal and
-8-
<PAGE>
instructions for use in order to surrender the certificates which immediately
prior to the Effective Date represented shares of SSB Common Stock or BNI Common
Stock in exchange for certificates representing shares of EVB Common Stock. Cash
(without interest) will be paid to SSB shareholders in lieu of the issuance of
any fractional shares in an amount equal to the fraction of a share of EVB
Common Stock to which such shareholder would otherwise be entitled multiplied by
$12.70. Under the Reorganization Agreement, either party may terminate the
Reorganization Agreement if the transaction is not consummated by March 31,
1998. See "The Reorganization Surrender of Stock Certificates."
Certain Federal Income Tax Consequences
Williams, Mullen, Christian & Dobbins, counsel for EVB, will deliver an
opinion that, among other things, (i) no gain or loss will be recognized by SSB
shareholders and BNI shareholders who receive solely shares of EVB Common Stock
pursuant to the Reorganization, (ii) the aggregate tax basis of EVB Common Stock
received by a SSB shareholder will equal the aggregate tax basis of the SSB
Common Stock surrendered in exchange therefor by such shareholder (reduced by
any amount allocable to fractional share interests for which cash is received),
(iii) the aggregate tax basis of EVB Common Stock received by a BNI shareholder
will equal the aggregate tax basis of the BNI Common Stock surrendered in
exchange therefore by such shareholder, and (iv) the holding period of the EVB
Common Stock received will generally include the holding period of the SSB
Common Stock or BNI Common Stock surrendered if such SSB Common Stock or BNI
Common Stock is held as a capital asset at the Effective Date. For a more
complete description of the federal income tax consequences of the
Reorganization, see "The Reorganization - Certain Federal Income Tax
Consequences." Due to the individual nature of the tax consequences of the
Reorganization, it is recommended that each SSB shareholder and each BNI
shareholder consult his or her own tax advisor concerning the tax consequences
of the Reorganization.
Conditions to Consummation of the Reorganization
Consummation of the Reorganization is subject to various conditions,
including among other matters: (i) receipt of the approval of the shareholders
of SSB and BNI solicited hereby; (ii) receipt of an opinion of counsel as to the
tax-free nature of the Reorganization for shareholders of SSB and BNI (except
for cash received by SSB shareholders in lieu of fractional shares or by SSB
shareholders or BNI shareholders upon the exercise of dissenters' rights); and
(iii) approval of the Federal Reserve under the Bank Holding Company Act of
1956, as amended ("BHC Act"), and the SCC. Substantially all of the conditions
to consummation of the Reorganization may be waived, in whole or in part, to the
extent permissible under applicable law by the party for whose benefit the
condition has been imposed, without the approval of the shareholders of that
party. Shareholder and regulatory approvals, however, may not be waived. See
"The Reorganization - Representations and Warranties;" "Conditions to the
Reorganization" and "The Reorganization - Regulatory Approvals."
The Reorganization Agreement may be terminated and the Reorganization
abandoned notwithstanding shareholder approval (i) by mutual agreement of the
Boards of Directors of EVB, BNI and SSB or (ii) by EVB, BNI or SSB if the
Effective Date has not occurred by March 31, 1998 or if certain specified events
occur. See "The Reorganization - Waivers, Amendment and Termination."
Effects of the Reorganization on the Rights of SSB Shareholders
Upon consummation of the Reorganization, SSB shareholders and BNI
shareholders shall become shareholders of EVB. The rights of the former
shareholders of SSB and BNI, now governed by the Virginia Stock Corporation Act
(the "Virginia SCA"), will continue to be governed by the Virginia SCA after the
Effective Date and the rights of SSB shareholders and BNI shareholders will also
be as provided for under the Articles of Incorporation and Bylaws of EVB. The
provisions of the Articles of Incorporation and Bylaws of EVB differ in certain
material respects from the Articles of Incorporation and Bylaws of SSB and BNI.
See "Comparative Rights of Shareholders."
-9-
<PAGE>
Accounting Treatment
It is intended that the Reorganization will be accounted for as a
pooling of interests. It is intended that EVB will receive a letter from
Deloitte & Touche LLP that the Reorganization will be accounted for as a pooling
of interests, which is a condition to the consummation of that transaction.
Although pooling of interests accounting, like other terms in the Agreement, can
be waived, EVB has indicated that it is unlikely to waive that requirement. If
independent accountants determine that pooling of interests accounting treatment
is not available and both parties agree to waive that term, the Reorganization
would have to be resubmitted to shareholders of BNI and SSB for their approval.
See "The Reorganization - Accounting Treatment."
Rights of Dissent and Appraisal
Each SSB shareholder and each BNI shareholder may dissent from the
Reorganization and is entitled to the rights and remedies of dissenting
shareholders provided in Article 15 of the Virginia SCA, subject to compliance
with the procedures set forth therein, including the right to appraisal of his
or her stock. A copy of Article 15 is attached as Appendix B to this Joint Proxy
Statement and a summary thereof is included under "The Reorganization - Rights
of Dissenting Shareholders."
Markets and Market Prices
Neither SSB Common Stock nor BNI Common Stock is registered on any
exchange, traded in the over-the-counter market, or quoted by The Nasdaq Stock
Market. Both SSB Common Stock and BNI Common Stock have periodically been sold
in a limited number of privately negotiated transactions. Based on information
available to it, SSB believes that the per share selling price of SSB Common
Stock ranged from $28.00 to $34.00 in 1996 and in the first three quarters of
1997. There may, however, have been other transactions at other prices not known
to SSB. Based on information available to it, BNI believes that the per share
selling price of BNI Common Stock ranged from $8.00 to $14.00 in 1996 and in the
first three quarters of 1997. There may, however, have been other transactions
at other prices not known to BNI.
To the best knowledge of SSB, the predominant price at which SSB Common
Stock has traded since year-end 1996 is $33.00 per share. To the best knowledge
of BNI, the predominant price at which BNI Common Stock has traded since
year-end 1996 is $12.50 per share. See "Comparative Stock Prices and Dividends."
No assurance can be given as to the market price or trading value of
EVB Common Stock at or after the Effective Date.
COMPARATIVE PER SHARE INFORMATION
The following unaudited consolidated financial information reflects
certain comparative per share data relating to the Reorganization. The
information shown below should be read in conjunction with the historical
financial statements of BNI and SSB, including the respective notes thereto,
which are included elsewhere in this Joint Proxy Statement or in documents
delivered herewith, and in conjunction with the unaudited pro forma consolidated
financial information appearing elsewhere in this Joint Proxy Statement. See
"Pro Forma Condensed Financial Information."
The following information is not necessarily indicative of the results
of operations or combined financial position that would have resulted had the
Reorganization been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the results of operations in future periods.
The following table presents selected comparative consolidated
unaudited per share information (i) for BNI on a historical basis and on a pro
forma combined basis assuming the Reorganization had been
-10-
<PAGE>
effective during the periods presented and accounted for as a pooling of
interests and (ii) for SSB on a historical basis and on a pro forma equivalent
basis.
SSB AND BNI
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30
For the Year Ended December 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Common Share:
Net Income:
SSB-historical $2.31 $2.51 $2.10 $2.03 $1.81 $1.60
BNI-historical 0.85 0.98 0.78 0.80 0.81 0.78
EVB pro forma combined (1) 0.87 0.97 0.79 0.79 0.75 0.69
SSB pro forma equivalent (2) 2.26 2.52 2.05 2.05 1.95 1.79
BNI pro forma equivalent (2) 0.87 0.97 0.79 0.79 0.75 0.69
Cash Dividends Declared:
SSB-historical $0.16 $0.76 $0.71 $0.70 $0.68 $0.63
BNI-historical 0.18 0.33 0.23 0.21 0.19 0.17
EVB pro forma combined (1) 0.12 0.31 0.25 0.24 0.23 0.20
SSB pro forma equivalent (2) 0.31 0.81 0.65 0.62 0.60 0.52
BNI pro forma equivalent (2) 0.12 0.31 0.25 0.24 0.23 0.20
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31,
Book Value: 1997 1996
---- ----
<S> <C> <C>
SSB-historical $18.67 $16.53
BNI-historical 8.04 7.33
EVB pro forma combined (1) 7.60 6.83
SSB pro forma equivalent (2) 19.75 17.75
BNI pro forma equivalent (2) 7.60 6.83
</TABLE>
- ----------------
(1) Pro forma combined and equivalent amounts represent historical
information adjusted for the SSB Exchange Ratio of 2.5984 shares of EVB
Common Stock for each share of SSB Common Stock, and the BNI Exchange
Ratio of 1.0 share of EVB Common Stock for each share of BNI Common
Stock. The approximate number of EVB shares outstanding for current SSB
and BNI shareholders following consummation will be 2,647,375 and
2,541,920, respectively.
(2) The pro forma equivalent information is computed by multiplying the EVB
pro forma combined information by the exchange ratio of 2.5984 shares
of EVB Common Stock for SSB Common Stock and 1.0 share of EVB Common
Stock for BNI Common Stock.
-11-
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain selected historical financial
information for BNI and SSB and certain unaudited combined pro forma financial
information giving effect to the Reorganization using the pooling of interests
method of accounting. See "The Reorganization - Accounting Treatment." The
selected historical financial information is based on, derived from and should
be read in conjunction with the historical financial statements of BNI and the
historical financial statements of SSB and the respective notes thereto included
elsewhere in this Joint Proxy Statement. See "Available Information". All of the
following selected financial information should be read in conjunction with the
unaudited pro forma combined financial information, including the notes thereto,
appearing elsewhere in this Joint Proxy Statement. See "Pro Forma Combined
Financial Information." The pro forma combined financial information is not
necessarily indicative of the results that actually would have occurred had the
Reorganization been consummated on the dates indicated or that may be obtained
in the future.
-12-
<PAGE>
Bank of Northumberland, Incorporated
Selected Historical Financial Information
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------------ ----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income............ $ 4,104 $ 3,809 $ 5,166 $ 4,642 $ 4,648
Provision for loan losses...... - - 92 252 316
------- -------- -------- ------- -------
Net interest income after provision
for loan losses.............. 4,104 3,809 5,074 4,390 4,332
Noninterest income............. 319 330 435 417 445
Noninterest expense............ 1,588 1,550 2,266 2,279 2,225
------- -------- -------- ------- -------
Income before income taxes..... 2,835 2,589 3,243 2,528 2,552
Income taxes................... 686 625 748 542 524
------- -------- -------- ------- -------
Net income..................... $ 2,149 $ 1,964 $ 2,495 $ 1,986 $ 2,028
======= ======== ======== ======= =======
Per Share Data:
Net income..................... $ 0.85 $ 0.77 $ 0.98 $ 0.78 $ 0.80
Cash dividends................. 0.18 - 0.33 0.23 0.21
Book value at period end....... 8.04 7.41 7.33
Balance Sheet Data:
Total assets................... $ 133,610 $ 128,255 $131,546
Loans, net..................... 79,512 72,959 74,696
Securities..................... 46,486 45,961 49,692
Deposits....................... 112,513 108,715 112,096
Stockholders' equity........... 20,431 18,842 18,621
Average shares outstanding (1). 2,541,920 2,541,920 2,541,920
Performance Ratios (2):
Return on average assets....... 2.17% 2.11% 1.98% 1.67% 1.76%
Return on average equity....... 14.55% 14.47% 13.68% 12.15% 13.39%
Net interest margin (3)........ 4.81% 4.75% 4.76% 4.52% 4.72%
Average loans to deposits...... 69.75% 68.33% 67.61% 69.14% 67.76%
Dividend payout to net income.. 21.30% - 33.62% 29.44% 26.25%
Equity to assets............... 15.29% 14.69% 14.15%
Asset Quality Ratios:
Allowance for loan losses to
period end loans............. 1.56% 1.74% 1.66%
Allowance for loan losses to
nonaccrual loans............. 4.60x 3.02x 3.40x
Nonperforming assets to period
end loans and other real estate
owned........................ 0.55% 0.57% 0.54%
Net chargeoffs to average loans - (0.04)% 0.13%
</TABLE>
- ---------------
(1) The weighted average shares outstanding during 1994 is retroactively
adjusted by a 1994 stock split effected in the form of a stock
dividend.
(2) Annualized for the nine months ended September 30, 1997 and 1996.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
-13-
<PAGE>
Southside Bank
Selected Historical Financial Information
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------------ ----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income............ $6,101 $5,557 $7,480 $6,713 $6,724
Provision for loan losses...... 262 227 345 324 480
------- -------- -------- ------- -------
Net interest income after provision
for loan losses.............. 5,839 5,330 7,135 6,389 6,244
Noninterest income............. 888 756 1,050 1,020 799
Noninterest expense............ 3,522 3,289 4,674 4,494 4,208
----- ----- ----- ----- -----
Income before income taxes..... 3,205 2,797 3,511 2,914 2,835
Income taxes................... 855 684 962 775 768
--- --- --- --- ---
Net income..................... $2,350 $2,113 $2,549 $2,139 $2,066
====== ====== ====== ====== ======
Per Share Data:
Net income..................... $2.31 $2.08 $2.51 $2.10 $2.03
Cash dividends................. 0.16 0.14 0.76 0.71 0.70
Book value at period end....... 18.67 16.57 16.53
Balance Sheet Data:
Total assets................... $185,745 $169,156 $177,182
Loans, net..................... 138,341 129,934 128,008
Securities..................... 32,099 31,531 32,600
Deposits....................... 164,481 151,264 157,765
Stockholders' equity........... 19,020 16,818 16,836
Average shares outstanding..... 1,018,587 1,019,355 1,014,281
Performance Ratios:
Return on average assets....... 1.73% 1.69% 1.49% 1.36% 1.42%
Return on average equity....... 17.49% 17.56% 15.88% 14.90% 15.88%
Net interest margin (1)........ 4.71% 4.76% 5.06% 4.87% 5.26%
Average loans to deposits...... 84.21% 82.50% 80.46% 80.93% 79.78%
Dividend payout to net income.. 6.93% 6.73% 30.28% 33.81% 34.49%
Equity to assets............... 10.24% 9.94% 9.50%
Asset Quality Ratios:
Allowance for loan losses to
period end loans............. 1.86% 1.87% 1.86%
Allowance for loan losses to
nonaccrual loans............. 0.99x 0.80x 0.68x
Nonperforming assets to period
end loans and other real estate
owned........................ 1.88% 2.62% 2.73%
Net chargeoffs to average loans 0.01% 0.32% 0.42%
</TABLE>
- --------------
(1) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
-14-
<PAGE>
Eastern Virginia Bankshares, Inc.
Selected Pro Forma Combined Financial Information
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------------ ----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income............ $10,205 $9,366 $12,646 $11,354 $11,371
Provision for loan losses...... 262 227 437 576 796
--- --- --- --- ---
Net interest income after provision
for loan losses.............. 9,943 9,139 12,209 10,778 10,575
Noninterest income............. 1,207 1,086 1,485 1,437 1,244
Noninterest expense............ 5,110 4,839 6,940 6,773 6,433
----- ----- ----- ----- -----
Income before income taxes..... 6,040 5,386 6,754 5,442 5,386
Income taxes................... 1,541 1,309 1,710 1,317 1,292
----- ----- ----- ----- -----
Net income..................... $4,499 $4,077 $5,044 $4,125 $4,094
====== ====== ====== ====== ======
Per Share Data:
Net income..................... $0.87 $0.79 $0.97 $0.79 $0.79
Cash dividends................. 0.12 0.03 0.31 0.25 0.24
Book value at period end....... 7.60 6.81 6.83
Balance Sheet Data:
Total assets................... $ 319,355 $297,411 $308,728
Loans, net..................... 217,853 196,893 202,704
Securities..................... 78,585 77,492 82,292
Deposits....................... 276,994 259,979 269,862
Stockholders' equity........... 39,120 35,330 35,457
Average shares outstanding..... 5,188,616 5,190,612 5,177,428
Performance Ratios:
Return on average assets....... 1.88% 1.86% 1.69% 1.48% 1.55%
Return on average equity....... 15.38% 16.13% 14.87% 13.56% 14.83%
Net interest margin (1)........ 4.71% 4.76% 4.94% 4.77% 5.11%
Average loans to deposits...... 78.29% 75.44% 75.13% 75.28% 73.64%
Dividend payout to net income.. 13.80% 3.80% 31.96% 31.65% 30.38%
Equity to assets............... 12.26% 11.88% 11.48%
Asset Quality Ratios:
Allowance for loan losses to
period end loans............. 1.75% 1.82% 1.80%
Allowance for loan losses to
nonaccrual loans............. 1.35x 1.09x 0.94x
Nonperforming assets to period
end loans and other real estate
owned........................ 1.30% 1.67% 1.91%
Net chargeoffs to average loans 0.01% 0.19% 0.31%
</TABLE>
- ---------------
(1) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
-15-
<PAGE>
THE SHAREHOLDER MEETINGS
The SSB Meeting
Date, Place and Time. The SSB Meeting will be held at the Operations
Center of SSB, 412 Duke Street, Tappahannock, Virginia on December 29, 1997 at
3:00 p.m.
Record Date. The Board of Directors of SSB has fixed the close of
business on November 21, 1997 as the record date (the "SSB Record Date") for the
determination of the holders of SSB Common Stock entitled to receive notice of
and to vote at the SSB Meeting or any adjournment thereof. At the close of
business on the SSB Record Date, there were 1,018,848 shares of SSB Common Stock
outstanding held by 1,243 shareholders of record.
Vote Required. Each share of SSB Common Stock outstanding on the SSB
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the SSB Meeting. The affirmative vote of the holders of more than
two-thirds of the shares of SSB Common Stock outstanding, as of the SSB Record
Date, in person or by proxy, is required to approve the Reorganization
Agreement.
As of the SSB Record Date, directors and executive officers of SSB and
their affiliates, persons and entities as a group, owned of record and
beneficially a total of 50,828 shares of the Common Stock or approximately 5.0%
of the shares of SSB Common Stock outstanding, on such date. Directors and
executive officers of SSB have indicated an intention to vote their shares of
SSB Common Stock FOR the Reorganization.
A failure to vote, either by not returning the enclosed proxy or by
checking the "abstain" box thereon, will have the same effect as a vote against
approval of the Reorganization Agreement.
A shareholder may abstain or withhold his vote (collectively,
"abstentions") with respect to the Reorganization Agreement. Abstentions will be
counted for purposes of determining the existence of a quorum. Abstentions will
be counted as not voting in favor of the Reorganization Agreement. Since
approval of the Reorganization Agreement requires an affirmative vote of a
specified number of shares outstanding, abstentions will have the effect of a
negative vote with respect thereto.
A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to shareholders without
instructions from the beneficial owner. Where brokers do not have or do not
exercise such discretion, the inability or failure to vote is referred to as a
broker nonvote. Under the circumstances where the broker is not permitted to or
does not exercise its discretion, assuming proper disclosure to SSB of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum, but also will be counted as not voting in favor of
the particular matter. Since the approval of the Reorganization Agreement
requires an affirmative vote of a specified number of shares outstanding, broker
nonvotes, if any, will have the effect of a negative vote with respect thereto.
Voting and Revocation of Proxies. Shareholders of SSB are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
SSB in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by SSB will be voted for approval of
the Reorganization Agreement.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to SSB by executing and delivering a substitute proxy to
SSB or by attending the SSB Meeting and voting in person. If a SSB shareholder
desires to revoke a proxy by written notice, such notice should be mailed or
delivered on or prior to the meeting date to J. Thomas Newman, Southside Bank,
307 Church Lane, P.O. Box 1005, Tappahannock, Virginia 22560-1005. If a proxy is
signed and returned without indicating
-16-
<PAGE>
any voting instructions, shares of SSB Common Stock represented by the proxy
will be voted FOR the Reorganization Agreement.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by SSB by the
time scheduled for the SSB Meeting, the persons named as proxies may propose one
or more adjournments of the SSB Meeting to permit continued solicitation of
proxies with respect to such approval. If an adjournment is proposed, the
persons named as proxies will vote in favor of such adjournment those proxies
that are entitled to be voted in favor of the Reorganization Agreement and
against such adjournment those proxies containing instructions to vote against
approval of the Reorganization Agreement. Abstentions with respect to approval
of the Reorganization Agreement will be voted against such adjournment.
Adjournment of the SSB Meeting will be proposed only if the Board of Directors
of SSB believes that additional time to solicit proxies might permit the receipt
of sufficient votes to approve the Reorganization Agreement, or at the request
of EVB. It is anticipated that any such adjournment would be for a relatively
short period of time, but in no event for more than 120 days. Any shareholder
may revoke such shareholder's proxy during any period of adjournment in the
manner described above.
Solicitation of Proxies. SSB will bear the costs of its solicitation of
proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or
personally by directors, officers and employees at SSB, none of whom will
receive additional compensation for performing such services. SSB and BNI each
shall pay half of the expenses incurred in preparing, printing and mailing the
Joint Proxy Statement.
The Board of Directors of SSB recommends a vote FOR the Reorganization.
The BNI Meeting
Date, Place and Time. The BNI Meeting will be held at the
Northumberland County Historical Society, 86 Back Street, Heathsville, Virginia
on December 29, 1997 at 3:00 p.m.
Record Date. The Board of Directors of BNI has fixed the close of
business on November 21, 1997 as the record date (the "BNI Record Date") for the
determination of the holders of BNI Common Stock entitled to receive notice of
and to vote at the BNI Meeting or any adjournment thereof. At the close of
business on the BNI Record Date, there were 2,541,920 shares of BNI Common Stock
outstanding held by 599 shareholders of record.
Vote Required. Each share of BNI Common Stock outstanding on the BNI
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the BNI Meeting. The affirmative vote of the holders of more than
two-thirds of the shares of BNI Common Stock outstanding, as of the BNI Record
Date, in person or by proxy, is required to approve the Reorganization
Agreement.
As of the BNI Record Date, directors and executive officers of BNI and
their affiliates, persons and entities as a group, owned of record and
beneficially a total of 488,420 shares of the Common Stock or approximately
19.2% of the shares of BNI Common Stock outstanding, on such date. Directors and
executive officers of BNI have indicated an intention to vote their shares of
BNI Common Stock FOR the Reorganization.
A failure to vote, either by not returning the enclosed proxy or by
checking the "abstain" box thereon, will have the same effect as a vote against
approval of the Reorganization Agreement.
A shareholder may abstain or withhold his vote (collectively,
"abstentions") with respect to the Reorganization Agreement. Abstentions will be
counted for purposes of determining the existence of a quorum. Abstentions will
be counted as not voting in favor of the Reorganization Agreement. Since
approval of the Reorganization Agreement requires an affirmative vote of a
specified number of shares outstanding, abstentions will have the effect of a
negative vote with respect thereto.
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A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to shareholders without
instructions from the beneficial owner. Where brokers do not have or do not
exercise such discretion, the inability or failure to vote is referred to as a
broker nonvote. Under the circumstances where the broker is not permitted to or
does not exercise its discretion, assuming proper disclosure to BNI of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum, but also will be counted as not voting in favor of
the particular matter. Since the approval of the Reorganization Agreement
requires an affirmative vote of a specified number of shares outstanding, broker
nonvotes, if any, will have the effect of a negative vote with respect thereto.
Voting and Revocation of Proxies. Shareholders of BNI are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
BNI in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by BNI will be voted for approval of
the Reorganization Agreement.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to BNI by executing and delivering a substitute proxy to
BNI or by attending the BNI Meeting and voting in person. If a BNI shareholder
desires to revoke a proxy by written notice, such notice should be mailed or
delivered on or prior to the meeting date to Lewis R. Reynolds, President and
Chief Executive Officer, Bank of Northumberland, Incorporated, Route 360, P.O.
Box 9, Heathsville, Virginia 22473-0009. If a proxy is signed and returned
without indicating any voting instructions, shares of BNI Common Stock
represented by the proxy will be voted FOR the Reorganization Agreement.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by BNI by the
time scheduled for the BNI Meeting, the persons named as proxies may propose one
or more adjournments of the BNI Meeting to permit continued solicitation of
proxies with respect to such approval. If an adjournment is proposed, the
persons named as proxies will vote in favor of such adjournment those proxies
that are entitled to be voted in favor of the Reorganization Agreement and
against such adjournment those proxies containing instructions to vote against
approval of the Reorganization Agreement. Abstentions with respect to approval
of the Reorganization Agreement will be voted against such adjournment.
Adjournment of the BNI Meeting will be proposed only if the Board of Directors
of BNI believes that additional time to solicit proxies might permit the receipt
of sufficient votes to approve the Reorganization Agreement, or at the request
of EVB. It is anticipated that any such adjournment would be for a relatively
short period of time, but in no event for more than 120 days. Any shareholder
may revoke such shareholder's proxy during any period of adjournment in the
manner described above.
Solicitation of Proxies. BNI will bear the costs of its solicitation of
proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or
personally by directors, officers and employees at BNI, none of whom will
receive additional compensation for performing such services. BNI and SSB each
shall pay half of the expenses incurred in preparing, printing and mailing the
Joint Proxy Statement.
The Board of Directors of BNI recommends a vote FOR the Reorganization.
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THE REORGANIZATION
The following is a summary description of the material terms of the
Reorganization, and is qualified in its entirety by reference to the
Reorganization Agreement which is attached as Appendix A hereto. All holders of
SSB Common Stock or BNI Common Stock are urged to read the Reorganization
Agreement in its entirety.
Background
General. As community banks operating for over the past 80 years in
geographically close markets, SSB and BNI each has generally been aware of the
other's operations and performance. The Presidents of SSB and BNI have known
each other for 15 years. The two banks serve the Northern Neck and Middle
Peninsula markets with no overlapping of branch facilities. SSB's strategic plan
focuses on the expansion of its retail franchise in the Middle Peninsula area.
Over the last ten years, SSB has increased its number of offices from three to
eight locations. With its focus on technological and operational support, SSB
can provide certain functional support to BNI, which enjoys a strong capital
base.
On May 22, 1997, Thomas M. Boyd, Jr., F.L. Garrett, III, and William L.
Lewis from SSB and Robert L. Covington, Lewis R. Reynolds, and Howard R.
Straughan, Jr. from BNI, together with representatives from Crestar Securities
Corporation, BNI's financial advisor and a Richmond, Virginia based investment
banking and brokerage firm and an affiliate of Crestar Financial Corporation
("Crestar Securities"), met to began informal discussions about a possible
"merger of equals" transaction, and, by the beginning of June 1997, the parties
began serious discussions that led to the preparation of a draft letter of
intent outlining the financial and other terms of such a transaction. This same
group, with representatives of Austin Financial Services, Inc., SSB's financial
advisor and a nationally recognized bank consultant firm ("AFSI"), participating
by telephone conference, met again on June 26, 1997 to discuss further the terms
of the letter of intent.
BNI. During the twelve month period leading up to discussions with SSB,
the BNI Board of Directors reviewed and examined the ability of BNI to continue
to grow and successfully compete as an independent institution and the various
strategic alternatives available to BNI. Among the strategic alternatives that
the Board considered were the affiliation of BNI with a larger community-based
institution, a merger of equals transaction, and a policy of internal growth.
The Board retained Crestar Securities to serve as its financial advisor in
connection with this review and long-term planning process.
Initially, BNI engaged in informal preliminary discussions with a
larger community-based institution with respect to a possible affiliation, but
those discussions did not proceed to more formal discussions. The Board then
authorized Crestar Securities to contact two other larger community oriented
institutions to determine their possible interest in pursuing an affiliation
with BNI, but neither of those institutions exhibited strong interest. At that
juncture, the Board of Directors decided to determine whether a small and select
group of institutions would be interested in pursuing a merger of equals
transaction, and at a meeting held on April 23, 1997, the Board of Directors of
BNI authorized representatives of Crestar Securities to contact SSB.
At a meeting of BNI's Board of Directors on July 9, 1997,
representatives of Crestar Securities led a discussion regarding the proposed
terms of a merger of equals transaction between BNI and SSB as set forth in the
proposed letter of intent. The Board continued its consideration of the
transaction at a special meeting on July 11, 1997 with representatives of
Crestar Securities present at the meeting. At that meeting, the Board elected to
defer final action on letter of intent, pending further discussion concerning,
among other issues, the composition of the Board of Directors of the proposed
holding company.
At the suggestion of SSB, the two banks' Boards of Directors met on
July 30, 1997 for further discussion. At that meeting and in subsequent
discussions, the terms of the letter of intent were agreed to,
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and on August 14, 1997, a non-binding letter of intent between BNI and SSB was
executed. At a meeting of BNI's Board of Directors on September 10, 1997,
following a review and discussion of the Reorganization Agreement, the Board
unanimously approved the Reorganization Agreement and authorized the appropriate
officers to sign the Reorganization Agreement on behalf of BNI.
SSB. On June 11, 1997, a special meeting of the Board of Directors of
SSB was called for the purpose of discussing the possibility of affiliating with
BNI. SSB engaged Dr. Douglas Austin, President and CEO of AFSI, to analyze a
possible merger with BNI. Following Dr. Austin's report, the SSB Board of
Directors recommended that Messrs. Garrett and Boyd, SSB's Chairman and
President, respectively, and Mr. Lewis meet with Charles W. Byrd, Jr. of Crestar
Securities and Messrs. Covington and Reynolds, BNI's Chairman and President,
respectively, and Mr. Straughan to discuss the financial and other terms of a
proposed affiliation.
At a special meeting of SSB's Board of Directors on July 7, 1997, Mr.
Boyd apprised the Board of the discussions and meetings with the BNI
representatives. Included in his account were negotiation scenarios with regard
to the composition of a holding company Board of Directors and the financial
terms and conditions of a merger of equals. The Board discussed a merger
proposal in which SSB shareholders would own 51% of the combined entity, and
President Boyd presented a draft letter of intent. No action was taken at the
meeting, and discussions were tabled until a meeting on the following day. On
July 8, 1997, Craig Bernard, a consultant with AFSI, led a discussion regarding
the merger of equals between SSB and BNI. The Board of Directors arrived at a
decision to pursue a transaction that would result in SSB shareholders' owning
51% of the combined equity and SSB directors having a majority of seats on the
Board of Directors of the holding company.
On July 11, 1997, the Chairman and President of SSB recommended that
the two banks' Boards of Directors meet without consultants present for further
discussion. In accordance with this recommendation, entire boards of both banks
met on July 30, 1997. The meeting further convinced all parties that this
affiliation was in the best interests of both institutions, and, on August 14,
1997, a non-binding letter of intent between SSB and BNI was signed. At a
meeting of SSB's Board of Directors on September 11, 1997, following a review
and discussion of the Reorganization Agreement, the Board unanimously approved
the Reorganization Agreement and authorized the appropriate officers to sign the
Reorganization Agreement on behalf of SSB.
Under the proposal, EVB's officers will include Robert L. Covington,
Chairman of BNI, as chairman, and F. L. Garrett, III, Chairman of SSB, as vice
chairman. Thomas M. Boyd, President and Chief Executive Officer of SSB, will
serve in the same capacity for EVB, and Lewis R. Reynolds, President and CEO of
BNI, will be executive vice president.
Reasons for the Reorganization -- BNI
In deciding to enter into the Reorganization Agreement, the BNI Board
considered a number of factors. The BNI Board did not assign any relative or
specific weights to the factors considered. A principal factor that led the BNI
Board to approve the Reorganization was the balanced, merger of equals approach
and the ability of BNI to remain a separate bank under the new holding company
structure with a local Board continuing to manage its affairs. The Board also
considered BNI's future prospects for continued earnings growth in view of its
dominant market position in Northumberland County, its primary market area where
it has a 72% deposit market share based on the most recent June 30, 1996 deposit
data. With operations in a broader geographic market, the Board of Directors
concluded that an affiliation with SSB would enhance future earnings growth
potential and diversify the risks associated with operations in a limited market
area. It would also allow for the more effective deployment of BNI's
historically large capital base. BNI also anticipates that the larger capital
resources and depth of management that would result from the Reorganization will
enable the parties to offer certain customer services, including trust services,
that neither BNI nor SSB offers today. While the realization of cost savings is
not a principal reason for the Reorganization, BNI and SSB do anticipate that
certain efficiencies and economies of scale may be realized over time in areas
such as data processing, loan review, human resources and compliance.
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Other material factors considered were: the exchange ratio offered for
BNI Common Stock; the financial condition and history of performance of SSB; the
well capitalized position and earnings of SSB; and the compatibility of the
managements of the two organizations. The BNI Board believes that the addition
of resources resulting from the Reorganization will enable BNI to provide a
wider and improved array of financial services to consumers and businesses and
to achieve added flexibility in dealing with the changing competitive
environment in their market areas. In addition, the BNI Board believes that the
Reorganization will help provide BNI with the financial resources needed to meet
the competitive challenges arising from recent and anticipated changes in the
banking and financial services industry.
The BNI Board has concluded that the terms of the Reorganization
Agreement, which were determined on the basis of arms-length negotiations, are
fair to BNI shareholders. As explained below, this conclusion is supported by
the opinion of an independent financial advisor. In establishing the Exchange
Ratio, the BNI Board also considered the Exchange Ratio in relation to the
market value and earnings per share of BNI Common Stock and SSB Common Stock;
information concerning the financial condition, results of operations and the
prospects of BNI and SSB; and the tax-free nature of the Reorganization to the
shareholders of BNI to the extent they receive EVB Common Stock in exchange for
their shares of BNI Common Stock.
Following the Effective Date, Messrs. Covington, Reynolds, Dawson and
Haynie, directors of BNI, will continue to serve as directors of EVB. However,
pursuant to the Reorganization Agreement, the directors, officers and employees
of BNI will not change as a result of the Reorganization. The Reorganization
Agreement notwithstanding, EVB will have the power after the Effective Date to
elect the entire Board of Directors of BNI.
The Board of Directors of BNI believes that the Reorganization is in
the best interests of BNI and its shareholders. The BNI directors have all
committed to vote shares under their control in favor of the Reorganization to
the extent of their fiduciary ability. The BNI directors unanimously recommend
that BNI shareholders vote FOR the approval of the Reorganization Agreement.
Reasons for the Reorganization -- SSB
In deciding to enter into the Reorganization Agreement, the SSB Board
considered a number of factors. The SSB Board did not assign any relative or
specific weights to the factors considered. Several factors, however,
predominated. BNI operates north of the Rappahannock River (the "Northern Neck")
where SSB currently has no offices. SSB has considered the Northern Neck an
attractive market, but believes it can be more successful in that area by
combining with BNI, which already has established customer and community
relationships than by de novo branching. Additionally, BNI has excess capital,
which can be used by EVB to help SSB and BNI expand more rapidly in new and
existing markets. SSB also anticipates that the larger capital resources and
depth of management that would result from the Reorganization will enable the
parties to offer certain customer services, including trust services, that
neither SSB nor BNI offers today. While the realization of cost savings is not a
principal reason for the Reorganization, SSB and BNI do anticipate that certain
efficiencies and economies of scale may be realized over time in areas such as
data processing, loan review, human resources and compliance. Other material
factors considered were: the exchange ratio offered for SSB Common Stock; the
financial condition and history of performance of BNI; diversification of risk
associated with ownership of an institution with a broader geographic market
area; the well capitalized position and earnings of BNI; the compatibility of
the managements of the two organizations; and the ability of SSB to remain a
separate entity with a local Board managing its affairs. The SSB Board believes
that the addition of resources resulting from the Reorganization will enable SSB
to provide a wider and improved array of financial services to consumers and
businesses and to achieve added flexibility in dealing with the changing
competitive environment in their market areas. In addition, the SSB Board
believes that the Reorganization will help provide SSB with the financial
resources needed to meet the competitive challenges arising from recent and
anticipated changes in the banking and financial services industry.
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The SSB Board has concluded that the terms of the Reorganization
Agreement, which were determined on the basis of arms-length negotiations, are
fair to SSB shareholders. As explained below, this conclusion is supported by
the opinion of an independent financial advisor. In establishing the SSB
Exchange Ratio, the SSB Board also considered the market value and earnings per
share of SSB Common Stock and BNI Common Stock; information concerning the
financial condition, results of operations and the prospects of SSB and BNI; and
the tax-free nature of the Reorganization to the shareholders of SSB to the
extent they receive EVB Common Stock in exchange for their shares of SSB Common
Stock.
Following the Effective Date, Messrs. Garrett, Boyd, Cook, Johnson and
Lewis, directors of SSB, will continue to serve as directors of EVB. However,
pursuant to the Reorganization Agreement, the directors, officers and employees
of SSB will not change as a result of the Reorganization. The Reorganization
Agreement notwithstanding, EVB will have the power after the Effective Date to
elect the entire Board of Directors of SSB.
The Board of Directors of SSB believes that the Reorganization is in
the best interests of SSB and its shareholders. The SSB directors have all
committed to vote shares under their control in favor of the Reorganization to
the extent of their fiduciary ability. The SSB directors unanimously recommend
that SSB shareholders vote FOR the approval of the Reorganization Agreement.
Terms of the Reorganization
SSB Common Stock. At the Effective Date, each outstanding share of SSB
Common Stock (other than shares held by shareholders who perfect their
dissenters' rights) will be exchanged for 2.5984 shares of EVB Common Stock and
cash in lieu of any fractional shares. SSB shareholders will thereby become
shareholders of EVB. The amount of cash which may be paid to a SSB shareholder
in lieu of issuing any fractional shares will be equal to the fraction of a
share of EVB Common Stock to which such shareholder would otherwise be entitled
multiplied by $12.70.
BNI Common Stock. At the Effective Date, each outstanding share of BNI
Common Stock (other than shares held by shareholders who perfect their
dissenters' rights) will be exchanged for 1.0 share of EVB Common Stock.
BNI shareholders will thereby become shareholders of EVB.
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of SSB and BNI and by the Federal Reserve and the SCC (See "The
Reorganization - Regulatory Approvals") and other conditions to the
Reorganization are satisfied (or waived to the extent permitted by the
Reorganization Agreement and applicable law), the Reorganization will be
consummated and effected on the date and at the time set forth in Certificates
of Share Exchange issued by the SCC pursuant to the Virginia SCA. The
Reorganization Agreement provides that the acquisitions of SSB and BNI by EVB
will become effective at the same time. Unless EVB acquires both SSB and BNI, it
will not acquire either SSB or BNI. See "The Reorganization - Representations
and Warranties; Conditions to the Reorganization."
It is anticipated that the Effective Date will be on or about December
31, 1997, but there can be no assurance as to whether or when the Reorganization
will occur.
Management and Operations After the Reorganization
On the Effective Date, SSB and BNI will become bank subsidiaries of
EVB, which will then serve as the parent holding company for both SSB and BNI
and will operate under the name "Eastern Virginia Bankshares, Inc." See "The
Reorganization."
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The Board of Directors of EVB consists of the following nine
individuals, five of whom are Directors of SSB and four of whom are Directors of
BNI.
Name Affiliation
Robert L. Covington BNI
F.L. Garrett, III SSB
Thomas M. Boyd, Jr. SSB
Lewis R. Reynolds BNI
L. Edelyn Dawson, Jr. BNI
F. Warren Haynie, Jr. BNI
W. Rand Cook SSB
Eric A. Johnson SSB
William L. Lewis SSB
The EVB Board of Directors will remain the same after consummation of the
Reorganization. All nine directors will serve as such until the first annual
meeting of EVB's shareholders, or until their successors are elected and
qualify.
The principal executive officers of EVB are Thomas M. Boyd, Jr.,
President and Chief Executive Officer, and Lewis R. Reynolds, Executive Vice
President. Robert L. Covington is Chairman of the Board of EVB, and F.L. Garrett
is Vice Chairman of the Board of EVB. The Boards of Directors, officers and
employees of SSB and BNI will not change as a result of the Reorganization.
Following the Reorganization, SSB and BNI will keep their existing
names and office locations and will continue to carry on their respective
banking businesses in the same manner as before the Reorganization. See "The
Reorganization."
The Bylaws of EVB include several provisions that are intended to
preserve the autonomy of SSB and BNI after the Effective Date, as well as to
preserve the number of Directors of each of SSB and BNI who serve on the Board
of Directors of EVB. The EVB Bylaws provide that in the first five annual
elections of Directors of EVB, beginning in 1998, nominations made by the Board
of EVB will consist of five individuals designated by Directors of EVB who are
also are Directors of SSB and four individuals designated by Directors of EVB
who also are Directors of BNI.
Consistent with the foregoing provision, if a vacancy on the Board of
Directors of EVB arises for any reason before the Annual Meeting of Shareholders
in 2003, the vacancy shall be filled by an individual designated by Directors of
EVB who also are Directors of BNI or an individual designated by Directors of
EVB who also are Directors of SSB, as the case may be, in order that at all
times before the Annual Meeting of Shareholders in 2003, five Directors shall
have been designated by Directors of EVB who also are Directors of SSB and four
Directors shall have been designated by Directors of EVB who also are Directors
of BNI.
The Bylaws of EVB also provide that the affirmative vote of more than a
simple majority of the entire Board of Directors will be required to take
certain actions. So long as the Board of Directors of EVB consists of nine
individuals, at least six votes will be required to (i) amend the Bylaws of EVB,
(ii) submit to the shareholders of EVB any plan of merger or share exchange or
any proposal to dissolve EVB or to sell, lease, exchange or otherwise dispose of
all or substantially all of EVB's property, other than in the usual and regular
course of business; (iii) submit to the shareholders any proposal to change the
name of EVB; (iv) cause SSB or BNI to change its name or amend its Articles of
Incorporation or Bylaws; (v) cause SSB or BNI to appoint, remove or transfer its
Chief Executive Officer; (vi) dispose of any of the stock of SSB or BNI or cause
either of such Banks to dissolve or enter into a plan of merger or share
exchange or to sell, lease, exchange or otherwise dispose of all or
substantially all of its property, other than in the usual and regular course of
business; or (vii) appoint, remove or transfer the Chief Executive Officer of
EVB.
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The Bylaws of EVB also provide that the Directors of each of SSB and
BNI shall nominate individuals for election to their respective Boards each
year. The Bylaws of EVB provide that it will not remove any Director of SSB or
BNI or refuse to vote its shares of either of such Bank's common stock in favor
of the election of those nominated unless a Director of either of such Banks
violates a code of conduct that is generally applicable to the Directors of EVB
and its subsidiaries; EVB's Board of Directors determines that either of such
Bank is experiencing business, financial or regulatory difficulties and, as a
result, EVB determines that a change in the Board of Directors of such Bank is
necessary or advisable in order to protect EVB and its investment in such Bank;
or a Director of either of such Banks acts in a manner inconsistent with his
fiduciary duty to such Bank.
Surrender of Stock Certificates
Promptly after the Effective Date, SSB as the exchange agent, will mail
to the former holders of SSB Common Stock and BNI Common Stock a letter of
transmittal and instructions relating to the exchange of their share
certificates for share certificates representing the number of shares of EVB
Common Stock to which they are entitled as a result of the Reorganization. The
former holders of SSB Common Stock will be asked to mail or deliver their share
certificates to SSB's main office in Tappahannock, and the former holders of BNI
Common Stock will be asked to mail or deliver their share certificates to BNI's
main office in Heathsville.
SSB SHAREHOLDERS AND BNI SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for BNI Common
Stock or SSB Common Stock, together with a properly completed letter of
transmittal, the holder of such certificates will receive a certificate or
certificates representing the number of shares of EVB Common Stock to which he
or she is entitled and, in the case of SSB Shareholders, a check for the amount
payable in cash in lieu of issuing a fractional share. Lost, stolen, mutilated
or destroyed certificates will be treated in accordance with the procedures of
EVB.
All EVB Common Stock issued as a result of the conversion of SSB Stock
and BNI Common Stock pursuant to the Reorganization will be deemed issued as of
the Effective Date. After the Effective Date, SSB shareholders and BNI
shareholders will be entitled to vote the number of shares of EVB Common Stock
for which their shares of SSB Common Stock and BNI Common Stock have been
exchanged, regardless of whether they have surrendered their SSB or BNI
certificates. The Reorganization Agreement provides, however, that no dividend
or distribution payable to the holders of record of EVB Common Stock at or as of
any time after the Effective Date will be paid to the holder of any SSB
certificate or BNI certificate until such holder physically surrenders such
certificate, promptly after which time all such dividends or distributions will
be paid (without interest).
Representations and Warranties; Conditions to the Reorganization
The Reorganization Agreement contains representations and warranties by
EVB, BNI and SSB, including representations and warranties with respect to their
respective organizations, authorizations to enter into the Reorganization
Agreement, capitalization, financial statements and pending and threatened
litigation. These representations and warranties (except as otherwise provided
in the Reorganization Agreement) will not survive the Effective Date.
The obligations of EVB, BNI and SSB to consummate the Reorganization
are subject to the following conditions: approval and adoption of the
Reorganization Agreement and the appropriate Plan of Share Exchange by the
requisite shareholder votes; receipt of all regulatory approvals necessary to
consummate the Reorganization, not conditioned or restricted in a manner that,
in the judgment of the Boards of Directors of EVB, BNI or SSB, materially
adversely affects the economic or business benefits of the Reorganization so as
to render inadvisable consummation thereof; the absence of certain actual or
threatened proceedings before a court or other governmental body relating to the
Reorganization; receipt of
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current fairness opinions from the investment advisors for BNI and SSB; and the
receipt of an opinion of counsel as to certain Federal income tax consequences
of the Reorganization; and the qualification of the Reorganization for
pooling-of-interests accounting treatment. Also, under the terms of the
Reorganization Agreement, EVB has agreed that, following the Effective Date, it
will indemnify those persons associated with SSB, BNI and their subsidiaries who
are entitled to indemnification as of the Effective Date of the Reorganization.
In addition, each party's obligation to effect the Reorganization,
unless waived, is subject to performance by the other party of its obligations
under the Reorganization Agreement, the accuracy, in all material respects, of
the representations and warranties of the other party contained therein, and the
receipt of certain opinions and certificates from the other party.
Regulatory Approvals
EVB's acquisition of SSB and BNI pursuant to the Reorganization is
subject to approval by the Federal Reserve under the BHC Act, which requires
that the Federal Reserve take into consideration the financial and managerial
resources and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. The BHC Act prohibits the
Federal Reserve from approving the Reorganization if it would result in a
monopoly or if it would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect may be substantially to lessen competition
or to tend to create a monopoly, or if it would be in any other manner a
restraint of trade, unless the Federal Reserve finds that the anti-competitive
effects of the Reorganization are clearly outweighed in the public interest by
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. The Reorganization may not be consummated for 15
days after such approval, pursuant to federal law, in order to provide a period
for the Reorganization to be challenged under the antitrust laws.
The BHC Act provides for the publication of notice and the opportunity
for administrative hearings relating to the applications, and it authorizes the
regulatory agency to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could
substantially delay the regulatory approvals required for consummation of the
Reorganization.
The Reorganization is further subject to the approval of the SCC. To
obtain such approval, the SCC must conclude that the Reorganization will not
affect detrimentally the safety or soundness of a Virginia bank.
Applications for approval of the Reorganization have been filed with
the Federal Reserve and the SCC. None of the agencies has yet approved the
applications. EVB, BNI and SSB are not aware of any other governmental approvals
or actions that are required for consummation of the Reorganization, except as
described above. Should any such approval or action be required, it is currently
contemplated that such approval or action would be sought. There can be no
assurance that any such approval or action, if needed, could be obtained.
Business Pending the Reorganization
Until consummation of the Reorganization (or termination of the
Reorganization Agreement), each of SSB, BNI and EVB is obligated to operate its
businesses only in the ordinary and usual course, consistent with past practice,
and to use its best efforts to maintain its business organization, employees and
business relationships and to retain the services of its officers and key
employees. Until consummation of the Reorganization (or termination of the
Reorganization Agreement) SSB may not, without the consent of BNI and EVB, and
BNI may not, without the consent of SSB and EVB, among other things: (a) declare
or pay dividends on its capital stock, except in the regular course of business
consistent with past practice; (b) enter into any merger, consolidation or
business combination (other than the Reorganization) or any acquisition or
disposition of a material amount of assets or securities or solicit proposals in
respect thereof; (c) amend its charter or bylaws (except as may be required by
the Reorganization Agreement); (d) issue any capital stock, except upon exercise
of rights, warrants or options issued pursuant to existing employee
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benefits plans, programs or arrangements or effect any stock split or otherwise
change its capitalization; or (e) purchase or redeem any of its capital stock.
Waiver, Amendment and Termination
At any time on or prior to the Effective Date, any term or condition of
the Reorganization may be waived by the party which is entitled to the benefits
thereof, without shareholder approval, to the extent permitted under applicable
law. The Reorganization Agreement may be amended at any time prior to the
Effective Date by agreement of the parties whether before or after the SSB and
BNI Meetings (except that the Exchange Ratios shall not be changed after
approval of the Reorganization Agreement by the SSB and BNI shareholders). Any
material change in a material term of the Reorganization Agreement after this
Joint Proxy Statement is mailed to shareholders of SSB and BNI would require a
resolicitation of SSB's and BNI's shareholders. Such a material change would
include, but not be limited to, a change in the tax consequences to SSB's or
BNI's shareholders.
The Reorganization Agreement may be terminated by EVB, BNI or SSB,
whether before or after the approval of the Reorganization Agreement by the
shareholders: (a) if another party materially breaches any representation,
warranty or agreement which is not properly cured by such breaching party; (b)
if the Reorganization is not consummated by March 31, 1998; or (c) if the
Federal Reserve or the SCC have denied approval of the Reorganization. The
Reorganization Agreement also may be terminated at any time by the mutual
consent of EVB, BNI and SSB. In the event of termination, the Reorganization
Agreement shall become null and void, except that certain provisions thereof
relating to expenses and confidentiality of information exchanged between the
parties shall survive any such termination.
Resales of EVB Common Stock
All shares of EVB Common Stock received by SSB shareholders and BNI
shareholders in connection with the Reorganization will be freely transferable,
except that EVB Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined in Rule 144 under the Securities Act of
1933 (the "1933 Act")) of SSB or BNI may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the 1933 Act. For purposes
of Rule 144 as applied to SSB and BNI, the directors and executive officers of
SSB and BNI are the only affiliates who will be subject to the resale
limitations.
Interest of Certain Persons in the Reorganization
In considering the recommendations of the Boards of Directors of SSB
and BNI with respect to the Reorganization, holders of voting stock should be
aware that certain members of the Boards of Directors and senior management of
SSB and BNI have certain interests in the Reorganization that are in addition to
the interest of shareholders of SSB and BNI generally. The Boards of Directors
of SSB and BNI were aware of these interests and considered them, among other
factors, in approving the Reorganization. These interests are as follows:
Board of Directors. The Board of Directors of EVB after the Effective
Date will include five current members of SSB's Board of Directors and four
current members of BNI's Board of Directors. See "The Reorganization -
Background and Reasons for the Reorganization - SSB"; "The Reorganization -
Background and Reasons for the Reorganization - BNI."
Employment Agreements. Messrs. Reynolds and Dawson have employment
agreements with BNI to serve as officers of BNI. Both contracts will continue
after the Reorganization without any change to the terms of such contracts. Both
contracts are for five-year terms and expire on November 13, 2001. Each contract
also provides for automatic renewals for successive terms of one year at a time,
unless the contract is terminated by BNI or the employee. Both officers' salary
are determined at the sole discretion of BNI's Board of Directors, with a
minimum 1996 salary of $72,628 for Mr. Reynolds and $67,450 for Mr. Dawson. In
the event that either officer's employment is terminated under his agreement
within six months before or 18 months after a change of control of BNI, the
officer is entitled to receive the greater of
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<PAGE>
(i) his current salary and benefits or (ii) the level of such salary and
benefits in effect over the most recent 12 months preceding the date of his
termination of employment. Each officer would be eligible to receive this
compensation subsequent to his termination in these circumstances over the
longer of (i) an additional 12 months or (ii) the remainder of his unexpired
original term.
Projected EVB Common Stock Ownership.
SSB. The table below sets forth (i) the projected holdings of EVB
Common Stock by all SSB Directors and executive officers, both individually and
in the aggregate, upon the Reorganization and (ii) the percentage of ownership
in EVB such shares would represent.
<TABLE>
<CAPTION>
No. of No. of Projected Post-Share
SSB EVB Exchange Percent of
Shares Shares (1) EVB Common Stock (2)
------ ---------- --------------------
<S> <C> <C> <C>
E. Gary Ball 1,200 3,118 0.06
Thomas M. Boyd, Jr. 9,115 23,684 0.46
W. Rand Cook 413 1,073 0.02
W. Gerald Cox 2,011 5,225 0.10
F.L. Garrett, III 8,138 21,146 0.41
Eric A. Johnson 1,895 4,924 0.10
William L. Lewis 8,076 20,985 0.40
William W. Lowery, III 1,872 4,864 0.09
Lawrence R. Moter, M.D. 344 894 0.02
J. Thomas Newman 8,158 21,198 0.41
Charles R. Revere 845 2,196 0.04
Leslie E. Taylor 455 1,182 0.02
Emmett M. Upshaw 5,959 15,484 0.30
All present executive officers and
directors as a group (18 persons) 50,828 132,071 2.55
</TABLE>
- ---------------
(1) Includes shares of BNI Common Stock currently owned by SSB Directors
and Executive Officers.
(2) Based on 1,018,848 shares of SSB Common Stock outstanding on
November 21, 1997 and 2,541,920 shares of BNI Common Stock outstanding on
November 21, 1997.
BNI. The table below sets forth (i) the projected holdings of EVB
Common Stock by all BNI Directors and executive officers, both individually and
in the aggregate, upon the Reorganization and (ii) the percentage of ownership
in EVB such shares would represent.
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<PAGE>
<TABLE>
<CAPTION>
No. of No. of Projected Post-Share
BNI EVB Exchange Percent of
Shares Shares (1) EVB Common Stock (2)
------ ---------- --------------------
<S> <C> <C> <C>
Robert L. Covington 83,534 83,534 1.61
S. Lake Cowart, Sr. 43,080 43,080 0.83
L. Edelyn Dawson, Jr. 16,256 16,256 0.31
F. Warren Haynie, Jr. 4,000 4,000 0.08
W. Leslie Kilduff 104,056 104,056 2.01
Lewis R. Reynolds 18,238 18,238 0.35
Charles R. Rice 58,568 58,568 1.13
William E. Sanford, Jr. 44,688 44,688 0.86
Howard R. Straughan, Jr. 116,000 116,260 2.24
All present executive officers and
directors as a group (9 persons) 488,420 488,680 9.42
</TABLE>
- -------------
(1) Includes the conversion of 100 shares of SSB Common Stock currently
owned by Mr. Straughan.
(2) Based on 2,541,920 shares of BNI Common Stock outstanding on November
21, 1997 and 1,018,848 shares of SSB Common Stock outstanding on
November 21, 1997.
Accounting Treatment
It is anticipated that the Reorganization will be accounted for as a
pooling of interests for accounting and financial reporting purposes. Under this
method of accounting, recorded assets and liabilities of EVB, BNI and SSB are
carried forward at their previously recorded amounts; income of the combined
corporations will include income of EVB, BNI and SSB for the entire fiscal year
in which the Reorganization occurs; and the reported income of the separate
corporations for prior periods will be combined. No recognition of goodwill in
the combination is required of any party to the Reorganization.
For the Reorganization to qualify as a pooling of interests, it must
satisfy certain conditions, including the condition that the total cash paid by
EVB pursuant to the Reorganization Agreement for (a) fractional shares and (b)
all SSB Common Stock and BNI Common Stock held by dissenting shareholders, may
not exceed 10% of the value of EVB Common Stock at the Effective Date. In
addition, affiliates of BNI and SSB must have agreed that, among other things,
they will not sell any BNI Common Stock or SSB Common Stock within 30 days prior
to the Effective Date, nor sell any EVB Common Stock until such time as EVB has
published financial results covering at least 30 days of the combined operations
of EVB, BNI and SSB after the Reorganization. Although pooling of interests
accounting, like other terms in the Agreement, is waivable, EVB has indicated
that it is unlikely to waive that requirement. If outside auditors determine
that pooling of interest accounting treatment is not available and both parties
agree to waive that term, the Reorganization would have to be resubmitted to
shareholders of BNI and SSB for their approval. See "Summary" and "Pro Forma
Condensed Financial Information."
Federal Income Tax Matters
Set forth below is a discussion of all material federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
to SSB shareholders and BNI shareholders who receive EVB Common Stock solely in
exchange for SSB Common Stock or BNI Common Stock as a result of the
Reorganization; SSB shareholders who receive cash in lieu of fractional shares;
and BNI shareholders and
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<PAGE>
SSB shareholders who receive cash for their shares upon exercise of dissenters'
rights. The discussion does not deal with all aspects of federal taxation that
may be relevant to particular SSB shareholders and BNI shareholders. In view of
the individual nature of tax consequences, SSB shareholders and BNI shareholders
are urged to consult their own tax advisors as to the specific tax consequences
to them of the Reorganization, including the applicability of federal, state,
local and foreign tax laws.
Neither EVB, BNI nor SSB has requested a ruling from the Internal
Revenue Service ("IRS") in connection with the Reorganization. To meet a
condition to consummation of the Reorganization, EVB, BNI and SSB will receive
from Williams, Mullen, Christian & Dobbins, counsel to EVB, an opinion as to
certain of the federal income tax consequences of the Reorganization. Such
opinion is neither binding on the IRS nor precludes it from adopting a contrary
position.
In the opinion of counsel, the Reorganization will constitute a
tax-free reorganization under Section 368 of the Code if consummated in the
manner set forth in the Reorganization Agreement. Accordingly, among other
things, in the opinion of such counsel:
1. No gain or loss will be recognized by EVB, BNI or SSB as a
result of the Reorganization;
2. No gain or loss will be recognized by the SSB shareholders or
BNI shareholders who receive solely shares of EVB Common Stock pursuant to the
Reorganization;
3. The aggregate basis of EVB Common Stock received by each SSB
shareholder will be the same as the aggregate basis of the SSB Common Stock
surrendered in exchange therefor (reduced by any amount allocable to fractional
share interests for which a shareholder receives cash);
4. The aggregate basis of EVB Common Stock received by each BNI
shareholder will be the same as the aggregate basis of the BNI Common Stock
surrendered in exchange therefor; and
5. The holding period for each share of EVB Common Stock received
by each SSB shareholder and each BNI shareholder in exchange for SSB Common
Stock or BNI Common Stock will generally include the period for which such
shareholder held the SSB Common Stock or BNI Common Stock exchanged therefor,
provided such SSB Common Stock or BNI Common Stock is a capital asset in the
hands of such holder at the Effective Date.
Any cash received by shareholders, whether as a result of an exercise
of their dissenters' rights or in lieu of the issuance of fractional shares with
respect to SSB Common Stock, could result in taxable income to the shareholders.
The receipt of such cash generally will be treated as a sale or exchange of the
stock resulting in capital gain or loss measured by the difference between the
cash received and an allocable portion of the basis of the stock relinquished.
The receipt of such cash may be treated as a dividend and taxed as ordinary
income in certain limited situations. In the case of cash payments in lieu of
fractional shares, however, such payments will be small in amount and not a
material concern to SSB shareholders. Shareholders should consult their own tax
advisors concerning proper treatment of such cash amounts.
Rights of Dissenting Shareholders
Any shareholder of SSB Common Stock or BNI Common Stock who objects to
the Reorganization (a "Dissenting Shareholder") and who complies with provisions
of Article 15 of Title 13.1 of the Virginia SCA ("Article 15") may demand the
right to receive a cash payment, if the Reorganization is consummated, for the
fair value of his or her stock immediately before the Reorganization Effective
Date, exclusive of any appreciation or depreciation in anticipation of the
Reorganization unless such exclusion would be inequitable. In order to receive
payment, a Dissenting Shareholder must deliver to SSB or BNI, as the case may be
(referred to in this subsection as the "Bank"), prior to the SSB Meeting or the
BNI Meeting, as the case may be, a written notice of intent to demand payment
for his or her shares if the Reorganization is consummated (an "Intent to Demand
Payment") and must not vote his or her shares in favor of the Reorganization.
With respect to shareholders of SSB Common Stock, the Intent to Demand Payment
should be addressed to Thomas E. Stephenson, Vice President and Chief Financial
Officer,
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<PAGE>
Southside Bank, 307 Church Lane, P.O. Box 1005, Tappahannock, Virginia
22560-1005. With respect to shareholders of BNI Common Stock, the Intent to
Demand Payment should be addressed to Lewis R. Reynolds, President and Chief
Executive Officer, Bank of Northumberland, Incorporated, Route 360, P.O. Box 9,
Heathsville, Virginia 22473-0009. A VOTE AGAINST THE REORGANIZATION WILL NOT
ITSELF CONSTITUTE SUCH WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT CONSTITUTE
A TIMELY WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT.
A shareholder of record of SSB Common Stock or BNI Common Stock may
assert dissenters' rights as to fewer than all the shares registered in his or
her name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the Bank in writing of the
name and address of each person on whose behalf he asserts dissenters' rights.
The rights of such a partial dissenter are determined as if the shares to which
he dissents and his other shares were registered in the names of different
shareholders. A beneficial shareholder of SSB Common Stock or BNI Common Stock
may assert dissenters' rights as to shares held on his behalf by a shareholder
of record only if (i) he submits to the Bank the record shareholder's written
consent to the dissent not later than the time when the beneficial shareholder
asserts dissenters' rights, and (ii) he dissents with respect to all shares of
which he is the beneficial shareholder or over which he has power to direct the
vote.
Within 10 days after the Effective Date, the Bank is required to
deliver a notice in writing (a "Dissenter's Notice") to each Dissenting
Shareholder who has filed an Intent to Demand Payment and who has not voted such
shares in favor of the Reorganization. The Dissenter's Notice shall (i) state
where the demand for payment (the "Payment Demand") shall be sent and where and
when stock certificates shall be deposited; (ii) supply a form for demanding
payment; (iii) set a date by which the Bank must receive the Payment Demand; and
(iv) be accompanied by a copy of Article 15. A Dissenting Shareholder who is
sent a Dissenter's Notice must submit the Payment Demand and deposit his or her
stock certificates in accordance with the terms of, and within the time frames
set forth in, the Dissenter's Notice. As a part of the Payment Demand, the
Dissenting Shareholder must certify whether he or she acquired beneficial
ownership of the shares before or after the date of the first public
announcement of the terms of the proposed Reorganization (the "Announcement
Date"), which was August 14, 1997. The Bank will specify the Announcement Date
in the Dissenter's Notice.
Except with respect to shares acquired after the Announcement Date, the
Bank shall pay a Dissenting Shareholder the amount the Bank estimates to be the
fair value of his or her shares, plus accrued interest. Such payment shall be
made within 30 days of receipt of the Dissenting Shareholder's Payment Demand.
As to shares acquired after the Announcement Date, the Bank is only obligated to
estimate the fair value of the shares, plus accrued interest, and to offer to
pay this amount to the Dissenting Shareholder conditioned upon the Dissenting
Shareholder's agreement to accept it in full satisfaction of his or her claim.
If a Dissenting Shareholder believes that the amount paid or offered by
the Bank is less than the fair value of his or her shares, or that the interest
due is incorrectly calculated, that Dissenting Shareholder may notify the Bank
of his or her own estimate of the fair value of his shares and amount of
interest due and demand payment of such estimate (less any amount already
received by the Dissenting Shareholder) (the "Estimate and Demand"). The
Dissenting Shareholder must notify the Bank of the Estimate and Demand within 30
days after the date the Bank makes or offers to make payment to the Dissenting
Shareholder.
Within 60 days after receiving the Estimate and Demand, the Bank must
either commence a proceeding in the appropriate circuit court to determine the
fair value of the Dissenting Shareholder's shares and accrued interest, or the
Bank must pay each Dissenting Shareholder whose demand remains unsettled the
amount demanded. If a proceeding is commenced, the court must determine all
costs of the proceeding and must assess those costs against the Bank, except
that the court may assess costs against all or some of the Dissenting
Shareholders to the extent the court finds that the Dissenting Shareholders did
not act in good faith in demanding payment of the Dissenting Shareholder's
Estimates.
The foregoing discussion is a summary of the material provisions of
Article 15. Shareholders are strongly encouraged to review carefully the full
text of Article 15, which is included as Appendix B to this
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<PAGE>
Joint Proxy Statement. The provisions of Article 15 are technical and complex,
and a shareholder failing to comply strictly with them may forfeit his
Dissenting Shareholder's rights. Any shareholder who intends to dissent from the
Reorganization should review the text of those provisions carefully and also
should consult with his attorney. No further notice of the events giving rise to
dissenters' rights or any steps associated therewith will be furnished SSB
shareholders and BNI shareholders, except as indicated above or otherwise
required by law.
Any Dissenting Shareholder who perfects his right to be paid the fair
value of his shares will recognize gain or loss, if any, for federal income tax
purposes upon the receipt of cash for his shares. The amount of gain or loss and
its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code. See "The
Reorganization - Certain Federal Income Tax Consequences."
Certain Differences in Rights of Security Holders
EVB is a corporation subject to the provisions of the Virginia SCA, and
SSB and BNI also are corporations subject to the provisions of the Virginia SCA.
Shareholders of SSB and BNI, whose rights are governed by the respective
Articles of Incorporation and Bylaws of SSB and BNI, will, upon consummation of
the Reorganization, become shareholders of EVB. The rights of the former SSB
shareholders and BNI shareholders will then be governed by the Articles of
Incorporation and Bylaws of EVB and the Virginia SCA.
There are no material differences between the rights of a SSB
shareholder under SSB's Articles of Incorporation and Bylaws and the Virginia
SCA, on the one hand, and the rights of a EVB shareholder under the Articles of
Incorporation and Bylaws of EVB and the Virginia SCA, on the other hand, except
as disclosed in the section "Comparative Rights of Shareholders."
There are no material differences between the rights of a BNI
shareholder under BNI's Articles of Incorporation and Bylaws and the Virginia
SCA, on the one hand, and the rights of a EVB shareholder under the Articles of
Incorporation and Bylaws of EVB and the Virginia SCA, on the other hand, except
as disclosed in the section "Comparative Rights of Shareholders."
Expenses of the Reorganization
Whether or not the Reorganization is consummated, SSB and BNI will pay
their own expenses incident to preparing, entering into and carrying out the
Reorganization Agreement, preparing and filing the Registration Statement of
which this Joint Proxy Statement is a part, except under circumstances involving
willful breaches of certain provisions of the Reorganization Agreement. In
general, the Reorganization Agreement provides for each party to pay its own
expenses in this regard. If, for any reason, the Reorganization is not
consummated, BNI and SSB each will pay half the expenses incurred by EVB in
connection with the Reorganization.
If, however, either party materially breaches the Reorganization
Agreement, that party must pay the costs associated with this transaction
incurred by the non-breaching party. In no event, however, can the liability for
such costs incurred by either party exceed the sum of $100,000 and the amount
owed for the expenses incurred by EVB.
SSB and BNI have incurred and will continue to incur expenses related
to the Reorganization, which expenses include, among other things, legal fees,
filing fees, accounting fees, investment banking fees, printing charges and
costs of mailing.
BNI and SSB Market Prices and Dividends
SSB. SSB Common Stock is neither listed on any stock exchange nor
quoted on the Nasdaq Stock Market and trades infrequently. SSB Common Stock has
periodically been sold in a limited number of
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<PAGE>
privately negotiated transactions. The prices set forth below do not necessarily
reflect the price that would be paid in an active and liquid market.
SSB Market Price and Dividends
Sales Price ($) Dividends ($)
--------------- -------------
High Low
1995:
1st quarter 24.00 24.00
2nd quarter 26.00 25.00 0.125
3rd quarter 26.00 26.00
4th quarter 28.00 26.00 0.585
1996:
1st quarter 28.00 28.00
2nd quarter 29.00 28.00 0.14
3rd quarter 30.00 30.00
4th quarter 32.00 30.00 0.62
1997:
1st quarter 33.00 33.00
2nd quarter 33.00 33.00 0.16
3rd quarter 33.50 33.00
4th quarter 34.00 33.00
(through November 14, 1997)
The future payment of dividends is solely in the discretion of the
Board of Directors of SSB and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of SSB and such
other factors as SSB's Board of Directors may, from time to time, deem relevant.
SSB is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay shareholders, and will be subject to the same
restrictions upon consummation of the Reorganization. Dividends are generally
restricted to net profits, as defined by FDIC regulations, for the current year
plus retained net profits for the preceding two years. At September 30, 1997,
dividends were so limited to approximately $5.38 million.
As of November 21, 1997, SSB had 1,243 shareholders of record.
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<PAGE>
BNI. BNI Common Stock is neither listed on any stock exchange nor
quoted on the Nasdaq Stock Market and trades infrequently. BNI Common Stock has
periodically been sold in a limited number of privately negotiated transactions.
The prices set forth below do not necessarily reflect the price that would be
paid in an active and liquid market.
BNI Market Price and Dividends
Sales Price ($) Dividends ($)
--------------- -------------
High Low
1995:
1st quarter 7.50 7.50
2nd quarter 8.00 7.50
3rd quarter 8.00 8.00
4th quarter 8.00 8.00 0.23
1996:
1st quarter 8.50 8.00
2nd quarter 9.00 9.00
3rd quarter 10.00 8.00
4th quarter 10.00 10.00 0.33
1997:
1st quarter 10.00 10.00
2nd quarter 12.50 10.00 0.18 (1)
3rd quarter 14.00 12.50
4th quarter 14.00 12.50
(through November 14, 1997)
- ---------------
(1) As of January 1, 1997, BNI began paying dividends on a semi-annual
basis.
The future payment of dividends is solely in the discretion of the
Board of Directors of BNI and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of BNI and such
other factors as BNI's Board of Directors may, from time to time, deem relevant.
BNI is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay shareholders, and will be subject to the same
restrictions upon consummation of the Reorganization. Dividends are generally
restricted to net profits, as defined by FDIC regulations, for the current year
plus retained net profits for the preceding two years. At September 30, 1997,
dividends were so limited to approximately $4.75 million.
As of November 21, 1997, BNI had 599 shareholders of record.
EVB. If the Reorganization is consummated, EVB will be a legal entity
separate and distinct from its subsidiary banks, and its revenues will depend
primarily on the payment of dividends from its subsidiary banks. BNI and SSB
each will be subject to certain legal restrictions on the amount of dividends it
will be permitted to pay to EVB. At September 30, 1997, BNI and SSB, together,
had available for distribution as dividends to EVB approximately $4.75 million
and $5.38 million, respectively.
EVB management has discussed the possibility of filing the application
necessary for shares of EVB Common Stock to be listed with The Nasdaq Stock
Market. EVB has not yet made a decision. In order for shares of EVB Common Stock
to be listed for quotation on The Nasdaq Stock Market, EVB will need to have at
least three investment firms committed as market makers for approval of such an
application. If EVB decides to file such an application, there is no guarantee
that it will be approved.
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<PAGE>
Even if EVB Common Stock becomes listed for trading on The Nasdaq Stock Market,
there is no assurance that an active trading market will develop or be sustained
following the Reorganization. If EVB decides not to list its stock on The Nasdaq
Stock Market, it is unlikely that there will be an active trading market for EVB
Common Stock.
INVESTMENT ADVISOR OPINIONS
Both BNI and SSB management relied upon the advice of qualified
investment advisors in analyzing the Reorganization and recommending it to BNI's
and SSB's respective shareholders. SSB relied on the advice of Austin Financial
Services, Inc., an investment banking firm headquartered in Toledo, Ohio
("AFSI"). AFSI determined that the Reorganization is in the best interest of SSB
shareholders, from a financial point of view. BNI relied on the advice of
Crestar Securities Corporation, an investment banking firm headquartered in
Richmond, Virginia ("Crestar Securities"). Crestar Securities determined that
the Reorganization is in the best interest of SSB shareholders, from a financial
point of view. A more detailed analysis of the Reorganization, from the point of
view of SSB's and BNI's financial advisors, follows.
SSB - Opinion of Financial Advisor
SSB's board of directors retained AFSI to act as exclusive financial
advisor with respect to a review of SSB's strategic alternatives and the
possible merger, involving all or a substantial amount of the business,
securities, or assets of SSB. SSB selected AFSI as its financial advisor because
of its reputation and because AFSI has significant experience in transactions
similar to the Reorganization Agreement. As part of its services, AFSI analyzed
SSB and its operations, historical performance and future prospects,
participated in negotiations concerning the financial aspects of the
Reorganization Agreement under the guidance of the SSB board of directors, and
provided an opinion as to the fairness, from a financial point of view, of the
terms of the Reorganization Agreement.
AFSI is a nationally recognized investment banking firm specializing in
the banking and financial services industry. AFSI is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, private placements and valuations for estate, corporate and other
purposes. In the past ten years, AFSI has not provided professional services
and/or products to BNI or SSB in the ordinary course of business. Furthermore,
AFSI does not contemplate any future business with SSB and/or BNI arising from
this engagement, nor has its opinion concerning the fairness, from a financial
point of view, of the terms of the Reorganization Agreement been subject to
indications of future business with either SSB or BNI.
AFSI has rendered a written opinion to the SSB board of directors to
the effect that, as of the date of this Joint Proxy Statement, the terms of the
Reorganization Agreement are fair, from a financial point of view, to the
stockholders of SSB. No limitations were imposed by the board of directors of
SSB upon AFSI with respect to the investigations made or procedures followed by
AFSI in rendering its opinion. The full text of the opinion of AFSI dated the
date of this Joint Proxy Statement, which sets forth assumptions made, matters
considered and limits on the review undertaken by AFSI, is attached as Appendix
D. SSB STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY.
AFSI's opinion is directed only to the fairness, from a financial point
of view, of the terms of the Reorganization Agreement and does not constitute a
recommendation to any SSB stockholder as to how such stockholder should vote at
the special meeting of SSB stockholders or any other matter.
In connection with its opinion, AFSI reviewed material bearing upon the
financial operating condition of SSB and BNI including, but not limited to: (1)
the audited financial statements of SSB and BNI for the years ending 1994-1996;
(2) the financial statements of SSB and BNI for August 31, 1997; (3)
Consolidated Reports of Condition and Income of SSB and BNI for the years ending
1992-1996 and for June 30, 1997; (4) federal income tax return of SSB and BNI
for the year 1996; (5) certain other public
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<PAGE>
information on SSB and BNI; (6) other internal financial and operating
information which was provided to AFSI by SSB and BNI; (7) publicly available
information concerning certain other banks and bank holding companies, the
trading markets for their securities and the nature and terms of certain other
merger and acquisition transactions believed relevant to its inquiry; (8)
discussed the foregoing as well as other matters relevant to its inquiry,
including the past and current business operations, results of regulatory
examinations, financial condition, current loan quality and trends, and future
prospects of SSB and BNI, both separately and on a combined basis with certain
officers and representatives of SSB and BNI; (9) reviewed the reported price and
trading activity for SSB Common Stock and BNI Common Stock, compared certain
financial and stock market information for SSB and BNI with similar information
for certain other companies the securities of which are publicly traded; (10)
reviewed the financial terms of certain recent business combinations in the
financial institution industry and performed such other studies and analyses as
it considered appropriate; (11) the Reorganization Agreement; and (12) this
Joint Proxy Statement. AFSI also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and its
knowledge of the banking industry generally. AFSI's opinion was necessarily
based upon conditions as they existed and could be evaluated on the date of the
opinion and the information made available to AFSI through that date.
AFSI relied upon and assumed without independent verification the
accuracy and completeness of all of the financial and other information provided
to it by SSB and BNI or from public sources. AFSI has not made an independent
evaluation of the assets of SSB or BNI, but has relied upon the books and
records of SSB, BNI, and the audited financial statements as presented to AFSI
as the valuators of the fair value of SSB. In addition, AFSI did not
independently verify and relied on and assumed that the aggregate allowances for
loan losses set forth in the balance sheet of each of SSB and BNI at August 31,
1997, were adequate to cover such losses and complied fully with applicable law,
regulatory policy and sound banking practice as of the date of such financial
statements. Furthermore, AFSI did not independently verify the carrying values
of other real estate owned and loans classified as in-substance foreclosures of
each of SSB and BNI in their respective August 31, 1997, balance sheets, and
AFSI assumed that such carrying values complied fully with applicable law,
regulatory policy and sound banking practice as of such date. AFSI was not
retained to and did not conduct a physical inspection of any of the properties
or facilities of SSB or BNI, nor did AFSI make any independent evaluation or
appraisal of the assets, liabilities or prospects of SSB or BNI, was not
furnished with any such evaluation or appraisal, and did not review any
individual credit files. AFSI also assumed that the Reorganization Agreement is,
and will be, in compliance with all laws and regulations that are applicable to
SSB and BNI.
In connection with rendering its opinion to SSB's board, AFSI performed
a variety of financial analyses which are summarized below. AFSI's summary of
such analyses as set forth in this Joint Proxy Statement does not purport to be
a complete description of such analyses. AFSI believes that its analyses and the
summary set forth in this Joint Proxy Statement must be considered as a whole
and that selecting portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an incomplete view of
the analyses and the process underlying AFSI's opinion. The preparation of a
fairness opinion is a complex process involving AFSI's subjective judgments and
is not necessarily susceptible to partial analysis or summary description. In
its analyses, AFSI made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of SSB and BNI. Any estimates contained in AFSI's
analyses are not necessarily indicative of future results or value, which may be
significantly more or less favorable than such estimates. AFSI's estimates of
values of companies do not purport to be appraisals or necessarily reflect the
price at which companies or their securities actually may be sold. No company or
transaction utilized in AFSI's analyses was identical to SSB or BNI or the
Reorganization Agreement. Accordingly such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments by AFSI concerning differences in financial and operating
characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that could
affect the public trading markets of the company or companies to which they are
being compared. None of the analyses performed by AFSI was assigned a greater
significance by AFSI than any other.
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The following is a brief description of the analyses performed by AFSI
in connection with its opinion as described to SSB's board of directors by AFSI:
Summary. The terms of the Reorganization Agreement between SSB, BNI,
and EVB provide that each share of SSB Common Stock and BNI Common Stock will be
exchanged for EVB Common Stock under the exchange ratio described in the
Reorganization Agreement. Under the terms of the Reorganization Agreement, each
share of BNI Common Stock outstanding immediately prior to consummation of the
Reorganization will be exchanged for 1.0 share of EVB Common Stock. In addition,
each share of SSB Common Stock outstanding immediately prior to consummation of
the Reorganization will be exchanged for 2.5984 shares of EVB Common Stock.
Following the Reorganization, BNI and SSB each will continue to carry on its
banking business as a wholly-owned subsidiary of EVB in substantially the same
manner as before the Reorganization.
Discounted Cash Flow Analysis. AFSI utilized a discounted cash flow
analysis in order to determine the fair market values of both SSB and BNI. AFSI
projected SSB's cash flow from June 30, 1997, through June 30, 2002, assuming a
minimum equity capital to asset ratio of 6.00%. The present value per fully
diluted share of SSB Common Stock resulting from this analysis was $32.75. Using
the same approach for BNI resulted in a value per fully diluted share of BNI
Common Stock of $12.76. Based on these values, the resulting exchange ratio of
each share of SSB Common Stock outstanding would be for 2.5666 shares of EVB
Common Stock. Correspondingly, the resulting exchange ratio of each share of BNI
Common Stock outstanding would be for 1.0 share of EVB Common Stock. Therefore,
the exchange terms of the Reorganization Agreement provide an additional 0.032
shares of EVB Common Stock for each share of SSB Common Stock in comparison to
the exchange ratio based on the values of SSB and BNI determined by AFSI.
Analysis of Other Merger Transactions. AFSI analyzed certain other
mergers and acquisitions that have consummated over the past twelve months in
Virginia as well as other nearby states (including the states of Maryland, North
Carolina, South Carolina, Kentucky, and West Virginia) involving financial
institutions with assets between $200 million and $600 million. AFSI compared
the multiples produced by this Reorganization to the median multiples for the
transactions analyzed. AFSI's analysis showed that the range of implied
valuations of SSB, applying the median transaction multiples described above to
SSB's earnings and book value was $68.34 to $31.06 per share. Furthermore,
AFSI's analysis showed that the range of implied valuations of BNI, applying the
median transaction multiples described above to BNI's earnings and book value
was $25.54 to $13.31 per share. The results produced in this analysis do not
purport to be indicative of actual values or expected values of SSB and BNI or
shares of SSB Common Stock and BNI Common Stock.
Analysis of Comparable Companies. AFSI examined the operating and
trading performance of SSB and BNI in comparison to selected publicly traded
bank/bank holding companies located in Virginia with total assets between $200
million and $600 million. AFSI analyzed the relative performance and outlook for
SSB and BNI by comparing certain financial and trading market information of SSB
and BNI with the group of comparable banks. AFSI compared SSB and BNI with the
comparable banks based upon selected operating statistics, including
capitalization, profitability and credit quality. Using data at, or for the 12
months ended, June 30, 1997, the multiple of median market price to latest 12
months earnings was 16.54 for the comparable banks. The median price to stated
book value was 172.64 percent for the comparable banks. The implied market
trading values for SSB derived from such comparable company analysis utilizing
the resulting median valuation ratios ranged from approximately $46.46 to $31.01
per share. The implied market trading values for BNI derived from such
comparable company analysis utilizing the resulting median valuation ratios
ranged from approximately $17.36 to $13.29 per share.
SSB and AFSI have entered into an arrangement relating to the services
to be provided by AFSI in connection with the Reorganization Agreement. SSB has
agreed to pay AFSI on an hourly basis for its services which as of August 31,
1997, totaled $25,514. In regards to AFSI's services in determining an opinion
as to the fairness, from a financial point of view, of the terms of the
Reorganization Agreement, the cost is a contractual $10,000, plus out-of-pocket
expenses. In addition, SSB also has agreed to indemnify
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AFSI and its officers, directors, shareholders, employees and agents for all of
its time, expenses, and any liability incurred as a result of AFSI's proposed
engagement by means of legal action, administrative proceedings or threat
thereof, unless such action, pending or threat thereof is caused by AFSI's own
unlawful conduct, breach of duty or negligence during the course of performing
AFSI's services.
AFSI, in rendering its opinion, has assumed that the transaction will
be a tax-free reorganization with no material adverse tax consequences to any of
the parties involved, or to SSB shareholders receiving EVB Common Stock. In
addition, AFSI has assumed that in the course of obtaining the necessary
regulatory approvals for the transaction, no condition will be imposed upon SSB
or BNI that will have a materially adverse impact on the contemplated benefits
of the proposed transaction to SSB and BNI and their shareholders.
BNI - Opinion of Financial Advisor
BNI retained the investment banking firm of Crestar Securities to act
as its financial advisor and as such, among other things, to evaluate the terms
of the Reorganization Agreement. In such capacity, Crestar Securities
participated in the negotiations with respect to the pricing and other terms and
conditions of the Reorganization. Crestar Securities has rendered its opinion to
the Board of Directors of BNI that the terms of the Reorganization Agreement are
fair from a financial point of view to BNI and its shareholders. In developing
its opinion, Crestar Securities reviewed and analyzed: (1) the Reorganization
Agreement (2) the Form S-4 Registration Statement filed with the Securities and
Exchange Commission in connection with the Reorganization; (3) BNI's annual
report to shareholders and audited financial statements for the three years
ended December 31, 1996; (4) BNI's unaudited financial statements for the six
months ended June 30, 1997 and 1996, and other information related to BNI
prepared by BNI's management, including, but not limited to asset quality,
reserve adequacy, margin analysis, interest rate sensitivity, internal controls,
loan policies, regulatory matters and legal matters; (5) information regarding
the trading market for the common stocks of BNI and SSB and the price range
within which the respective stocks have traded; (6) the relationship of prices
paid to relevant financial data such as net worth, loans, deposits and earnings
in certain financial institution mergers and acquisitions in Virginia in recent
years; (7) SSB's annual reports to shareholders and its audited financial
statements for the three years ended December 31, 1996; (8) SSB's unaudited
financial statements for the six months ended June 30, 1997 and 1996; and (9)
and other information related to SSB prepared by SSB's management including but
not limited to asset quality, reserve adequacy, margin analysis, interest rate
sensitivity, internal controls, loan policies, regulatory matters and legal
matters. Crestar Securities has discussed with members of BNI's and SSB's
management the background of the Reorganization, the reasons and basis for the
Reorganization, and the business and future prospects of BNI and SSB
individually and as a combined entity. No instructions or limitations were given
or imposed by BNI or SSB in connection with the scope of the examination or
investigation made by Crestar Securities in arriving at its findings. Finally,
Crestar Securities has conducted such other studies, analysis and investigations
particularly of the banking industry, and considered such other information as
it deemed appropriate, the material portion of which is described below. A copy
of that opinion, which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix F hereto and
should be read in its entirety. The opinion of Crestar Securities is directed
only to the consideration to be received by BNI shareholders in the
Reorganization and does not constitute a recommendation to any BNI shareholder
as to how such shareholder should vote at the Special Meeting.
Crestar Securities used the information gathered to evaluate the
financial terms of the transaction using a variety of financial analyses as
described below. In conducting its review and arriving at its opinion, Crestar
Securities relied upon and assumed the accuracy and completeness of the
information furnished to Crestar Securities by or on behalf of BNI and SSB or
from public sources. Crestar Securities did not attempt independently to verify
such information, nor did Crestar Securities make any independent appraisal of
the assets of BNI or SSB.
In its analyses, Crestar Securities made numerous assumptions with
respect to industry performance, business and economic conditions, and other
matters, many of which are beyond BNI's or SSB's control. Any estimates
contained in the analyses of Crestar Securities are not necessarily indicative
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<PAGE>
of future results or values, which may be significantly more or less favorable
than such estimates. Estimates of values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold.
The opinion of Crestar Securities dated as of the date of this Joint
Proxy Statement was based solely upon the information available to it and the
economic, market and other circumstances as they existed as of the date of such
opinion, including the market price of BNI's and SSB's Common
Stock. Events occurring after that date, including a material change in the
market price of BNI Common Stock and SSB Common Stock as compared to the current
market price, could materially affect the assumptions and conclusions contained
in its opinion. Crestar Securities has not undertaken to reaffirm or revise its
opinion or otherwise comment upon any events occurring after the date thereof.
The following is a brief summary of the analyses and procedures
performed by Crestar Securities in the course of arriving at its opinion:
Contribution Analysis. Crestar Securities analyzed the contribution as
of June 30, 1997 of BNI to, among other things, the total assets, total equity
and net income of EVB on a pro forma basis and determined BNI's contribution to
be 42.2%, 51.7%, and 47.2%, respectively. This analysis did not include any
assumed cost savings from the Reorganization. Upon consummation of the
Reorganization and after giving effect to the BNI Exchange Ratio and the SSB
Exchange Ratio, BNI's existing shareholders would own approximately 49.0% of EVB
Common Stock.
The Reorganization provides for the exchange of each outstanding share
of BNI Common Stock for one share of EVB Common Stock. Crestar analyzed the
changes in the amount of earnings, book value, and dividends represented by one
share of BNI Common Stock before the Reorganization and one share of EVB Common
Stock after the Reorganization. This analysis indicated that, based on internal
estimates of BNI and SSB, current holders of BNI Common Stock would realize an
11.8% increase in per share earnings, a 5.0% decrease in book value per share,
and an 11.8% increase in dividends per share in 1997 from the Reorganization.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, Crestar Securities, using publicly available information, reviewed and
compared selected financial information of BNI, SSB, and EVB, on a pro forma
basis, relative to a group of 17 Virginia-based financial institutions (the
"Virginia Bank Group"). These financial institutions included (i) seven
financial institutions with total assets ranging from $122 million to $558
million comprised of Union Bankshares Corporation, FFVA Financial Corporation,
James River Bankshares, Inc., Bank of Tidewater, First National Corporation,
Mid-Atlantic Community Bank Group, Inc., Salem Bank & Trust N.A. (the "Peer
Group"); and (ii) ten financial institutions with total assets ranging from $710
million to $22.8 billion consisting of Crestar Financial Corporation, Signet
Banking Corporation, Central Fidelity Banks, Inc., First Virginia Banks, Inc.,
F&M National Corporation, Jefferson Bankshares, Inc., Life Bankcorp, Inc.,
Mainstreet BankGroup Inc., George Mason Bankshares, Inc., and Cenit Bankcorp,
Inc. Financial data reviewed and compared by Crestar Securities included, among
other things, return on assets, return on equity, equity to assets, loans to
deposits, asset quality and loan loss reserve ratios, and asset and deposit
growth rates. Historical financial information used in computing the preceding
ratios was as of June 30, 1997. The ratio of equity-to-assets, the return on
assets, and the return on equity was: 9.6%, 1.1% and 11.2%, respectively, for
the Virginia Bank Group; 14.8%, 2.1%, and 14.4%, respectively, for BNI; 10.1%,
1.7%, and 17.3%, respectively for SSB; and 12.1%, 1.9% and 15.8%, respectively,
for EVB, on a pro forma basis. Crestar Securities concluded that EVB, on a pro
forma basis, has significantly higher profitability levels as measured by return
on equity and return on assets than the Virginia Bank Group despite having a
higher capital base as measured by equity-to-assets.
Crestar Securities also analyzed the relative performance and value of
BNI and SSB by comparing certain market trading statistics for BNI and SSB with
the Peer Group. The market trading information used in the valuation analysis
was as of June 30, 1997 and included market price to book value per share and
market price to trailing twelve months earnings per share. The multiple of price
to stated book value
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per share and price to trailing twelve months earnings per share was: 1.7x and
17.7x, respectively, for the Peer Group; 1.6x and 12.0x, respectively, for BNI;
and 1.8x and 12.2x, respectively, for SSB.
Analysis of Comparable Acquisition Transactions. Crestar Securities
reviewed all known merger and acquisition transactions, completed and pending,
since the beginning of 1996, of banks with total assets ranging from $100
million to $300 million. Crestar Securities determined the median acquisition
price paid to book value, latest twelve months earnings, assets, and deposits to
be 2.0x, 16.7x, 19.1%, and 21.7%, respectively, for all such transactions
nationally. For transactions completed or pending in Virginia, North Carolina,
West Virginia, Tennessee, Maryland, and Pennsylvania, Crestar Securities
determined the median acquisition price paid to book value, latest twelve months
earnings, assets, and deposits to be 2.2x, 21.2x, 20.3%, and 24.9%,
respectively. Equally weighting the mean multiples of price to stated book,
latest twelve months earnings, assets and deposits and applying these to BNI and
SSB, Crestar Securities calculated the implied per share merger values of BNI to
be $13.07 to $15.08 and EVB, on a pro forma basis and assuming no cost savings
from the Reorganization, to be $13.75 to $15.83.
Present Value Analysis. Using a discounted cash flow analysis, Crestar
Securities determined a range of present values per share of BNI Common Stock
assuming BNI continued to operate as a stand alone entity. This range was
determined by adding (i) the present value of the future dividend stream that
BNI could produce over a five-year period, and (ii) the present value of a share
of BNI Common Stock at the end of five years. To determine a projected dividend
stream, Crestar Securities assumed, among other things, assets and earnings
growth rates for BNI ranging between 3.0% and 5.0% and a dividend payout equal
to 33% of projected earnings. The value of BNI at the end of five years was
calculated by applying price/earnings multiples to BNI's projected earnings in
the fifth year. The range of price/earnings multiples considered was 14.0x to
18.0x. Crestar Securities calculated the implied multiples of book value in the
fifth year to be 1.7x to 2.1x. The discount rates used ranged from 11.0% to
14.0%, which reflect different assumptions regarding the required rates of
return of holders and prospective buyers of BNI Common Stock. On the basis of
such varying assumptions, Crestar Securities calculated a present value of BNI
Common Stock on a stand-alone basis ranging from $11.34 to $16.03.
Crestar Securities determined a range of present values per share of
EVB Common Stock on a pro forma basis, assuming, among other things, assets and
earnings growth rates for EVB ranging between 5.0% and 7.0% and a dividend
payout equal to 33% of projected earnings. The value of EVB at the end of five
years was calculated by applying price/earnings multiples ranging from 14.0x to
18.0x. Crestar Securities calculated the implied multiples of book value in the
fifth year to be 2.0x to 2.5x. The discount rates used ranged from 11.0% to
14.0%. On the basis of such varying assumptions, Crestar Securities calculated a
present value of EVB Common Stock, on a pro forma basis, ranging from $13.33 to
$18.88.
The summary set forth above includes all material factors considered,
but does not purport to be a complete description of the presentation by Crestar
Securities to the Board of Directors of BNI or of the analyses performed by
Crestar Securities. The preparation of a fairness opinion is not susceptible to
partial analysis or summary description. Crestar Securities believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, would create an incomplete view of the process underlying the
preparation of its opinion.
Crestar Securities is an investment banking and brokerage firm
headquartered in Richmond, Virginia, that provides a broad array of services to
corporations, financial institutions and state and local governments. The
Investment Banking Division of Crestar Securities actively works with community
banks in the Mid-Atlantic region and has extensive experience with the Virginia
banking markets and banking organizations operating in the Virginia market. As
part of its investment banking business, Crestar Securities is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions and for other purposes. Crestar Securities was selected
by the Board of Directors of BNI based upon its experience and expertise in
providing valuation, merger and acquisition, and advisory services to banks and
bank holding companies.
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In exchange for its services, Crestar Securities will receive from BNI
upon consummation of the Reorganization a fee of $150,000. In addition, during
1996 Crestar Securities received fees totaling $7,500 for acting as a financial
advisor to BNI on other matters.
SOUTHSIDE BANK
Business
SSB is a community bank headquartered in Tappahannock, Virginia. SSB
opened for business in 1910 and currently operates eight branches throughout
Essex, King William, Middlesex, Caroline, and Hanover counties. SSB has applied
for regulatory approval to open another branch in Gloucester county. SSB also
owns an operations center in Tappahannock.
Principal Market Area. The primary service areas of SSB consist of
Essex, King William, Middlesex, Caroline, and Hanover counties. SSB also serves
customers in surrounding counties. SSB solicits business from individuals and
small- to medium-sized businesses within these service areas. SSB's present
intention is to continue to concentrate its activities in its current service
area and expand into the Gloucester area.
Banking Services. SSB provides a wide range of banking services
including various deposit products, loan services, automated teller machines,
debit cards, and telephone banking. No material portion of SSB's deposits has
been obtained from a single or small group of customers and the loss of deposits
of any one customer or of a small group of customers would not have a material
adverse effect on the business of SSB.
Lending Activities
SSB's primary focus is on making loans to individuals and small
businesses within its market area. SSB's legal lending limit to any one customer
was approximately $2,852,959 at September 30, 1997. SSB had $2,753,700 in loan
commitments outstanding at September 30, 1997.
Commercial Business Lending. SSB's commercial loans are made primarily
to service, retail and wholesale businesses in SSB's market area. Such loans are
generally collateralized by real estate and personal guarantees, and have a
higher degree of risk than residential mortgage loans. To manage these risks,
SSB charges slightly higher interest rates on commercial loans, maintains
specific reserves where necessary, and maintains an internal watch system to
monitor the financial condition of these borrowers and the market value of
associated collateral. Due to the diversification of the local economy, no
significant concentrations of credit exist in any single industry.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but also offer commensurately higher yields. Pricing
of commercial business loans is tied to the prevailing interest rate, at a
factor over prime. Pricing decisions in individual cases are based on perceived
credit risk and anticipated administrative costs. Pricing on commercial loans
also takes into account any depository relationship between the borrower and
SSB, which in many cases, can provide for both a stable lending and depository
relationship. Although SSB typically looks to the borrower's cash flow as the
principal source of repayments of these types of loans, the large majority of
SSB's commercial loans are secured by assets, such as real estate, accounts
receivable and other forms of collateral. In addition, SSB's commercial loans
are personally guaranteed by the principals of the business as necessary under
SSB's credit standards.
Real Estate Construction Loans. SSB's construction loans for
residential purposes are generally structured as construction-permanent loans
where the borrower will remain as a permanent mortgage customer of SSB. SSB
obtains a first lien on the security property as collateral for its construction
loans,
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limits loan amounts to 80% of the appraised value, and limits its lending
activities to borrowers with demonstrated financial strength. SSB has
experienced modest losses involving its construction loan portfolio.
Residential Mortgage Lending. The residential mortgage loans made by
SSB have a three year adjustable rate feature with terms up to 30 years. Its
lending and asset/liability strategies currently do not allow SSB to maintain
conventional 30 year fixed rate mortgage loans. However, SSB has established a
relationship with a third party for placement of loan requests for this type,
for which SSB earns a portion of the origination fees associated with these
types of loans.
Consumer Lending. SSB currently offers most types of consumer
installment loans in addition to VISA(R) credit cards. The performance of the
consumer loan portfolio is directly tied to and dependent upon the general
economic conditions in SSB's market area.
Credit Policies and Loan Administration. SSB has adopted a
comprehensive lending policy which includes stringent underwriting standards for
all types of loans and pricing guidelines, as well as the "New Standards for
Prudent Real Estate Lending" set forth in a recent FFIEC opinion statement.
SSB's policy specifies "permitted" loans, as well as "undesirable and
prohibited" loans. Collateral requirement and maturity limits also are
addressed. In an effort to manage risk, all credit decisions are made according
to prescribed lending authorities for each loan officer and the Loan Committee
of the Board. These lending authorities are approved by the full Board.
Employees
On September 30, 1997, SSB had 82 full-time and 11 part-time employees.
None of its employees are represented by any collective bargaining agreements,
and relations with employees are considered excellent.
Competition
SSB's primary market is generally defined as each county in which a
branch is located. SSB is subject to intense competition from various other
financial institutions and other companies that offer financial services. Among
financial institutions, the primary method of competition is the efficient
delivery of quality services at competitive prices.
Property
SSB currently operates eight retail facilities, two of which are
located in Tappahannock, Virginia, and one each in Urbanna, Deltaville,
Hartfield, Bowling Green, Aylett, and Mechanicsville, Virginia. All facilities
except the Hartfield facility are owned by SSB, and the Hartfield facility is in
the sixth year of a 50-year lease. In addition, SSB owns an operations center in
Tappahannock, Virginia, in which data processing functions are housed. The
corporate headquarters is housed in the Tappahannock office, where the greatest
concentration of deposits and loans are serviced. All other offices are
physically equipped to provide all services available at SSB, including ATM
service.
The offices in Urbanna and Mechanicsville are each subject to purchase
money deeds of trust securing amounts totaling $170,000 at September 30, 1997.
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Security Ownership of Management
The following table sets forth information as of November 21, 1997
regarding the number of shares of SSB Common Stock beneficially owned by all
directors of SSB, by the executive officers of SSB and by all directors and
executive officers as a group. For the purposes of this table, beneficial
ownership has been determined in accordance with the provisions of Rule 13d-3
under the Securities and Exchange Act of 1934 (the "Exchange Act"), as amended,
under which, in general, a person is deemed to be a beneficial owner of a
security if he has or shares the power to vote or direct the voting of the
security or the power to dispose or direct disposition of the security, or if he
has the right to acquire beneficial ownership of the security within 60 days.
<TABLE>
<CAPTION>
Common Stock
Name Beneficially Owned Percent of Class
- ---- ------------------ ----------------
Director
- --------
<S> <C> <C>
E. Gary Ball 1,200 0.1
Thomas M. Boyd, Jr. 9,115 0.9
W. Rand Cook 413 *
W. Gerald Cox 2,011 0.2
F.L. Garrett, III 8,138 0.8
Eric A. Johnson 1,895 0.2
William L. Lewis 8,076 0.8
William W. Lowery, III 1,872 0.2
Lawrence R. Moter, M.D. 344 *
J. Thomas Newman 8,158 0.8
Charles R. Revere 845 *
Leslie E. Taylor 455 *
Emmett M. Upshaw 5,959 0.6
All present executive officers
and directors as a group
(18 persons) 50,828 5.0
</TABLE>
* Represents less than 0.1% ownership.
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SOUTHSIDE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition of SSB. This
discussion and analysis should be read in conjunction with SSB's consolidated
financial statements and accompanying notes.
Overview
In 1996 SSB experienced asset growth of $12.9 million (7.8%) compared
to asset growth of $13.0 million in 1995. In 1996 SSB had net income of $2.5
million or $2.51 per share, compared to net income of $2.1 million, or $2.10 per
share in 1995. Asset growth was due to increased loan balances, which were
funded by increased deposits. Increased earnings resulted primarily from
increased net interest income.
Net Income
For the nine months ended September 30, 1997, net income was $2.3
million, or $2.31 per share, compared to $2.1 million, or $2.08 per share, for
the same period in 1996, an increase of 11.2%. The principal reason for the
increase in net income was a 9.8% increase in net interest income, which was
$6.1 million for the first nine months of 1997, compared to $5.6 million for the
same period in 1996. At September 30, 1997, total assets were $185.7 million,
compared to $169.1 million at September 30, 1996 and $177.2 million at December
31, 1996. Deposits at September 30, 1997 were $164.5 million, compared to $151.3
million and $157.8 million at September 30, 1996 and December 31, 1996,
respectively.
Net income for the year ended December 31, 1996 of $2.5 million was an
increase of 19.1% over the year ended December 31, 1995. The increase in net
income during 1996 reflects primarily an increase in the lending volume and
improvement in the rates earned on interest-earning assets. In addition, deposit
volume increased by 7.1% while the total cost of those deposits increased by
only 1.1%, thereby contributing substantially to the improvement in net income.
SSB has shown an increase of 56% in net income over the five years ended
December 31, 1996, from $1.6 million in 1992 to $2.5 million during 1996. The
increase in income over the past five years is attributable to the 46% growth in
the loan portfolio and the 58% decrease in provision for loan losses when
comparing the expense for the year ended December 31, 1992 to the year ended
December 31, 1996. As total assets grew from $129.8 million as of December 31,
1992 to $177.2 million as of December 31, 1996, net loans increased from $87.6
million to $128.0 million.
SSB increased net income 3.5% to $2.1 million during 1995 over 1994.
This increase was largely attributable to a decrease in the provision for loan
losses and not from any improvement in net interest income. Net income during
1994 of $2.1 million was an 11.9% increase over 1993. On a per share basis, net
income was $2.03 in 1994.
SSB's return on average equity increased for the year ended December
31, 1996 when compared to the year ended December 31, 1995. The return on
average equity was 15.88% for the year ended December 31, 1996, compared to
14.90% for 1995 and 15.88% for 1994. SSB's return on average assets was 1.49%,
1.36%, and 1.42% for the three years ended December 31, 1996, 1995, and 1994,
respectively.
SSB is not aware of any current recommendations by the bank regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital reserve or results of operations. There are no agreements
between SSB and either the FDIC or the SCC, nor has either regulatory agency
made any recommendations concerning the operations of SSB that could have a
material effect on its liquidity, capital reserves or results of operations.
-43-
<PAGE>
Net Interest Income
Net interest income is the difference between interest income and
interest expense and represents SSB's gross profit margin. For comparative
purposes, the income from tax-exempt securities and loans is adjusted to a
tax-equivalent basis. This adjustment, based on the statutory federal corporate
tax rate of 34 percent, causes tax exempt income and resultant yields to be
presented on a basis comparable with income and yields from fully taxable
earning assets. The net interest margin represents tax-equivalent net interest
income divided by average earning assets. It reflects the average effective rate
earned by SSB on its average earning assets. Net interest income and the net
interest margin are influenced by fluctuations in market rates and changes in
both the volume and mix of average earning assets and the liabilities used to
fund those assets.
Table 1 presents average balances, related interest income and expense,
and average yield/cost rate for the first nine months of 1997 and 1996 and for
each of the last three years. Table 2 reflects changes in interest income and
interest expense resulting from changes in average volume and changes due to
rates.
Table 1
<TABLE>
<CAPTION>
Average Balances, Interest Income and Expenses, and Average Yields and Rates
Nine Months Ended September 30
----------------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Interest Interest
Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $31,590 $1,409 5.95 % $32,534 $1,469 6.02 %
Federal funds sold 5,456 229 5.60 2,870 116 5.39 %
Loans (net) 135,561 9,377 9.22 % 121,792 8,453 9.25 %
------- ----- ------ ------- ----- ------
Total earning assets 172,607 11,015 8.51 % 157,196 10,038 8.51 %
Non-interest earning assets:
Cash and due from banks 4,945 4,655
Premises and equipment 3,176 3,236
Other assets 2,955 3,049
Less: allowance for loan losses 2,466 2,479
----- -----
Total assets $181,217 $165,657
======== ========
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
Money Market and NOW 29,106 640 2.93 28,115 621 2.94 %
accounts
Regular savings 44,077 1,302 4.17 % 40,914 1,243 4.05 %
Time deposits 62,073 2,549 5.48 % 55,540 2,252 5.41 %
Time deposits > $100,000 10,189 423 5.54 % 8,903 365 5.47 %
------ --- ------ ----- --- ------
Total interest-bearing deposits 145,445 4,914 4.50 % 133,472 4,481 4.46 %
----- -----
Non-interest bearing liabilities:
Demand deposits 15,754 14,816
Other liabilities 2,060 1,441
----- -----
Total liabilities 163,259 149,729
Stockholders' equity 17,958 15,928
------ ------
Total liabilities and
stockholders' equity $181,217 $165,657
======== ========
Net interest income $6,101 $5,557
====== ======
Interest rate spread (2) 4.01 % 4.05 %
Interest expense as a percent 3.80 % 3.80 %
of average earning assets
Net interest margin (3) 4.71 % 4.71 %
</TABLE>
-44-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- -----------------------------
Interest Interest Interest
Average Income/ Yield Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $32,452 $2,435 7.50% $30,473 $2,267 7.44% $30,835 $2,286 7.41%
Federal funds sold 3,150 171 5.43 3,997 231 5.78 2,027 87 4.29
Loans (net) 123,842 10,918 8.82 117,156 10,210 8.71 107,822 8,942 8.29
Total earning assets 159,444 13,524 8.48 151,626 12,708 8.38 140,684 11,315 8.04
Non-interest earning assets:
Cash and due from banks 4,884 4,238 3,730
Premises and equipment 3,192 3,377 2,753
Other assets 2,645 2,615 2,556
Less: allowance for loan
losses 2,463 2,550 2,304
----- ----- -----
Total assets $167,702 $159,306 $147,419
======== ======== ========
Liabilities and
Stockholders'
Equity
Interest-bearing deposits:
Money Market and NOW
accounts 28,416 840 2.96 27,943 904 3.24 30,666 921 3.00
Regular savings 40,874 1,667 4.08 37,339 1,599 4.28 26,292 871 3.31
Time deposits 56,283 3,021 5.37 55,768 2,977 5.34 53,715 2,308 4.30
Time deposits >$100,000 9,071 500 5.51 8,689 482 5.55 9,261 405 4.37
----- --- ----- --- ----- ---
Total interest-bearing
deposits 134,644 6,028 4.48 129,739 5,962 4.60 119,934 4,505 3.76
----- ----- -----
Non-interest bearing
liabilities:
Demand deposits 15,400 13,784 12,872
Other liabilities 1,437 1,237 1,295
----- ----- -----
Total liabilities 151,481 144,760 134,101
Stockholders' equity 16,221 14,546 13,318
------ ------ ------
Total liabilities and
stockholders' equity $167,702 $159,306 $147,419
======== ======== ========
Net interest income $7,496 $6,746 $6,810
====== ====== ======
Interest rate spread (2) 4.00% 3.78% 4.28%
Interest expense as a percent
of average earning assets 3.78% 3.93% 3.20%
Net interest margin (3) 4.70% 4.45% 4.84%
</TABLE>
(1) Income and yields are reported on a tax equivalent basis assuming a
federal tax rate of 34%.
(2) Interest spread is the average yield earned on earning assets,
calculated on a fully taxable equivalent basis, less the average rate
incurred on interest-bearing liabilities.
(3) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal income tax rate of 34%, expressed as a
percentage of average earning assets.
Interest income and interest expense are affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table analyzes changes in net
interest income attributable to changes in the volume of interest-bearing assets
and liabilities compared to changes in interest rates. Nonaccruing loans are
included in average loans outstanding. The change in interest due to both rate
and volume has been allocated to change due to volume and change due to rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
-45-
<PAGE>
Table 2
<TABLE>
<CAPTION>
Volume and Rate Analysis
Nine Months Ended September 30,
--------------------------------------
1997 vs. 1996
Increase (decrease)
Due to changes in:
Volume Rate Total
(Dollars in thousands)
<S> <C> <C> <C>
Increase (decrease) in:
Earning assets:
Securities $ (20) $ (40) $ (60)
Federal funds sold 105 8 113
Loans 911 13 924
-- -- --
Total $ 996 $ (19) $ 977
------- -------- ------
Interest expense:
Savings and time
deposits $ 402 $ 12 $ 414
Money market and
NOW accounts 21 (2) 19
-- -- --
Total $ 423 $ 10 $ 433
------- ------- -------
Net interest earnings $ 573 $ (29) $ 544
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
Increase (decrease) Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in: Due to changes in:
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Earning assets:
Securities $ 147 $ 19 $ 166 $ 27 $ 9 $ (18) $ (91) $ (228) $ (319)
Federal funds sold (49) (11) (60) 84 60 144 (7) 30 23
Loans 574 134 708 776 492 1,268 1,157 (205) 952
--- --- --- --- --- ----- ----- ----- ---
Total $ 672 $ 142 $ 814 $ 833 $ 561 $1,394 $1,059 $ (403) $ 656
------- ------ ------- ----- ------ ------ ------ -------- --------
Interest expense:
Savings and time
deposits $ 220 $ (96) $ 124 $ 502 $ 977 $ 1,479 $ 307 $ (89) $ 218
Money market and
NOW accounts 15 (80) (65) (82) 67 (15) 64 (25) 39
------ ---- -------- ---- -- ---- -- ---- --
Total $ 235 $(176) $ 59 $ 420 $1,044 $ 1,464 $ 371 $ (114) $ 257
------ ------ ------ ------ ------ ------- ------ ------- ------
Net interest earnings $437 $(34) $755 $413 $(483) $(70) $688 $(289) $399
==== ===== ==== ==== ====== ===== ==== ====== ====
</TABLE>
* The change in interest income due to both rate and volume has been
allocated to change due to volume and change due to rate in proportion
to the relationship of the absolute dollar amounts of the change in
each.
In the nine months ended September 30, 1997, net interest income was
$6.1 million, compared to $5.6 million for the same period in 1996. The net
interest margin decreased to 4.71%, compared to 4.76% for the nine months ended
September 30, 1996 and increased compared to 4.70% for the year ended December
31, 1996.
-46-
<PAGE>
Tax-equivalent income from earning assets increased 6.4% in 1996 to
$13.5 million from $12.7 million in 1995. The net interest margin increased to
4.70% in 1996 from 4.45% in 1995. This increase was due to an increase in SSB
yields on its earning assets and a decrease in the cost of its interest bearing
liabilities.
Net interest income and the net interest margin benefited in 1996 from
a 5.16% increase in average earning assets. The loan portfolio experienced
growth throughout 1996, and average loans increased 5.71% during the year.
Securities, on average, increased 6.49% in 1996.
Influenced by interest rate trends, competitive factors, and
management's efforts to stabilize SSB's expenses associated with obtaining and
maintaining deposits, its cost of funds declined in 1996 from 4.48% compared to
4.60% in 1995. By comparison, the yield on earning assets was 10 basis points
higher in 1996 as tax-equivalent interest income increased 6.4%.
Comparing 1995 with 1994, tax-equivalent net interest income decreased
.9%, and the net interest margin decreased to 4.45% in 1995 from 4.84% in 1994.
This decrease was due to a larger increase in the cost of interest bearing
liabilities compared to the increase in yields on earning assets experienced in
1995. Net interest income and the net interest margin benefited in 1995 from a
7.8% increased in average earning assets when compared to 1994. The loan
portfolio experienced growth in 1995, and average loans increased 8.7% over the
average in 1994. Securities decreased in 1995, by 1.2%.
Interest Sensitivity
An important element of earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
liabilities in a specific time interval. This gap can be managed by repricing
assets or liabilities, which can be effected by replacing an asset or liability
at maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities maturing in the same
time interval helps to hedge the risk and minimize the impact on net interest
income in periods of rising or falling interest rates.
SSB determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding sources
and pricing and off-balance-sheet commitments. These decisions are based on
management's outlook regarding future interest rate movements, the state of the
local and national economy, and other financial and business risk factors. SSB
uses computer simulations to measure the effect on net interest income of
various interest rate scenarios. This modeling reflects interest rate changes
and the related impact on net income over specified time horizons.
-47-
<PAGE>
The following tables present SSB's interest sensitivity position at
September 30, 1997 and at December 31, 1996. This is a one-day position which
continually is changing and is not necessarily indicative of SSB's position at
any other time.
Table 3
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
September 30, 1997 (1)
------------------------------------------------------------------
Within 3-12 1 to 5 Over
3 Months Months Years 5 Years Total
--------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans (net) $ 31,669 $ 19,331 $ 89,519 $ 400 $140,919
Investment securities, at amortized cost 550 2,462 7,169 8,238 18,419
Securities available for sale, at fair value 1,477 1,580 7,701 3,927 14,685
Federal funds sold 2,075 - - - 2,075
-------- -------- -------- -------- --------
Total earning assets 35,771 23,373 104,389 12,565 176,098
Interest Bearing Liabilities:
Deposits:
Demand & Savings 5,864 16,063 41,816 - 63,743
Money Market 1,844 5,271 3,603 - 10,718
Time deposits, $100,000 and over 2,149 4,042 4,022 - 10,213
Other time deposits 11,164 27,995 24,016 - 63,175
------ ------ ------ ------- ------
Total interest-bearing liabilities 21,021 53,371 73,457 - 147,849
Period Gap $ 14,750 $(29,998) $730,932 $ 12,565 $ 28,249
Cumulative Gap $ 14,750 $(15,248) $ 15,684 $ 28,249 $ 28,249
Ratio of cumulative gap to total earning
assets 8.38 % (8.66 %) 8.91 % 16.04 %
Target Cumulative Gap Range +(-) 15% +(-) 15 % +(-) 15 % +(-) 25 %
Ratio of interest-earning assets
to interest-bearing liabilities 170.2 % 43.8 % 142.1 %
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 170.2 % 79.5 % 110.6 %
</TABLE>
-48-
<PAGE>
<TABLE>
December 31, 1996 (1)
------------------------------------------------------------------
Within 3-12 1 to 5 Over
3 Months Months Years 5 Years Total
--------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans (net) $36,826 $19,921 $70,878 $ 383 $128,008
Investment securities, at amortized cost 519 1,232 9,362 6,708 17,820
Securities available for sale, at fair value 1,218 2,698 7,089 3,775 14,780
Federal funds sold 5,037 - - - 5,037
------ ------ ------- ------- -------
Total earning assets 43,600 23,851 87,329 10,866 165,645
------ ------ ------- ------- -------
Interest Bearing Liabilities:
Deposits:
Demand and savings 5,014 15,498 40,410 - 60,922
Money Market 1,791 5,215 3,399 - 10,405
Time deposits, $100,000 and over 1,764 5,056 3,369 - 10,189
Other time deposits 11,658 28,463 20,902 - 61,023
------ ------ ------- ------- -------
Total interest-bearing liabilities 20,227 54,232 68,080 - 142,539
------ ------ ------- ------- -------
Period Gap $23,373 $(30,381) $(19,249) $10,866 $23,106
Cumulative Gap $23,373 $ (7,008) $ 12,241 $23,107
Ratio of cumulative gap to total earning
assets 14.11 % (4.23%) 7.39 % 13.95 %
Target Cumulative Gap Range +(-) 15 % +(-) 15 % +(-) 15% +(-) 25 %
</TABLE>
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
As of September 30, 1997 SSB had $14.7 million more in assets than
liabilities subject to repricing within three months or less and was, therefore,
in an asset sensitive position. The cumulative gap at the end of one year was a
negative $30.0 million and, therefore in a liability-sensitive position. The one
year negative gap position reflects a loan base weighted predominantly in loans
repricing within one year. Approximately $74.4 million, or 50% of SSB's
interest-bearing liabilities, matures or reprices within one year or less. An
asset-sensitive institution's net interest margin generally will be impacted
favorably by increasing interest rates, while that of a liability sensitive
institutions will be impacted favorably by declining interest rates. To reduce
the impact of shifts in prevailing rates, a significant portion of SSB's loan
portfolio is either short-term or based upon a floating rate.
Noninterest Income
Noninterest income includes service charges and other income from
services rendered by SSB. In addition, other operating income includes gains and
losses realized from the sales and calls of investment securities and other
income items.
Noninterest income increased slightly from $1.02 million in 1995 to
$1.05 million in 1996. In the nine months ended September 30, 1997 noninterest
income was $888,000, compared to $756,000 for the same period in 1996. The
increase as attributable to growth in products producing fee income, such as
retail and commercial checking accounts and rental of safe deposit boxes.
Noninterest income increased from $799,000 in 1994 to $1.0 million in
1995 or 27.6%. The increase was attributable to increases associated with
service charges on deposit accounts which increased from $617,000 in 1994 to
$693,000 in 1995 and a loss of $85,000 from sale of securities in 1994.
-49-
<PAGE>
Table 4
<TABLE>
<CAPTION>
Noninterest Income
Nine Months Ended Years Ended
September 30, December 31,
------------------------ -----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $555 $536 $730 $693 $617
Other fees and commissions 348 272 376 327 267
--- --- --- --- ---
Non-interest income 903 808 1,106 1,020 884
Securities gains, net (15) (52) (56) 0 (85)
---- ---- ---- - ----
Total noninterest income $888 $756 $1,050 $1,020 $799
==== ==== ====== ====== ====
</TABLE>
Noninterest Expense
Noninterest expense increased from $4.5 million in 1995 to $4.7 million
in 1996 or 4.0%. In the nine months ended September 30, 1997 noninterest expense
was $3.5 million, compared to $3.3 million for the same period in 1996. The
category with the largest increase over 1995 was other operating expenses, which
increased 9.0% in 1996. Expense factors involved in this increase include
printing and supplies, consultant fees, and collection fees. The cost of
providing deposit insurance from the Federal Deposit Insurance Corporation
("FDIC") reflected a significant decrease from the $159,000 expenses incurred in
1995 to $2,000 in 1996. This decrease was due to reductions in FDIC insurance
premiums as a result of the re-capitalization of the FDIC's insurance fund.
Noninterest expenses increased from $4.2 million in 1994 to $4.5
million in 1995 or 6.8%. The category with the largest increase over 1994 was
salaries, which increased $219,000 or 15.1% in 1995. Factors involved in this
change included staffing for a new branch and a full year's expenses for our
operations center which opened in the middle of 1994. The cost of providing
deposit insurance from the FDIC continued to be a significant portion of
noninterest expense, although it declined from $289,000 in 1994 to $159,000 in
1995 due to the reductions in FDIC premiums as a result of the re-capitalization
of the FDIC's insurance fund.
Table 5
<TABLE>
<CAPTION>
Noninterest Expenses
Nine Months Ended Years Ended
September 30, December 31,
------------------------ -----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $1,662 $1,544 $2,195 $2,179 $1,949
Occupancy expenses 520 484 677 662 606
Other expenses 1,340 1,261 1,802 1,653 1,653
----- ----- ----- ----- -----
Total noninterest expenses $3,522 $3,289 $4,674 $4,494 $4,208
====== ====== ====== ====== ======
</TABLE>
Income Taxes
Reported income tax expense for the year ended December 31, 1996 was
$962,000, a 24.2% increase from the $775,000 for the year end December 31, 1995.
The effective tax rate increased slightly to 27.4% in 1996 compared to 26.6% in
1995. The increase in income tax expense in 1996 was due to the increase in
taxable income. Reported income tax expense for the year ended December 31, 1994
was
-50-
<PAGE>
$768,000 or a 27.1% effective tax rate. Note 7 to the consolidated financial
statements provides a reconciliation between the amount of income tax expense
computed using the federal statutory income tax rate and the Bank's actual
income tax expense and information regarding the principal items giving rise to
deferred taxes as of December 31, 1996 and 1995.
Loan Portfolio
SSB's loan portfolio is comprised of commercial loans, real estate
loans, home equity loans, consumers loans, and other miscellaneous types of
credit. The primary markets in which SSB makes loans are generally areas
contiguous to its branch locations. The philosophy is consistent with SSB's
focus on providing community-based financial services.
As of December 31, 1996, the loan portfolio was $128.0 million, net of
unearned income, an increase from the prior year of 9.0% or $10.6 million. Net
loans increased an additional $10.3 million from December 31, 1996 to September
30, 1997. This increase was due in part to the improved local economy as well as
management's increased efforts to grow the portfolio. Real estate loans continue
to be the major portion of the portfolio, with loans from that category totaling
$87.8 million, or 66.0% of gross loans at December 31, 1996, and $95.8 million,
or 66.5% of gross loans at September 30, 1997. During 1996 loans to individuals
increased by $6.1 million or 21.7% as management attempted to diversify the
portfolio and increase its emphasis on providing competitive consumer lending
products. Growth in this segment of the loan portfolio moderated in the first
nine months of 1997.
Total loans increased 5.0% from year-end 1994 to year-end 1995. The
composition of SSB's portfolio continued to be in real estate loans, increasing
from $80.0 million at year-end 1994 to $85.5 million at year-end 1995, an
increase of 6.8%. The installment category increased from $25.1 million at
year-end 1994 to $28.0 million at year-end 1995. An analysis of the loan
portfolio for the most recent three years is included in the following table:
Table 6
<TABLE>
<CAPTION>
Loan Portfolio
September 30,
------------------------------------------------------------
1997 1996
--------------------------- ----------------------------
% to % to
Total Total
Gross Gross
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans $95,838 66.53% $80,551 65.42%
Commercial, industrial
& agricultural loans 10,970 7.61% 9,838 7.99%
Loans to individuals for
household, family and other
consumer expenditures 36,957 25.65% 32,250 26.19%
All Other Loans 298 .21% 493 .40%
Total Gross Loans 144,063 100.00% 123,132 100.00%
------- -------
Less unearned income (2,566) (2,090)
Less deferred loan fee (525) (417)
Less allowance for loan losses (2,630) (2,368)
Total Net Loans $138,342 $128,007
======== ========
</TABLE>
-51-
<PAGE>
<TABLE>
December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- --------------------------
% to % to % to
Total Total Total
Gross Gross Gross
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans $87,803 65.98% $85,503 70.05% $80,044 68.95%
Commercial, industrial
& agricultural loans 10,332 7.76% 7,938 6.50% 10,402 8.96%
Loans to individuals for
household, family and other
consumer expenditures 34,065 25.60% 28,002 22.94% 25,099 21.62%
All Other Loans 868 .66% 613 .51% 552 .47%
Total Gross Loans 133,068 100.00% 122,056 100.00% 116,097 100.00%
------- ------- -------
Less unearned income (2,211) (1,579) (1,328)
Less deferred loan fee (469) (478) (503)
Less allowance for loan losses (2,380) (2,552) (2,436)
Total Net Loans $128,008 $117,447 $111,830
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1993 1992
--------------------------- -------------------------
% to % to
Total Total
Gross Gross
Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans $66,904 66.19% $57,030 62.89%
Commercial, industrial
& agricultural loans 9,538 9.44% 9,287 10.24%
Loans to individuals
for household, family and other
consumer expenditures 24,185 23.93% 24,149 26.63%
All Other Loans 449 .44% 220 .24%
Total Gross Loans 101,075 100.00% 90,686 100.00%
------- -------
Less unearned income (1,173) (1,310)
Less deferred loan fee (416) (246)
Less allowance for loan losses (2,015) (1,556)
Total Net Loans $97,471 $87,574
======= =======
</TABLE>
Consistent with its focus on providing community-based financial
services, SSB generally does not make loans outside its principal market areas.
SSB maintains a policy not to originate or purchase loans classified by
regulators as highly leveraged transactions or loans to foreign entities or
individuals.
SSB's unfunded loan commitments (excluding unused lines of credit and
credit card lines) were approximately $2.5 million at December 31, 1996 compared
to $2.1 million at December 31, 1995.
Included in Table 7 is a maturity schedule of selected loans within the
portfolio. Actual maturities may differ from those shown in the table as loans
often are refinanced or repaid prior to maturity. A significant portion of SSB's
loans have a variable rate feature which allows SSB to change rates as "prime
rates" change, thus reducing SSB's interest rate risk.
-52-
<PAGE>
Table 7
Loan Maturity Schedule
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Maturing
---------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $2,066 $8,264 $ - $10,330
Installment 6,553 24,713 234 31,500
Bank Card 381 - - 381
Real Estate 4,085 12,255 71,836 88,176
----- ------- ------- ------
Total $13,085 $45,232 $72,070 $130,387
======= ======= ======== ========
Loans maturing after one year with:
Fixed interest rates $19,770 $ 124 $ 19,894
Variable interest rates 25,462 71,946 97,408
------- ------- ------
Total $45,232 $72,070 $117,302
======== ======== ========
</TABLE>
Allowance for Loan Losses
The allowance for loan losses represents an amount management believes
is adequate to provide for potential loan losses inherent in the loan portfolio.
However, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because those
risks are influenced by general economic trends as well as conditions affecting
individual borrowers, management's judgment of the allowance is necessarily
approximate and imprecise. The allowance is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance and the size of the
allowance in comparison to peer Companies identified by regulatory agencies. SSB
is examined at different times by the FDIC and the State Corporation
Commission's Bureau of Financial Institutions. The last examination of SSB was
conducted by the Bureau of Financial Institutions as of June 30, 1997.
The provision for loan losses for the year ended December 31, 1996 was
$345,000, an increase of $21,000 over the previous year. Management charged
income for the provision deemed necessary based on its analysis of the loan
portfolio. After reviewing the increase in nonperforming loans and specifically
nonaccrual loans, management believes that the allowance for loan losses is at
the appropriate level to cover potential losses. SSB had recoveries of $133,000
during 1996, compared to charge-offs of $650,000. Recoveries in 1995 totaled
$83,000 while charge-offs totaled $291,000. For the nine months ended September
30, 1997, the provision for loan losses was $262,000. The allowance for loan
losses was $2.6 million at September 30, 1997, compared to $2.4 million at
September 30, 1996 and $2.4 million at December 31, 1996.
-53-
<PAGE>
Table 8
Allowance for Loan Losses
<TABLE>
<CAPTION>
September 30, December 31,
-------------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $2,380 $2,551 $2,551 $2,436 $2,015 $1,556 $1,110
Loans charged off:
Real Estate - 10 23 - 11 43 62
Commercial 123 307 324 166 90 149 215
Installment 216 189 294 122 140 125 205
Credit card 18 1 9 3 12 4 11
--- --- --- --- --- --- ---
Total loans charged off 357 507 650 291 253 321 493
Recoveries of loans previously
charged off:
Real Estate 4 16 17 11 11 1 -
Commercial 239 2 - - 91 - 3
Installment 97 78 114 71 90 106 114
Credit card 5 - 3 - 2 1 0
--- --- --- --- --- --- ---
Total recoveries 345 96 134 82 194 108 117
--- --- --- --- --- --- ---
Net loans recovered (charged off) 12 411 (516) (209) (59) (213) (376)
Provision for loan losses 262 228 345 324 480 672 822
--- --- --- --- --- --- ---
Balance, end of period $2,630 $2,368 $2,380 $2,551 $2,436 $2,015 $1,556
====== ====== ====== ====== ====== ====== ======
Average total loans 138,438 124,029 $123,842 $117,156 $105,518 94,172 82,230
Total loans (net of unearned
income) 136,053 122,233 $130,856 $120,476 $112,332 99,902 87,820
Selected Loan Loss Ratios:
Net charge-offs (recoveries) to
average loans .01% .34% .42% 0.18% 0.06% 0.23% 0.46%
Provisions for loan losses to
average loans .19% .19% 0.28% 0.28% 0.45% .07% .10%
Provision for loan losses to
net charge-offs (2381.82)% (55.47)% (66.7)% (155.00)% (813.60)% (315.49)% (218.62)%
Allowance for loan losses to
year-end loans 1.87 % 1.87% 1.82% 2.12% 2.17% 2.02% 1.77%
</TABLE>
Total loans charged off, net of recoveries, when compared to 1994,
increased in 1995, a result of losses in the commercial loan portfolio. Net
charge-offs increased from $59,000 in 1994 to $209,000 in 1995. Also included in
Table 8 is the ratio of net charge-offs to average loans outstanding during the
period. This ratio increased to 0.18% for 1995 compared to 0.05% in 1994.
Effective January 1, 1995, SSB adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure). The effect of adopting this new
accounting standard was immaterial to the operating results of SSB for the year
ended December 31, 1995.
Under the new accounting standard, a loan is considered to be impaired
when it is probable that SSB will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
loan is not considered to be impaired if (a) there is an insignificant delay in
or shortfall
-54-
<PAGE>
in the amounts of payments, or (b) SSB expects to collect all amounts due,
including interest accrued at the contractual interest rate for the period of
delay. SSB does not aggregate loans for risk classification.
The allowance for loan losses related to loans identified as impaired
is primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate of
the future cash flows on the loan discounted at the loan's effective interest
rate. At September 30, 1997 and at December 31, 1996 and 1995, the recorded
investment in loans which had been identified as impaired loans, in accordance
with SFAS No. 114, totaled $1.2 million, $1.5 million and $972,000,
respectively. The related specific valuation allowance of these loans was
$225,000 at December 31, 1995. There was no specific valuation allowance for
impaired loans at December 31, 1996. The average recorded investment in impaired
loans for the years ended December 31, 1995 was $1.2 million and $857,000
respectively. During the years ended December 31, 1996 and 1995 the bank did not
recognize any interest income on the impaired loans.
Presented in Table 9 are details of the allocation of the allowance for
loan losses. The allocation for loan losses has remained relatively constant
over the past five years.
Table 9
Allocation for Allowance for Loan Losses in Dollars
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
1997 1996
------------------------ -----------------------
% of Loans % of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 205 7.78 % $ 184 7.78 %
Real Estate 1,794 68.21 % 1,615 68.21 %
Installment 607 23.09 % 547 23.09 %
Other Loans 24 0.92 % 22 0.92 %
-- ------ -- ------
Total allowance for loan losses $2,630 100.00 % $2,368 100.00 %
====== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- ------------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $185 7.76% $166 6.50% $218 8.96%
Real Estate 1,570 65.99 1,787 70.06 1,679 68.94
Installment 607 25.60 585 22.94 527 21.62
Other Loans 15 0.65 13 0.50 12 0.48
-- ---- -- ---- -- ----
Total allowance for loan losses $2,379 100.00% $2,551 100.00% $2,436 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1993 1992
------------------------ -----------------------
% of Loans % of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $190 9.44% $159 10.24%
Real Estate 1,334 66.19 979 62.89
Installment 482 23.93 414 26.63
Other Loans 9 0.44 4 0.24
- ---- - ----
Total allowance for loan losses $2,015 100.00% $1,556 100.00%
====== ======= ====== =======
</TABLE>
Nonperforming Assets
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, loans 90 days or more past due, and other real estate owned
were $3.7 million at December 31, 1996. An decrease of $655,000 from one year
earlier. Total nonperforming assets decreased further to $2.6 million at
September 30, 1997. Total nonperforming assets were $4.3 million at December 31,
1995 compared to $2.9 million at December 31, 1994. Table 10 indicates that as
of December 31, 1996 SSB had a total of $33,000 of loans that were 90 days past
due and still accruing interest and as of December 31, 1995 SSB had $41,000 of
loans in that category. Sales of foreclosed properties totaled $405,000 for the
year ended December 31, 1996. The ratio of nonperforming assets to period-end
loans and foreclosed properties is also detailed within Table 10.
-56-
<PAGE>
Table 10
<TABLE>
<CAPTION>
Nonperforming Assets
September 30, December 31,
------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $2,618 $2,977 $3,500 $3,741 $2,712 $1,862 $2,290
Loans past due 90 days accruing
interest 27 23 33 41 26 24 7
Troubled debt restructuring - - - - - -
--- --- --- --- --- --- ---
Total nonperforming loans $2,645 $3,000 $3,533 $3,782 $2,738 $1,886 $2,297
Other real estate owned:
Foreclosed properties 9 323 153 558 200 325 393
Other real estate owned, net 9 323 153 558 200 325 393
--- --- --- --- --- --- ---
Total nonperforming assets $2,654 $3,323 $3,686 $4,340 $2,938 $2,211 $2,690
====== ====== ====== ====== ====== ====== ======
Nonperforming assets to
period-end total loans and
other real estate 1.88 % 2.66 % 2.73% 3.17% 2.42% 1.90% 2.60%
Foregone interest income on
nonaccrual loans $287 $205 $260 $133 $188 $131 $250
Interest income recorded on
non- accrual loans during the
year - - - - - - -
--- --- --- --- --- --- ---
</TABLE>
(1) This total represents one property acquired in 1989 for future branch
expansion, which in 1991 was placed on the market for resale and has
subsequently been reclassified as a nonperforming asset.
Nonaccrual loans decreased from $3.7 million as of year-end 1995 to
$3.5 million as of year-end 1996 and to $2.6 million at September 30, 1997.
Loans are placed on nonaccrual status when collection of interest and principal
is doubtful, generally when loans become 90 days past due unless they are well
secured and in the process of collection. There are three negative implications
for earnings when a loan is placed on nonaccrual status. All interest accrued
but unpaid at the date the loan is placed on nonaccrual status is either
deducted from interest income or written off as a loss. Second, accruals of
interest are discontinued until it becomes certain that both principal and
interest can be repaid. Third, there may be actual losses which necessitate
additional provisions for loan losses charged against earnings.
During 1996, approximately $260,000 in additional interest would have
been recorded if SSB's nonaccrual loans had been current and performing in
accordance with their original terms.
SSB closely monitors loans that are deemed to be potential problem
loans. Loans are viewed as potential problem loans when possible credit problems
of the borrowers or industry trends cause
-57-
<PAGE>
management to have doubts as to the ability of such borrowers to comply with
current repayment terms. Those loans are subject to regular management
attention, and their status is reviewed on a regular basis.
As of September 30, 1997, management is not aware of any loans other
than those disclosed in the foregoing table and discussion, for which management
has serious doubt as to the ability of the borrower to comply with loan
repayment terms.
Securities
The securities portfolio is maintained to manage excess funds in order
to provide diversification and liquidity in the overall asset management policy.
The maturity of securities purchased are based on the needs of SSB and current
yields and other market conditions.
When securities are purchased, they are classified as investment
securities when management has the positive intent and SSB the ability at the
time of purchase to hold them until maturity. Investment securities are carried
at cost adjusted for amortization of premium and accretion of discounts.
Unrealized losses in the portfolio are not recognized unless management believes
that other than a temporary decline has occurred. Securities to be held for
indefinite periods of time and not intended to be held to maturity, are
classified as available for sale. Securities available for sale are recorded at
fair value, based on quoted market prices. The net unrealized holding gain or
loss on securities available for sale, net of deferred income taxes, is included
as a separate component of stockholders' equity. A decline in the fair value of
any securities available for sale below cost that is deemed other than temporary
is charged to earnings resulting in a new cost basis for the security. Cost of
securities sold are determined on the basis of specific identification.
The carrying value of investment securities amounted to $32.5 million
at December 31, 1996 compared to $30.8 million at December 31, 1995. The
comparison of book value to fair value is shown in note 2 of the notes to the
consolidated financial statements. Note 2 also provides an analysis of gross
unrealized gains and losses of investment securities. Securities available for
sale are used as part of SSB's interest rate risk management strategy and may be
sold in response to changes in interest rates, changes in prepayment risk,
liquidity needs, the need to increase regulatory capital and other factors. The
fair value of securities available for sale totaled $14.8 million at December
31, 1996 compared to $13.0 million at December 31, 1995. The comparison of fair
value to book value is shown in Note 2 of the notes to the consolidated
financial statements. Note 2 also provides an analysis of gross unrealized gains
and losses of securities available for sale. Included in Table 11 are the
carrying values and fair values of investment securities and securities
available for sale as of September 30, 1997 and December 31, 1996, 1995 and
1994.
Table 11
Securities Portfolio
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------------
Held to Maturity Available for Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Agencies $ - $ - $ 5,432 $ 5,350
Other Agencies 8,514 8,530
------- ------- ------- -------
Total Federal Agencies - - 13,946 13,880
State and political subdivision 16,834 17,423 - -
Other securities 1,384 1,401 - -
------- ------- ------- -------
Total $18,218 $18,824 $13,946 $13,880
======= ======= ======= =======
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Agencies $ - $ - $6,527 $6,538
Other Agencies 8,191 8,242
----- ----- ----- -----
Total Federal Agencies - - 14,718 14,780
State and political subdivision 16,184 16,380 - -
Other securities 1,636 1,665 - -
----- ----- ----- -----
Total $17,820 $18,045 $14,718 $14,780
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Agencies $ - $ - $4,254 $4,336
- -
Other Agencies - - 8,588 8,687
----- ----- ----- -----
Total Federal Agencies - - 12,842 13,023
State and political subdivision 16,611 17,034 - -
Other securities 1,387 1,449 - -
----- ----- ----- -----
Total $17,998 $18,483 $12,842 $13,023
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Agencies $ - $ - $4,641 $4,584
- -
Other Agencies - - 8,503 8,183
----- ----- ----- -----
Total Federal Agencies - - 13,144 12,767
State and political subdivision 12,982 12,750 - -
Other securities 1,849 1,853 - -
----- ----- ----- -----
Total $14,831 $14,603 $13,144 $12,767
======= ======= ======= =======
</TABLE>
-59-
<PAGE>
Table 12 provides an analysis of maturities of investment securities
and securities available for sale at September 30, 1997 and December 31, 1996
and 1995.
Table 12
Maturities of Investments
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Held to Maturity Available for Sale
--------------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less $3,012 $3,032 6.11 % $3,053 $3,057 5.81 %
After one year to five years 7,169 7,269 5.27 % 7,682 7,701 5.80 %
After five years to ten years 5,480 5,653 5.50 % 1,220 1,236 6.98 %
After ten years 2,758 2,843 5.88 % 2,623 2,691 7.78 %
------ ------ ------ ------ ------
Total $18,419 $18,797 5.57 % $14,578 $14,685 6.26 %
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Held to Maturity Available for Sale
--------------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less $1,651 $1,673 6.13% $2,503 $2,512 6.28%
After one year to five years 8,532 8,632 5.32% 7,024 7,025 5.68%
After five years to ten years 3,905 3,959 5.16% 944 950 7.01%
After ten years 3,732 3,781 5.76% 4,247 4,293 7.84%
------ ------ ------ ------
Total $17,820 $18,045 5.46% $14,718 $14,780 6.50%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Held to Maturity Available for Sale
--------------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less $1,025 $1,043 6.41% $1,915 $1,928 6.65%
After one year to five years 8,643 8,869 5.61% 7,356 7,392 6.30%
After five years to ten years 4,325 4,448 5.47% 1,185 1,228 7.36%
After ten years 4,005 4,123 5.63% 2,386 2,475 7.05%
----- ----- ----- -----
Total $17,998 $18,483 5.62% $12,842 $13,023 6.58%
======= ======= ======= =======
</TABLE>
-60-
<PAGE>
Deposits
Deposits provide funds for SSB's investments in loans and securities,
and the interest paid for deposits must be managed carefully to control the cost
of funds. The table below presents a three year history of total deposits and
the rates paid on interest-bearing deposit accounts, beginning with the year
ended December 31, 1994.
Table 13
Deposit Analysis
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1997 1996
---- ----
Rate Rate
Balance Paid Balance Paid
------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing accounts $16,611 $17,362
------ ------
Interest-bearing liabilities:
Money market and NOW accounts 28,810 2.93 % 29,052 2.94 %
Savings deposits 45,651 4.17 % 40,140 4.05 %
Time Deposits >100M 10,213 5.54 % 8,530 5.47 %
Other Time Deposits 63,196 5.48 % 56,180 5.41 %
------ ------
Total interest-bearing accounts 147,870 4.50 % 133,902 4.46 %
======= =======
Total $164,481 $151,264
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Rate Rate Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing accounts $15,226 - $15,360 - $12,597 -
Interest-bearing liabilities:
Money market and NOW accounts 28,517 2.96% 28,070 3.24% 28,687 3.00%
Savings deposits 42,811 4.08% 39,033 4.28% 32,615 3.31%
Time Deposits >100M 10,189 5.51% 8,836 5.55% 8,306 4.37%
Other Time Deposits 61,022 5.37% 55,984 5.34% 53,800 4.30%
------- ------- ------
Total interest-bearing accounts 142,539 4.48% 131,923 4.60% 123,408 3.76%
------- ------- -------
Total $157,765 $147,283 $136,005
======== ======== ========
</TABLE>
-61-
<PAGE>
Table 14
Maturity of CDs $100,000 and Over
<TABLE>
<CAPTION>
Within Three To Percent of
Three Twelve Over One Total
Months Months Year Total Deposits
------ ------ ---- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
September 30, 1997 $2,149 $4,042 $4,022 $10,213 6.38%
December 31, 1996 $1,742 $5,039 $3,408 $10,189 6.46%
</TABLE>
Deposits at December 31, 1996 were $157.8 million, up $10.5 million
from December 31, 1995, or 7.12%. The growth in deposits was led by other time
deposits which increased to $61.0 million at December 31, 1996, up $5.0 million
from year end 1995, or 9.0%. Savings accounts also increased, to a total of
$42.8 million at December 31, 1996, for an increase of $3.8 million from
year-end December 31, 1995, an increase of 9.7%.
Deposits at December 31, 1995 were $147.3 million, a 8.29% increase
from 1994. Savings accounts increased from $32.6 million at December 31, 1994 to
$39.0 million at December 31, 1995, or an increase of 19.7%. Similarly,
Certificates of deposit under $100,000 increased from $53.8 million at December
31, 1994 to $56.0 million at December 31, 1995, an increase of 4.1%.
Capital Resources
Capital represents funds, earned or obtained, over which financial
institutions can exercise great or longer control in comparison with deposits
and borrowed funds. The adequacy of SSB's capital is reviewed by management on
an ongoing basis with reference to the size, composition, and quality of SSB's
resources and consistency with regulatory requirements and industry standards.
Management seeks to maintain a capital structure that will support anticipated
asset growth and absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, recently adopted new capital guidelines
to supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the new guidelines categorize
assets and off-balance-sheet items into four risk-weighted categories. After the
transition period which ended December 31, 1992, the minimum ratio of qualifying
total capital to risk-weighted assets is now 8.0%, of which 4.0% must be Tier 1
capital. Tier 1 capital is defined as common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. SSB
had a ratio of risk-weighted assets to total capital of 11.45% on December 31,
1996 and a ratio of risk-weighted assets to Tier 1 capital of 11.18%. Both of
these exceed the fully phased-in capital requirements.
-62-
<PAGE>
Table 15 labeled Analysis of Capital contains a three year summary,
beginning with 1994, of the breakdown between Tier 1 capital, Tier 2 capital,
risk-weighted assets, as well as the ratios discussed above.
Table 15
Analysis of Capital
<TABLE>
<CAPTION>
September 30, December 31,
-----------------------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tier 1 Capital
Common stock $5,094 $5,076 $5,092 $5,118 $5,100
Surplus 2,096 1,993 2,081 2,185 2,102
Retained earnings (deficit) 11,810 9,719 9,622 7,844 6,428
Total Tier 1 capital 19,000 16,788 16,795 15,147 13,630
Tier 2 Capital
Allowance for loan losses 1,525 1,405 1,429 1,349 1,416
Allowance for long-term debt - - - - -
----- ----- ----- ----- -----
Total Tier 2 capital 1,525 1,405 1,429 1,349 1,416
----- ----- ----- ----- -----
Total risk-based capital $20,525 $18,193 $18,224 $16,496 $15,046
======= ======= ======= ======= =======
Risk weighted assets 120,912 112,452 $113,359 $107,911 $113,133
Capital Ratios:
Tier 1 risk-based capital ratio 15.71 % 14.92 % 14.82% 14.04% 12.05%
Total risk based capital ratio 16.98 % 16.18 % 16.08% 15.29% 13.30%
Tier 1 capital to average adjusted total assets 10.30 % 10.05 % 9.70% 9.24% 9.17%
</TABLE>
Liquidity
Liquidity refers to the SSB's ability to meet present and future
financial obligations on a timely basis and at reasonable cost. SSB manages its
liquidity of both assets and liabilities.
Asset liquidity is derived from the management of cash due from banks,
fed funds sold, and available-for-sale investment securities, all of which
provide cash flow to meet liquidity demands. The aggregate of these assets
represented 14.1%, 13.2% and 14.5% of total assets at the end of 1996, 1995, and
1994, respectively.
Liability liquidity is primarily derived from the management of
deposits. Demand, savings, and time deposits are used with maturity dates from 1
day to five years. Such deposits represented 98.4%, 98.8% and 98.7% of total
liabilities at the end of 1996, 1995, and 1994, respectively. Additionally,
management monitors the volume of $100,000 and over time deposits that it
considers to be potentially volatile liabilities. Time deposits over $100,000 as
a percent of total time deposits were 14.3%, 13.6%, and 13.4% at the end of
1996, 1995, and 1994, respectively. All other time deposits plus savings and
demand deposits are considered to be core deposits because of their historical
stability and relative low cost. Certificates of deposit amounting to $45.4
million mature within the next 12 months. Management believes that this amount
will present no significant liquidity risk in light of SSB's strong
capitalization, long history of deposit growth, and minimal dependence upon
non-core deposits.
-63-
<PAGE>
Additional sources of liquidity available to SSB include the capacity
to borrow additional funds when the need arises. SSB has obtained lines of
credit with two of its correspondents banks totaling approximately $7,000,000
and $25,000,000 from the Federal Home Loan Bank.
SSB has no long term debt.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of SSB.
Emerging Issues
The Federal Financial Institutions Examination Council ("FFIEC") first
alerted the banking industry to potential year 2000 computer problems in June
1996 and recommended that institutions perform risk assessments and adopt
strategies to address vulnerable systems. In a May 1997 policy statement the
FFIEC strongly encouraged institutions to complete an inventory of core computer
functions and set priorities for year 2000 goals by September 30, 1997. Banks
are expected to largely complete programming changes and have systems testing
well underway by December 31, 1998. The federal bank regulatory agencies are
assessing individual institutions' planning efforts and have announced that they
expect to complete examinations of individual institutions' conversion efforts
by mid-1998.
SSB has established a plan to address year 2000 issues. Successful
implementation of this plan will eliminate any extraordinary expenses related to
the year 2000. The plan includes obtaining confirmation from mission-critical
suppliers and vendors regarding their year 2000 plans. If confirmations are
unavailable, SSB will request specific documentation of the supplier's or
vendor's plans and will regularly follow up with progress checks. Areas to be
monitored include but are not limited to mainframe systems, microcomputers,
ATMs, all software, electrical systems, phone systems, elevators and vaults. SSB
intends to test all mission critical systems beginning in January 1999.
SHAREHOLDER PROPOSALS
If the Reorganization is not consummated, proposals of SSB shareholders
intended to be presented at the next annual meeting of SSB, must be received in
writing by the Secretary of SSB no later than November 26, 1997, in order to be
included in the proxy materials relating to the next annual meeting.
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BANK OF NORTHUMBERLAND, INCORPORATED
General
BNI, a Virginia banking corporation headquartered in Heathsville,
Virginia, was incorporated under the laws of the Commonwealth of Virginia as a
state chartered bank in 1910. BNI is a community oriented financial institution
that provides varied banking services to small and medium-sized businesses and
individuals located in its market area of the Northern Neck area of Virginia.
BNI strives to provide its customers with products comparable to statewide
regional banks located in its market area, while maintaining the prompt response
and level of service of a community bank. Management believes this operating
strategy is effective in BNI's market area.
Its banking activities include receiving demand, savings and time
deposits for personal and commercial accounts; making commercial, agricultural,
real estate and consumer loans; acting as a United States tax depository
facility; providing money transfer and cash management services, selling
traveler's checks, bank money orders; issuing letters of credit; handling
domestic collections; providing night depository facilities; and investing in
U.S. Treasury securities and securities of other U.S. government agencies and
corporations and state and municipal securities.
Two of its branches are equipped with automatic teller machines
purchased during 1995. The automatic teller machine provides 24-hour service to
customers wishing to make withdrawals from and deposits to their personal
checking accounts, to transfer funds between checking and savings accounts, to
make balance inquiries, and to make loan payments. BNI is a member of the
CIRRUS(R)/MasterCard(R) and Plus(R)/VISA(R) automatic teller machine networks,
providing its customers with access to their funds nationwide and in selected
foreign countries.
Lending Activities
General. BNI engages in a broad range of lending activities, including
making real estate, commercial and consumer loans within its primary service
area. At December 31, 1996, BNI's loans totaled $76.7 million, representing
58.3% of total assets. At that date, 65.2% of the loans were construction,
commercial and residential real estate loans, 24.6% were commercial loans and
10.2% were consumer loans.
The principal economic risk associated with each of the categories of
loans in BNI's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage the risk, BNI's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and installment loans to
individuals varies based upon employment levels, consumer confidence,
fluctuations and value of residential real estate and other conditions that
affect the ability of consumers to repay indebtedness. The risk associated with
commercial loans varies based on the strength and activity of the local economy
of BNI's market area. The risk associated with real estate construction loans
varies based on the supply and demand for the type of real estate under
construction. Most of BNI's residential real estate construction loans are for
pre-sold and contract homes.
While BNI does not monitor or track specific economic data from any
particular source, it does rely on information contained in local, regional and
national publications dealing with economic activity, consumer confidence,
employment trends, residential and commercial real estate sales and
construction, and resort activities. In addition to this, BNI's directors,
officers and staff members are involved in a wide variety of local business,
civic and charitable organizations which provides the overall monitoring of the
general direction and developing trends that affect the business climate of the
region.
Real Estate Lending-Construction. BNI provides construction financing
for a variety of commercial and residential single-family and multi-family
developments. These include both construction loans to experienced builders and
loans to consumers for owner occupied residences. Construction lending entails
significant additional risk as compared with residential mortgage lending.
Construction loans to
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<PAGE>
builders can involve larger loan balances concentrated with single borrowers or
groups of related borrowers. Also, with construction loans, funds are advanced
upon the security of the home under construction, for which the value is
uncertain prior to the completion of its construction. Therefore, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. Residential construction loans to
consumers, for which a permanent loan commitment from another lender approved
prior to loan closing is required, are subject to the additional risk of the
permanent lender failing to provide the necessary funds at closing, either due
to the borrower's inability to fulfill the terms of his commitment or due to the
permanent lender's inability to meet its funding commitments. In addition to its
usual credit analysis of the borrowers, BNI seeks to obtain a first lien on the
property as security for its construction loans. At December 31, 1996,
approximately 3.19% of BNI's total real estate loans were collateralized by
properties under construction.
Real Estate Lending-Commercial. BNI provides permanent financing for a
variety of commercial developments but concentrates on owner-occupied projects.
Occasionally, in the normal course of business, BNI will provide a limited
amount of financing for income producing, non-owner occupied properties which
meet all the guidelines established by loan policy. These loans generally do not
exceed 75% of current appraised or market value, whichever is lower, and are
written on terms that provide for a maturity provision or interest rate
adjustment available from three to five years from the note date. At December
31, 1996, approximately 10.49% of BNI's total real estate loans were
collateralized by commercial properties.
Real Estate Lending-Residential. BNI makes residential real estate
loans, including home equity loans, to enable borrowers to purchase, refinance
or improve residential real property. The loans are collateralized by mortgage
liens on the related property, substantially all of which are located in
Northumberland County, Virginia. At December 31, 1996, approximately 86.31% of
BNI's total real estate loans were collateralized by single-family and
multifamily residences.
Commercial Lending. As a full service community bank, BNI is a major
lender to primarily small businesses in its market area. Commercial business
loans generally have a higher degree of risk than residential mortgage loans,
but have commensurably higher yields. To manage these risks, BNI generally
secures appropriate collateral and carefully monitors the financial condition of
its business borrowers and the concentration of such loans in its portfolio.
Residential mortgage loans are generally made on the basis of the borrower's
ability to make repayment from employment and other income and are secured by
real estate whose value tends to be easily determined. In contrast, commercial
business loans may be substantially dependent on the success of the business
itself. Further, the collateral for secured commercial business loans may
depreciate over time and cannot be appraised with as much precision as
residential real estate.
Consumer Lending. BNI offers many types of loans and credits to
customers. BNI provides lines of credit, uncollateralized or collateralized, and
provides various types of personal and automobile loans. Such loans range from
demand, time and installment loans to automobile and home equity loans. BNI
introduced a VISA(R) debit card bearing its name in late 1995.
Credit Evaluation and Loan Underwriting. BNI places priority on meeting
the borrowing requirements of its credit-worthy depositors. Non-deposit,
credit-worthy customers will also be granted loans when their requests meet the
established requirements, and there are sufficient funds available to satisfy
the demand. General economic conditions in the trade area, loan demand and yield
opportunities will be the principal determining factors of loan levels within
the categories previously noted. BNI's underwriting practices, which are
consistently applied, involve investigation of sources of income, employment
history, details of existing debt, obtaining a credit report if the customer is
previously unknown to BNI and compiling a summary of the borrower relative to
all these areas. The primary source of repayment is normally the ability to pay
from operations with the secondary sources usually being collateral.
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<PAGE>
Market Area
BNI's market area is in the Northern Neck area of Virginia. The
Northern Neck encompasses the counties of Northumberland, Lancaster, Richmond
and Westmoreland. Each of BNI's three branches is located on a major federal
highway which traverses its market area. BNI maintains the largest market share
for deposits in Northumberland County where all three of its branches are
located. With a population of approximately 11,300, Northumberland County is
known as a summer resort community for vacationers with second homes who enjoy
spending their time fishing and boating on the adjoining Chesapeake Bay, Potomac
River and Great Wicomico River. Additionally, the Rappahannock River, a popular
river for Virginia vacationers, sportsmen and second homeowners is nearby.
Northumberland County has experienced steady growth in recent years as
nonresident homeowners, particularly retirees, develop and construct homes to be
used as vacation or second homes. According to the 1990 census, the population
of Northumberland County increased by 7.1% from 1980 to 1990.
Employees
As of December 31, 1996, BNI had 32 full-time employees. None of its
employees are represented by any collective bargaining agreements and relations
with employees are considered excellent.
Competition
Competition in the financial services industry in the Northern Neck
area of Virginia is intense. Regional and super-regional banking organizations,
along with other financial institutions and companies that offer financial
services, such as savings and loan associations, credit unions, securities
firms, insurance companies, small loan companies, mortgage companies and other
financial service enterprises compete against one another. Competition among
financial institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges, the
quality of services rendered, the convenience of banking facilities and in the
case of loans to large commercial borrowers, relative lending limits. Additional
competition for depositors' funds comes from U.S. Government securities, private
issuers of debt obligations and suppliers of other investment alternatives for
depositors. Many of BNI's nonbank competitors are not subject to the same
extensive federal regulations that govern federally-insured banks and state
regulations governing state chartered banks. As a result, such nonbank
competitors may have certain advantages over BNI in providing certain services.
Many of the financial organizations in competition with BNI have
greater resources than BNI and are able to offer similar services at varying
costs and greater loan capacities.
Property
BNI currently owns all three of its buildings from which its operations
are conducted. Its principal branch and headquarters are located at the county
seat of Heathsville and are adjacent to the courthouse. This branch contains
BNI's greatest concentration of depositors. Callao, Virginia is the location of
the second greatest concentration of depositors. The Callao branch acquired an
ATM machine in 1995. The third branch is located in Burgess, Virginia at the
corner of US 360 and State Route 200, which is the main road to Kilmarnock,
Virginia from Heathsville, Virginia. The Burgess branch also acquired an ATM
machine in 1995. All of BNI's branch operations are located on US 360 which is
the major federal highway through the Northern Neck linking it to Richmond,
Virginia, the State's capital.
There are no liens on any of the property owned by BNI as of December
31, 1996. Additionally, BNI is not a party to any lease agreements on any of its
properties.
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<PAGE>
Security Ownership of Management
The following table sets forth information as of November 21, 1997
regarding the number of shares of BNI Common Stock beneficially owned by all
directors of BNI, by the executive officers of BNI and by all directors and
executive officers as a group. For the purposes of this table, beneficial
ownership has been determined in accordance with the provisions of Rule 13d-3
under the Securities and Exchange Act of 1934 (the "Exchange Act"), as amended,
under which, in general, a person is deemed to be a beneficial owner of a
security if he has or shares the power to vote or direct the voting of the
security or the power to dispose or direct disposition of the security, or if he
has the right to acquire beneficial ownership of the security within 60 days.
Common Stock
Name Beneficially Owned Percent of Class
- ---- ------------------ ----------------
Director
Robert L. Covington 83,534 3.3
S. Lake Cowart, Sr. 43,080 1.7
L. Edelyn Dawson, Jr. 16,256 0.6
F. Warren Haynie, Jr. 4,000 0.2
W. Leslie Kilduff 104,056 4.1
Lewis R. Reynolds 18,238 0.7
Charles R. Rice 58,568 2.3
William E. Sanford, Jr. 44,688 1.8
Howard R. Straughan, Jr. 116,000 4.6
All present executive officers
and directors as a group
(9 persons) 488,420 19.2
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BANK OF NORTHUMBERLAND, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of BNI. This discussion and analysis should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Proxy Statement/Prospectus.
Overview
For the three-month period ended September 30, 1997, BNI recorded
quarterly earnings of $735,000, or $.29 per share. This compares with $689,000,
or $.27 per share for the third quarter of 1996. For the nine-month period ended
September 30, 1997, BNI posted net income $2.1 million, or $.85 per share, as
compared with $2.0 million, or $.77 per share, for the same period in 1996.
Earnings per share are based on the weighted average number of shares
outstanding during 1997 and 1996. The weighted average number of shares
outstanding during the three and nine-month periods ended September 30, 1997 and
1996 were 2,541,920.
BNI recorded net income for 1996 of $2.5 million, an increase of 25.62%
from $2.0 million for 1995. Net income per share for 1996 was $.98 compared to
$.78 for 1995. BNI's net income in 1995 of $2.0 million represented a decrease
of 2.1% from net income of $2.0 million for 1994. Net income per share for 1995
was $.78 compared to $.80 for 1994.
The higher net income for 1996 was attributable to the $6.4 million, or
5.6%, increase in average earning assets over the $114.1 million in average
earning assets reported in 1995. Although average interest-bearing deposits
increased $3.7 million, or 4.0% over the previous year, the interest rates
associated with these deposits decreased by 20 basis points (1% equals 100 basis
points) which resulted in a $20,000 decrease in interest expense. Additionally,
BNI's FDIC premium decreased by $115,000 or 98.3% in 1996 as a result of its
"well capitalized" status.
The lower net income for 1995 was primarily due to the realization of
losses from sales of available-for-sale securities of $9,000, as compared to the
realization of gains from sales of such securities in the amount of $33,000
during 1994. Additionally, 1995 income tax expense included a charge of $9,000
resulting from an Internal Revenue Service audit on BNI's tax reporting of cash
receipts for nonaccrual loans.
BNI's return on average total assets for 1996 was 1.98% compared to
1.67% for 1995. This rate of return has averaged 1.83% for the most recent two
years. For 1996, the return on average stockholders' equity was 13.68% compared
to 12.15% for 1995. This rate of return has averaged 12.92% for the most recent
two years. BNI's return on average total assets for 1994 was 1.76%. For 1994,
BNI's return on average stockholders' equity was 13.39%.
BNI's asset quality measures improved on an overall loan portfolio
basis from 1995 to 1996, with nonperforming assets decreasing to .54% of gross
loans from .67% in 1995. Net charge-offs to average loans decreased to .13% for
1996 from .21% in 1995. Similar improvement in asset quality was noted in BNI's
overall loan portfolio from 1994 to 1995, with nonperforming assets decreasing
to .67% of gross loans from .82% in 1994. Net charge-offs to average loans
increased to .21% for 1995 from .20% in 1994.
BNI's continued commitment to cost containment controls has kept its
overhead expense levels below that of its peer group. BNI's efficiency ratio
(consisting of noninterest expenses as a percentage of net operating revenue,
including net interest income and noninterest income, but exclusive of
nonrecurring items such as securities transactions) was 40.48%, 44.97% and
43.97% for 1996, 1995 and 1994, respectively.
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<PAGE>
BNI's capital position continues to exceed regulatory guidelines, and
BNI is classified as a "well-capitalized institution" under federal banking
regulations. At September 30, 1997, BNI's ratios of Tier 1 Capital to
risk-weighted assets was 29.10%; its total capital to risk weighted assets was
27.85% and the leverage ratio, which compares Tier 1 Capital to total assets was
15.29%. These ratios are well above the regulatory minimum of 4.0%, 8.0% and
3.0%, respectively. Book value at September 30, 1997 was $8.04 per share
compared to $7.41 per share at September 30, 1996.
At December 31, 1996, BNI's ratios of Tier I Capital to risk-weighted
assets and Total Capital to risk-weighted assets were 27.54% and 28.79%,
respectively, compared with 26.63% and 27.88%, respectively at December 31,
1995. At December 31, 1994, BNI's ratios of Tier I Capital to risk-weighted
assets and Total Capital to risk-weighted assets were 25.88% and 27.13%,
respectively. These ratios are well in excess of the respective minimum ratios
of 4.00% and 8.00% that are specified by the Board of Governors of the Federal
Reserve System.
Net Interest Income
Net interest income for the three-month period ended September 30, 1997
was $1.4 million as compared with $1.3 million for the same period in 1996, an
increase of 4.04%. For the nine-month period ended September 30, 1997 and 1996,
BNI recorded net interest income of $4.1 million and $3.8 million, respectively.
This represents an increase of $295,000, or 7.74%. This increase can be
attributed to a continuing growth in earning assets and effective management of
interest rate margins. Investment securities increased $525,000, or 1.14%, from
September 30, 1996 to September 30, 1997 and loans, net of unearned discounts
and the allowance for loan losses, increased $6.5 million, or 8.98%, for the
same period. The environment of stable interest rates and effective
asset/liability management have created a positive effect on the net interest
margin. BNI's net interest margin increased from 4.75% to 4.81%, on an
annualized basis, for the nine months ended September 30, 1996 and 1997,
respectively, as earning assets have tended to reprice at a faster rate than
interest-bearing liabilities.
As reflected in Table 1, net interest income on an annualized tax
equivalent basis, increased $444,000 or 6 basis points, from $5.6 million during
the nine months ended September 30, 1996 to $6.1 million during the same period
in 1997. This increase was primarily due to the 6.55% increase in average
earning assets. Tables 1, 2 and 3 present an analysis of the components and
changes in net interest income for the nine months ended September 30, 1997 and
1996.
As reflected in Table 2, net interest income on a tax equivalent basis,
increased $579,000 or 24 basis points, from $5.2 million in 1995 to $5.7 million
in 1996. This increase was primarily due to the 5.6% increase in average earning
assets. Tables 1 and 2 present an analysis of the components and changes in net
interest income for 1996, 1995 and 1994. Also as reflected in Table 1, net
interest income on a tax equivalent basis, decreased $51,000, or 20 basis
points, from $5.2 million in 1994 to $5.2 million in 1995. This decrease was due
to the 71 basis point increase in rates paid on average interest-bearing
deposits.
In the first nine months of 1997, the prevailing interest rates through
most of the year reflected slight decreases comparable with 1996. The yield on
average earning assets decreased 4 basis points. However, the rate paid for
sources of funds used for such earning assets also decreased 6 basis points.
This resulted in an increase in the net interest margin from 4.75% to 4.81%.
In 1996, the prevailing interest rates through most of the year
remained comparable with 1995. The yield on average earning assets increased 2
basis points and the rate paid for sources of funds used for such earning assets
decreased 20 basis points. This resulted in an increase in the net interest
margin from 4.52% to 4.76%. In 1995, increases in prevailing interest rates
through most of the year contributed to an increase of the yield on average
earning assets by 36 basis points. Similarly, the rate paid for sources of funds
used for such earning assets increased 71 basis points which resulted in a
decrease in the net interest margin from 4.72% in 1994 to 4.52% in 1995.
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<PAGE>
Average earning assets for the nine months increased from $118.6
million at September 30, 1996 to $126.3 million at September 30, 1997, an
increase of 6.55%. The mix of earning assets remained flat as BNI's amount of
loans and investment securities in its portfolio remained at 61% and 37% of
average earning assets at September 30, 1997 and 1996.
Average earning assets increased by $6.4 million, or 5.6%, in 1996 over
1995. However, the mix of earning assets changed slightly, as BNI decreased the
amount of higher-yielding loans in its portfolio, from 62% in 1995 to 60% in
1996. Average loans increased by $1.7 million, or 2.4%, from 1995 to 1996, as a
result of normal growth and an improving economy in the Northern Neck region of
Virginia. Also, average earning assets increased by $3.7 million or 3.3% in 1995
over 1994. In addition, the mix of earning assets changed slightly, as BNI
increased the amount of higher-yielding loans in its portfolio, from 61% in 1994
to 62% in 1995. Average loans increased by $3.0 million, or 4.5%, from 1994 to
1995.
During the nine months ended September 30, 1997, average
interest-bearing deposits and liabilities increased by $4.7 million, or 4.9%,
over the same period in 1996, as a result of normal growth. As reflected in
Table 3, the increase in total interest expense of $155,000, from September 30,
1996 to September 30, 1997, consisted of an increase of $197,000 due to higher
average balances and a decrease of $42,000 due to lower interest rates.
During 1996, average interest-bearing deposits and liabilities
increased by $3.7 million, or 4.0%, over 1995, as a result of normal growth. As
reflected in Table 3, the decrease in total interest expense of $20,000, from
1995 to 1996, consisted of an increase of $200,000 due to higher average
balances and a decrease of $220,000 due to lower interest rates. During 1995,
average interest-bearing deposits and liabilities increased by $2.6 million,
2.8%, over 1994, as a result of normal growth. As reflected in Table 3, the
increase in total interest expense of $764,000, from 1994 to 1995, consisted of
an increase of $140,000 due to higher average balances and an increase of
$624,000 due to higher interest rates.
Tables 1 and 2: Average Balances, Interest Income, and Yields and Rates (taxable
equivalent basis)
The following table sets forth the condensed average balance sheets, an
analysis of annualized interest income/expense and average annualized yield/rate
for each major category of earning assets and interest-bearing deposits and
liabilities for the nine-month periods indicated on a taxable equivalent basis.
The tax equivalent adjustment is made for items exempt from Federal income taxes
(assuming a 34% tax rate for the nine months ended September 30, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994) to make them comparable
with taxable items before any income taxes are applied.
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<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------------------------------------------------
1997 1996
---------------------------------------- ---------------------------------------
(dollars in thousands) Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Federal funds sold $ 1,372 $ 78 5.69% $ 3,177 $ 166 5.23%
Held-to-maturity securities:
U.S. Treasury and other U.S. Government
agencies and corporations - - - - - -
States and political subdivisions 21,590 1,803 8.35 19,580 1,696 8.66
Other - - - 153 7 4.58
------ ----- ------ -----
Total held-to-maturity securities 21,590 1,803 8.35 19,733 1,703 8.63
------ ----- ------ -----
Available-for-sale securities (1) 25,771 1,565 6.07 23,827 1,432 6.01
Loans (2) 77,614 7,077 9.12 71,839 6,624 9.22
------ ----- ------ -----
Total earning assets 126,347 10,523 8.33 118,576 9,925 8.37
------- ------ ------- -----
Cash and due from banks 3,093 3,001
Premises and equipment 549 626
Other assets 1,898 1,747
----- -----
Total assets $ 131,887 $ 123,950
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits and liabilities
Deposits:
Interest-bearing demand $ 27,766 $ 859 3.09% $ 25,870 $ 799 3.09%
Savings 16,759 613 3.66 16,385 588 3.59
Time 55,951 2,980 5.33 53,557 2,911 5.44
------ ----- ------ -----
Total interest-bearing
deposits and liabilities 100,476 4,452 4.43 95,812 4,298 4.49
------- ----- ------ -----
Noninterest-bearing demand deposits 10,806 9,322
Other liabilities 915 720
--- ---
Total liabilities 112,197 105,854
Shareholders' equity 19,690 18,096
------ ------
Total liabilities and
shareholders' equity $ 131,887 $ 123,950
========= =========
Net interest income
and margin on
earning assets 6,071 4.81% 5,627 4.75%
Tax equivalent adjustment 599 548
--- ---
Net interest income $ 5,472 $ 5,079
= ===== = =====
</TABLE>
Notes:
(1) Available-for-sale securities in the above table are reflected at
amortized cost.
(2) Nonaccruing loans have been included in the computations of average
loan balances.
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<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------------------------------------
(dollars in thousands) Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Federal funds sold $ 3,408 $ 178 5.22% $ 3,885 $ 224 5.77% $ 3,736 $ 158 4.23%
Held-to-maturity securities:
U.S. Treasury and other U.S.
Government
agencies and corporations - - - - - - 4,956 226 4.56
States and political subdivisions 19,674 1,717 8.73 16,688 1,522 9.12 18,045 1,662 9.21
Other 115 5 4.35 251 12 4.78 251 12 4.78
------ ----- ------ ----- ------ -----
Total held-to-maturity securities 19,789 1,722 8.70 16,939 1,534 9.06 23,252 1,900 8.17
------ ----- ------ ----- ------ -----
Available-for-sale securities (1) 25,087 1,503 5.99 22,733 1,298 5.71 15,915 958 6.02
Loans (2) 72,231 6,664 9.23 70,518 6,452 9.15 67,494 5,779 8.56
------ ----- ------ ----- ------ -----
Total earning assets 120,515 10,067 8.35 114,075 9,508 8.33 110,397 8,795 7.97
------- ------ ------- ----- ------- -----
Cash and due from banks 3,067 2,889 2,976
Premises and equipment 616 663 576
Other assets 1,774 1,821 1,762
----- ----- -----
Total assets $125,972 $119,448 $115,711
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits and
liabilities
Deposits:
Interest-bearing demand $26,727 $ 823 3.08% $27,095 $ 999 3.69% $28,095 $ 943 3.36%
Savings 16,579 597 3.60 15,986 659 4.12 16,405 599 3.65
Time 53,837 2,912 5.41 50,362 2,694 5.35 46,390 2,046 4.41
------ ----- ------ ----- ------ -----
Total interest-bearing
deposits and liabilities 97,143 4,332 4.46 93,443 4,352 4.66 90,890 3,588 3.95
------ ----- ------ ----- ------ -----
Noninterest-bearing demand deposits 9,689 8,548 8,722
Other liabilities 749 742 665
--- --- ---
Total liabilities 107,581 102,733 100,277
Shareholders' equity 18,391 16,715 15,434
------ ------ ------
Total liabilities and
shareholders' equity $125,972 $119,448 $115,711
======== ======== ========
Net interest income
and margin on
earning assets 5,735 4.76% 5,156 4.52% 5,207 4.72%
Tax equivalent adjustment 569 514 559
--- --- ---
Net interest income $ 5,166 $ 4,642 $ 4,648
======== ======== ========
</TABLE>
Notes:
(1) Available-for-sale securities in the above table are reflected at
amortized cost.
(2) Nonaccruing loans have been included in the computations of average
loan balances.
Table 3: Analysis of Changes in Net Interest Income (taxable equivalent basis)
The following table analyzes the dollar amount of change (on a taxable
equivalent basis) in interest income and expense and the changes in dollar
amounts attributable to (a) changes in volume (change in volume times prior
year's rates), (b) changes in rates (change in rate times prior year's volume),
and (c) changes in rate/volume (change in rate times change in volume). In this
table, the dollar change in rate/volume is prorated to volume and rate
proportionately. The tax equivalent adjustment is made for items exempt from
Federal income taxes (assuming a 34% tax rate) to make them comparable with
taxable items before any income taxes are applied.
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<PAGE>
<TABLE>
<CAPTION>
September 30, 1997 1996 Compared to 1995 1995 Compared to 1994
Compared to September 30, 1996
Increase (Decrease) Due to Increase (Decrease) Due to: Increase (Decrease) Due to:
----------------------------------------------------------------------------------------
Net Net Net
Increase Increase Increase
(in thousands) Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold $ (103) $ 15 $ (88) $ (26) $ (20) $ (46) $ 6 $ 60 $ 66
Held-to-maturity securities:
U.S. Treasury and other
U.S. Government agencies
and corporations - - - - - - (226) - (226)
States and political
subdivisions 164 (57) 107 257 (62) 195 (124) (16) (140)
Other (7) - (7) (6) (1) (7) - - -
Total
held-to-maturity 157 (57) 100 251 (63) 188 (350) (16) (366)
--- --- --- --- --- --- ---- --- ----
Available-for-sale
securities (1) 119 15 134 140 65 205 386 (46) 340
Loans (2) 525 (72) 453 158 54 212 266 407 673
--- ---- --- --- -- --- --- --- ---
Total earning assets 698 (99) 599 523 36 559 308 405 713
--- ---- --- --- -- --- --- --- ---
Interest paid on:
Deposits:
Interest-bearing demand 59 1 60 (14) (162) (176) (32) 88 56
Savings 13 12 25 25 (87) (62) (14) 74 60
Time 125 (55) 70 189 29 218 186 462 648
--- ---- -- --- -- --- --- --- ---
Total interest-bearing
deposits 197 (42) 155 200 (220) (20) 140 624 764
--- ---- --- --- ----- ---- --- --- ---
Increase (decrease) in
net interest income (taxable
equivalent basis $ 501 $ (57) $ 444 $ 323 $ 256 $ 579 $ 168 $ (219) $ (51)
</TABLE>
Notes:
(1) Available-for-sale securities in the above table are reflected at
amortized cost.
(2) Nonaccruing loans have been included in the computations of average
loan balances.
Asset/Liability Management
BNI actively measures and manages its exposure to interest rate risk in
order to maintain relatively stable net interest margins and to allow it to take
advantages of profitable business opportunities. Interest rate risk refers to
the exposure to earnings and capital arising from changes in future interest
rates. BNI carefully measures and monitors its interest rate risk exposure using
gap analysis and market value of equity analysis.
Interest rate risk exposure is managed through the issuance of
shorter-period loans, which mature in generally five to seven years, repricing
interest rates paid on deposits ahead of repricing interest rates charged on
loans in a downward interest rate environment, and vice versa in an upward
interest sensitive market and extending or reducing the duration of the
investment securities portfolio.
Interest Rate Sensitivity
BNI's interest rate sensitivity positions as of September 30, 1997 and
December 31, 1996 are presented below. The interest rate sensitivity gap, shown
at the bottom of the table, refers to the difference between assets and
liabilities subject to repricing, maturity and/or volatility during a specified
period. BNI's interest rate sensitivity positions presented in the tables below
have taken into consideration maturity repricing models that reflect the earlier
of the financial instrument's expected maturity or repricing as well as expected
volatility. The information presented in the tables below is as of specific date
and will
-74-
<PAGE>
continually change as a result of prepayments or other changes that are driven
by interest rates. Therefore, the interest sensitivity positions reflected in
the tables at September 30, 1997 and December 31, 1996 are not necessarily
indicative of BNI's position at any other time.
Since all interest rates and yields do not adjust at the same velocity
or magnitude, and since volatility is subject to change, the gap is only a
general indicator of interest rate sensitivity. At September 30, 1997 and
December 31, 1996, the cumulative one-year gap for BNI was a negative $8.5
million and $8.5 million, respectively, representing 6.35% and 6.47%,
respectively, of total assets. This remains well within BNI's current guidelines
of +/-10% of total assets for the cumulative one-year gap. Because of the
current asset and liability mix, a change in interest rates is not expected to
have a material impact on the net interest margin or liquidity of BNI.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
September 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Over
(Dollars in thousands) 0-3 months 4-12 months 1-5 years 5 years Total
---------- ----------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 1,960 $ - $ - $ - $ 1,960
Investment securities 950 3,972 22,869 18,695 46,486
Net loans: (1)
Commercial, financial and agricultural 12,786 3,783 1,867 827 19,263
Real estate 6,941 7,554 29,894 8,225 52,614
Other 864 2,597 4,116 57 7,634
----- ------ ----- ------ -----
Total earning assets 23,501 17,906 58,746 27,804 127,957
Noninterest-earning 5,653 - - - 5,653
----- ------ ----- ------ -----
Total assets $ 29,154 $ 17,906 $ 58,746 $ 27,804 $ 133,610
----- ------ ----- ------ -----
Liabilities and shareholders' equity:
Interest-bearing deposits $ 14,817 $ 28,667 $ 57,634 $ - $ 101,118
Noninterest-bearing deposits 11,395 - - - 11,395
Stockholders' equity - - - 20,431 20,431
Noninterest-bearing liabilities 666 - - - 666
----- ------ ----- ------ -----
Total liabilities and
stockholders' equity $ 26,878 $ 28,667 $ 57,634 $ 20,431 $ 133,610
----- ------ ----- ------ -----
Interest sensitivity gap $ 2,276 $ (10,761) $ 1,112 $ 7,373
Cumulative gap $ 2,276 $ (8,486) $ (7,374) $ -
Cumulative gap as a percentage to total assets 1.70 % (6.35) % (5.52) % - %
Cumulative gap as a percentage to total
interest-earning assets 1.78 % (6.63) % (5.76) % - %
Cumulative gap as a percentage to total
interest-bearing liabilities 2.25 % (8.39) % (7.29) % - %
</TABLE>
-75-
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Over
(Dollars in thousands) 0-3 months 4-12 months 1-5 years 5 years Total
---------- ----------- --------- ------- -----
<S> <C> <C> <C> <C>
Assets:
Federal funds sold $ 490 $ - $ - $ - $ 490
Investment securities 1,253 3,012 25,328 20,099 49,692
Net loans: (1)
Commercial, financial and agricultural 13,278 2,878 1,736 661 18,553
Real estate 6,038 7,921 27,540 7,650 49,149
Other 776 2,453 3,755 10 6,994
----- ------ ------ ------ -----
Total earning assets 21,835 16,264 58,359 28,420 124,878
Noninterest-earning 6,668 - - - 6,668
----- ------ ------ ------ -----
Total assets $ 28,503 $ 16,264 $ 58,359 $ 28,420 $ 131,546
----- ------ ------ ------ -----
Liabilities and shareholders' equity:
Interest-bearing deposits $ 15,312 $ 27,003 $ 59,653 $ - $ 101,968
Noninterest-bearing deposits 10,128 - - 10,128
Stockholders' equity - - - 18,621 18,621
Noninterest-bearing liabilities 829 - - - 829
----- ------ ------ ------ -----
Total liabilities and
stockholders' equity $ 26,269 $ 27,003 $ 59,653 $ 18,621 $ 131,546
----- ------ ------ ------ -----
Interest sensitivity gap $ 2,234 $ (10,739) $ (1,294) $ 9,799
Cumulative gap $ 2,234 $ (8,505) $ (9,799) $ -
Cumulative gap as a percentage to total assets 1.70 % (6.47) % (7.45) % - %
Cumulative gap as a percentage to total
interest-earning assets 1.79 % (6.81) % (7.85) % - %
Cumulative gap as a percentage to total
interest-bearing liabilities 2.19 % (8.34) % (9.61) % - %
</TABLE>
(1) Net loans include an allocation of allowance for loan losses based on the
respective concentration of loan types to total loans. All such allocations
have been included in the 0-3 months column. Unearned discounts of $790,963
and $703,775 have been included with other loans in the 0-3 months column
at September 30, 1997 and December 31, 1996, respectively.
Noninterest Income
Total noninterest income for the third quarter increased 97 basis
points from $103,000 to $104,000 at September 30, 1996 and 1997, respectively.
The primary components of this increase was attributable to a $4,000 increase in
service charges on deposit accounts. For the nine-month period ended September
30, 1997, total noninterest income was $319,000 as compared with $330,000 for
the same period a year earlier. This represents a decrease of 3.33%. The
decrease was a result of realizing investment securities losses of $3,000 during
the six-month period ended September 30, 1997, as compared with net securities
gains of $3,000 during the six-month period ended September 30, 1996, and the
absence in the current period of a $15,000 gain on the sale of foreclosed
properties that was present in the same period a year ago.
Total noninterest income increased $18,000, or 4.36% from $417,000 in
1995 to $435,000 to 1996. From 1994 to 1995, total noninterest income decreased
$28,000, or 6.3%, from $445,000 to $417,000. Service charges on deposit accounts
increased $8,000, or 3.81% from 1995 to 1996. From 1994 to 1995, service charges
on deposit accounts decreased $2,000, or 86 basis points. Other service charges
and fees increased $8,000, or 6.07%, from 1995 to 1996. From 1994 to 1995, other
service charges and fees decreased $13,000, or 9.1%. These increases were
primarily the result of a slight increase in refinancing activity in 1996. In
1995, the decreases were primarily the result of a softening of refinancing
activity as compared to such activity in 1994.
-76-
<PAGE>
Net investment securities gains increased $13,000, or 144.7%, from 1995
to 1996 to reflect a net investment securities gain of $4,000. From 1994 to
1995, net investment securities gains decreased $42,000, or 127.7%, to reflect a
net investment securities loss of $9,000. On October 18, 1995, the Financial
Accounting Standards Board (FASB) announced that a one-time reassessment may be
allowed to permit an enterprise to reassess the appropriateness of the
classifications of all securities held at that time. The FASB noted in this
meeting that any reclassifications made as a result of this one-time
reassessment should occur no later than December 31, 1995. Accordingly, and in
conjunction with this one-time reassessment, BNI elected to transfer, on
December 15, 1995, held-to-maturity securities with an amortized cost basis of
$3.7 million and gross unrealized gains of $58,000 and gross unrealized losses
of $52,000 to the available-for-sale classification. On December 18, 1995, these
U.S. agencies were sold for a gain of $6,000.
Components of changes in noninterest income are reflected below for the
years indicated:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended 1996/95 Change 1995/94 Change
(Dollars in thousands) September 30, December 31,
1997 1996 1996 1995 1994 Amount Amount
---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 245 $ 239 $ 216 $ 208 $ 210 $ 8 3.8% $ (2) (0.9)%
Other service charges and fees 74 73 141 133 146 8 6.1 (13) (9.1)
Net investment securities
gains (losses) (2) 3 4 (9) 33 13 144.7 (42) (127.8)
Other - 15 74 86 57 (11) (12.9) 29 50.8
-- -- -- -- -- ---- --
Total noninterest income $ 317 $ 330 $ 435 $ 417 $ 445 $ 18 4.4% $ (28) (6.3)%
--- --- --- --- --- -- ----
</TABLE>
Provision and Allowance for Loan Losses
The provision for loan losses is based upon management's judgment as to
the adequacy of the allowance to absorb future losses. In assessing the adequacy
of the allowance for loan losses, management's methodology takes into
consideration BNI's historical loan loss experience, value and adequacy of the
collateral, level of nonperforming (nonaccrual and renegotiated) loans, loan
concentrations, the growth and composition of the portfolio, review of monthly
delinquency reports, results of examinations of individual loans and/or
evaluation of the overall portfolio by senior credit personnel, Federal and
State regulatory agencies and general economic conditions. This assessment is
made on a quarterly basis.
Due to the success of BNI's credit underwriting policies, improving
economic conditions and loan portfolio collection experience, as evidenced by
static levels of nonperforming assets, its management believes that the
allowance for loan losses at September 30, 1997 of 1.56% of the total loan
portfolio, exclusive of unearned income is sufficient to cover any specific
losses that may occur, and therefore management's provision for loan losses
during 1997 has remained substantially unchanged. At September 30, 1996, the
allowance for loan losses was 1.74% of the total loan portfolio, exclusive of
unearned income.
The provision for loan losses for 1996 was $92,000, a decrease of
63.34%, or $159,000 less than the amount recorded for 1995. This is primarily
due to a decrease in the amount of nonperforming assets from $489,000 in 1995 to
$414,000 in 1996. Loans charged off in 1996, net of recoveries, totaled $92,000
compared to $151,000 in 1995. Net charge-offs in 1996 and 1995 represented .13%
and .21%, respectively, of average outstanding loans.
At December 31, 1996, the allowance for loan losses remained unchanged
at $1.3 million and represented 1.66% of total outstanding loans compared to
1.73% as of December 31, 1995. The following sets forth the activity in the
allowance for loan losses for the periods or years indicated:
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------- ---------------------------------------------------
(Dollars in thousands) 1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Loans outstanding, including unearned discounts $ 80,773 $ 74,250 $ 75,959 72,884 $ 69,536 $ 67,180 $ 66,554
- ------ - ------ - ------ ------ - ------ - ------ - ------
Average loans outstanding $ 77,614 $ 71,839 $ 72,231 70,518 $ 67,494 $ 66,104 $ 64,786
- ------ - ------ - ------ ------ - ------ - ------ - ------
Allowance for loan losses:
Balance at beginning of year $ 1,263 $ 1,263 $ 1,263 1,163 $ 983 $ 783 $ 583
Loans charged off:
Commercial, financial and agricultural 9 12 111 112 129 55 30
Commercial real estate 5 - - 17 59 15 22
Installment 20 31 68 71 13 46 95
-- -- -- -- -- -- --
Total loans charged off 34 43 179 200 201 116 147
-- -- --- --- --- --- ---
Recoveries on loans
previously charged off
Commercial, financial and agricultural 7 13 19 16 21 21 20
Commercial real estate 2 31 31 1 - - 24
Installment 23 27 37 32 44 23 33
-- -- -- -- -- -- --
Total recoveries on loans
previously charged off 32 71 87 49 65 44 77
-- -- -- -- -- -- --
Net charge-offs (2) 28 (92) (151) (136) (72) (70)
Provisions charged to expense - - 92 251 316 272 270
----- ----- -- --- --- --- ---
Balance at end of period or year $ 1,261 $ 1,291 $ 1,263 1,263 $ 1,163 $ 983 $ 783
- ----- - ----- - ----- ----- - ----- - --- - ---
Net loans charged off to average loans 0.00% (0.04)% 0.13% 0.21% 0.20% 0.11% 0.11%
Net loans charged off to
allowance for loan losses 0.16 (2.17) 7.28 11.96 11.69 7.32 8.94
Allowance for loan losses to
total loans (end of period or year) 1.56 1.74 1.66 1.73 1.67 1.46 1.18
Allowance for loan losses to
nonperforming loans:
Excluding past due loans 460.22 301.64 340.43 294.41 319.51 215.57 1909.76
Including past due loans 150.48 80.34 104.12 97.68 74.55 60.20 65.47
Average loans $ 72,231 $ 71,839 $ 72,231 70,518 $ 67,494 $ 66,104 $ 64,786
Total loans 81,564 74,926 76,663 73,474 70,022 67,619 67,032
Unearned discounts included in total loans 791 676 704 590 486 439 478
Total loans, net of unearned discounts 80,773 74,250 75,959 72,884 69,536 67,180 66,554
Total assets 133,610 128,255 131,546 122,282 118,525 116,547 110,879
Nonperforming loans excluding past due loans 274 428 371 429 364 456 41
Nonperforming loans including past due loans 838 1,607 1,213 1,293 1,560 1,633 1,196
Nonaccrual loans 274 428 371 429 364 456 41
</TABLE>
BNI has allocated the allowance for loan losses based on the ratio of
the applicable loan category to total loans (before unearned discount) as of the
dates indicated in the table below. This allocation, for purposes of this
analysis, is for informational purposes only, and is not necessarily reflective
of the risk elements contained in the loan portfolio.
-78-
<PAGE>
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------
1997 1996
-------------------------------------------
Percent Percent
of of
Loans Loans
in Each in Each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 303,054 23.99% $ 308,233 24.40%
Real estate:
Construction 33,350 2.64 25,897 2.05
Commercial 87,543 6.93 91,459 7.24
Residential 706,788 55.95 712,094 56.37
Consumer 132,515 10.49 125,567 9.94
------- ----- ------- ----
Total $1,263,250 100.00 % $1,263,250 100.00%
========== ====== = ========== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 310,886 24.61% $ 319,602 25.30% $ 277,552 23.86% $ 248,959 25.32% $ 196,439 25.08%
Real estate:
Construction 26,276 2.08 14,906 1.18 21,636 1.86 8,456 0.86 8,224 1.05
Commercial 86,406 6.84 92,723 7.34 73,983 6.36 59,093 6.01 41,904 5.35
Residential 710,704 56.26 720,053 57.00 681,897 58.62 575,890 58.57 461,099 58.87
Consumer 128,978 10.21 115,966 9.18 108,182 9.30 90,852 9.24 75,584 9.65
------- ----- ------- ---- ------- ---- ------ ---- ------ ----
Total $ 1,263,250 100.00 % $ 1,263,250 100.00 $ 1,163,250 100.00 $ 983,250 100.00 $ 783,250 100.00%
= ========= ====== = = ========= ====== = ========= ====== = ======= ====== = ======= =======
</TABLE>
Effective January 1, 1995, BNI adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FASB 114"), as amended by FASB 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures," which requires that impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's market price, if available, or
fair value of the collateral (if the loan is collateral dependent). The adoption
of FASB 114 did not have any impact on BNI's financial position or results of
operations.
Nonperforming Assets and Past Due Loans
Nonperforming assets and past due loans are reflected below for the
years indicated:
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<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual:
Commercial, financial and agricultural $201 $ 377 $ 322 $ 369 $ 336 $ 134 $ -
Real estate 73 51 49 60 28 322 41
Loans past due 90 or more days and accruing interest 564 1,179 842 864 1,196 1,177 1,155
------ ------ ------ ------ ------ -------- --------
Total nonaccrual and nonperforming loans 838 1,607 1,213 1,293 1,560 1,633 1,196
Other real estate owned 175 - 43 60 207 - -
------ ------ ------ ------ ------ -------- --------
Total nonperforming assets $1,013 $1,607 $1,256 $1,353 $1,767 $1,633 $ 1,196
------ ------ ------ ------ ------ -------- --------
Nonperforming assets to total loans and other
real estate owned (end of year):
Excluding past due loans 0.55% 0.57% 0.54% 0.67% 0.81% 0.67% 0.06%
Including past due loans 1.24 2.14 1.64 1.84 2.52 2.42 1.77
Nonperforming assets to total assets (end of year)
Excluding past due loans 0.34 0.33 0.31 0.40 0.48 0.39 0.04
Including past due loans 0.76 1.25 0.95 1.11 1.49 1.40 1.08
</TABLE>
Nonperforming assets, excluding past due loans, at September 30, 1997
are $449,000, or .55% of total loans and other real estate owned ("OREO"), and
.34% of total assets. These levels compare to total nonperforming assets,
excluding past due loans, September 30, 1996 of $428,000, or .57% of total loans
and OREO, and .33% of total assets.
Nonperforming assets at December 31, 1996 are $414,000, or .54% of
total loans and OREO, and .31% of total assets. These levels compare to total
nonperforming assets at December 31, 1995 of $489,000, or .67% of total loans
and OREO, and .4% of total assets. Nonperforming assets at December 31, 1994
were $571,000, or .82% of total loans and OREO and .48% of total assets. These
decreases in nonperforming assets were primarily attributable to improving
economic conditions in the Northern Neck region of Virginia.
Past due loans at September 30, 1997 and December 31, 1997 $564,000 of
$842,000 include loans which are greater than 90 days past due and still
accruing interest. These loans are, in management's judgment, well secured and
in the process of collection. Loans which are greater than 90 days past due are
generally placed on nonaccrual status by management, unless such loans are well
secured and in the process of collection. At September 30, 1997, management does
not believe that there will be any significant charge-offs to any individual
loans currently outstanding during 1997. Additionally, at September 30, 1997,
management does not believe that any problem loans exist that may warrant
disclosure in future periods as a nonperforming asset. However, depending on
changes in the economy and other future events, other loans not presently
identified could be classified as nonperforming assets in the future.
Interest income which would have been recognized if the nonaccrual
loans had been current amounted to $19,000 at September 30, 1997. Interest
income received on the cash basis and recorded on these nonaccrual loans
amounted to zero for book purposes at September 30, 1997. Interest income which
would have been recognized if the nonaccrual loans had been current amounted to
$30,000 at December 31, 1996. Interest income received on the cash basis and
recorded on these nonaccrual loans amounted to zero for book purposes at
December 31, 1996. Interest income which would have been recognized if the
nonaccrual loans had been current amounted to $65,000 at December 31, 1995.
Interest income received on the cash basis and recorded on these nonaccrual
loans amounted to zero for book purposes at December 31, 1995. Interest income
which would have been recognized if the nonaccrual loans had been current
amounted to $27,000 at December 31, 1994. Interest income received on the cash
basis and recorded on these nonaccrual loans amounted to zero for book purposes
at December 31, 1994.
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<PAGE>
Noninterest Expenses
Compared with the third quarter 1996, noninterest expense decreased
$9,000, or 1.79%, to $493,000 at September 30, 1997. The primary component of
this decrease during the third quarter was occupancy costs which includes
depreciation. For the year to date, noninterest expense increased 2.32% from
$1.6 million at September 30, 1996 to $1.6 million at September 30, 1997 and was
attributable to increases in salaries and employee benefits. Salaries and
employee benefits increased from $748,000 to $795,000, or 6.28%, for the nine
months ended September 30, 1996, as compared to the nine months ended September
30, 1997.
Total noninterest expenses for 1996 amounted to $2.3 million, a
decrease of $13,000, or .58%, from 1995. Total noninterest expenses for 1995
amounted to $2.3 million, an increase of $54,000, or 2.4%, from 1994.
Total personnel expenses for 1996 increased $65,000, or 5.8%, over
1995. Total personnel expenses for 1995 increased $9,000, or 80 basis points,
over 1994. Salaries and employee benefits increased $67,000, or 7.1%, reflecting
merit increases and higher workers' compensation, health insurance and payroll
tax expenses related to such salaries and wages. From 1994 to 1995, salaries and
employee benefits increased $14,000, or 1.6%, reflecting nominal increases in
the previously mentioned areas.
Occupancy expense decreased $33,000, or 9.88%, from 1995, as a result
of lower maintenance costs, property insurance and depreciation. From 1994 to
1995, occupancy costs increased $80,000, or 31.6%, as a result of higher
maintenance costs and depreciation associated with new ATM machines acquired at
the Callao and Burgess branches and computer equipment acquired at the
Heathsville operations center.
Other expenses decreased $45,000, or 5.38%, from 1995 to 1996 primarily
as a result of a $115,000 decrease in FDIC insurance premiums from $117,000 in
1995 to $2,000 in 1996, or 98.3%. The FDIC reduced the insurance premiums
significantly in 1995 and again in 1996 on deposits maintained by BNI. From 1994
to 1995, other expenses decreased $35,000, or 4.1%, primarily as a result of a
$105,000 decrease in FDIC insurance premiums from $222,000 in 1994 to $117,000
in 1995, 47.3%.
Components of and changes in noninterest expenses are reflected below
for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended 1996/95 Change 1995/94 Change
September 30, December 31,
----------------------------------------------------------- ------------------ ------------------
1997 1996 1996 1995 1994 Amount Amount
---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 795 $ 748 $ 1,177 $ 1,113 $ 1,104 $ 65 5.8% $ 9 0.8%
Occupancy expenses 206 228 301 334 254 (33) (9.9) 80 31.6
Data processing services 116 137 184 180 176 4 2.0 4 2.2
Stationary printing and
supplies 119 111 153 146 122 7 5.0 24 19.9
Taxes other than income 154 142 150 160 129 (11) (6.8) 32 24.6
FDIC premiums 10 2 2 117 222 (115) (98.3) (105) (47.3)
Other 186 182 299 229 219 70 30.7 10 4.5
--- --- --- --- --- -- --
Total noninterest expense $ 1,586 $ 1,550 $ 2,266$ 2,279 $ 2,225 $ (13) (0.6)% $ 54 2.4%
----- - ----- - ------ ----- - ----- - ---- --
</TABLE>
Income Taxes
The provision for income taxes as shown in the Statements of Income
represent 23.1%, 21.4% and 20.5% of pre-tax income for 1996, 1995 and 1994,
respectively. The effective tax rate differs from the statutory rate of 34%,
primarily due to tax-exempt securities. Additional information on BNI's income
taxes is provided in Note 8 to the Financial Statements.
-81-
<PAGE>
Loans
The following table sets forth the loan portfolio by major categories
and loan mix as of September 30, and December 31, for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 19,565 $ 18,287 18,864 $ 18,595 $ 16,706 17,118 $ 16,814
Real estate:
Construction 2,152 1,538 1,596 868 1,304 584 703
Commercial 5,651 5,422 5,244 5,389 4,452 4,062 3,583
Residential 45,638 42,233 43,132 41,878 41,049 39,606 39,461
Installment 8,558 7,446 7,827 6,744 6,511 6,249 6,471
----- ----- ----- ----- ----- ----- -----
Total loans $ 81,564 $ 74,926 76,663 $ 73,474 $ 70,022 67,619 $ 67,032
= ====== = ====== ====== = ====== = ====== ====== = ======
</TABLE>
The loan population is the largest component of earning assets and
accounts for the greatest portion of total interest income. During the nine
months ended September 30, 1997, BNI continued to experience steady growth in
total loans. At September 30, 1997, total loans were $81.6 million, an increase
of 6.4% from December 31, 1996 and an increase of 8.9% from September 30, 1996.
Residential real estate loans was the largest volume contributor to this growth
during the nine months ended September 30, 1997 by increasing 5.8% and 8.1% from
December 31, 1996 and September 30, 1996, respectively. This is attributed to
continued expansion in the resort home market. At December 31, 1996, total loans
were $77.7 million, an increase of 4.3% from December 31, 1995. This growth was
primarily in residential real estate and installment loan borrowings. At
December 31, 1995, total loans were $73.5 million, an increase of 4.9% from
December 31, 1994. This growth was primarily in commercial lending and was also
supported by modest growth in commercial and residential real estate.
Total loans at December 31, 1996, represent 58.3% of total assets,
61.4% of total earning assets and 68.4% of total deposits as compared to 60% of
total assets, 63.2% of total earning assets and 70.4% of total deposits at
December 31, 1995. Total loans at December 31, 1994, represented 59% of total
assets, 62.3% of total earning assets and 68.1% of total deposits.
BNI's total real estate loans totaled $50.0 million or 65.2% of total
loans at December 31, 1996, and represents an increase of 3.82% over December
31, 1995. At December 31, 1995, BNI's total real estate loans were $48.1
million, or 65.5% of total loans, and represented an increase of 2.8% over
December 31, 1994. These increases was primarily due to improving economic
conditions, more favorable interest rates and BNI's introduction, in late 1994,
of adjustable rate mortgages.
Contractual Loan Maturities
The contractual maturities of loans do not necessarily reflect the
actual term of the Company's loan portfolio. The actual term of the Company's
experience has been that the average life of real estate loans is substantially
less than their contractual terms because of loan prepayments and, with respect
to fixed-rate loans, enforcement of due-on-sale clauses. Due-on-sale clauses
give the Company the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. In general, the average life of real
estate loans tends to increase when current interest rates exceed rates on
existing real estate loans. Correspondingly, prepayments tend to increase when
current interest rates are below the rates on existing real estate loans.
Because the volume of such prepayments fluctuates depending upon changes in both
the absolute level of interest rates and the relationship between fixed and
adjustable-rate loan rates, the average life of the Company's fixed-rate real
estate loans has varied widely.
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<PAGE>
At September 30, 1997, loans with maturities over one year were
comprised of fixed rate loans totaling $49.0 million and floating or adjustable
rate loans totaling $7.8 million.
At December 31, 1996, loans with maturities over one year were
comprised of fixed rate loans totaling $44.7 million and floating or adjustable
rate loans totaling $7.9 million.
The following table set forth the contractual maturities of the
Company's loan portfolio by loan categories at September 30, 1997 and December
31, 1996. Demand loans are included as due within one year.
<TABLE>
<CAPTION>
September 30, 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands) After One
Within but Within After Five
One Year Five Years Years Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 15,087 $ 2,266 $ 2,212 $ 19,565
Real estate:
Construction 2,152 - - 2,152
Commercial 3,608 1,804 239 5,651
Residential 3,937 26,591 15,110 45,638
Consumer 914 7,506 138 8,558
--- ----- --- -----
Total $ 25,698 $ 38,167 $ 17,699 $ 81,564
= ====== = ====== = ====== = ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands) After One
Within but Within After Five
One Year Five Years Years Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 16,467 $ 1,736 $ 661 $ 18,864
Real estate:
Construction 1,596 - - 1,596
Commercial 3,333 1,641 270 5,244
Residential 7,942 27,540 7,650 43,132
Consumer 910 6,881 36 7,827
----- ----- -- -----
Total $ 30,248 $ 37,798 $ 8,617 $ 76,663
- ------ - ------ - ----- - ------
</TABLE>
Investments
The book value of BNI's investment securities was $46.5 million at
September 30, 1997, compared to $49.9 million at December 31, 1996 and $41.7
million at December 31, 1995. These changes were largely due to a $7.8 million,
or 7.4%, increase of deposits from December 31, 1995 to December 31, 1996 and a
strengthening economy and improved loan demand from December 31, 1996 to
September 30, 1997.
Securities are classified as held-to-maturity when management has the
intent and BNI as the ability at the time of purchase to hold the securities to
maturity. Held-to-maturity securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Additional securities are
classified as available-for-sale and are carried at fair value.
The following table presents the book value and fair value of
investment securities for the periods presented:
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<PAGE>
<TABLE>
<CAPTION>
September 30, 1997 December 31,
--------------------- ----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ------------------------------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury and other U.S.
Government agencies and corporations $ 19,258 $ 19,267 $ 20,340 $ 20,233 $ 17,504 $ 17,575 $ 11,926 $ 11,220
States and political subdivisions 410 415 410 409 204 210 - -
Mortgage-backed securities 5,160 5,112 7,044 6,938 5,175 5,128 4,453 4,093
Other 262 262 446 446 338 341 297 282
--- --- --- --- --- --- --- ---
25,090 25,056 28,240 28,026 23,221 23,254 16,676 15,595
------ ------ ------ ------ ------ ------ ------ ------
Held-to-maturity
U.S. Treasury and other U.S.
Government agencies and corporations 150 151 200 199 - - 5,236 5,052
States and political subdivisions 21,280 21,788 21,466 21,895 18,182 18,937 17,143 17,259
Mortgage-backed securities - - - - - - - -
Other - - - - 250 250 251 241
------ ------ ------ ------ --- --- --- ---
21,430 21,939 21,666 22,094 18,432 19,187 22,630 22,552
------ ------ ------ ------ ------ ------ ------ ------
Total $ 46,520 $ 46,995 $ 49,906 $ 50,120 $ 41,653 $ 42,441 $ 39,306 $ 38,147
======== ======== ======== ======== ========= ========= ======== ========
</TABLE>
Investment Securities by Maturities and Weighted Average Yield
The following table presents the maturities of investment securities,
excluding securities which have no stated maturity at September 30, 1997 and
December 31, 1997, and the weighted average yields (for obligations exempt from
federal income taxes on a taxable equivalent basis assuming a 35% tax rate) of
such securities. The tax equivalent adjustment is made for items exempt from
federal income taxes to make them comparable with taxable items before any
income taxes are applied. The calculation of the weighted average yields is
based on effective yield, weighted by the respective book value of the
securities, using the cost basis in the case of securities available-for-sale.
<TABLE>
<CAPTION>
September 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten
One Year Five Years Ten Years Years Total
------------------ ----------------- ------------------------------------ ------------------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $ 3,599 5.87% $ 15,933 6.24% $ 3,989 6.56% $ 397 6.47% $ 23,918 6.24%
States and political subdivisions 1,341 9.08 6,876 8.01 12,349 8.02 592 8.21 21,158 8.09
Collateralized mortgage obligations
of U.S. agencies - - - - 500 5.50 498 5.80 998 5.65
Other - - 100 6.72 - - 346 - 446 6.72
------ - --- ---- ----- - --- - --- ----
Total $ 4,940 6.74 % $ 22,909 6.77% $ 16,838 7.61% $ 1,833 5.63% $ 46,520 7.03%
= ===== ==== = = ====== ===== = ====== ===== = ===== ===== = ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
After One After Five
Within but Within but Within After Ten
One Year Five Years Ten Years Years Total
------------------ ----------------- ------------------------------------ ------------------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $ 3,206 5.90% $ 17,988 6.22% $ 4,295 6.43% $ 697 6.51% $ 26,186 6.22%
States and political subdivisions 1,051 9.09 7,406 8.59 12,128 8.11 1,292 7.62 21,877 8.30
Collateralized mortgage obligations
of U.S. agencies - - - - 901 5.30 497 5.80 1,398 5.55
Other - - 100 6.72 - - 345 - 445 6.72
------ - --- ---- ----- - --- - --- ----
Total $ 4,257 6.69 % $ 25,494 6.91% $ 17,324 7.55% $ 2,831 6.10% $ 49,906 7.07%
= ===== ==== = = ====== ===== = ====== ===== = ===== ===== = ====== =====
</TABLE>
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<PAGE>
Deposits
Deposits are the largest component of BNI's liabilities and account for
the greatest portion of interest expense. At September 30, 1997, total deposits
were $112.5 million, an increase of $400,000, or 36 basis points, over December
31, 1996 and increase of $3.8 million, or 3.5%, over September 30, 1996. The
increases were attributable to the continued strength in agriculture. At
December 31, 1996, total deposits were $112.1 million, an increase of $7.8
million, or 7.4%, over December 31, 1995. The increase from 1995 to 1996 was
attributable to the strength in agriculture and fishing during 1996. The
increase from 1994 to 1995 was attributable to the normal growth of BNI's
customer base. At December 31, 1995, total deposits were $104.3 million, an
increase of $1.5 million, or 1.4%, over December 31, 1994.
For September 30, 1997, average deposits increased $4.4 million and
$6.1 million, or 4.2% and 5.8%, over the amounts reflected at December 31, 1996
and September 30, 1996, respectively.
For 1996, average deposits increased $4.8 million, or 4.75%, as
compared to 1995. For 1995, average deposits increased $2.4 million, or 2.39%,
as compared to 1994. The increase from 1995 to 1996 was attributable to the
strength in agriculture and fishing during 1996. The increase from 1994 to 1995
was attributable to the normal growth of BNI's customer base. The expansion of
BNI's customer deposit base during this year was in contrast to many of its
competitors, whose customers sought higher-yielding alternative investments,
generally with nonfinancial institutions. The following table presents the
average amount and average rate paid on deposits for the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------------------------------------------------------
1996 1995 1996 1995 1994
---------------- -------------------------------- ----------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 10,806 -% $ 9,322 - $ 9,689 -% $ 8,548 -% $ 8,722 -%
Interest-bearing demand 27,766 3.09 25,870 3.09 26,727 3.08 27,095 3.69 28,095 3.36
Savings 16,759 3.66 16,385 3.59 16,579 3.60 15,986 4.12 16,405 3.65
Time 55,951 5.33 53,557 5.44 53,837 5.41 50,362 5.35 46,390 4.41
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
$111,282 $105,134 $106,832 $101,991 $ 99,612
======== ======== ======== ======== = ======
</TABLE>
The following table presents the maturity distribution of time
certificates of deposits of $100,000 or more at September 30 and December 31 for
the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
-------------------------------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Within three months $ 2,340,601 $ 1,833,718 $ 1,821,546 $ 501,967 $ 702,794
Three to twelve months 2,289,765 3,176,014 3,665,360 1,991,241 2,354,093
One year to five years 3,166,631 2,115,499 2,242,118 2,803,903 1,337,030
--------- --------- --------- --------- ---------
Total $ 7,796,997 $ 7,125,231 $ 7,729,024 $ 5,297,111 $ 4,393,917
= ========= = ========= = ========= = ========= = =========
</TABLE>
Liquidity Management
Liquidity refers to BNI's ability to provide sufficient cash flows to
fund operations and to meet obligations and commitments on a timely basis at
reasonable costs. BNI achieves its liquidity objectives from both assets and
liabilities. Asset-based liquidity is derived from its investment securities
portfolio and short-term investments which can be readily converted to cash.
These liquid assets consist of cash and due from banks, federal funds sold and
available-for-sale investment securities. The aggregate
-85-
<PAGE>
of these assets represented 22.3% and 25% of total assets at September 30, 1997
and 1996, respectively. The aggregate of these assets represented 24.7%, 24.3%
and 20.8% of total assets at the end of 1996, 1995 and 1994, respectively.
Liability-based liquidity is provided primarily from deposits. Average
total deposits for 1996 increased $4.8 million, or 4.75%, to $106.8 million. For
1995, average total deposits increased $2.4 million, or 2.39%, to $102.0
million. Average total deposits for 1996, 1995 and 1994 funded 84.81%, 85.65%
and 86.30% , respectively, of average total assets. Demand, savings and time
deposits under $100,000--which BNI considers its core deposits because of their
historical stability and relatively low cost--constituted 93.1%, 94.9% and 95.7%
of total deposits at December 31, 1996, 1995 and 1994, respectively.
Additional liquidity was provided from short-term borrowings, which
consisted of Federal funds purchased by BNI, although at December 31, 1996, 1995
and 1994, BNI was not in a Federal funds purchased liability position.
As indicated in the Statement of Cash Flows, net cash provided by
operating and financing activities was $9.5 million, and net cash used in
investing activities was $11.5 million for 1996. For 1995, net cash provided by
operating and financing activities was $3.3 million, and net cash used in
investing activities was $5.9 million. For 1994, net cash provided by operating
and financing activities was $2.9 million and net cash used in investing
activities was $2.9 million.
BNI's ability to pay dividends is subject to certain limitations as
described in Note 13 to the Financial Statements.
Capital Requirements
Banks are required to comply with risk-based capital guidelines as
established by the Federal Reserve Board. The guidelines define qualifying
capital (Tier 1 Capital and Total Capital) and risk-weighted assets. Tier 1
Capital includes shareholders' equity less unrealized valuation adjustments and
goodwill and, beginning in 1993, all other intangibles, subject to certain
exceptions described below.
Total Capital includes, in addition to Tier 1 Capital, subordinated and
other qualifying term debt and a portion of the allowance for loan losses. The
Tier 1 component must comprise at least 50% of qualifying Total Capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets
which include both on- and off-balance sheet exposures. A Bank's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk-weighted assets (the denominator). The minimum required
qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1
Capital.
In addition, banks are required to maintain a minimum leverage ratio of
Tier 1 Capital to total average assets (net of goodwill and other intangibles,
subject to certain exceptions). The Federal Reserve Board has stated that the
minimum leverage ratio is 3% for the most highly rated banking organizations
which are not experiencing or anticipating significant growth. Other banking
organizations are expected to maintain leverage ratios of at least one to two
percent higher.
-86-
<PAGE>
<TABLE>
<CAPTION>
The following tables present BNI's regulatory capital position as of
the periods presented:
September 30, December 31,
-------------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
-----------------------------------------------------------------------------------------
Risk-Based Capital Ratios
- ----------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 20,454 27.85% $ 19,070 28.35% $ 18,762 27.54% $ 17,106 26.63% $ 15,704 25.88%
Tier 1 Capital minimum requirements 2,938 4.00 2,690 4.00 2,725 4.00 2,569 4.00 2,428 4.00
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Excess $ 17,516 23.85% $ 16,380 24.35% $ 16,037 23.54% $ 14,537 22.63% $ 13,276 21.88%
- ------ ------ - ------ ------ - ------ ------ - ------ ------ - ------ ------
Total Capital $ 21,376 29.10% $ 19,911 29.60% $ 19,614 28.79% $ 17,909 27.88% $ 16,463 27.13%
Total Capital minimum requirements 5,876 8.00 5,380 8.00 5,451 8.00 5,139 8.00 4,855 8.00
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Excess $ 15,500 21.10% $ 14,531 21.60% $ 14,163 20.79% $ 12,770 19.88% $ 11,608 19.13%
- ------ ------ - ------ ------ - ------ ------ - ------ ------ - ------ ------
Risk-weighted assets $ 73,455 $ 67,256 $ 68,134 $ 64,234 $ 60,688
- ------ - ------ - ------ - ------ - ------
</TABLE>
<TABLE>
<CAPTION>
Leverage Ratio
- ----------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital to total average assets
(Tier 1 Leverage Ratio) $ 20,454 15.51% $ 19,070 15.36% $ 18,762 14.89% $ 17,106 14.37% $ 15,704 13.52%
Minimum leverage requirements 3,957 3.00 3,725 3.00 3,779 3.00 3,572 3.00 3,484 3.00
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Excess $ 16,497 12.51% $ 15,345 12.36% $ 14,983 11.89% $ 13,534 11.37% $ 12,220 10.52%
- ------ ------ - ------ ------ - ------ ------ - ------ ------ - ------ ------
Total assets (net of certain
intangibles) $ 131,910 $124,177 $ 125,964 $ 119,058 $116,136
- ------- -------- - ------- - ------- --------
</TABLE>
Impact of Inflation and Changing Prices and Seasonality
The financial statements in this document have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price of
goods and services, since such prices are affected by inflation.
Recent Accounting Pronouncements
In March 1995, the FASB issued FASB No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed of. This Statement requires that
long-lived assets and certain intangibles to be held and used by an entity be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable. In addition, FASB No. 121 requires
long-lived assets and certain intangibles to be disposed of to be reported at
the lower of carrying value or fair value less cost to sell. FASB No. 121 is
effective for fiscal years beginning after December 15, 1995. The application of
this pronouncement did not have an impact on BNI's financial statements.
In May 1995, the FASB issued FASB No. 122, Accounting for Mortgage
Servicing Rights which amends FASB No. 65. This Statement requires entities that
acquire mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with the servicing rights
retained should allocate the total costs of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. In addition, FASB No. 122 requires entities to
assess their capitalized mortgage servicing rights for impairment based on the
fair value of those rights. FASB No. 122 is effective for fiscal years beginning
after December 15, 1995.
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<PAGE>
Management does not expect the application of this pronouncement to have a
material impact on BNI's financial statements in that it does not purchase,
sell, or securitize mortgage loans.
In October 1995, the FASB issued FASB No. 123, Accounting for
Stock-Based Compensation. This Statement encourages, but does not require
entities to expense the fair value of employee stock options, based on the fair
value on the date of the grant. Companies that elect to continue to follow
existing accounting rules (the intrinsic value method which often results in no
compensation expense) must provide pro forma disclosures of net income and
earnings per share which would have been reported had the new fair value method
been applied. In addition, FASB No. 123 requires all entities to make
significant more disclosures regarding employee stock options than is currently
required. FASB No. 123 is effective for fiscal years beginning after December
15, 1995. Management does not presently have a stock-based compensation plan,
and, accordingly, BNI has not been impacted by the adoption of this
pronouncement.
In June 1996, the FASB issued FASB No.125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial components approach that focuses on
control of the affected asset or liability that it controls or surrenders. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. BNI is not presently expected to be impacted by this
Statement in the foreseeable future.
In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls, and other secured transactions. The FASB also agreed
to defer for one year paragraph 15 (Secured Borrowings and Collateral) under
FASB No. 125 for all transactions.
In February 1997, the FASB issued FASB No. 128, Earnings Per Share.
FASB No. 128 simplifies the calculation of earnings per share (EPS) and makes it
comparable to international standards. Under FASB No. 128, primary EPS is
replaced with a calculation known as basic EPS. Basic EPS is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. Fully diluted EPS has not
changed significantly but has been renamed diluted EPS. Under the new rules,
income available to common shareholders should be adjusted for the assumed
conversion of all potentially dilutive securities. The treasury stock method is
used to calculate the dilutive effect of options and warrants. The treasury
stock method is applied using the average market price of BNI's common stock
during the period rather than the higher of the average market price or ending
market price. The dilutive effect of convertible debt of convertible preferred
stock will be calculated using the if-converted method, which assumes conversion
at the beginning of the period of the effect is dilutive. FASB No. 128 is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. Earlier application is not permitted.
In February 1997, the FASB also issued FASB No. 129, Disclosure of
Information about Capital Structure. FASB No. 129 consolidates the existing
guidance from several other pronouncements relating to an entity's capital
structure. Management does not expect the application of this pronouncement to
have a material impact on BNI's financial statements.
During June 1997, the FASB issued FASB No. 130, Reporting Comprehensive
Income. This pronouncement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. FASB No. 130 is effective
for financial statements beginning after December 15, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131,
Disclosures about Segments of an Enterprise and Related Information. FASB No.
131 establishes standards for the way that public
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<PAGE>
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement becomes effective for
financial statements for periods beginning after December 31, 1997.
Emerging Issues
The Federal Financial Institutions Examination Council ("FFIEC") first
alerted the banking industry to potential year 2000 computer problems in June
1996 and recommended that institutions perform risk assessments and adopt
strategies to address vulnerable systems. In a May 1997 policy statement the
FFIEC strongly encouraged institutions to complete an inventory of core computer
functions and set priorities for year 2000 goals by September 30, 1997. Banks
are expected to largely complete programming changes and have systems testing
well underway by December 31, 1998. The federal bank regulatory agencies are
assessing individual institutions' planning efforts and have announced that they
expect to complete examinations of individual institutions' conversion efforts
by mid-1998.
BNI has developed and is implementing a plan know as "Year 2000 Project
Management Plan," which will alert the institution to the substantial risks
faced by the millenium change. It is expected that, through this plan,
management will be able to identify and address the multitude of complexities
posed by the year 2000 problem and monitor the process of insuring that all
systems are year 2000 compliant. This plan is designed in a series of phases
that will enable management to monitor the potential risks and determine the
appropriate measures necessary to correct the problem. Management expects that
the testing of BNI's systems as part of this plan will be completed by the third
quarter of 1998.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next annual
meeting of BNI must be received in writing by the Secretary of BNI no later than
December 18, 1997, in order to be included in the proxy materials relating to
the next annual meeting.
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<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
Business
Eastern Virginia Bankshares, Inc. is a Virginia corporation that was
organized in September 1997 for the purpose of becoming the holding company for
SSB and BNI. Currently EVB does not transact any material business.
If the Reorganization is approved by the requisite vote of the
shareholders of SSB and BNI, and by the Federal Reserve, the FDIC and the SCC,
and if other conditions of the Reorganization are satisfied (or waived to the
extent permitted by the Agreement and applicable law), the Reorganization will
be consummated and effected at the time of the last to occur of the following
events: (i) a certificate of share exchange is issued by the SCC with respect to
the SSB Share Exchange pursuant to the Plan of Share Exchange; (ii) a
certificate of share exchange is issued by the SCC with respect to the BNI Share
Exchange pursuant to the Plan of Share Exchange; (iii) a certificate of
incorporation is issued by the SCC for EVB; and (iv) regulatory approval is
issued by the Federal Reserve and the SCC with respect to EVB. Thereafter, EVB
will serve as the parent company of SSB and BNI and will transact any material
business through these bank subsidiaries and such other subsidiaries as may be
established from time to time.
The principal office of EVB will be located at 307 Church Lane,
Tappahannock, Virginia 22560.
Management
Directors. The Board of Directors of EVB consists of nine individuals,
five of whom also are Directors of SSB and four of whom also are Directors of
BNI. The following paragraphs set forth certain information, as of October 31,
1997, for each of the persons who are expected to serve as directors of EVB
following the consummation of the Reorganization.
Robert L. Covington, 72, is the Chairman of the Board of Directors of
EVB and has been Chairman of the Board of BNI since 1991 and a Director of BNI
since 1968. Until December 31, 1990, Mr. Covington served as the President and
Chief Executive Officer of BNI.
F.L. Garrett, III, 57, is the Vice-Chairman of the Board of Directors
of EVB and has been a Director of SSB since 1982. Mr. Garrett is an oysterman
and a realtor in Essex County, Virginia.
Thomas M. Boyd, Jr., 57, is the President and Chief Executive Officer
of EVB. Mr. Boyd has served as the President and Chief Executive Officer and a
Director of SSB since 1982.
Lewis R. Reynolds, 46, is the Executive Vice President of EVB. Mr.
Reynolds has served as the President and Chief Executive Officer of BNI since
January 1, 1991 and has been a Director of BNI since 1994.
W. Rand Cook, 45, is an attorney with McCaul, Martin, Evans & Cook,
P.C. in Mechanicsville, Virginia, and has been a Director of SSB since 1996.
L. Edelyn Dawson, Jr., 56, is Senior Vice President of BNI and has been
a Director of BNI since 1997.
F. Warren Haynie, Jr., 59, is an attorney with F. Warren Haynie, Jr.,
P.C., in Heathsville, Virginia, and has been a Director of BNI since 1987.
Eric A. Johnson, 44, is General Manager of Mason Realty, Inc. in
Urbanna, Virginia, and has been a Director of SSB since 1988.
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William L. Lewis, 47, is an attorney with Lewis & Ware, P.C. in
Tappahannock, Virginia, and has been a Director of SSB since 1989.
Executive Officer Who is Not a Director
Thomas E. Stephenson, 43, is Chief Financial Officer of EVB. Mr.
Stephenson has been Vice President and Chief Financial Officer of SSB since
1987.
Security Ownership of Management
The following table sets forth, based on information as of November 21,
1997, the beneficial ownership of SSB Common Stock, the beneficial ownership of
BNI Common Stock, and the anticipated beneficial ownership, after giving effect
to the Reorganization, of EVB Common Stock as to each director of EVB, each of
the five most highly compensated executive officers of EVB, and all EVB
directors and executive officers, as a group, upon consummation of the
Reorganization.
<TABLE>
<CAPTION>
Ownership Before Ownership After
the Reorganization the Reorganization
------------------ ------------------
EVB Common Stock
----------------
SSB BNI Number Percent
Name Common Stock Common Stock of Shares of Class (%)
- ---- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Robert L. Covington - 83,534 83,534 1.61
F.L. Garrett, III 8,138 - 21,146 0.41
Thomas M. Boyd, Jr. 9,115 - 23,684 0.46
Lewis R. Reynolds 18,238 18,238 0.35
W. Rand Cook 413 - 1,073 0.02
L. Edelyn Dawson, Jr. - 16,256 16,256 0.31
F. Warren Haynie, Jr. - 4,000 4,000 0.02
Eric A. Johnson 1,895 - 4,924 0.09
William L. Lewis 8,076 - 20,985 0.40
All present executive officers
and directors as a group (10 persons) 29,821 122,028 199,515 3.84
</TABLE>
Security Ownership of Certain Beneficial Owners
To the knowledge of EVB, based on information as of November 21, 1997,
no person will own more than 5% of the outstanding shares of EVB Common Stock
upon consummation of the Reorganization.
Compensation
Directors. Directors of EVB receive no compensation from EVB. EVB's
management has discussed the possibility of compensating directors, but no
specific arrangements will be made until the Reorganization has been
consummated. At present, however, all directors of EVB also are directors of
either SSB or BNI, which do compensate their directors.
All directors of SSB are paid a retainer of $150 for each Board meeting
and a fee of $150 for each such meeting attended, with an additional $100 for
each committee meeting of SSB. Directors who are
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full-time employees of SSB do not receive fees for attending Board or Committee
meetings. Total fees paid to the directors in 1996 for attendance at meetings
were $97,687.
All directors of BNI, including directors who are employees of BNI, are
paid a fee of $300 for each meeting attended and $75 for each meeting of BNI's
Executive Committee. Total fees paid to the directors in 1996 for attendance at
meetings were $35,000. In April 1997, the Board revised its directors'
compensation policy and discontinued its practice of paying directors' fees to
directors who are also employees of BNI, which includes Messrs. Covington,
Dawson and Reynolds.
Executive Officers. Executive officers of EVB receive no compensation
from EVB. EVB's management has discussed the possibility of compensating
executive officers, but no specific arrangements will be made until the
Reorganization has been consummated. At present, however, all executive officers
of EVB also are executive officers of either SSB or BNI, which do compensate
their executive officers.
The following table sets forth the annual compensation paid or accrued
by SSB to Thomas M. Boyd, Jr., President and Chief Executive Officer of SSB, and
by BNI to Lewis R. Reynolds, President and Chief Executive Officer of BNI for
the three fiscal years ended December 31, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
Name and Other Annual All Other Compensation
Principal Position Year Salary (1) Bonus Compensation (3)
------------------ ---- ---------- ----- ------------ ---
<S> <C> <C> <C> <C> <C>
Thomas M. Boyd, Jr. 1996 $108,000 $100 (2) $6,696
President and Chief 1995 $102,000 $100 (2) $7,140
Executive Officer -- 1994 $96,000 $100 (2) $7,490
SSB
Lewis R. Reynolds 1996 $77,428 $17,710 (2) -
President and Chief 1995 $70,553 $13,959 (2) -
Executive Officer -- 1994 $66,725 $13,123 (2) -
BNI
</TABLE>
(1) For Mr. Reynolds, includes Director's fees.
(2) The value of perquisites and other personal benefits did not exceed
the lesser of $50,000 or ten percent of total annual salary and bonus.
(3) For Mr. Boyd, includes contributions to SSB's Profit Sharing Plan,
which was terminated effective December 31, 1996.
The Executive Officers of SSB are provided with other benefit plans
provided to all full-time employees of SSB who meet eligibility requirements;
specifically, group life insurance, hospitalization and major medical insurance,
as well as a long-term disability plan. SSB implemented a 401(k) Plan effective
April 1, 1997. For the calendar year ending December 1997, SSB will contribute
two percent of employee compensation, plus an additional two percent when the
employee contributes at least four percent. Employees may contribute up to a
maximum of 15% of their respective salaries on a pre-tax basis. Qualified
employees were initially those employees who were 21 years of age and had 90
days of service and currently those employees who are 21 and had one year of
service. Executive Officers of SSB are allowed to participate under the same
rules and requirements as other employees.
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SSB participates in a defined-benefit pension plan offered by the
Virginia Bankers Association Insurance Trust, managed by Reliance Trust. The
plan was fully funded as of December 31, 1987, and the benefits are based on an
employee's salary at the time of retirement, normally at age 65. All active,
full-time employees are eligible at age 25 with two years of service, at age 36
with one year of service, or at age 41. Employees do not contribute to the plan,
and a participant becomes 100% vested upon completion of five years of service.
Directors who are full-time employees of SSB are eligible for participation. The
estimated annual benefits payable upon retirement are as follows:
Pension Plan Table
<TABLE>
<CAPTION>
Remuneration Years of Service
------------ ----------------
15 20 25 30 35
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
$25,000 $ 6,075 $ 8,100 $10,125 $11,213 $12,300
$50,000 $14,513 $19,350 $24,188 $27,150 $30,113
$75,000 $22,950 $30,600 $38,250 $43,088 $47,925
$100,000 $31,388 $41,850 $52,313 $59,025 $65,738
$125,000 $39,825 $53,100 $66,375 $74,963 $83,550
</TABLE>
The estimated credited years of service for Mr. Boyd, Jr. is 23 years.
Based on a straight-line annuity assuming full benefit at age 65 and
1996 covered compensation of $21,000 for a person age 65 in 1996. Benefits are
not subject to deduction for Social Security offset amounts. Benefits are based
on an employee's salary at the time of retirement.
Employment Contracts
Messrs. Reynolds and Dawson have employment agreements with BNI to
serve as officers of BNI. Both contracts will continue after the Reorganization
without any change to the terms of such contracts. Both contracts are for
five-year terms and expire on November 13, 2001. Each contract also provides for
automatic renewals for successive terms of one year at a time, unless the
contract is terminated by BNI or the employee. Both officers' salary are
determined at the sole discretion of BNI's Board of Directors, with a minimum
1996 salary of $72,628 for Mr. Reynolds and $67,450 for Mr. Dawson. In the event
that either officer's employment is terminated under his agreement within six
months before or 18 months after a change of control of BNI, the officer is
entitled to receive the greater of (i) his current salary and benefits or (ii)
the level of such salary and benefits in effect over the most recent 12 months
preceding the date of his termination of employment. Each officer would be
eligible to receive this compensation subsequent to his termination in these
circumstances over the longer of (i) an additional 12 months or (ii) the
remainder of his unexpired original term.
Transactions with Management
In the normal course of business, loans are made to Directors and
Executive Officers of SSB, as well as certain business organizations and
individuals associated with them. These loans are made on substantially the same
terms as those prevailing at the time for comparable loans with other persons
and do not involve more than the normal risk of collectibility or present other
unfavorable features. SSB's executive officers and directors, and their
associates, have not had any material direct or indirect interest in any
business transaction to which SSB is or was a party outside the ordinary course
of SSB's business and have not received any payment from SSB where the rates or
charges involved in the transaction were not determined by competitive bids.
BNI has entered into transactions with certain of its directors,
significant shareholders and their affiliates (related parties). In the opinion
of BNI's management, such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not involve more than normal credit
risk or present other unfavorable features. The total direct and indirect
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indebtedness to BNI of all its directors, principal officers and significant
shareholders at December 31, 1996 was $2,736,166, or 14.69% of its equity
capital at December 31, 1996.
The Law Office of F. Warren Haynie, Jr., P.C. serves as counsel to BNI.
F. Warren Haynie, Jr., a principal of the Law Office of F. Warren Haynie, Jr.,
P.C., is a director of EVB and BNI.
Lewis & Ware, P.C. serves as counsel to SSB. William L. Lewis, a
principal of Lewis & Ware, P.C., is a director of EVB and SSB.
Adverse Proceedings
Management of EVB, BNI and SSB are not aware of any material
proceedings to which any Director, officer or affiliate of such entities, any
owner of record or beneficial owner of more than five percent of BNI's Common
Stock or SSB's Common Stock, or any associate of any such Director, officer,
affiliate of any of such entities, or shareholder is a party adverse to any of
such entities or has a material interest adverse to any of such entities.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which EVB or any of its
subsidiaries is a party or of which any of their property is subject.
DESCRIPTION OF EVB CAPITAL STOCK
Authorized and Outstanding Capital Stock
EVB is authorized to issue up to 50,000,000 shares of Common Stock, par
value $2.00 per share. EVB has one share of Common Stock outstanding held by one
shareholder. The following summary description of the capital stock of EVB is
qualified in its entirety by reference to the Articles of Incorporation of EVB
(the "EVB Articles") and EVB's Bylaws, copies of which are available for
inspection as exhibits to the registration statement filed with the Securities
and Exchange Commission (the "SEC") in connection with this Joint Proxy
Statement.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders. Subject to certain limitations on
the payment of dividends, holders of EVB Common Stock are entitled to receive
dividends when and as declared by the EVB Board of Directors from funds legally
available therefor.
All outstanding shares of Common Stock, including the shares offered
hereby, are fully paid and non-assessable. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election subject to the rights of preferred stock, if and when
issued. Holders of Common Stock have no preemptive or other subscription rights,
and there are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock.
Certain Provisions of Articles of Incorporation and Bylaws
Provisions with Anti-takeover Implications. A number of provisions of
EVB's Articles and Bylaws deal with matters of corporate governance and the
rights of shareholders.
The Bylaws of EVB provide that special meetings of shareholders may be
held whenever called by the President, the Chairman or Vice Chairman of the
Board of Directors or by the Board of Directors, itself, which means that the
shareholders of EVB do not have the right to call special meetings.
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The foregoing provisions, together with certain provisions of the
Virginia SCA (See "Comparative Rights of Shareholders - State Anti-Takeover
Statutes," below), also could discourage or make more difficult a merger, tender
offer or proxy contest, even if they may be favorable to the interests of
shareholders, thus depressing the market price of the Common Stock.
The EVB Articles provide that directors and officers of EVB will be
indemnified by EVB to the fullest extent authorized by Virginia law, as it now
exists or may in the future be amended, against all expense, liabilities and
loss reasonably incurred or suffered in connection with service for or on behalf
of EVB, and provide for mandatory advancement of such expenses. The EVB Articles
also provides that the right of directors and officers to indemnification is not
exclusive of any other right under any statute, agreement or otherwise.
In addition, the EVB Articles provide that directors of EVB will not be
personally liable for monetary damages to EVB, except in cases of willful
misconduct or a knowing violation of criminal or securities laws. This provision
would have no effect on the availability of equitable remedies or non-monetary
relief, such as an injunction or rescission. See "Comparative Rights of
Shareholders - State Anti-Takeover Statutes."
COMPARATIVE RIGHTS OF SECURITY HOLDERS
General
EVB is a Virginia corporation subject to the provisions of the Virginia
SCA. SSB and BNI each is a Virginia corporation organized as a state bank and
also is subject to the provisions of the Virginia SCA. Shareholders of SSB and
shareholders of BNI, whose rights are governed by their respective Articles of
Incorporation and Bylaws and by the Virginia SCA, will become shareholders of
EVB upon consummation of the Reorganization. The rights of such shareholders as
shareholders of EVB will then be governed by the Articles of Incorporation and
Bylaws of EVB and by the Virginia SCA.
Except as set forth below, there are no material differences between
the rights of a SSB shareholder or BNI shareholder under the respective Articles
and Bylaws of SSB and BNI and under the Virginia SCA, on the one hand, and the
rights of a EVB shareholder under the Articles of Incorporation and Bylaws of
EVB and under the Virginia SCA, on the other hand. This summary is qualified in
its entirety by reference to the Articles of Incorporation and Bylaws of SSB and
BNI and to the Virginia SCA and the Articles of Incorporation and Bylaws of EVB
and the Virginia SCA.
Authorized Capital
SSB. SSB's Articles of Incorporation (the "SSB Articles") authorize the
issuance of up to 1,200,000 shares of SSB Common Stock, par value $5.00 per
share, of which 1,018,848 shares were issued and outstanding as of the SSB
Record Date. SSB is not authorized to issue shares of preferred stock.
BNI. BNI's Articles of Incorporation (the "BNI Articles") authorize the
issuance of up to 5,000,000 shares of BNI Common Stock, par value $1.00 per
share, of which 2,541,920 shares were issued and outstanding as of the BNI
Record Date. BNI is not authorized to issue shares of preferred stock.
EVB. EVB is authorized to issue 50,000,000 shares of Common Stock, par
value $2.00 per share, of which one (1) share is issued and outstanding. EVB is
not authorized to issue shares of preferred stock. See "Description of EVB
Capital Stock" for additional information.
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Amendment of Articles of Incorporation or Bylaws
The Virginia SCA provides that an amendment to a corporation's articles
of incorporation must be approved by each voting group entitled to vote on the
proposed amendment. Under Virginia law, an amendment to the corporation's
articles of incorporation must be approved by more than two-thirds of all votes
entitled to be cast by that voting group. However, the corporation's articles of
incorporation may require a greater vote or a lesser vote, which may not be not
less than a majority, by each voting group entitled to vote on the transaction.
A corporation's board of directors may require a greater vote.
SSB. The SSB Articles do not address amendments, so SSB is governed by
the provisions of the Virginia SCA. Accordingly, amendments to SSB's Articles of
Incorporation must be approved by two-thirds of all votes entitled to be cast by
each voting group.
SSB's Bylaws provide that the power to amend the Bylaws is vested in
the Board of Directors. Thus, SSB's Bylaws may be amended by a majority of the
directors present at a meeting which was properly called and at which a quorum
is present. Also, under Virginia law, the Bylaws may be amended by action of the
majority of the shareholders.
BNI. The BNI Articles do not address amendments, so BNI is governed by
the provisions of the Virginia SCA. Accordingly, amendments to BNI's Articles of
Incorporation must be approved by two-thirds of all votes entitled to be cast by
each voting group.
BNI's Bylaws provide that the Bylaws may be amended by a two-thirds
vote of the shareholders. Subject to the power of the shareholders to adopt,
amend or repeal the Bylaws, the power to amend the Bylaws is vested in the Board
of Directors. Thus, BNI's Bylaws may be amended by a majority of the directors
present at a meeting which was properly called and at which a quorum is present.
EVB. The Articles of Incorporation of EVB provide that amendments must
be approved by a majority of the votes entitled to be cast by each voting group
entitled to vote and, unless such action is approved by at least two-thirds of
the Directors, by holders of more than two-thirds of the issued and outstanding
shares of EVB Common Stock (the vote generally required under Virginia law).
EVB's Bylaws may be amended by the vote of more than a simple majority
of the directors in office or by the shareholders. Since EVB currently has nine
directors, this currently means that the EVB Bylaws can be amended if at least
six directors vote in favor of the amendment.
Mergers, Consolidations and Sales of Assets.
SSB. The Articles of Incorporation of SSB do not specify the vote
required to enter into a merger, a share exchange or a direct or indirect sale,
lease, exchange or other disposition of all or substantially all of the property
of SSB. Accordingly, the vote required for such a transaction is the vote
specified in the Virginia SCA, which is the affirmative vote of holders of more
than two-thirds of the issued and outstanding shares of SSB Common Stock.
BNI. The Articles of Incorporation of BNI do not specify the vote
required to enter into a merger, a share exchange or a direct or indirect sale,
lease, exchange or other disposition of all or substantially all of the property
of BNI. Accordingly, the vote required for such a transaction is the vote
specified in the Virginia SCA, which is the affirmative vote of holders of more
than two-thirds of the issued and outstanding shares of BNI Common Stock.
EVB. The Articles of Incorporation of EVB provide that a plan of merger
or share exchange or a direct or indirect sale, lease, exchange or other
disposition of all or substantially all of the property of EVB not in the
ordinary course of business may be approved by the same vote that is required in
order to amend the Articles of Incorporation. Additionally, consistent with
Virginia law, the Board of Directors of EVB
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may condition its submission of such plan of merger or share exchange or such a
sale or disposition of assets to the shareholders on any basis, including the
requirement of a greater vote than the required vote described above.
A proposed merger, share exchange or sale of substantially all assets
of EVB that is favored by two-thirds of the Directors could be adopted as long
as a majority (rather than two-thirds) of the outstanding shares entitled to
vote in each voting group entitled to vote are voted in favor of the proposed
action. In addition to requiring the affirmative vote of a majority of the
shares entitled to vote in each voting group entitled to vote, the Articles of
Incorporation of EVB would require that, unless a proposed action is approved by
at least two-thirds of the Directors, more than two-thirds of the issued and
outstanding shares vote in favor of the proposed action. The purpose of such
additional requirements is to ensure that if a proposed major corporate action
does not have the support of a board of directors who can provide continuity to
and an in-depth knowledge of the business of EVB, the action must be supported
by more than two-thirds of the issued and outstanding shares of EVB Common
Stock.
Size and Classification of Board of Directors
SSB. SSB's Bylaws provide that its Board of Directors shall consist of
not less than eight or more than 16 individuals. Under Virginia banking laws a
majority of the directors must be residents of Virginia and each director must
own SSB stock having a book value of not less than $5,000. Directors are elected
at each annual meeting of shareholders.
BNI. BNI's Bylaws provide that its Board of Directors shall consist of
not less than five, nor more than nine, individuals. Under Virginia banking
laws, a majority of the Directors must be residents of Virginia and each
Director must own BNI stock having a book value of not less than $5,000.
Directors are elected at each annual meeting of shareholders.
EVB. EVB's Bylaws provide for a board of directors consisting of nine
individuals. Directors are elected annually and serve until their successors are
elected and qualified.
Vacancies and Removal of Directors
SSB. SSB's Bylaws provide that shareholders may remove any Director
with or without cause. However, because the Virginia SCA provides that a
Director may be removed only at a special meeting of shareholders, SSB
shareholders could not remove a Director of SSB unless the Chairman of the
Board, the President or the Board of Directors called a meeting for that
purpose. Under the SSB Bylaws, a vacancy on the Board of Directors, including a
vacancy resulting from the removal of a Director or an increase in the number of
Directors may be filled by the shareholders or the Board of Directors.
BNI. BNI's Articles of Incorporation and Bylaws provide that any
vacancy on the board of directors may be filled by an election by the active
board members. BNI's Articles of Incorporation contain no provision relating to
removal of directors. Therefore, under the Virginia SCA, shareholders may remove
directors with or without cause at a special meeting of shareholders, which can
be called by the Chairman or Vice Chairman of the Board, the President, a
majority of the Board or holders of at least 10% of BNI Common Stock.
EVB. Under the Articles of Incorporation of EVB, vacancies occurring in
the Board of Directors, including vacancies created by newly created
directorships resulting from an increase in the number of directors, may be
filled by the affirmative vote of a majority of the remaining directors, even if
less than a quorum, until the next election of directors by shareholders.
Shareholders of EVB may not call a special meeting for the purpose of removing a
director.
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Director Liability and Indemnification
The Virginia SCA provides that in any proceeding brought by or in the
right of a corporation or brought by or on behalf of shareholders of the
corporation, the damages assessed against an officer or director arising out of
a single transaction, occurrence or course of conduct may not exceed the lesser
of (1) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
as a limitation on or elimination of the liability of the officer or director;
or (2) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
SSB. SSB's Articles of Incorporation provide that each director of SSB
shall be indemnified by SSB to the full extent permitted and in the manner
prescribed by the Virginia SCA unless a liability is incurred as a result of
gross negligence or willful misconduct. SSB is permitted to pay for or reimburse
reasonable expenses incurred in advance of final determination or other
disposition of a proceeding if the applicant furnishes to the corporation a
written statement of his good faith belief that indemnity will be due to him,
the applicant furnishes to the corporation a written undertaking to repay the
advance if it is ultimately determined that he did not meet the standard
required, and a majority of the disinterested board members or an independent
council appointed by the board determines that facts then known would not
preclude indemnification.
BNI. BNI's Articles of Incorporation provide that each director and
officer shall be indemnified by BNI against liability (including amounts paid in
settlement) by reason of having been such a director or officer, whether or not
then continuing so to be, and against all expenses (including counsel fees)
reasonably incurred by him in connection therewith, except such liabilities as
are incurred because of willful misconduct or a knowing violation of the
criminal law. The Articles of Incorporation limit the liability of BNI Directors
to BNI or its shareholders arising out of a single transaction, occurrence or
course of conduct to one dollar.
EVB. The Articles of Incorporation of EVB provide that to the full
extent that Virginia law permits the limitation or elimination of the liability
of directors and officers, they will not be liable to EVB or its shareholders
for any money damages. At this time, Virginia law does not permit any limitation
of liability if a director engages in willful misconduct or a knowing violation
of the criminal law or any federal or state securities law.
To the fullest extent permitted by Virginia law, EVB's Articles of
Incorporation require it to indemnify any director or officer of EVB who is made
a party to any proceeding because he was or is a director or officer of EVB
against any liability, including reasonable expenses and legal fees, incurred in
the proceeding. Under EVB's Articles of Incorporation, "proceeding" is broadly
defined to include pending, threatened or completed actions of all types,
including actions by or in the right of EVB. Similarly, "liability" is defined
to include, not only judgments, but also settlements, penalties, fines and
certain excise taxes. EVB's Articles of Incorporation also provide that EVB may,
but is not obligated to, indemnify its other employees or agents. EVB must
indemnify any person who or is or was serving at the written request of EVB as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, the full extent provided by Virginia law.
The indemnification provisions also require EVB to pay reasonable expenses
incurred by a director or officer of EVB in a proceeding in advance of the final
disposition of any such proceeding, provided that the indemnified person
undertakes to repay EVB if it is ultimately determined that such person was not
entitled to indemnification. Virginia law does not permit indemnification
against willful misconduct or a knowing violation of the criminal law.
The rights of indemnification provided in EVB's Articles of
Incorporation are not exclusive of any other rights which may be available under
any insurance or other agreement, by vote of shareholders or
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disinterested directors or otherwise. In addition, the Articles of Incorporation
authorize EVB to maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of EVB, whether or not EVB would have the
power to provide indemnification to such person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Holding Company pursuant to the foregoing provisions, the Holding Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Special Meetings of Shareholders
SSB. SSB's Bylaws provide that special meetings of shareholders may be
held on the call of the Chairman of the Board, the President, or the Board of
Directors. Shareholders do not have the right to call a special meeting.
BNI. BNI's Bylaws provide that special meetings of shareholders may be
held on the call of the Chairman or Vice Chairman of the Board, the President, a
majority of the Board or holders of at least 10% of BNI Common Stock.
EVB. The Bylaws of EVB provide that special meetings of shareholders
may be held whenever called by the President, the Chairman or Vice Chairman of
the Board of Directors or by the Board of Directors, itself, which means that
the shareholders of EVB do not have the right to call special meetings.
Director Nominations
SSB. SSB's Bylaws do not prescribe procedures for directors'
nominations. It is the practice of SSB for the board to nominate directors for
shareholders' consideration.
BNI. BNI's Bylaws do not prescribe procedures for directors'
nominations. It is the practice of BNI for the board to nominate directors for
shareholders' consideration.
EVB. EVB's Bylaws set forth certain advance notice or information
requirements and time limitations on any director nomination or any new business
which a shareholder wishes to propose for consideration at an annual or special
meeting of shareholders. Any director nomination must be stated in writing and
filed with the Secretary of EVB at least 60 days prior to the date of the
shareholder meeting. The notice must contain certain information relating to the
nominee for director. The presiding officer of the meeting must reject any
nomination proposal not timely made or supported by insufficient information.
The Bylaws of EVB require that the shareholder's notice set forth as to
each nominee (i) the name, age, business address and residence address of such
nominee, (ii) the principal occupation or employment of such nominee, (iii) the
class and number of shares of EVB which are beneficially owned by each nominee,
and (iv) any other information relating to such nominee that is required under
federal securities laws to be disclosed in solicitations of proxies for the
election of directors, or is otherwise required (including, without limitation,
such nominee's written consent to being named in a proxy statement as nominee
and to serving as a director if elected). The Bylaws of EVB further require that
the shareholder's notice set forth as to the shareholder giving the notice (i)
the name and address of such shareholder and the names and addresses of any
other person or entity who owns, beneficially or of record, any shares of EVB
and who, to the knowledge of the shareholders giving notice, supports the
nominee and (ii) the class and amount of such shareholder's (or other supporting
entity's) beneficial ownership of EVB capital stock. If the information supplied
by shareholder is deficient in any material aspect or if the foregoing procedure
is not followed, the chairman of the annual meeting may determine that such
shareholder's nomination should not be brought before the annual meeting and
that such nominee shall not be eligible for election as a director of EVB.
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Shareholder Proposals
SSB. The Articles of Incorporation and Bylaws of SSB do not contain any
requirements relating to the timing or content of shareholder proposals for
shareholder vote.
BNI. The Articles of Incorporation and Bylaws of BNI do not contain any
requirements relating to the timing or content of shareholder proposals for
shareholder vote.
EVB. EVB's Articles provides that for business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely written notice to the Secretary of EVB. This notice must be received at
EVB not less than 60 days prior to the date of the annual meeting, except that
if less than 70 days notice or prior public disclosure of the date of the
meeting is given, notice by the shareholder must be received not later than the
close of business on the tenth day following the date on which such notice was
made. The notice must set forth each matter and a brief description of the
business desired to be brought before the meeting as well as certain other
information relating to the Shareholder requesting the proposal. The presiding
officer of the meeting must reject any such shareholder proposal not timely made
or supported by insufficient information.
Shareholder Voting Rights in General
The Virginia SCA generally provides that shareholders do not have
cumulative voting rights unless those rights are provided in the corporation's
articles. The Virginia SCA requires the approval of a majority of a
corporation's board of directors and the holders of more than two-thirds of all
the votes entitled to be cast by each voting group entitled to vote on any plan
of merger or consolidation, plan of share exchange or sale of substantially all
of the assets of a corporation not in the ordinary course of business. The
Virginia SCA also specifies additional voting requirements for Affiliated
Transactions which are discussed below under "State Anti-Takeover Statutes."
SSB. SSB's Articles of Incorporation do not provide shareholders
cumulative voting rights for the election of directors. Therefore, the holders
of a majority of the shares voted in the election of directors can elect all of
the directors then standing for election. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders.
BNI. BNI's Articles of Incorporation do not provide shareholders
cumulative voting rights for the election of directors. Therefore, the holders
of a majority of the shares voted in the election of directors can elect all of
the directors then standing for election. The holders of BNI Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders.
EVB. See "Description of EVB Capital Stock - Common Stock and Business
Combination Provisions."
Pre-emptive Rights
SSB. The Articles of Incorporation of SSB eliminate the pre-emptive
right of shareholders to subscribe for and purchase SSB Common Stock.
BNI. Because the Articles of Incorporation BNI do not eliminate
pre-emptive rights, shareholders of BNI have the pre-emptive right to subscribe
for and purchase shares of BNI common stock to the extent provided in the
Virginia SCA.
EVB. The Articles of Incorporation of EVB eliminate the pre-emptive
right of shareholders to subscribe for and purchase SSB Common Stock.
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State Anti-Takeover Statutes
The Virginia SCA restricts transactions between a corporation and its
affiliates and potential acquirers. The summary below is necessarily general and
is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the statutory provisions contained in the Virginia SCA. Because EVB, SSB and
BNI are Virginia corporations, the provisions of the Virginia SCA described
below apply to SSB and BNI and will continue to apply to EVB after the
Reorganization.
Affiliated Transactions. The Virginia SCA contains provisions governing
"Affiliated Transactions," found at Sections 13.1-725 - 727.1 of the Virginia
SCA. Affiliated Transactions include certain mergers and share exchanges,
certain material dispositions of corporate assets not in the ordinary course of
business, any dissolution of a corporation proposed by or on behalf of an
Interested Shareholder (as defined below), and reclassifications, including
reverse stock splits, recapitalizations or mergers of a corporation with its
subsidiaries, or distributions or other transactions which have the effect of
increasing the percentage of voting shares beneficially owned by an Interested
Shareholder by more than 5%. For purposes of the Virginia SCA, an Interested
Shareholder is defined as any beneficial owner of more than 10% of any class of
the voting securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia SCA as a member of a
corporation's board of directors who (i) was a member before the later of
January 1, 1988 or the date on which an Interested Shareholder became an
Interested Shareholder and (ii) was recommended for election by, or was elected
to fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the corporation's board of directors. At the
expiration of the three year period after a shareholder becomes an Interested
Shareholder, these provisions require approval of the Affiliated Transaction by
the affirmative vote of the holders of two-thirds of the outstanding shares of
the corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of: the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder who has been an
Interested Shareholder continuously since the effective date of the statute
(January 26, 1988) or who became an Interested Shareholder by gift or
inheritance from such a person or whose acquisition of shares making such person
an Interested Shareholder was approved by a majority of the Disinterested
Directors of the corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia SCA provides that by affirmative vote of
a majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt by meeting certain voting requirements an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. Neither
SSB nor BNI has adopted such an amendment. Currently, no shareholder of SSB owns
or controls 10% or more of SSB Common Stock, and there are no Interested
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Shareholders as defined by the Virginia SCA. Moreover, no shareholder of BNI
owns or controls 10% or more of BNI Common Stock, and there are no Interested
Shareholders as defined by the Virginia SCA.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728 - 728.8 of the Virginia SCA, also is
designed to afford shareholders of a public company incorporated in Virginia
protection against certain types of non-negotiated acquisitions in which a
person, entity or group ("Acquiring Person") seeks to gain voting control of
that corporation. With certain enumerated exceptions, the statute applies to
acquisitions of shares of a corporation which would result in an Acquiring
Persons ownership of the corporation's shares entitled to vote in the election
of directors falling within any one of the following ranges: 20% to 33-1/3%,
33-1/3% to 50% or 50% or more (a "Control Share Acquisition"). Shares that are
the subject of a Control Share Acquisition ("Control Shares") will not be
entitled to voting rights unless the holders of a majority of the "Disinterested
Shares" vote at an annual or special meeting of shareholders of the corporation
to accord the Control Shares with voting rights. Disinterested Shares do not
include shares owned by the Acquiring Person or by officers and inside directors
of the target company. Under certain circumstances, the statute permits an
Acquiring Person to call a special shareholders' meeting for the purpose of
considering granting voting rights to the holders of the Control Shares. As a
condition to having this matter considered at either an annual or special
meeting, the Acquiring Person must provide shareholders with detailed
disclosures about his identity, the method and financing of the Control Share
Acquisition and any plans to engage in certain transactions with, or to make
fundamental changes to, the corporation, its management or business. Under
certain circumstances, the statute grants dissenters' rights to shareholders who
vote against granting voting rights to the Control Shares. The Virginia Control
Share Acquisitions Statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. A corporation may opt-out of
the statute, which neither SSB nor BNI has done, by so providing in its articles
of incorporation or bylaws. EVB, however, has opted out of the statute by so
providing in its bylaws. Among the acquisitions specifically excluded from the
statute are acquisitions which are a part of certain negotiated transactions to
which the corporation is a party and which, in the case of mergers or share
exchanges, have been approved by the corporation's shareholders under other
provisions of the Virginia SCA.
Dissenters' Rights
The provisions of Article 15 of the Virginia SCA provide shareholders
of Virginia corporations certain rights of appraisal or dissent, for payment of
the fair value of their shares in the event of mergers, consolidations and
certain other corporate transactions. The Virginia SCA provides dissenters'
rights in a share exchange only to the acquired corporation, and not the
acquiring corporation. Therefore, both the shareholders of SSB and the
shareholders of BNI have dissenters' rights and may exercise that right and
obtain payment of the fair value of their shares upon compliance and in
accordance with the provisions of Article 15 of the Virginia SCA.
SUPERVISION AND REGULATION
Banks and their holding companies are extensively regulated entities.
EVB will become a holding company subject to supervision and regulation by the
Federal Reserve. SSB is a Virginia chartered bank regulated principally at the
federal level by the FDIC and at the state level by the SCC. BNI is a Virginia
chartered bank regulated principally at the federal level by the Federal Reserve
and at the state level by the SCC. The regulatory oversight of SSB and BNI will
not change as a result of the Reorganization.
The regulatory discussion is divided into two major subject areas, each
of which have three subsections. First, the discussion addresses the general
regulatory considerations governing bank holding companies. This area focuses on
the primary regulatory considerations that will be applicable to EVB as a bank
holding company. Second, the discussion addresses the general regulatory
provisions governing financial institutions. This focuses on the regulatory
considerations of SSB and BNI.
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The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework before and after the
Reorganization. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
Bank Holding Companies
As a result of the Reorganization, SSB and BNI will become subsidiaries
of EVB. The Federal Reserve has jurisdiction under the BHC Act to approve any
bank or nonbank acquisition, merger or consolidation proposed by a bank holding
company. The BHC Act generally limits the activities of a bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any
other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by statute of the state where the bank whose shares were to be
acquired was located. However, under federal legislation enacted in 1994, the
restriction on interstate acquisitions was abolished, effective September 1995.
A bank holding companies from any state now may acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks also will be able to
branch across state lines by acquisition, merger or de novo, effective June 1,
1997 (unless state law would permit such interstate branching at an earlier
date), provided certain conditions are met, including that applicable state law
must expressly permit such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the BIF. The FDIC's claim
for damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
Certain Regulatory Considerations of EVB Following the Reorganization
Regulatory Capital Requirements
All depository institutions are required to maintain minimum levels of
regulatory capital. The federal bank regulatory agencies have established
substantially similar risked based and leverage capital standards for financial
institutions they regulate. These regulatory agencies also may impose capital
requirements in excess of these standards on a case-by-case basis for various
reasons, including financial
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condition or actual or anticipated growth. Under the risk-based capital
requirements of these regulatory agencies, SSB and BNI are required to maintain
(and EVB will be required to maintain) a minimum ratio of total capital to
risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of EVB on a pro forma combined
basis following the Reorganization as of September 30, 1997, are 19.99% and
21.40%, exceeding the minimums required. Based upon the applicable Federal
Reserve regulations, at September 30, 1997, EVB (on a pro forma basis), SSB and
BNI would be considered "well capitalized". (See the "Capital Ratios" table in
this section below.)
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The pro forma leverage ratio
of EVB as of September 30, 1997, was 13.07% which is well above the minimum
requirements.
The following table summarizes the minimum regulatory and current
capital ratios for SSB and BNI at September 30, 1997, and also the pro forma
combined capital ratios as of September 30, 1997.
<TABLE>
<CAPTION>
Capital Ratios
Regulatory SSB BNI Pro Forma Combined
Minimum Current Current SSB and BNI
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Risk-based capital (1)
Tier 1 (3).................... 4.00% 15.59% 27.72% 19.99%
Total (3)..................... 8.00% 16.99% 29.10% 21.40%
Leverage (2)(3)................. 4.00% 11.13% 15.98% 13.07%
Total shareholders' equity
to total assets............... N/A 10.24% 15.29% 12.26%
</TABLE>
- ---------
(1) The pro forma risk-based capital ratios have been computed using pro
forma combined historical data for SSB and BNI at September 30, 1997.
(2) Leverage ratio is calculated by Tier 1 capital as a percentage of
quarterly period end assets.
(3) Calculated in accordance with the FDIC's and Federal Reserve's
capital rules, with adjustment for net unrealized depreciation on
securities available for sale.
Limits on Dividends and Other Payments
Certain state law restrictions are imposed on distributions of
dividends to shareholders of EVB. EVB shareholders are entitled to receive
dividends as declared by the EVB Board of Directors. However, no such
distribution may be made if, after giving effect to the distribution, it would
not be able to pay its debts as they become due in the usual course of business
or its total assets would be less than its total liabilities. There are similar
restrictions with respect to stock repurchases and redemptions.
Similarly, SSB and BNI are subject to legal limitations on capital
distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). With respect to each of SSB and BNI, the prior approval of
its principal federal regulator is required if the total of all dividends
declared in any calendar year will exceed
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the sum of its net profits for that year and its retained net profits for the
preceding two calendar years. Federal law also generally prohibits a depository
institution from making any capital distribution (including payment of a
dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal banking regulators are also authorized to limit the
payment of dividends by any state bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The Virginia SCC has general authority to prohibit payment of
dividends by a Virginia chartered bank if it determines that the limitation is
in the public interest and is necessary to ensure the bank's financial
soundness.
Following the consummation of the Reorganization, most of the revenues
of EVB and EVB's ability to pay dividends to its shareholders will depend on
dividends paid to it by SSB and BNI. Based on SSB's and BNI's current financial
conditions, EVB expects that the above-described provisions will have no impact
on EVB's ability to obtain dividends from SSB or BNI or on EVB's ability to pay
dividends to its shareholders.
The Depository Institutions
In addition to the regulatory provisions regarding holding companies
addressed above, SSB and BNI are subject to extensive regulation as well. The
following discussion addresses certain primary regulatory considerations
affecting SSB and BNI. Also, certain primary regulatory provisions are
applicable to both SSB and BNI, and these provisions are therefore discussed in
the last section.
SSB and BNI are regulated extensively under both federal and state law.
SSB and BNI each is organized as a Virginia chartered banking corporation and is
regulated and supervised by the Bureau of Financial Institutions of the Virginia
SCC. As a member of the Federal Reserve System as well, BNI is regulated and
supervised by the Federal Reserve Bank of Richmond. Since SSB is not a member of
the Federal Reserve System, its federal regulator is the FDIC. The Virginia SCC,
the Federal Reserve Bank of Richmond (in the case of BNI) and the FDIC (in the
case of SSB) conduct regular examinations of SSB and BNI, reviewing such matters
as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of their
operations. In addition to these regular examinations, SSB and BNI each must
furnish its state and federal regulators with periodic reports containing a full
and accurate statement of its affairs. Supervision, regulation and examination
of banks by these agencies are intended primarily for the protection of
depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC
SSB's and BNI's deposits are insured up to $100,000 per insured
depositor (as defined by law and regulation) through the Bank Insurance Fund
("BIF"). The BIF is administered and managed by the FDIC. As insurer, the FDIC
is authorized to conduct examinations of and to require reporting by BIF-insured
institutions. The actual assessment to be paid by each BIF member is based on
the institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. In 1996, the deposit insurance assessment paid by each of
SSB and BNI was $2,000.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution, including SSB and BNI, if
it determines, after a hearing, that the institution has engaged or is engaging
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed in writing by the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If deposit insurance is
terminated, the deposits at the institution at the time of termination, less
subsequent withdrawals, shall continue to be
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insured for a period from six months to two years, as determined by the FDIC.
Management is aware of no existing circumstances that could result in
termination of SSB's or BNI's deposit insurance.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and to maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and managerial
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposal contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. EVB has not
yet determined the effect that the proposed rule would have on its operations
and the operations of its depository institution subsidiary if it is enacted
substantially as proposed.
Community Reinvestment
The requirements of the Community Reinvestment Act ("CRA") affect both
SSB and BNI. The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's efforts in
meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. To the best knowledge of SSB and BNI, each is meeting its
obligations under the CRA. The CRA rating of SSB is "satisfactory", and the CRA
rating of BNI is "satisfactory".
LEGAL OPINION
The validity of EVB Common Stock to be issued in connection with the
Reorganization will be passed upon by Williams, Mullen, Christian & Dobbins,
P.C.
EXPERTS
The financial statements of SSB included in this Joint Proxy Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm, given their authority of as experts in accounting and auditing.
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The consolidated financial statements of BNI included in this Joint
Proxy Statement have been so included in reliance on the report of Goodman &
Company, L.L.P., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
Pro Forma Combined Balance Sheets
The following unaudited pro forma combined balance sheets combines the
historical balance sheets of SSB and the historical balance sheets of BNI on the
assumption that the Share Exchange had been effective as of September 30, 1997,
giving effect to the transaction on a pooling of interests accounting basis.
These unaudited pro forma combined balance sheets should be read in conjunction
with the historical financial statements of SSB and the historical financial
statements of BNI, including the respective notes thereto, included elsewhere in
this Joint Proxy Statement.
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<TABLE>
<CAPTION>
EASTERN VIRGINIA BANKSHARES, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF September 30, 1997
PRO FORMA PRO FORMA
ASSETS SSB BNI ADJUSTMENTS COMBINED
- ------------------------------------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash and due from banks $ 6,245,166 $ 2,819,986 $ $ 9,065,152
Federal funds sold 2,075,000 1,960,000 4,035,000
---------------- ----------------- ---------------- ----------------
Total cash and cash equivalents 8,320,166 4,779,986 - 13,100,152
Investment securities:
Available for sale 13,880,431 25,056,130 38,936,561
Held to maturity 18,218,306 21,429,952 39,648,258
Loans, net 138,341,491 79,512,055 217,853,546
Bank premises and equipment, net 3,363,729 519,674 3,883,403
Accrued interest receivable 1,308,719 1,265,653 2,574,372
Other assets 2,312,050 1,047,271 3,359,321
---------------- ----------------- ---------------- ----------------
$185,744,892 $133,610,721 $ - $319,355,613
================ ================= ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 16,611,447 $ 11,395,370 $ $ 28,006,817
Interest bearing demand deposits 28,809,595 27,683,086 56,492,681
Savings deposit 45,650,861 12,024,448 57,675,309
Other time deposits 73,409,362 61,410,477 134,819,839
---------------- ----------------- ---------------- ----------------
Total Deposits 164,481,265 112,513,381 276,994,646
Accrued interest payable 450,703 352,227 802,930
Other liabilities 1,793,200 315,259 330,000 2,438,459
---------------- ----------------- ---------------- ----------------
Total Liabilities 166,725,168 113,180,867 330,000 280,236,035
---------------- ----------------- ---------------- ----------------
Stockholders' Equity
Common stock 5,094,238 2,541,920 2,742,643 10,378,801
Surplus 2,096,364 865,420 (2,742,643) 219,141
Retained earnings 11,809,178 17,045,458 (330,000) 28,524,636
Net unrealized gains (losses) on
available for sale securities,
net of tax 19,944 (22,944) (3,000)
---------------- ----------------- ---------------- ----------------
---------------- ----------------- ---------------- ----------------
19,019,724 20,429,854 (330,000) 39,119,578
---------------- ----------------- ---------------- ----------------
$185,744,892 $133,610,721 $ - $319,355,613
================ ================= ================ ================
</TABLE>
See Notes to Pro Forma Combined Financial Information.
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Pro Forma Combined Statements of Income
The following unaudited pro forma combined statements of income for the
nine months ended September 30, 1997 and the three years ended December 31, 1996
present the combined statements of income of SSB and BNI assuming that SSB and
BNI were combined at the beginning of each period presented on a pooling of
interests accounting basis. These unaudited pro forma condensed statements of
income should be read in conjunction with the consolidated historical financial
statements of SSB and the historical financial statements of BNI, including the
respective notes thereto, included elsewhere in this Joint Proxy Statement or in
documents delivered herewith or incorporated herein by reference.
The pro forma information is not necessarily indicative of the results
of operations that would have resulted had the Share Exchange been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
the results of operations of future periods.
-109-
<PAGE>
<TABLE>
<CAPTION>
EASTERN VIRGINIA BANKSHARES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1997
PRO FORMA PRO FORMA
SSB BNI ADJUSTMENTS COMBINED
- ------------------------------------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,376,922 $ 5,306,839 $ - $ 14,683,761
Interest on investment securities: 1,409,084 2,084,399 3,493,483
Interest on federal funds sold 229,291 57,984 - 287,275
---------------- ----------------- ---------------- ----------------
Total interest income 11,015,297 7,449,222 - 18,464,519
---------------- ----------------- ---------------- ----------------
Interest expense:
Interest on deposits 4,914,086 3,339,256 - 8,253,342
Interest on federal funds purchased
and securities sold under
agreements to repurchase - 5,928 - 5,928
---------------- ----------------- ---------------- ----------------
Total interest expense 4,914,086 3,345,184 - 8,259,270
---------------- ----------------- ---------------- ----------------
Net interest income 6,101,211 4,104,038 - 10,205,249
Provision for loan losses 262,000 - - 262,000
---------------- ----------------- ---------------- ----------------
Net interest income after
provision for loan losses 5,839,211 4,104,038 - 9,943,249
---------------- ----------------- ---------------- ----------------
Other income:
Service charges, commissions and fees 554,472 318,548 - 873,020
Security gains / (losses) (14,847) (1,722) - (16,569)
Other operating income 348,171 - - 348,171
---------------- ----------------- ---------------- ----------------
Total other income 887,796 316,826 - 1,204,622
---------------- ----------------- ---------------- ----------------
Other expenses:
Salaries and employee benefits 1,661,931 794,721 - 2,456,652
Net occupancy expense 506,037 206,344 - 712,381
Other operating expenses 1,354,142 585,291 - 1,939,433
---------------- ----------------- ---------------- ----------------
Total other expenses $ 3,522,110 $ 1,586,356 $ - $ 5,108,466
---------------- ----------------- ---------------- ----------------
Income before income taxes $ 3,204,897 $ 2,834,508 $ - $ 6,039,405
Income taxes (855,000) (686,246) - (1,541,246)
---------------- ----------------- ---------------- ----------------
Net income $ 2,349,897 $ 2,148,262 $ - $ 4,498,159
================ ================= ================ ================
Per Share Data:
Net income 2.31 .85 .87
Cash dividends .16 .18 .12
Average common shares outstanding 1,018,587 2,541,920 5,188,816
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-110-
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SSB BNI ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,369,223 $ 6,664,004 $ - $ 18,033,227
Interest on investment securities:
U. S. Government agencies and
corporations 895,712 2,313,192 - 3,208,904
Other securities 157,996 * - 157,996
States and political subdivisions 913,853 343,220 - 1,257,073
Interest on federal funds sold
171,199 177,537 - 348,736
----------------- ------------------ ----------------- -----------------
Total interest income 13,507,983 9,497,953 - 23,005,936
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 6,027,624 4,332,421 - 10,360,045
Interest on federal funds purchased and
securities sold under agreements to
repurchase - -
----------------- ------------------ ----------------- -----------------
Total interest expense 6,027,624 4,332,421 - 10,360,045
----------------- ------------------ ----------------- -----------------
Net interest income 7,480,359 5,165,532 - 12,645,891
Provision for loan losses 345,000 92,186 - 437,186
----------------- ------------------ ----------------- -----------------
Net interest income after provision
for loan losses 7,135,359 5,073,346 - 12,208,705
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 730,012 356,691 - 1,086,703
Security gains / (losses) (56,406) 4,079 - (52,327)
Gain on sale of other real estate - -
Other operating income 376,048 74,495 - 450,543
----------------- ------------------ ----------------- -----------------
Total other income 1,049,654 435,265 - 1,484,919
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 2,194,704 1,177,403 - 3,372,107
Net occupancy expense 676,726 301,078 - 977,804
Furniture and equipment expense * * - *
Other operating expenses 1,802,944 787,281 - 2,590,225
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,674,374 $ 2,265,762 $ - $ 6,940,136
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 3,510,639 $ 3,242,849 $ - $ 6,753,488
Income taxes 962,096 747,885 - 1,709,981
----------------- ------------------ ----------------- -----------------
Net income $ 2,548,543 $ 2,494,964 $ - $ 5,043,507
================= ================== ================= =================
Per Share Data:
Net income $2.51 $ .98 $ .97
Cash dividends .76 .33 .31
Average common shares outstanding 1,014,281 2,541,920 5,177,428
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-111-
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SSB BNI ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 10,564,942 $ 6,451,537 $ - $ 17,016,479
Interest on investment securities:
U. S. Government agencies and
corporations 923,193 2,018,915 - 2,942,108
Other securities 171,325 - - 171,325
States and political subdivisions 785,463 299,189 - 1,084,652
Interest on federal funds sold
230,708 224,165 - 454,873
----------------- ------------------ ----------------- -----------------
Total interest income 12,675,631 8,993,806 - 21,669,437
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 5,963,064 4,352,158 - 10,315,222
- - - -
----------------- ------------------ ----------------- -----------------
Total interest expense 5,963,064 4,352,158 - 10,315,222
----------------- ------------------ ----------------- -----------------
Net interest income 6,712,567 4,641,648 - 11,354,215
Provision for loan losses 324,000 251,473 - 575,473
----------------- ------------------ ----------------- -----------------
Net interest income after provision
for loan losses 6,388,567 4,390,175 - 10,778,742
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 693,257 340,700 - 1,033,957
Security gains (losses) - (9,127) - (9,127)
Other operating income 326,320 85,524 - 411,844
----------------- ------------------ ----------------- -----------------
Total other income 1,019,577 417,097 - 1,436,674
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 2,179,011 1,112,872 - 3,291,883
Net occupancy expense 661,583 334,088 - 995,671
Furniture and equipment expense * * - *
Other operating expenses 1,653,783 832,059 - 2,485,842
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,494,377 $ 2,279,019 $ - $ 6,773,396
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 2,913,767 $ 2,528,253 $ - $ 5,442,020
Income taxes 774,634 542,129 - 1,316,763
----------------- ------------------ ----------------- -----------------
Net income $ 2,139,133 $ 1,986,124 $ - $ 4,125,257
================= ================== ================= =================
Per Share Data:
Net income $2.10 $ .78 $ .79
Cash dividends .71 .23 .25
Average common shares outstanding 1,019,647 2,541,920 5,191,371
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-112-
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1994
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SSB BNI ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,300,997 $ 5,779,352 $ - $ 15,080,349
Interest on investment securities:
U. S. Government agencies and
corporations 907,272 1,922,896 - 2,830,168
Other securities 190,562 - - 190,562
States and political subdivisions 746,732 375,030 - 1,121,762
Interest on federal funds sold
86,958 158,260 - 245,218
----------------- ------------------ ----------------- -----------------
Total interest income 11,232,521 8,235,538 - 19,468,059
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 4,505,587 3,587,888 - 8,093,475
Interest on obligation under capital
lease
3,158 - - 3,158
----------------- ------------------ ----------------- -----------------
Total interest expense 4,508,745 3,587,888 - 8,096,633
----------------- ------------------ ----------------- -----------------
Net interest income 6,723,776 4,647,650 - 11,371,426
Provision for loan losses 480,000 316,064 - 796,064
----------------- ------------------ ----------------- -----------------
Net interest income after provision
for loan losses 6,243,776 4,331,586 - 10,575,362
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 617,357 355,772 - 973,129
Security gains (losses) (84,762) 32,838 - (51,924)
Loss on sale of other real estate - - -
Other operating income 266,530 56,710 - 323,240
----------------- ------------------ ----------------- -----------------
Total other income 799,125 445,320 - 1,244,445
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 1,949,367 1,103,832 - 3,053,199
Net occupancy expense 606,391 253,806 - 860,197
Furniture and equipment expense * * - *
Other operating expenses 1,652,594 867,382 - 2,519,976
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,208,352 $ 2,225,020 $ - $ 6,433,372
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 2,834,549 $ 2,551,886 $ - $ 5,386,435
Income taxes 768,265 524,090 - 1,292,355
----------------- ------------------ ----------------- -----------------
Net income $ 2,066,284 $ 2,027,796 $ - $ 4,094,080
================= ================== ================= =================
Per Share Data:
Net income $2.03 $ .80 $ .79
Cash dividends .70 .21 .24
Average common shares outstanding 1,020,000 2,541,920 5,192,288
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-113-
<PAGE>
Notes to Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position that
would gave resulted had the Share Exchange been consummated at the
beginning of the periods indicated, nor is it necessarily indicative of
the results of operations in future periods or the future financial
position of the combined entities.
(2) It is assumed that the Share Exchange will be accounted for on a
pooling of interests accounting basis and, accordingly, the related pro
forma adjustments have been calculated using the exchange ratio,
whereby EVB will issue 2.5984 shares of stock for each share of SSB
Common Stock and 1.0 share of stock for each share of BNI Common Stock.
(3) Per share data has been computed based on the combined historical
income applicable to common shareholders of SSB and BNI using the
historical weighted average shares outstanding, adjusted to equivalent
shares of EVB stock, of SSB and the weighted average shares, adjusted
to equivalent shares of EVB stock, of BNI, as of the earliest period
presented.
(4) The pro forma combined information presented includes the total
estimated costs associated with the transaction of $330,000, as if the
transaction was consummated on September 30, 1997. Such costs include,
but are not limited to, legal and accounting fees, regulatory filing
fees, financial advisor fees, and fees associated with fairness
opinions.
(5) Information was appropriately adjusted to reflect the Share Exchanges
for (i) the issuance of shares of EVB Common Stock and (ii) the
elimination of surplus to reflect this issuance of EVB Common Stock
with a $2.00 par value.
-114-
<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
BANK OF NORTHUMBERLAND, INCORPORATED
AND
SOUTHSIDE BANK
AND
EASTERN VIRGINIA BANKSHARES, INC.
-------------------------
September 26, 1997
A-1
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
The Reorganization and Related Matters
Page
1.1 The Reorganization ............................................. A-6
1.2 Management and Business of SSB and BNI.......................... A-6
1.3 The Closing and Effective Date.................................. A-6
1.4 Definitions..................................................... A-7
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of SSB Stock......................................... A-7
Conversion of BNI Stock......................................... A-8
2.2 Manner of Exchange.............................................. A-8
2.3 Fractional Shares............................................... A-8
2.4 Dividends....................................................... A-8
2.5 Dissenting Shares............................................... A-8
ARTICLE 3
Representations and Warranties
3.1 Representations and Warranties of SSB........................... A-9
(a) Organization, Standing and Power....................... A-9
(b) Authority.............................................. A-9
(c) Capital Structure...................................... A-10
(d) Ownership of the SSB Subsidiaries; Capital Structure
of the SSB Subsidiaries; and Organization of the SSB
Subsidiaries........................................... A-10
(e) Financial Statements................................... A-10
(f) Absence of Undisclosed Liabilities..................... A-11
(g) Legal Proceedings; Compliance with Laws................ A-11
(h) Regulatory Approvals................................... A-11
(i) Labor Relations........................................ A-11
(j) Tax Matters............................................ A-11
(k) Property............................................... A-11
(l) Reports................................................ A-12
(m) Employee Benefit Plans................................. A-12
(n) Investment Securities.................................. A-12
(o) Certain Contacts....................................... A-12
(p) Insurance.............................................. A-13
(q) Absence of Material Changes and Events................. A-13
(r) Loans, OREO and Allowance for Loan Losses.............. A-13
(s) Statements True and Correct............................ A-14
(t) Brokers and Finders.................................... A-14
(u) Administration of Trust Accounts....................... A-15
(v) Environmental Matters.................................. A-15
A-2
<PAGE>
3.2 Representations and Warranties of BNI........................... A-16
(a) Organization, Standing and Power....................... A-16
(b) Authority.............................................. A-17
(c) Capital Structure...................................... A-17
(d) Ownership of the BNI Subsidiaries; Capital Structure
of the BNI Subsidiaries; and Organization of the BNI
Subsidiaries........................................... A-17
(e) Financial Statements................................... A-18
(f) Absence of Undisclosed Liabilities..................... A-18
(g) Legal Proceedings; Compliance with Laws................ A-18
(h) Regulatory Approvals................................... A-19
(i) Labor Relations........................................ A-19
(j) Tax Matters............................................ A-19
(k) Property............................................... A-19
(l) Reports................................................ A-19
(m) Employee Benefit Plans................................. A-19
(n) Investment Securities.................................. A-20
(o) Certain Contacts....................................... A-20
(p) Insurance.............................................. A-21
(q) Absence of Material Changes and Events................. A-21
(r) Loans, OREO and Allowance for Loan Losses.............. A-21
(s) Statements True and Correct............................ A-22
(t) Brokers and Finders.................................... A-22
(u) Administration of Trust Accounts....................... A-22
(v) Environmental Matters.................................. A-22
3.3 Representations and Warranties of EVB........................... A-23
(a) Organization, Standing and Power....................... A-24
(b) Authority.............................................. A-24
(c) Capital Structure...................................... A-24
(d) Financial and Business Status.......................... A-24
(e) Legal Proceedings; Compliance with Laws................ A-24
(f) Regulatory Approvals................................... A-24
(g) Statements True and Correct............................ A-24
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties................................ A-25
4.2 Confidentiality................................................. A-25
4.3 Registration Statement, Proxy Statement and
Shareholder Approval............................................ A-25
4.4 Operation of the Business of SSB, BNI and EVB................... A-26
4.5 Dividends....................................................... A-27
4.6 No Solicitation................................................. A-27
4.7 Regulatory Filings.............................................. A-27
4.8 Public Announcements............................................ A-27
4.9 Notice of Breach................................................ A-27
4.10 Accounting Treatment............................................ A-27
4.11 Reorganization Consummation..................................... A-27
A-3
<PAGE>
ARTICLE 5
Additional Agreements
5.1 Accounting Treatment............................................ A-28
5.2 Benefit Plans................................................... A-28
5.3 Indemnification................................................. A-28
5.4 Timing ....................................................... A-28
ARTICLE 6
Conditions to the Reorganization
6.1 Conditions to Each Party's Obligations to Effect
the Reorganization.............................................. A-29
(a) Shareholder Approvals.................................. A-29
(b) Regulatory Approvals................................... A-29
(c) Registration Statement................................. A-29
(d) Tax Opinion............................................ A-29
(e) Accountants' Letter.................................... A-29
(f) Opinions of Counsel.................................... A-29
(g) Legal Proceedings...................................... A-29
6.2 Conditions to Obligations of EVB................................ A-29
(a) Representations and Warranties......................... A-30
(b) Performance of Obligations............................. A-30
(c) Affiliate Letters...................................... A-30
6.3 Conditions to Obligations of SSB................................ A-30
(a) Representations and Warranties......................... A-30
(b) Performance of Obligations............................. A-30
(c) Investment Banking Letter.............................. A-30
6.4 Condition to Obligations of BNI................................. A-31
(a) Representations and Warranties......................... A-31
(b) Performance of Obligations............................. A-31
(c) Investment Banking Letter.............................. A-31
ARTICLE 7
Termination
7.1 Termination..................................................... A-31
7.2 Effect of Termination........................................... A-32
7.3 Non-Survival of Representations, Warranties and Covenants....... A-32
7.4 Expenses........................................................ A-32
ARTICLE 8
General Provisions
8.1 Entire Agreement................................................ A-33
8.2 Waiver and Amendment............................................ A-33
8.3 Descriptive Headings............................................ A-33
8.4 Governing Law................................................... A-33
8.5 Notices......................................................... A-33
A-4
<PAGE>
8.6 Counterparts.................................................... A-34
8.7 Severability.................................................... A-34
8.8 Subsidiaries.................................................... A-34
Exhibit A - Plan of Share Exchange between Southside Bank and Eastern Virginia
Bankshares, Inc.
Exhibit B - Plan of Share Exchange between Bank of
Northumberland, Incorporated and Eastern Virginia Bankshares, Inc.
A-5
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of September 26, 1997 by and among Bank of Northumberland,
Incorporated, a Virginia state bank with its principal office in Heathsville,
Virginia ("BNI"), Southside Bank, a Virginia state bank with its principal
office located in Tappahannock, Virginia ("SSB"), and Eastern Virginia
Bankshares, Inc., a Virginia corporation with its principal office located in
Tappahannock, Virginia ("EVB").
WITNESSETH:
WHEREAS, SSB AND BNI entered into a non-binding agreement in principle
on August 14, 1997; and
WHEREAS, SSB and BNI have agreed to the affiliation of their two
companies through two Share Exchanges under Virginia law, as a result of which
SSB and BNI each would become a wholly-owned subsidiary of EVB (which has been
organized at the direction of BNI and SSB) and the shareholders of SSB and BNI
each would become shareholders of EVB, all as more specifically provided in this
Agreement and the Plans of Share Exchange in the form attached hereto as Exhibit
A and Exhibit B (the "Plans"); and
WHEREAS, the respective Boards of Directors of SSB, BNI and EVB have
resolved that the transactions described herein are in the best interests of the
parties and their respective shareholders and have authorized and approved the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
The Reorganization and Related Matters
1.1 The Reorganization. Subject to the terms and conditions of
this Agreement, at the Effective Date as defined in Section 1.3 hereof, SSB and
BNI each shall become a wholly-owned subsidiary of EVB through the exchange of
each outstanding share of common stock of SSB and BNI for shares of the common
stock of EVB in accordance with Section 2.1 of this Agreement and pursuant to
statutory share exchanges under Section 13.1-717 of the Virginia Stock
Corporation Act (the "Reorganization"). At the Effective Date, the
Reorganization shall have the effect provided in Section 13.1-721 of the
Virginia Stock Corporation Act.
1.2 Management and Business of SSB and BNI. The directors, officers
and employees of SSB and BNI will not change solely as a result of the
Reorganization. The Bylaws of EVB contain certain provisions that were reflected
in the August 14, 1997 agreement in principle between SSB and BNI concerning the
governance of EVB following the Effective Date and such Bylaws will not be
amended, except as set forth therein.
1.3 The Closing and Effective Date. The closing of the transactions
contemplated by this Agreement and the Plan of Reorganization shall take place
at the offices of Williams, Mullen, Christian & Dobbins, 1021 East Cary Street,
Richmond, Virginia or at such other place as may be mutually agreed upon by the
parties. The Reorganization shall become effective on the date shown on the
A-6
<PAGE>
Certificates of Share Exchange issued by the State Corporation Commission of
Virginia effecting the Reorganization (the "Effective Date"). Unless otherwise
agreed upon in writing by the chief executive officers of EVB, BNI and SSB,
subject to the conditions to the obligations of the parties to effect the
Reorganization as set forth in Article 6, the parties shall use their best
efforts to cause the Effective Date to occur on the first day of the month
following the month in which the conditions set forth in Sections 6.1(a) and
6.1(b) are satisfied. All documents required by the terms of this Agreement to
be delivered at or prior to consummation of the Reorganization will be exchanged
by the parties at the closing of the Reorganization (the "Reorganization
Closing"), which shall be held on or before the Effective Date. At or after the
Reorganization Closing, EVB and SSB and EVB and BNI shall execute and deliver to
the Virginia State Corporation Commission Articles of Share Exchange containing
Plans of Share Exchange in substantially the form of Exhibit A and Exhibit B
hereto.
1.4 Definitions. Any term defined anywhere in this Agreement shall
have the meaning ascribed to it for all purposes of this Agreement (unless
expressly noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a party
shall mean the knowledge, after due inquiry, of any "Executive Officer" of such
party, as such term is defined in Regulation O, (12 C.F.R. 215);
(b) the term "Material Adverse Effect", when applied to a
party, shall mean an event, occurrence or circumstance (including without
limitation (i) the making of any provisions for possible loan and lease losses,
write-downs or other real estate and taxes and (ii) any breach of a
representation or warranty by such party) which (a) has or is reasonably likely
to have a material adverse effect on the financial position, results of
operations or business of the party and its subsidiaries, taken as a whole, or
(b) would materially impair the party's ability to perform its obligations under
this Agreement or the consummation of the Reorganization and the other
transactions contemplated by this Agreement; provided, however, that solely for
purposes of measuring whether an event, occurrence or circumstance has a
material adverse effect on such party's results of operations, the term "results
of operations" shall mean net interest income plus non-interest income (less
securities gains) less gross expenses (excluding provisions for possible loan
and lease losses, write-downs of other real estate and taxes); and provided
further, that material adverse effect and material impairment shall not be
deemed to include the impact of (i) changes in banking and similar laws of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to banks and bank holding
companies generally, and (iii) the Reorganization on the operating performance
of the parties to this Agreement; and
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure letter that is delivered by that
party to the other party prior to or contemporaneously with the execution of
this Agreement and specifically designated as information "Previously Disclosed"
pursuant to this Agreement.
ARTICLE 2
Basis and Manner of Exchange
2.1(a) Conversion of SSB Stock. At the Effective Date, by virtue of
the Reorganization and without any action on the part of the holders thereof,
each share of common stock, par value $5.00 per share, of SSB ("SSB Common
Stock") issued and outstanding immediately prior to the Effective Date (other
than Dissenting Shares as defined in Section 2.5) shall cease to be outstanding
and shall be converted into and exchanged for shares of common stock, par value
$2.00 per share, of EVB ("EVB
A-7
<PAGE>
Common Stock") as follows (the "SSB Exchange Ratio"): Each share of SSB Common
Stock shall be converted into and shall become 2.5984 shares of EVB Common
Stock, plus cash for fractional shares. Each holder of a certificate
representing any shares of SSB Common Stock shall thereafter cease to have any
rights with respect to such SSB Common Stock, except the right to receive any
dividends previously declared but unpaid as to such stock and the consideration
described in this Section 2.1(a) and Section 2.3 upon the surrender of such
certificate in accordance with Section 2.2.
(b) Conversion of BNI Stock. At the Effective Date, by virtue of
the Reorganization and without any action on the part of the holders thereof,
each share of common stock, par value $1.00 per share, of BNI ("BNI Common
Stock") issued and outstanding immediately prior to the Effective Date (other
than Dissenting Shares as defined in Section 2.5) shall cease to be outstanding
and shall be converted into and exchanged for shares of common stock, par value
$2.00 per share, of EVB ("EVB Common Stock") as follows (the "BNI Exchange
Ratio"): Each share of BNI Common Stock shall be converted into and shall become
1.000 shares of EVB Common Stock. Each holder of a certificate representing any
shares of BNI Common Stock shall thereafter cease to have any rights with
respect to such BNI Common Stock, except the right to receive any dividends
previously declared but unpaid as to such stock and the consideration described
in this Section 2.1(b) upon the surrender of such certificate in accordance with
Section 2.2.
(c) At the Effective Date, the one (1) share of EVB Common Stock
issued and outstanding shall be canceled.
2.2 Manner of Exchange. As promptly as practicable after the
Effective Date, EVB shall cause SSB, acting as the exchange agent ("Exchange
Agent"), to send to each former shareholder of record of SSB and BNI immediately
prior to the Effective Date transmittal materials for use in exchanging such
shareholders' certificates of SSB Common Stock and BNI Common Stock (other than
shares held by shareholders who perfect their dissenters' rights as provided
under Section 2.5 hereof) for the consideration set forth in Section 2.1 above
and Section 2.3 below. Any fractional share checks which a SSB shareholder shall
be entitled to receive in exchange for such shareholder's shares of SSB Common
Stock, and any dividends paid on any shares of EVB Common Stock that any former
shareholder of SSB or BNI shall be entitled to receive prior to the delivery to
the Exchange Agent of such shareholder's certificates representing all of such
shareholder's shares of SSB Common Stock or BNI Common Stock will be delivered
to such shareholder only upon delivery to the Exchange Agent of the certificates
representing all of such shares (or indemnity satisfactory to EVB, in its
judgment, if any of such certificates are lost, stolen or destroyed). No
interest will be paid on any such fractional share checks or dividends to which
the holder of such shares shall be entitled to receive upon such delivery.
2.3 Fractional Shares. EVB shall issue cash in lieu of fractional
shares to holders of SSB Common Stock. EVB will pay the value of such fractional
shares in cash on the basis of $12.70 per share of EVB Common Stock.
2.4 Dividends. No dividend or other distribution payable to the
holders of record of EVB Common Stock at or as of any time after the Effective
Date shall be paid to the holder of any certificate representing shares of SSB
Common Stock or BNI Common Stock issued and outstanding at the Effective Date
until such holder physically surrenders such certificate for exchange as
provided in Section 2.2 of this Agreement, promptly after which time all such
dividends or distributions shall be paid (without interest).
2.5 Dissenting Shares. Shareholders of SSB and BNI shall have the
right to demand and receive payment of the fair value of their shares of SSB
Common Stock or BNI Common Stock
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pursuant to the provisions of Virginia Code ss. 13.1-729 et seq. (the
"Dissenting Shares"). If, however, a holder of BNI Common Stock or SSB Common
Stock shall have failed to perfect his right to dissent or shall have
effectively withdrawn or lost such right, each of his shares of SSB Common Stock
or BNI Common Stock, as the case may be, shall be deemed to have been converted
into, at the Effective Date, the right to receive the number of shares of EVB
Common Stock based on the SSB Exchange Ratio or the BNI Exchange Ratio, as the
case may be, and, as to shares of SSB Common Stock, cash in lieu of any
fractional shares pursuant to Section 2.3 hereof.
ARTICLE 3
Representation and Warranties
3.1 Representations and Warranties of SSB. SSB represents and
warrants to BNI and EVB as follows:
(a) Organization, Standing and Power. (1) SSB is a
corporation and a Virginia state bank, duly organized, validly existing and in
good standing under the laws of Virginia, and it has all requisite corporate
power and authority to carry on its business in Virginia as now being conducted
and to own and operate its assets, properties and business. SSB has the
corporate power and authority to execute and deliver this Agreement and perform
the respective terms of this Agreement and the Plan of Share Exchange attached
hereto as Exhibit A. SSB is not a member of the Federal Reserve System, and
except as Previously Disclosed is in compliance in all material respects with
all rules and regulations promulgated by the Federal Deposit Insurance
Corporation (the "FDIC"), the Virginia State Corporation Commission ("SCC") and
any other relevant regulatory authority, and it has all requisite corporate
power and authority to carry on a commercial banking business as now being
conducted and to own and operate its assets, properties and business.
(2) SSB is an "insured bank" as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder. All of the shares
of capital stock of SSB are fully paid and nonassessable.
(b) Authority. (1) The execution and delivery of this
Agreement, the Plan of Share Exchange attached hereto as Exhibit A and the
consummation of the Reorganization, have been duly and validly authorized by all
necessary corporate action on the part of SSB, except the approval of
shareholders. The Agreement represents the legal, valid, and binding obligations
of SSB, enforceable against SSB in accordance with its terms (except in all such
cases as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(2) Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated herein, nor compliance by SSB
with any of the provisions hereof will: (i) conflict with or result in a breach
of any provision of SSB's Articles of Incorporation or Bylaws; (ii) except as
Previously Disclosed, constitute or result in the breach of any term, condition
or provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of SSB
pursuant to (A) any note, bond, mortgage, indenture, or (B) any material
license, agreement, lease, or other instrument or obligation, to which SSB or
any SSB Subsidiary is a party or by which any of them or any of their properties
or assets may be bound, or (iii) subject to the receipt of
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the requisite approvals referred to in Section 4.7, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to SSB or any or its
properties or assets.
(c) Capital Structure. The authorized capital stock of SSB
consists of 1,200,000 shares of common stock, par value $5.00 per share, of
which, as of the date hereof, a maximum of 1,020,000 shares are issued,
outstanding, fully paid and nonassessable, not subject to shareholder preemptive
rights and were not issued in violation of any agreement to which SSB is a party
or otherwise bound, or of any registration or qualification provisions of any
federal or state securities laws. Except as Previously Disclosed, there are no
outstanding options, warrants or other rights to subscribe for or purchase from
SSB any capital stock of SSB or securities convertible into or exchangeable for
capital stock of SSB.
(d) Ownership of the SSB Subsidiaries; Capital Structure
of the SSB Subsidiaries; and Organization of the SSB Subsidiaries. (1) SSB does
not own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed (collectively the "SSB
Subsidiaries" and each individually a "SSB Subsidiary"). The outstanding shares
of capital stock of each SSB Subsidiary have been duly authorized and are
validly issued, and are fully paid and nonassessable and all such shares are
directly or indirectly owned by SSB free and clear of all liens, claims and
encumbrances. No rights are authorized, issued or outstanding with respect to
the capital stock of any SSB Subsidiary and there are no agreements,
understandings or commitments relating to the right of SSB to vote or to dispose
of said shares, except as Previously Disclosed. None of the shares of capital
stock of any SSB Subsidiary has been issued in violation of the preemptive
rights of any person.
(2) Each SSB Subsidiary is a duly organized corporation
validly existing and in good standing under applicable laws. Each SSB Subsidiary
(i) has full corporate power and authority to own, lease and operate its
properties and to carry on its business as now conducted except where the
absence of such power or authority would not have a material adverse effect on
the financial condition, results of operations or business of SSB on a
consolidated basis, and (ii) is duly qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification and where
failure to so qualify would have a material adverse effect on the financial
condition, results of operations or business of SSB on a consolidated basis.
Each SSB Subsidiary has all federal, state, local and foreign governmental
authorizations and licenses necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted, except where
failure to obtain such authorization or license would not have a material
adverse effect on the business of such SSB Subsidiary.
(e) Financial Statements. SSB's Annual Report on Form 10-K
(or the equivalent form designed by the FDIC) for the fiscal year ended December
31, 1996, and all other documents filed or to be filed subsequent to December
31, 1996 under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended (together with the rules and regulations of the FDIC
thereunder, the "Exchange Act"), in the form filed with the FDIC (in each such
case, the "SSB Financial Statements") did not and will not contain any untrue
statement of a material fact or omit to state a material face required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the SSB Financial Statements
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date and each of the statements of income and changes in
stockholders' equity and cash flows or equivalent statements in the SSB
Financial Statements (including any related notes and schedules thereto) fairly
presents and will fairly present the results of
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operations, changes in stockholders' equity and changes in cash flows, as the
case may be, of the entity or entities to which it relates for the periods set
forth therein, in each case in accordance with generally accepted accounting
principles consistently applied to banks during the periods involved, except as
may be noted therein, subject to normal and recurring year-end audit adjustments
in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At June 30, 1997,
SSB had no obligation or liability (contingent or otherwise) of any nature which
was not reflected in the SSB Financial Statements, except for those which in the
aggregate are immaterial or have been Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of SSB's management, threatened against SSB,
or against any property, asset, interest or right of SSB, that are reasonably
expected to have, either individually or in the aggregate a material adverse
effect on the financial condition of SSB or that are reasonably expected to
threaten or impede the consummation of the Reorganization. SSB is not a party to
any agreement or instrument or subject to any judgment, order, writ, injunction,
decree or rule that might reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), business or prospects of SSB.
To the best knowledge of SSB's management, SSB has complied in all material
respects with all laws, ordinances, requirements, regulations or orders
applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders).
(h) Regulatory Approvals. SSB knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) Labor Relations. SSB is not a party to or bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is it the subject of a proceeding
asserting that it has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel it to bargain with any
labor organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving it, pending or, to the best of its
knowledge, threatened, nor is it aware of any activity involving its employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
(j) Tax Matters. SSB has filed all federal, state and
local tax returns and reports required to be filed, and all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability in
the SSB Financial Statements or are being contested in good faith and have been
Previously Disclosed. Except to the extent that liabilities therefor are
specifically reflected in the SSB Financial Statements, there are no federal,
state or local tax liabilities of SSB other than liabilities that have arisen
since June 30, 1997, all of which have been properly accrued or otherwise
provided for on the books and records of SSB. Except as Previously Disclosed, no
tax return or report of SSB is under examination by any taxing authority or the
subject of any administrative or judicial proceeding, and no unpaid tax
deficiency has been asserted against SSB by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the SSB Financial Statements, SSB has good and marketable title free and clear
of all material liens, encumbrances, charges, defaults or equities of whatever
character to all of the material properties and assets, tangible or intangible,
reflected in the SSB Financial Statements as being owned by SSB as of the dates
thereof. To the best knowledge of SSB, all buildings, and all fixtures,
equipment, and other property and assets
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which are material to its business on a consolidated basis, held under leases or
subleases by SSB are held under valid instruments enforceable in accordance with
their respective terms, subject to bankruptcy, insolvency, reorganization,
moratorium and similar laws. The buildings, structures, and appurtenances owned,
leased, or occupied by SSB are in good operating condition and in a state of
good maintenance and repair, and to the best knowledge of SSB (i) comply with
applicable zoning and other municipal laws and regulations, and (ii) there are
no latent defects therein.
(l) Reports. Since January 1, 1993, SSB has filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with the SCC, the FDIC, and to
the best knowledge of SSB, any other governmental or regulatory authority or
agency having jurisdiction over its operations.
(m) Employee Benefit Plans. (1) SSB will deliver for review
by EVB and BNI, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
SSB for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "SSB Benefit Plans"). Any of the SSB Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as a "SSB ERISA Plan." No SSB
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(2) Except as Previously Disclosed, all SSB Benefit Plans
are in compliance with the applicable terms of ERISA and the Internal Revenue
Code of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to SSB on a consolidated basis.
(3) No SSB ERISA Plan which is a defined benefit pension
plan has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) Investment Securities. Except for pledges to secure
public and trust deposits and obligations under agreements pursuant to which SSB
has sold securities subject to an obligation to repurchase, none of the
investment securities reflected in the SSB Financial Statements is subject to
any restriction, contractual, statutory, or otherwise, which would impair
materially the ability of the holder of such investment to dispose freely of any
such investment at any time. With respect to any agreements pursuant to which
SSB has purchased securities subject to any agreement to resell, it has a valid,
perfected first lien or security interest in the government securities or other
collateral securing such agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(o) Certain Contracts. (1) Except as Previously Disclosed,
neither SSB nor any SSB Subsidiary is a party to, or is bound by, (i) any
material agreement, arrangement or commitment, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by SSB or any SSB Subsidiary
or the guarantee by SSB or any SSB Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement
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to make loans or for the provision, purchase or sale of goods, services or
property between SSB or any SSB Subsidiary and any director of officer of SSB or
any SSB Subsidiary, or any member of the immediate family or affiliate of any of
the foregoing, or (v) any agreement between SSB or any SSB Subsidiary and any 5%
or more shareholder of SSB; in each case other than agreements entered into in
the ordinary course of the banking business of SSB or any SSB Subsidiary
consistent with past practice.
(2) Neither SSB nor any SSB Subsidiary, nor to the
knowledge of SSB, the other party thereto, is in default under any material
agreement, commitment, arrangement, lease, insurance policy or other instrument
whether entered into in the ordinary course of business or otherwise, nor has
there occurred any event that, with the lapse of time or giving of notice or
both, would constitute such a default, other than defaults of loan agreement by
borrowers from SSB or a SSB Subsidiary in the ordinary course of its business.
(3) Since June 30, 1997 neither SSB nor any SSB Subsidiary
has incurred or paid any obligation or liability that would be material to SSB,
except obligations incurred or paid in connection with transactions in the
ordinary course of business of SSB or a SSB Subsidiary consistent with its
practice and, except as Previously Disclosed, from June 30, 1997 to the date
hereof, neither SSB nor any SSB Subsidiary has taken any action that, if taken
after the date hereof, would breach any of the covenants contained in Section
4.4 hereof.
(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of SSB has previously been furnished to EVB
and BNI and all such policies or binders are valid and enforceable in accordance
with their terms, are in full force and effect, and insure against risks and
liabilities to the extent and in the manner customary for the industry and are
deemed appropriate and sufficient by SSB. SSB is not in default with respect to
any provision contained in any such policy or binder and has not failed to give
any notice or present any claim under any such policy or binder in due and
timely fashion. SSB has not received notice of cancellation or non-renewal of
any such policy or binder. SSB has no knowledge of any inaccuracy in any
application for such policies or binders, any failure to pay premiums when due
or any similar state of facts or the occurrence of any event that is reasonably
likely to form the basis for any material claim against it not fully covered
(except to the extent of any applicable deductible) by the policies or binders
referred to above. SSB has not received notice from any of its insurance
carriers that any insurance premiums will be increased materially in the future
or that any such insurance coverage will not be available in the future on
substantially the same terms as now in effect.
(q) Absence of Material Changes and Events. Since June 30,
1997, there has not been any material adverse change in the condition (financial
or otherwise), aggregate assets or liabilities, cash flow, earnings or business
of SSB, and SSB has conducted its business only in the ordinary course
consistent with past practice.
(r) Loans, OREO and Allowance for Loan Losses. (1) Except
as Previously Disclosed, and except for matters which individually or in the
aggregate do not materially adversely affect the Reorganization or the financial
condition of SSB, to the best knowledge of SSB, each loan reflected as an asset
in the SSB Financial Statements (i) is evidenced by notes, agreements, or other
evidences of indebtedness which are true, genuine and what they purport to be,
(ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency and other laws of general applicability
relating to or affecting
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creditors' rights and to general equity principles. All loans and extensions of
credit which are subject to regulation by the FDIC which have been made by SSB
or the SSB Subsidiaries comply therewith.
(2) The classification on the books and records of SSB and
each SSB Subsidiary of loans and/or non-performing assets as nonaccrual,
troubled debt restructuring, OREO or other similar classification, complies in
all material respects with generally accepted accounting principles and
applicable regulatory accounting principles.
(3) Except for liens, security interests, claims, charges,
or such other encumbrances as have been appropriately reserved for in the SSB
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty claims with
respect to the OREO have been timely filed and neither SSB nor any SSB
Subsidiary has received any notice of denial of any such claim.
(4) SSB and each SSB Subsidiary are in possession of all of
the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and SSB and/or each SSB Subsidiary are
diligently pursuing such eviction or summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of SSB and each SSB Subsidiary,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by SSB
to facilitate the disposition of OREO are performing in accordance with their
terms.
(6) The allowance for possible loan losses shown on the
SSB Financial Statements was, and the allowance for possible loan losses shown
on the financial statements of SSB as of dates subsequent to the execution of
this Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of SSB and other extensions of credit (including letters of credit
and commitments to make loans or extend credit) by SSB.
(s) Statements True and Correct. None of the information
supplied or to be supplied by SSB for inclusion in the Registration Statement on
Form S-4 (the "Registration Statement") to be filed by EVB with the Securities
and Exchange Commission (the "SEC"), the Proxy Statement/Prospectus (as defined
in Section 4.3) to be mailed to every SSB shareholder and every BNI shareholder
or any other document to be filed with the SEC, the SCC, the Federal Reserve, or
any other regulatory authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and, in the case
of the Registration Statement, when it becomes effective and with respect to the
Proxy Statement/Prospectus, when first mailed to SSB shareholders and BNI
shareholders, be false or misleading with respect to any material fact or omit
to state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement/Prospectus or any supplement
thereto, at the times of the SSB Shareholders' Meeting and the BNI Shareholders'
Meeting (as defined in Section 4.3), be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the SSB Shareholders' Meeting or the BNI Shareholders' Meeting.
(t) Brokers and Finders. Neither SSB nor any SSB
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or
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incurred any liability for any fees or commissions in connection with the
transactions contemplated herein, except for Austin Financial Services, Inc.
(u) Administration of Trust Accounts. SSB and SSB
Subsidiaries have properly administered, in all respects material and which
could reasonably be expected to be material to the business, operations or
financial condition of SSB and SSB Subsidiaries, taken as a whole, all accounts
for which they act as fiduciaries including but not limited to accounts for
which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither SSB nor a SSB Subsidiary, nor any director, officer or
employee of SSB or a SSB Subsidiary has committed any breach of trust with
respect to any such fiduciary account which is material to or could reasonably
be expected to be material to the business, operations or financial condition of
SSB, or a SSB Subsidiary, taken as a whole, and the accountings for each such
fiduciary account are true and correct in all material respects and accurately
reflect the assets of such fiduciary account in all material respects.
(v) Environmental Matters. (1) Except as Previously
Disclosed, to the best of SSB's knowledge, neither SSB nor any SSB Subsidiary
owns or leases any properties affected by toxic waste, radon gas or other
hazardous conditions or constructed in part with the use of asbestos. Each of
SSB and the SSB Subsidiaries is in substantial compliance with all Environmental
Laws applicable to real or personal properties in which it has a direct fee
ownership or, with respect to a direct interest as lessee, applicable to the
leasehold premises or, to the best knowledge of SSB and the SSB Subsidiary, the
premises on which the leasehold is situated. Neither SSB nor any SSB Subsidiary
has received any Communication alleging that SSB or such SSB Subsidiary is not
in such compliance and, to the best knowledge of SSB and the SSB Subsidiaries,
there are no present circumstances (including Environmental Laws that have been
adopted but are not yet effective) that would prevent or interfere with the
continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on SSB and the SSB
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of SSB and the SSB Subsidiaries, threatened against (A)
SSB or any SSB Subsidiary, (B) any person or entity whose liability for any
Environmental Claim SSB or any SSB Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C) any real or personal
property which SSB or any SSB Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of SSB. SSB and the SSB
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of SSB and the SSB Subsidiaries,
there are no legal, administrative, arbitral or other proceedings, or
Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on SSB or any SSB Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which SSB or any SSB Subsidiary holds a security interest in connection with
a loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of SSB. SSB
and the SSB Subsidiaries are not subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
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(4) With respect to all real and personal property owned or
leased by SSB or any SSB Subsidiary, other than OREO, SSB has made available to
EVB copies of any environmental audits, analyses and surveys that have been
prepared relating to such properties. With respect to all OREO held by SSB or
any SSB Subsidiary and all real or personal property which SSB or any SSB
Subsidiary has been or is judged to have managed or to have supervised or
participated in the management of, SSB has made available to EVB the information
relating to such OREO available to SSB. SSB and the SSB Subsidiaries are in
compliance in all material respects with all recommendations contained in any
environmental audits, analyses and surveys relating to any of the properties,
real or personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against SSB or any SSB Subsidiary or
against any person or entity whose liability for any Environmental Claim SSB or
any SSB Subsidiary has or may have retained or assumed either contractually or
by operation of law.
(6) For the purpose of this Agreement, the following terms
shall have the following meanings:
(i) "Communication" means a communication which is of a
substantive nature and which is made (A) in writing to SSB or any SSB Subsidiary
on the one hand or to BNI or any BNI Subsidiary on the other hand, or (B) orally
to a senior officer of SSB or any SSB Subsidiary or of BNI or any BNI
Subsidiary, whether from a governmental authority or a third party.
(ii) "Environmental Claim" means any Communication from any
governmental authority or third party alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from the
presence, or release into the environment, of any Material of Environmental
Concern.
(iii) "Environmental Laws" means all applicable federal,
state and local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata). This definition includes, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
(iv) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other materials regulated under Environmental Laws.
3.2 Representations and Warranties of BNI. BNI represents and
warrants to EVB and SSB as follows:
(a) Organization, Standing and Power. (1) BNI is a
corporation and a Virginia state bank, duly organized, validly existing and in
good standing under the laws of Virginia, and it has
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all requisite corporate power and authority to carry on its business in Virginia
as now being conducted and to own and operate its assets, properties and
business. BNI has the corporate power and authority to execute and deliver this
Agreement and perform the respective terms of this Agreement and the Plan of
Share Exchange attached hereto as Exhibit B. BNI is a member of the Federal
Reserve System, and except as Previously Disclosed is in compliance in all
material respects with all rules and regulations promulgated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), the SCC and any
other relevant regulatory authority, and it has all requisite corporate power
and authority to carry on a commercial banking business as now being conducted
and to own and operate its assets, properties and business.
(2) BNI is an "insured bank" as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder. All of the shares
of capital stock of BNI are fully paid and nonassessable.
(b) Authority. (1) The execution and delivery of this
Agreement, the Plan of Share Exchange attached hereto as Exhibit B and the
consummation of the Reorganization, have been duly and validly authorized by all
necessary corporate action on the part of BNI, except the approval of
shareholders. The Agreement represents the legal, valid, and binding obligations
of BNI, enforceable against BNI in accordance with its terms (except in all such
cases as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(2) Neither the execution and delivery of this Agreement,
the consummation of the transactions contemplated herein, nor compliance by BNI
with any of the provisions hereof will: (i) conflict with or result in a breach
of any provision of BNI's Articles of Incorporation or Bylaws; (ii) except as
Previously Disclosed, constitute or result in the breach of any term, condition
or provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of BNI
pursuant to (A) any note, bond, mortgage, indenture, or (B) any material
license, agreement, lease, or other instrument or obligation, to which BNI or
any BNI Subsidiary is a party or by which any of them or any of their properties
or assets may be bound, or (iii) subject to the receipt of the requisite
approvals referred to in Section 4.7, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to BNI or any or its properties
or assets.
(c) Capital Structure. The authorized capital stock of
BNI consists of 5,000,000 shares of common stock, par value $1.00 per share, of
which, as of the date hereof, _________ shares are issued, outstanding, fully
paid and nonassessable, not subject to shareholder preemptive rights and were
not issued in violation of any agreement to which BNI is a party or otherwise
bound, or of any registration or qualification provisions of any federal or
state securities laws. Except as Previously Disclosed, there are no outstanding
options, warrants or other rights to subscribe for or purchase from BNI any
capital stock of BNI or securities convertible into or exchangeable for capital
stock of BNI.
(d) Ownership of the BNI Subsidiaries; Capital Structure of
the BNI Subsidiaries; and Organization of the BNI Subsidiaries. (1) BNI does not
own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed (collectively the "BNI
Subsidiaries" and each individually a "BNI Subsidiary"). The outstanding shares
of capital stock of each BNI Subsidiary have been duly authorized and are
validly issued, and are fully paid and nonassessable and all such shares are
directly or indirectly owned by BNI free and clear of all liens,
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claims and encumbrances. No rights are authorized, issued or outstanding with
respect to the capital stock of any BNI Subsidiary and there are no agreements,
understandings or commitments relating to the right of BNI to vote or to dispose
of said shares, except as Previously Disclosed. None of the shares of capital
stock of any BNI Subsidiary has been issued in violation of the preemptive
rights of any person.
(2) Each BNI Subsidiary is a duly organized corporation
validly existing and in good standing under applicable laws. Each BNI Subsidiary
(i) has full corporate power and authority to own, lease and operate its
properties and to carry on its business as now conducted except where the
absence of such power or authority would not have a material adverse effect on
the financial condition, results of operations or business of BNI on a
consolidated basis, and (ii) is duly qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification and where
failure to so qualify would have a material adverse effect on the financial
condition, results of operations or business of BNI on a consolidated basis.
Each BNI Subsidiary has all federal, state, local and foreign governmental
authorizations and licenses necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted, except where
failure to obtain such authorization or license would not have a material
adverse effect on the business of such BNI Subsidiary.
(e) Financial Statements. BNI's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and all other documents filed
or to be filed subsequent to December 31, 1996 under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (together with the
rules and regulations of the FDIC thereunder, the "Exchange Act"), in the form
filed with the Federal Reserve (in each such case, the "BNI Financial
Statements") did not and will not contain any untrue statement of a material
fact or omit to state a material face required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading; and each of the balance sheets in or
incorporated by reference into the BNI Financial Statements (including the
related notes and schedules thereto) fairly presents and will fairly present the
financial position of the entity or entities to which it relates as of its date
and each of the statements of income and changes in stockholders' equity and
cash flows or equivalent statements in the BNI Financial Statements (including
any related notes and schedules thereto) fairly presents and will fairly present
the results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the entity or entities to which it relates for the
periods set forth therein, in each case in accordance with generally accepted
accounting principles consistently applied to banks during the periods involved,
except as may be noted therein, subject to normal and recurring year-end audit
adjustments in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At June 30, 1997,
BNI had no obligation or liability (contingent or otherwise) of any nature which
was not reflected in the BNI Financial Statements, except for those which in the
aggregate are immaterial or have been Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of BNI's management, threatened against BNI,
or against any property, asset, interest or right of BNI, that are reasonably
expected to have, either individually or in the aggregate a material adverse
effect on the financial condition of BNI or that are reasonably expected to
threaten or impede the consummation of the Reorganization. BNI is not a party to
any agreement or instrument or subject to any judgment, order, writ, injunction,
decree or rule that might reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), business or prospects of BNI.
To the best knowledge of BNI's management, BNI has complied in all material
respects with all laws, ordinances,
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requirements, regulations or orders applicable to its business (including
environmental laws, ordinances, requirements, regulations or orders).
(h) Regulatory Approvals. BNI knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) Labor Relations. BNI is not a party to or bound by
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it the subject of
a proceeding asserting that it has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organization activity.
(j) Tax Matters. BNI has filed all federal, state and
local tax returns and reports required to be filed, and all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability in
the BNI Financial Statements or are being contested in good faith and have been
Previously Disclosed. Except to the extent that liabilities therefor are
specifically reflected in the BNI Financial Statements, there are no federal,
state or local tax liabilities of BNI other than liabilities that have arisen
since June 30, 1997, all of which have been properly accrued or otherwise
provided for on the books and records of BNI. Except as Previously Disclosed, no
tax return or report of BNI is under examination by any taxing authority or the
subject of any administrative or judicial proceeding, and no unpaid tax
deficiency has been asserted against BNI by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the BNI Financial Statements, BNI has good and marketable title free and clear
of all material liens, encumbrances, charges, defaults or equities of whatever
character to all of the material properties and assets, tangible or intangible,
reflected in the BNI Financial Statements as being owned by BNI as of the dates
thereof. To the best knowledge of BNI, all buildings, and all fixtures,
equipment, and other property and assets which are material to its business on a
consolidated basis, held under leases or subleases by BNI are held under valid
instruments enforceable in accordance with their respective terms, subject to
bankruptcy, insolvency, reorganization, moratorium and similar laws. The
buildings, structures, and appurtenances owned, leased, or occupied by BNI are
in good operating condition and in a state of good maintenance and repair, and
to the best knowledge of BNI (i) comply with applicable zoning and other
municipal laws and regulations, and (ii) there are no latent defects therein.
(l) Reports. Since January 1, 1993, BNI has filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with the SCC, the Federal
Reserve, and to the best knowledge of BNI, any other governmental or regulatory
authority or agency having jurisdiction over its operations.
(m) Employee Benefit Plans. (1) BNI will deliver for review
by EVB and SSB, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
BNI for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the
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"BNI Benefit Plans"). Any of the BNI Benefit Plans which is an "employee pension
benefit plan," as that term is defined in Section 3(2) of ERISA, is referred to
herein as a "BNI ERISA Plan." No BNI Benefit Plan is or has been a
multi-employer plan within the meaning of Section 3(37) of ERISA.
(2) Except as Previously Disclosed, all BNI Benefit Plans
are in compliance with the applicable terms of ERISA and the Internal Revenue
Code of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to BNI on a consolidated basis.
(3) No BNI ERISA Plan which is a defined benefit pension
plan has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) Investment Securities. Except for pledges to secure
public and trust deposits and obligations under agreements pursuant to which BNI
has sold securities subject to an obligation to repurchase, none of the
investment securities reflected in the BNI Financial Statements is subject to
any restriction, contractual, statutory, or otherwise, which would impair
materially the ability of the holder of such investment to dispose freely of any
such investment at any time. With respect to any agreements pursuant to which
BNI has purchased securities subject to any agreement to resell, it has a valid,
perfected first lien or security interest in the government securities or other
collateral securing such agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(o) Certain Contracts. (1) Except as Previously Disclosed,
neither BNI nor any BNI Subsidiary is a party to, or is bound by, (i) any
material agreement, arrangement or commitment, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by BNI or any BNI Subsidiary
or the guarantee by BNI or any BNI Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement to make loans or for the
provision, purchase or sale of goods, services or property between BNI or any
BNI Subsidiary and any director of officer of BNI or any BNI Subsidiary, or any
member of the immediate family or affiliate of any of the foregoing, or (v) any
agreement between BNI or any BNI Subsidiary and any 5% or more shareholder of
BNI; in each case other than agreements entered into in the ordinary course of
the banking business of BNI or any BNI Subsidiary consistent with past practice.
(2) Neither BNI nor any BNI Subsidiary, nor to the
knowledge of BNI, the other party thereto, is in default under any material
agreement, commitment, arrangement, lease, insurance policy or other instrument
whether entered into in the ordinary course of business or otherwise, nor has
there occurred any event that, with the lapse of time or giving of notice or
both, would constitute such a default, other than defaults of loan agreement by
borrowers from BNI or a BNI Subsidiary in the ordinary course of its business.
(3) Since June 30, 1997 neither BNI nor any BNI Subsidiary
has incurred or paid any obligation or liability that would be material to BNI,
except obligations incurred or paid in connection with transactions in the
ordinary course of business of BNI or a BNI Subsidiary consistent with its
practice and, except as Previously Disclosed, from June 30, 1997 to the date
hereof, neither BNI nor any BNI Subsidiary has taken any action that, if taken
after the date hereof, would breach any of the covenants contained in Section
4.4 hereof.
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(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of BNI has previously been furnished to EVB
and SSB and all such policies or binders are valid and enforceable in accordance
with their terms, are in full force and effect, and insure against risks and
liabilities to the extent and in the manner customary for the industry and are
deemed appropriate and sufficient by BNI. BNI is not in default with respect to
any provision contained in any such policy or binder and has not failed to give
any notice or present any claim under any such policy or binder in due and
timely fashion. BNI has not received notice of cancellation or non-renewal of
any such policy or binder. BNI has no knowledge of any inaccuracy in any
application for such policies or binders, any failure to pay premiums when due
or any similar state of facts or the occurrence of any event that is reasonably
likely to form the basis for any material claim against it not fully covered
(except to the extent of any applicable deductible) by the policies or binders
referred to above. BNI has not received notice from any of its insurance
carriers that any insurance premiums will be increased materially in the future
or that any such insurance coverage will not be available in the future on
substantially the same terms as now in effect.
(q) Absence of Material Changes and Events. Since June 30,
1997, there has not been any material adverse change in the condition (financial
or otherwise), aggregate assets or liabilities, cash flow, earnings or business
of BNI, and BNI has conducted its business only in the ordinary course
consistent with past practice.
(r) Loans, OREO and Allowance for Loan Losses. (1) Except
as Previously Disclosed, and except for matters which individually or in the
aggregate do not materially adversely affect the Reorganization or the financial
condition of BNI, to the best knowledge of BNI, each loan reflected as an asset
in the BNI Financial Statements (i) is evidenced by notes, agreements, or other
evidences of indebtedness which are true, genuine and what they purport to be,
(ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles. All
loans and extensions of credit which are subject to regulation by the Federal
Reserve which have been made by BNI or the BNI Subsidiaries comply therewith.
(2) The classification on the books and records of BNI and
each BNI Subsidiary of loans and/or non-performing assets as nonaccrual,
troubled debt restructuring, OREO or other similar classification, complies in
all material respects with generally accepted accounting principles and
applicable regulatory accounting principles.
(3) Except for liens, security interests, claims, charges,
or such other encumbrances as have been appropriately reserved for in the BNI
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty claims with
respect to the OREO have been timely filed and neither BNI nor any BNI
Subsidiary has received any notice of denial of any such claim.
(4) BNI and each BNI Subsidiary are in possession of all of
the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and BNI and/or each BNI Subsidiary are
diligently pursuing such eviction or summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is
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pending or, to the knowledge of BNI and each BNI Subsidiary, threatened
concerning any OREO or any servicing activity or omission to provide a servicing
activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by BNI
to facilitate the disposition of OREO are performing in accordance with their
terms.
(6) The allowance for possible loan losses shown on the BNI
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of BNI as of dates subsequent to the execution of this
Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of BNI and other extensions of credit (including letters of credit
and commitments to make loans or extend credit) by BNI.
(s) Statements True and Correct. None of the information
supplied or to be supplied by BNI for inclusion in the Registration Statement on
Form S-4 (the "Registration Statement") to be filed by EVB with the SEC, the
Proxy Statement/Prospectus (as defined in Section 4.3) to be mailed to every BNI
shareholder and every SSB Shareholder or any other document to be filed with the
SEC, the SCC, the Federal Reserve, or any other regulatory authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, and, in the case of the Registration Statement,
when it becomes effective and with respect to the Proxy Statement/Prospectus,
when first mailed to BNI shareholders and SSB shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the times
of the BNI Shareholders' Meeting and the SSB Shareholders' Meeting (as defined
in Section 4.3), be false or misleading with respect to any material fact or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the BNI
Shareholders' Meeting or the SSB Shareholders' Meeting.
(t) Brokers and Finders. Neither BNI nor any BNI
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with the transactions contemplated herein,
except for Crestar Securities Corporation.
(u) Administration of Trust Accounts. BNI and BNI
Subsidiaries have properly administered, in all respects material and which
could reasonably be expected to be material to the business, operations or
financial condition of BNI and BNI Subsidiaries, taken as a whole, all accounts
for which they act as fiduciaries including but not limited to accounts for
which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither BNI nor a BNI Subsidiary, nor any director, officer or
employee of BNI or a BNI Subsidiary has committed any breach of trust with
respect to any such fiduciary account which is material to or could reasonably
be expected to be material to the business, operations or financial condition of
BNI, or a BNI Subsidiary, taken as a whole, and the accountings for each such
fiduciary account are true and correct in all material respects and accurately
reflect the assets of such fiduciary account in all material respects.
(v) Environmental Matters. (1) Except as Previously
Disclosed, to the best of BNI's knowledge, neither BNI nor any BNI Subsidiary
owns or leases any properties affected by toxic waste, radon gas or other
hazardous conditions or constructed in part with the use of asbestos. Each of
BNI and the BNI Subsidiaries is in substantial compliance with all Environmental
Laws applicable to real or personal properties in which it has a direct fee
ownership or, with respect to a direct interest as
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lessee, applicable to the leasehold premises or, to the best knowledge of BNI
and the BNI Subsidiary, the premises on which the leasehold is situated. Neither
BNI nor any BNI Subsidiary has received any Communication alleging that BNI or
such BNI Subsidiary is not in such compliance and, to the best knowledge of BNI
and the BNI Subsidiaries, there are no present circumstances (including
Environmental Laws that have been adopted but are not yet effective) that would
prevent or interfere with the continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on BNI and the BNI
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of BNI and the BNI Subsidiaries, threatened against (A)
BNI or any BNI Subsidiary, (B) any person or entity whose liability for any
Environmental Claim BNI or any BNI Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C) any real or personal
property which BNI or any BNI Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of BNI. BNI and the BNI
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of BNI and the BNI Subsidiaries,
there are no legal, administrative, arbitral or other proceedings, or
Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on BNI or any BNI Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which BNI or any BNI Subsidiary holds a security interest in connection with
a loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of BNI. BNI
and the BNI Subsidiaries are not subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
(4) With respect to all real and personal property owned
or leased by BNI or any BNI Subsidiary, other than OREO, BNI has made available
to EVB copies of any environmental audits, analyses and surveys that have been
prepared relating to such properties. With respect to all OREO held by BNI or
any BNI Subsidiary and all real or personal property which BNI or any BNI
Subsidiary has been or is judged to have managed or to have supervised or
participated in the management of, BNI has made available to EVB the information
relating to such OREO available to BNI. BNI and the BNI Subsidiaries are in
compliance in all material respects with all recommendations contained in any
environmental audits, analyses and surveys relating to any of the properties,
real or personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against BNI or any BNI Subsidiary or
against any person or entity whose liability for any Environmental Claim BNI or
any BNI Subsidiary has or may have retained or assumed either contractually or
by operation of law.
3.3 Representations and Warranties of EVB. EVB represents and
warrants to BNI and SSB as follows:
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(a) Organization, Standing and Power. (1) EVB is a
corporation duly organized, validly existing and in good standing under the laws
of Virginia. EVB has the corporate power and authority to execute and deliver
this Agreement and perform the respective terms of this Agreement and Plan of
Reorganization.
(b) Authority. (1) The execution and delivery of this
Agreement and the Plans and the consummation of the Reorganization have been
duly and validly authorized by all necessary corporate action on the part of
EVB, including the approval of its sole shareholder. The Agreement represents
the legal, valid, and binding obligation of EVB, enforceable against EVB in
accordance with its terms (except in all such cases as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding may be brought).
(2) Neither the execution and delivery of the Agreement,
the consummation of the transactions contemplated therein, nor the compliance by
EVB with any of the provisions thereof will (i) conflict with or result in a
breach of any provision of the Articles of Incorporation or Bylaws of EVB, (ii)
subject to the receipt of the requisite approvals referred to in Section 4.7,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to EVB.
(c) Capital Structure. The authorized capital stock of
EVB consists of: 50,000,000 shares of common stock, par value $2.00 per share
("EVB Common Stock), of which one share is issued and outstanding, fully paid
and nonassessable, not subject to shareholder preemptive rights, and not issued
in violation of any agreement to which EVB is a party or otherwise bound, or of
any registration or qualification provisions of any federal or state securities
laws. The shares of EVB Common Stock to be issued in exchange for shares of SSB
Common Stock and BNI Common Stock upon consummation of the Reorganization will
have been duly authorized and, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and subject to
no preemptive rights. Except as set forth herein, there are no outstanding
understandings or commitments of any character pursuant to which EVB could be
required or expected to issue shares of capital stock.
(d) Financial and Business Status. EVB was incorporated on
September 5, 1997. Its sole asset is $10.00 in cash and it has no liabilities.
The only obligations of EVB are those set forth in this Agreement and it has not
conducted any business. The sole shareholder of EVB is Robert L. Covington, who
has subscribed for and purchased one (1) share of EVB Common Stock. EVB is not a
party to any contract, except this Agreement.
(e) Legal Proceedings; Compliance with Laws. There are no
actions, suits or proceedings instituted or pending or, to the best knowledge of
EVB's management, threatened or probable of assertion against EVB. To the best
knowledge of EVB, it has complied in all material respects with all laws,
ordinances, requirements, regulations or orders applicable to it.
(f) Regulatory Approvals. EVB knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(g) Statements True and Correct. None of the information
supplied or to be supplied by EVB for inclusion in the Registration Statement,
the Proxy Statement/Prospectus or any other document to be filed with the SEC or
any other regulatory authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and, in the case
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of the Registration Statement, when it becomes effective and with respect to the
Proxy Statement/Prospectus, when first mailed to SSB shareholders or BNI
Shareholders, be false or misleading with respect to any material fact or omit
to state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement/Prospectus or any supplement
thereto, at the times of the SSB Shareholders' Meeting and the BNI Shareholders'
Meeting, be false or misleading with respect to any material fact or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the SSB
Shareholders' Meeting and the BNI Shareholders' Meeting. All documents that EVB
is responsible for filing with the SEC or any other regulatory authority in
connection with the transactions contemplated, hereby will comply as to form in
all material respects with the provisions of applicable law, including
applicable provisions of federal and state securities law.
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties. SSB will keep BNI and EVB,
and BNI will keep SSB and EVB advised of all material developments relevant to
their respective businesses prior to consummation of the Reorganization. Prior
to the Effective Date, BNI, on the one hand, and SSB on the other, agree to give
to the other party reasonable access to all the premises and books and records
(including tax returns filed and those in preparation) of it and its
subsidiaries and to cause its officers to furnish the other with such financial
and operating data and other information with respect to the business and
properties as the other shall from time to time request for the purposes of
verifying the warranties and representations set forth herein; provided,
however, that any such investigation shall be conducted in such manner as not to
interfere unreasonably with the operation of the respective business of the
other.
4.2 Confidentiality. Between the date of this Agreement and the
Effective Date, EVB, BNI and SSB each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and not use to the detriment of the other party, any written, oral or other
information obtained in confidence from the other party or a third party in
connection with this Agreement or the transactions contemplated hereby unless
such information is already known to such party or to others not bound by a duty
of confidentiality or unless such information becomes publicly available through
no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Reorganization is not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested.
4.3 Registration Statement, Proxy Statement and Shareholder
Approval. The Board of Directors of SSB and the Board of Directors of BNI, each
will duly call and will hold a meeting of their respective shareholders as soon
as practicable for the purpose of approving the Reorganization (the "SSB
Shareholders' Meeting" and the "BNI Shareholders' Meeting", respectively) and,
subject to the fiduciary duties of the Board of Directors of SSB and of BNI (as
advised in writing by their respective counsel), SSB and BNI each shall use its
best efforts to solicit and obtain votes of the holders of its Common Stock in
favor of the Reorganization and will comply with the provisions in their
respective Articles of Incorporation and Bylaws relating to the call and holding
of a meeting of shareholders for such purpose; each member of the Board of
Directors of SSB and BNI shall vote all shares of SSB Common Stock and BNI
Common Stock under his control (and not held in a fiduciary capacity) in favor
of the Reorganization; and SSB and BNI shall, at the other's request, recess or
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adjourn the meeting if such recess or adjournment is deemed by the other to be
necessary or desirable. EVB, BNI and SSB will prepare jointly the proxy
statement/prospectus to be used in connection with the SSB Shareholders' Meeting
and the BNI Shareholders' Meeting (the "Joint Proxy Statement"). EVB will
prepare and file with the SEC the Registration Statement, of which such Joint
Proxy Statement shall be a part and will use its best efforts to have the
Registration Statement declared effective as promptly as possible. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the dates of the SSB Shareholders' Meeting and the BNI
Shareholders' Meeting, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein furnished
or to be furnished by EVB, by SSB relating to the SSB Companies and by BNI
relating to the BNI Companies, (i) will comply in all material respects with the
provisions of the Securities Act of 1933 and any other applicable statutory or
regulatory requirements, including applicable state blue-sky and securities
laws, and (ii) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading; provided, however, in no event
shall any party hereto be liable for any untrue statement of a material fact or
omission to state a material fact in the Registration Statement made in reliance
upon, and in conformity with, written information concerning another party
furnished by such other party specifically for use in the Registration
Statement.
4.4 Operation of the Business of SSB, BNI and EVB. SSB and BNI each
agrees that from the date hereof to the Effective Date it will operate its
business substantially as presently operated and only in the ordinary course,
and, consistent with such operation, it will use its best efforts to preserve
intact its relationships with persons having business dealings with it. EVB will
not conduct any business, except as required by this Agreement. Without limiting
the generality of the foregoing, SSB and BNI and EVB each agrees that it will
not, without the prior written consent of the others:
(a) Make any change in its authorized capital stock, or
issue or sell any additional shares of, securities convertible into or
exchangeable for, or options, warrants or rights to purchase, its capital stock,
nor shall it purchase, redeem or otherwise acquire any of its outstanding shares
of capital stock;
(b) Voluntarily make any changes in the composition of its
officers, directors or other key management personnel;
(c) Make any change in the compensation or title of any
officer, director or key management employee or make any change in the
compensation or title of any other employee, other than permitted by current
employment policies in the ordinary course of business, any of which changes
shall be reported promptly to the other party;
(d) Enter into any bonus, incentive compensation, stock
option, deferred compensation, profit sharing, thrift, retirement, pension,
group insurance or other benefit plan or any employment or consulting agreement;
(e) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or encumber
any of its assets, nor dispose of any of its assets in any other manner, except
in the ordinary course of its business and for adequate value, or as otherwise
specifically permitted in this Agreement;
(f) Issue or contract to issue any shares of its Common
Stock, options for shares of its Common Stock, or securities exchangeable for or
convertible into such shares;
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(g) Knowingly waive any right to substantial value:
(h) Enter into material transactions otherwise than in the
ordinary course of its business;
(i) Alter, amend or repeal its Bylaws or Articles of
Incorporation; or
(j) Propose or take any other action which would make any
representation or warranty in Section 3.1, Section 3.2 or Section 3.3 hereof
untrue.
4.5 Dividends. BNI and SSB each agree that the other may declare
and pay only regular periodic cash dividends in the ordinary course of business
and consistent with past practice from the date of this Agreement through the
Effective Date.
4.6 No Solicitation. Unless and until this Agreement shall have
been terminated pursuant to its terms, neither SSB or BNI nor any of their
respective officers, directors, representatives or agents shall, directly or
indirectly, (i) encourage, solicit or initiate discussions or negotiations with
any person other than EVB concerning any merger, share exchange, sale of
substantial assets, tender offer, sale of shares of capital stock or similar
transaction involving SSB or BNI, (ii) enter into any agreement with any third
party providing for a business combination transaction, equity investment or
sale of a significant amount of assets, or (iii) furnish any information to any
other person relating to or in support of such transaction. SSB and BNI will
promptly communicate to EVB and to the other the terms of any proposal which it
may receive in respect to any of the foregoing transactions. Unless and until
the Effective Date or until this Agreement shall have been terminated pursuant
to its terms, neither EVB nor any of its officers, directors, representatives or
agents shall enter into any agreement or letter of intent that provides for the
acquisition by EVB of substantially all of the assets or voting stock of a party
other than SSB and BNI.
4.7 Regulatory Filings. EVB, BNI and SSB shall prepare jointly
all regulatory filings required to consummate the transactions contemplated by
the Agreement and the Plans and submit the filings for approval with the Federal
Reserve and the SCC, and any other governing regulatory authority, as soon as
practicable after the date hereof. EVB, BNI and SSB shall use their best efforts
to obtain approvals of such filings.
4.8 Public Announcements. Each party will consult with the other
before issuing any press release or otherwise making any public statements with
respect to the Reorganization and shall not issue any such press release or make
any such public statement prior to such consultations except as may be required
by law.
4.9 Notice of Breach. EVB, BNI and SSB will give written notice to
the others promptly upon becoming aware of the impending or threatened
occurrence of any event which would cause or constitute a breach of any of the
representations, warranties or covenants made to the other party in this
Agreement and will use its best efforts to prevent or promptly remedy the same.
4.10 Accounting Treatment. EVB, BNI and SSB shall each use their
best efforts to ensure that the Reorganization qualifies for
pooling-of-interests accounting treatments.
4.11 Reorganization Consummation. Subject to the terms and
conditions of this Agreement, each party shall use its best efforts in good
faith to take, or cause to be taken, all actions, and to do or cause to be done
all things necessary, proper or desirable, or advisable under applicable laws,
as promptly as practicable so as to permit consummation of the Reorganization at
the earliest
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possible date, consistent with Section 1.3 herein, and to otherwise enable
consummation of the transactions contemplated hereby and shall cooperate fully
with the other parties hereto to that end, and each of SSB, BNI and EVB shall
use, and shall cause each of their respective subsidiaries to use, its best
efforts to obtain all consents (governmental or other) necessary or desirable
for the consummation of the transactions contemplated by this Agreement.
ARTICLE 5
Additional Agreements
5.1 Accounting Treatment. This Reorganization shall qualify for
pooling-of-interests accounting treatment.
5.2 Benefit Plans. Except as required by law, the Reorganization
shall not affect the pension, welfare benefit, health and similar plans of SSB
or BNI; provided, however, after the Effective Date EVB may cause BNI and SSB to
adopt uniform employee pension and welfare benefit plans; provided, further,
that after the Effective Date, EVB will not reduce, or cause BNI or SSB to
reduce the level of benefits provided to employees of BNI or SSB under any
pension, welfare benefit, health or similar plan maintained by BNI or SSB on the
date hereof. EVB also shall cause SSB and BNI to honor in accordance with their
terms as in effect on the date hereof (or as amended after the date hereof with
the prior written consent of the parties), all employment, severance, consulting
and other compensation contracts and agreements Previously Disclosed and
executed in writing by SSB or BNI on the one hand and any individual current or
former director, officer or employee thereof on the other hand, copies of which
have previously been delivered by SSB and BNI to the other and to EVB.
5.3 Indemnification. EVB agrees that following the Effective Date,
it shall indemnify and hold harmless any person who has rights to
indemnification from SSB or BNI, to the same extent and on the same conditions
as such person is entitled to indemnification pursuant to Virginia law and the
Articles of Incorporation or Bylaws of BNI or SSB, as in effect on the date of
this Agreement, to the extent legally permitted to do so, with respect to
matters occurring on or prior to the Effective Date. EVB further agrees that any
such person who has rights to indemnification pursuant to this Section 5.3 is
expressly made a third party beneficiary of this Section 5.3 and may directly,
in such person's personal capacity, enforce such rights through an action at law
or in equity or through any other manner or means of redress allowable under
Virginia law to the same extent as if such person were a party hereto. Without
limiting the foregoing, in any case in which corporate approval may be required
to effectuate any indemnification, EVB shall direct, at the election of the
party to be indemnified, that the determination of permissibility of
indemnification shall be made by independent counsel mutually agreed upon
between EVB and the indemnified party. EVB shall use its reasonable best efforts
to maintain the existing directors' and officers' liability policies of SSB and
BNI, or some other policy, including any policy EVB may obtain existing policy,
providing at least comparable coverage, covering persons who are currently
covered by such insurance of SSB or BNI for a period of five years after the
Effective Date on terms no less favorable than those in effect on the date
hereof.
5.4 Timing. The Articles of Share Exchange to be executed by EVB
and SSB and by EVB and BNI will be filed with the SCC on the same date and each
of such Articles of Share Exchange shall become effective at the same time.
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ARTICLE 6
Conditions to the Reorganization
6.1 Conditions to Each Party's Obligations to Effect the
Reorganization. The respective obligations of each of EVB, BNI and SSB to effect
the Reorganization and the other transactions contemplated by this Agreement
shall be subject to the fulfillment or waiver at or prior to the Effective Date
of the following conditions:
(a) Shareholder Approvals. Shareholders of SSB and of BNI
shall have approved all matters relating to this Agreement and the
Reorganization and the Plans attached hereto as Exhibit A and Exhibit B, as
appropriate, required to be approved by such shareholders in accordance with
Virginia law.
(b) Regulatory Approvals. This Agreement and the Plans
attached hereto as Exhibit A and Exhibit B, as appropriate, shall have been
approved by the Federal Reserve, the SCC, and any other regulatory authority
whose approval is required for consummation of the transactions contemplated
hereby, and such approvals shall not have imposed any condition or requirement
which would so materially adversely impact the economic or business benefits of
the transactions contemplated by this Agreement as to render inadvisable the
consummation of the Reorganization in the reasonable opinion of the Board of
Directors of EVB, BNI or SSB.
(c) Registration Statement. The Registration Statement
shall have been declared effective and shall not be subject to a stop order or
any threatened stop order.
(d) Tax Opinion. EVB, BNI and SSB shall have received an
opinion of Williams, Mullen, Christian & Dobbins, or other counsel reasonably
satisfactory to EVB, BNI and SSB, to the effect that the Reorganization will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code and that no gain or loss will be recognized by the shareholders of
SSB or BNI to the extent they receive EVB Common Stock solely in exchange for
their SSB Common Stock and BNI Common Stock in the Reorganization.
(e) Accountants' Letter. EVB and SSB shall have received
a letter, dated as of the Effective Date, from Deloitte & Touche LLP,
satisfactory in form and substance to each of EVB, BNI and SSB, that the
Reorganization will qualify for pooling-of-interests accounting treatment under
generally accepted accounting principles.
(f) Opinions of Counsel. SSB and BNI shall have delivered
to EVB and EVB shall have delivered to SSB and BNI opinions of counsel, dated as
of the Effective Date, as to such matters as they may each reasonably request
with respect to the transactions contemplated by this Agreement and in a form
reasonably acceptable to each of them.
(g) Legal Proceedings. Neither EVB nor SSB nor BNI 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 Reorganization.
6.2 Conditions to Obligations of EVB. The obligations of EVB to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
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(a) Representations and Warranties. Each of the
representations and warranties contained herein of SSB and BNI shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective Date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and EVB shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of each of SSB and BNI dated the Effective Date, to such
effect.
(b) Performance of Obligations. SSB and BNI each shall
have performed in all material respects all obligations required to be performed
by it under this Agreement prior to the Effective Date, and EVB shall have
received a certificate signed by the Chief Executive Officer of each of SSB and
BNI to that effect.
(c) Affiliate Letters. Each shareholder of SSB or BNI who
may be deemed by counsel for EVB to be an "affiliate" of SSB or BNI within the
meaning of Rule 145 under the Securities Act of 1933 shall have executed and
delivered a commitment and undertaking to the effect that (1) such shareholder
will dispose of the shares of EVB Common Stock received by him in connection
with the Reorganization only in accordance with the provisions of paragraph (d)
of Rule 145 and in a manner that would not prevent the Reorganization from
qualifying for pooling-of-interests accounting treatment; (2) such shareholders
will not dispose of any such shares until EVB has received an opinion of counsel
acceptable to it that such proposed disposition will not violate the provisions
of any applicable security laws; and (3) the certificates representing said
shares may bear a conspicuous legend referring to the forgoing restrictions.
6.3 Conditions to Obligations of SSB. The obligations of SSB to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of EVB and BNI shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and SSB shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer each of EVB and BNI dated the Effective Date, to such effect.
(b) Performance of Obligations. EVB and BNI each shall
have performed in all material respects all obligations required to be performed
by it under this Agreement prior to the Effective Date, and SSB shall have
received a certificate signed by Chief Executive Officer of EVB and BNI to that
effect.
(c) Investment Banking Letter. SSB shall have received a
written opinion in form and substance satisfactory to SSB from Austin Financial
Services, Inc. addressed to SSB and dated the date the Proxy
Statement/Prospectus is mailed to shareholders of SSB, to the effect that the
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terms of the Reorganization, including the Exchange Ratio, are fair, from a
financial point of view, to SSB.
6.4 Conditions to Obligations of BNI. The obligations of BNI to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of EVB and SSB shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and BNI shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of each of EVB and SSB dated the Effective Date, to such
effect.
(b) Performance of Obligations. EVB and SSB each shall
have performed in all material respects all obligations required to be performed
by it under this Agreement prior to the Effective Date, and BNI shall have
received a certificate signed by Chief Executive Officer of EVB and SSB to that
effect.
(c) Investment Banking Letter. BNI shall have received a
written opinion in form and substance satisfactory to BNI from Crestar
Securities Corporation addressed to BNI and dated the date the Proxy
Statement/Prospectus is mailed to shareholders of BNI, to the effect that the
terms of the Reorganization, including the Exchange Ratio, are fair, from a
financial point of view, to BNI.
ARTICLE 7
Termination
7.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement and the Plan of
Share Exchange by the shareholders of BNI and SSB, this Agreement may be
terminated and the Reorganization abandoned at any time prior to the Effective
Date:
(a) By the mutual consent of the Board of Directors of each
of EVB, BNI and SSB;
(b) By the respective Boards of Directors of EVB, BNI or
SSB if the conditions set forth in Section 6.1 have not been met, or waived by
EVB, BNI and SSB;
(c) By the Board of Directors of EVB if the conditions set
forth in Section 6.2 have not been met, or waived by EVB;
(d) By the Board of Directors of SSB if the conditions set
forth in Section 6.3 have not been met, or waived by SSB;
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(e) By the Board of Directors of BNI if the conditions set
forth in Section 6.4 have not been met, or waived by BNI;
(f) By the respective Boards of Directors EVB, BNI or SSB
if the Reorganization is not consummated by March 31, 1998.
(g)(i) By the Board of Directors of EVB or BNI if the Board of
Directors of SSB receives a subsequent offer to acquire SSB and does not within
fourteen (14) days after receipt of such subsequent offer confirm in writing to
EVB and BNI that each member of the Board of Directors of SSB supports the
Reorganization, will vote his shares of SSB Common Stock in favor of the
Reorganization, and will recommend to the shareholders of SSB that they approve
the Reorganization.
(ii) By the Board of Directors of EVB or SSB if the Board of
Directors of BNI receives a subsequent offer to acquire BNI and does not within
fourteen (14) days after receipt of such subsequent offer confirm in writing to
EVB and SSB that each member of the Board of Directors of BNI supports the
Reorganization, will vote his shares of BNI Common Stock in favor of the
Reorganization, and will recommend to the shareholders of BNI that they approve
the Reorganization.
7.2 Effect of Termination. In the event of the termination and
abandonment of this agreement and the Reorganization pursuant to Section 7.1,
this Agreement shall become void and have no effect, except that (i) the last
sentence of Section 4.2 and all of Sections 4.8 and 7.4 shall survive any such
termination and abandonment and (ii) no party shall be relieved or released from
any liability arising out of an intentional breach of any provision of this
Agreement.
7.3 Non-Survival of Representations, Warranties and Covenants.
Except for Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 5.3 and 7.4 of this Agreement,
none of the respective representations and warranties, obligations, covenants
and agreements of the parties shall survive the Effective Date, provided that no
such representations, warranties, obligations, covenants and agreements shall be
deemed to be terminated or extinguished so as to deprive EVB, BNI or SSB (or any
director, officer, or controlling person thereof) of any defense in law or
equity which otherwise would be available against the claims of any person,
including without limitation any shareholder or former shareholder of any of
EVB, BNI or SSB.
7.4 Expenses. The parties provide for the payment of expenses as
follows:
(a) Except as provided in this Section 7.4(a) or in Section
7.4(b) below, each of the parties shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions contemplated
herein, including fees and expenses of its own consultants, investment bankers,
accountants and counsel. If for any reason the Reorganization is not
consummated, BNI and SSB each will pay one-half the expenses incurred by EVB in
connection with the Reorganization.
(b) If this Agreement is terminated by BNI or SSB because
of a willful and material breach by the other of any representation, warranty,
covenant, undertaking or restriction set forth herein, and provided that the
terminating party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall bear and pay all such costs and expenses
of the other, including fees and expenses of consultants, investment bankers,
accountants, counsel, printers, and persons involved in the transactions
contemplated by this Agreement, including the preparation of the Registration
Statement and the Joint Proxy Statement.
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(c) Any liability to the other incurred by SSB or BNI
pursuant to this Section 7.4 shall not exceed a total of the sum of (1) $100,000
and (ii) any amount owed pursuant to the last sentence of Section 7.4(a).
(d) Final settlement with respect to the payment of such
fees and expenses by the parties shall be made within thirty (30) days after the
termination of this Agreement.
ARTICLE 8
General Provisions
8.1 Entire Agreement. This Agreement contains the entire
agreement among EVB, BNI and SSB with respect to the Reorganization and the
related transactions and supersedes all prior arrangements or understandings
with respect thereto.
8.2 Waiver and Amendment. Any term or provision of this Agreement
may be waived in writing at any time by the party which is, or whose
shareholders are, entitled to the benefits thereof, and this Agreement may be
amended or supplemented by written instructions duly executed by the parties
hereto at any time, whether before or after the meetings of SSB and BNI
shareholders referred to in Section 6.1(a) hereof, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
8.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
8.4 Governing Law. Except as required otherwise or otherwise
indicated herein, this Agreement shall be construed and enforced according to
the laws of the Commonwealth of Virginia.
8.5 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows:
If to EVB:
Thomas M. Boyd, Jr.
Eastern Virginia Bankshares, Inc.
307 Church Lane
P. O Box 1005
Tappahannock, Virginia 22560-1005
(804) 443-4333
Copy to:
Wayne A. Whitham, Jr.
Williams, Mullen, Christian & Dobbins
1021 East Cary Street
P.O. Box 1320
Richmond, Virginia 23210-1320
(Tel. 804-783-6473)
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If to SSB:
Thomas M. Boyd, Jr.
Southside Bank
307 Church Lane
P. O Box 1005
Tappahannock, Virginia 22560-1005
(804) 443-4333
Copy to:
Wayne A. Whitham, Jr.
Williams, Mullen, Christian & Dobbins
1021 East Cary Street
P.O. Box 1320
Richmond, Virginia 23210-1320
(Tel. 804-783-6473)
If to BNI:
Lewis R. Reynolds
Bank of Northumberland
Route 360
P. O. Box 9
Heathsville, Virginia 22473-0009
(804) 580-3621
Copy to:
F. Warren Haynie, Jr., Esq.
P. O. Box 220
Heathsville, VA 22473
(804) 580-3262
8.6 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but such counterparts
together shall constitute one and the same agreement.
8.7 Severability. In the event any provisions of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
8.8 Subsidiaries. All representations, warranties, and covenants
herein, where pertinent, include and shall apply to the wholly owned
subsidiaries belonging to the party making such representations, warranties, and
covenants.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the dates first written above.
EASTERN VIRGINIA BANKSHARES, INC.
By:
-----------------------------
Thomas M. Boyd, Jr.
President and Chief Executive Officer
ATTEST:
- ------------------------------
- ------------------
Secretary
SOUTHSIDE BANK
By:
-----------------------------
Thomas E. Boyd, Jr.
President and Chief Executive Officer
ATTEST:
- ------------------------------
- ------------------
Secretary
BANK OF NORTHUMBERLAND
By:
-----------------------------
Lewis R. Reynolds
President and Chief Executive Officer
ATTEST:
- ------------------------------
- ------------------
Secretary
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SOUTHSIDE BANK
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of Southside
Bank agrees to be bound by his personal obligations as provided in Section 4.3
and 4.6 of this Agreement.
September __, 1997 _______________________________
E. Gary Ball
September __, 1997 _______________________________
Thomas M. Boyd, Jr.
September __, 1997 _______________________________
W. Rand Cook
September __, 1997 _______________________________
W. Gerald Cox
September __, 1997 _______________________________
F. L. Garrett, III
September __, 1997 _______________________________
Eric A. Johnson
September __, 1997 _______________________________
William L. Lewis
September __, 1997 _______________________________
William Lowery, III
September __, 1997 _______________________________
Lawrence R. Moter
September __, 1997 _______________________________
Thomas M. Newman
September __, 1997 _______________________________
Charles R. Revere
September __, 1997 _______________________________
Leslie Taylor
September __, 1997 _______________________________
Emmett Upshaw
A-36
<PAGE>
BANK OF NORTHUMBERLAND
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of Bank of
Northumberland agrees to be bound by his personal obligations as provided in
Section 4.3 and 4.6 of this Agreement.
September __, 1997 _____________________________
Robert L. Covington
September __, 1997 _____________________________
S. Lake Cowart, Sr.
September __, 1997 _____________________________
L. Edelyn Dawson, Jr.
September __, 1997 _____________________________
F. Warren Haynie, Jr.
September __, 1997 _____________________________
W. Leslie Kilduff
September __, 1997 _____________________________
Lewis R. Reynolds
September __, 1997 _____________________________
Charles R. Rice
September __, 1997 _____________________________
William E. Sanford, Jr.
September __, 1997 _____________________________
Howard R. Straughan, Jr.
A-37
<PAGE>
EXHIBIT A
to the
Agreement and Plan
of Reorganization
PLAN OF SHARE EXCHANGE
BETWEEN
SOUTHSIDE BANK
AND
EASTERN VIRGINIA BANKSHARES, INC.
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"),
Southside Bank ("SSB"), a Virginia state bank, shall become a wholly-owned
subsidiary of Eastern Virginia Bankshares, Inc. ("EVB"), a Virginia corporation
pursuant to a share exchange under Section 13.1-717 of the Virginia Stock
Corporation Act.
ARTICLE 1
Terms of the Share Exchange
1.1 The Share Exchange. Subject to the terms and conditions of the
Agreement and Plan of Reorganization, dated as of September 26, 1997 between
SSB, Bank of Northumberland, Incorporated ("BNI") and EVB, at the Effective
Date, SSB shall become a wholly-owned subsidiary of EVB through the exchange of
each outstanding share of common stock of SSB for shares of the common stock of
EVB in accordance with Section 2.1 of this Plan of Share Exchange and pursuant
to a share exchange under Section 13.1-717 of the Virginia Stock Corporation Act
(the "Share Exchange"). At the Effective Date, the Share Exchange shall have the
effect as provided in Section 13.1-721 of the Virginia Stock Corporation Act.
1.2 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of EVB in effect immediately prior to the consummation
of the Share Exchange shall remain in effect following the Effective Date until
otherwise amended or repealed.
ARTICLE 2
Manner of Exchanging Shares
2.1 Exchange of Shares. Upon, and by reason of, the Share Exchange
becoming effective pursuant to the issuance of a Certificate of Share Exchange
by the Virginia State Corporation Commission, no cash, except as set forth in
section 2.3 below, shall be allocated to the shareholders of SSB, and stock
shall be issued and allocated as follows:
(a) The holders of each share of common stock, par value
$5.00 per share, of SSB ("SSB Common Stock") issued and outstanding immediately
prior to the Effective Date shall be entitled to the exchange rights set forth
in this Section 2.1 or to their rights under Article 15 of the Virginia Stock
Corporation Act as set forth in Section 2.5 below. On the Effective Date, each
shareholder of SSB immediately prior to the Effective Date shall be entitled to
exchange each such share of SSB Common Stock held for 2.5984 shares of EVB
Common Stock (the "Exchange Ratio"). Each holder of a certificate which
immediately prior to the Effective Date represented shares of SSB Common Stock,
upon the surrender of his SSB stock certificates to EVB, duly endorsed for
transfer in accordance with Section 2.2 below, will be entitled to receive in
exchange therefor a certificate or
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<PAGE>
certificates representing the number of shares of EVB Common Stock that such SSB
stock certificates shall entitle him to pursuant to the Exchange Ratio. After
the Effective Date, each such former holder of SSB Common Stock shall have the
right to receive (i) any dividend or such distribution payable at or as of any
time after the Effective Date to holders of record of EVB Common Stock at or as
of any time after the Effective Date, and (ii) the consideration described in
Sections 2.1 and 2.3 upon the surrender of such certificate in accordance with
Section 2.2.
(b) Shares of SSB Common Stock issued and outstanding
shall, by virtue of the Share Exchange, continue to be issued and outstanding
shares shall be denoted on the books and records of SSB as held of record by
EVB.
2.2 Manner of Exchange. As promptly as practicable after the
Effective Date, EVB shall cause SSB, acting as the exchange agent ("Exchange
Agent") to send to each former shareholder of record of SSB immediately prior to
the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of SSB Common Stock (other than shares held by
shareholders who perfect their dissenter's rights as provided under Section 2.5
hereof) for the consideration set forth in Section 2.1 above and Section 2.3
below. Any fractional share checks which a SSB shareholder shall be entitled to
receive in exchange for such shareholder's shares of SSB Common Stock, and any
dividends paid on any shares of EVB Common Stock that such shareholder shall be
entitled to receive prior to the delivery to the Exchange Agent of such
shareholder's certificates representing all of such shareholder's shares of SSB
Common Stock will be delivered to such shareholder only upon delivery to the
Exchange Agent of the certificates representing all of such shares (or indemnity
satisfactory to EVB, in its judgment, if any of such certificates are lost,
stolen or destroyed). No interest will be paid on any such fractional share
checks or dividends to which the holder of such shares shall be entitled to
receive upon such delivery.
2.3 Fractional Shares. EVB shall issue cash in lieu of fractional
shares. EVB will pay the value of such fractional shares in cash on the basis of
$12.70 per share of EVB Common Stock.
2.4 Dividends. No dividend or other distribution payable to the
holders of record of EVB Common Stock at or as of any time after the Effective
Date shall be paid to the holder of any certificate representing shares of SSB
Common Stock issued and outstanding immediately prior to the Effective Date
until such holder physically surrenders such certificate for exchange as
provided in Section 2.3, promptly after which time all such dividends or
distributions shall be paid by EVB (without interest).
2.5 Rights of Dissenting Shareholders. Shareholders of SSB who
object to the Share Exchange will be entitled to the dissenters' rights and
remedies set forth in sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act.
ARTICLE 3
Termination
This Plan of Share Exchange may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 7 of the Agreement
and Plan of Reorganization, dated September 26, 1997, between the parties and
BNI.
A-39
<PAGE>
EXHIBIT B
to the
Agreement and Plan
of Reorganization
PLAN OF SHARE EXCHANGE
BETWEEN
BANK OF NORTHUMBERLAND, INCORPORATED
AND
EASTERN VIRGINIA BANKSHARES, INC.
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"),
Bank of Northumberland ("BNI"), a Virginia state bank, shall become a
wholly-owned subsidiary of Eastern Virginia Bankshares, Inc. ("EVB"), a Virginia
corporation pursuant to a share exchange under Section 13.1-717 of the Virginia
Stock Corporation Act.
ARTICLE 1
Terms of the Share Exchange
1.1 The Share Exchange. Subject to the terms and conditions of the
Agreement and Plan of Reorganization, dated as of September 26, 1997 between
BNI, Southside Bank ("SSB") and EVB, at the Effective Date, BNI shall become a
wholly-owned subsidiary of EVB through the exchange of each outstanding share of
common stock of BNI for shares of the common stock of EVB in accordance with
Section 2.1 of this Plan of Share Exchange and pursuant to a share exchange
under Section 13.1-717 of the Virginia Stock Corporation Act (the "Share
Exchange"). At the Effective Date, the Share Exchange shall have the effect as
provided in Section 13.1-721 of the Virginia Stock Corporation Act.
1.2 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of EVB in effect immediately prior to the consummation
of the Share Exchange shall remain in effect following the Effective Date until
otherwise amended or repealed.
ARTICLE 2
Manner of Exchanging Shares
2.1 Exchange of Shares. Upon, and by reason of, the Share Exchange
becoming effective pursuant to the issuance of a Certificate of Share Exchange
by the Virginia State Corporation Commission, no cash shall be allocated to the
shareholders of BNI, and stock shall be issued and allocated as follows:
(a) The holders of each share of common stock, par value
$1.00 per share, of BNI ("BNI Common Stock")issued and outstanding immediately
prior to the Effective Date shall be entitled to the exchange rights set forth
in this Section 2.1 or to their rights under Article 15 of the Virginia Stock
Corporation Act as set forth in Section 2.5 below. On the Effective Date, each
shareholder of BNI immediately prior to the Effective Date shall be entitled to
exchange each such share of BNI Common Stock held for 1.000 shares of EVB Common
Stock (the "Exchange Ratio"). Each holder of a certificate which immediately
prior to the Effective Date represented shares of BNI Common Stock, upon the
surrender of his BNI stock certificates to EVB, duly endorsed for transfer in
accordance with Section 2.2 below, will be entitled to receive in exchange
therefor a certificate or certificates
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<PAGE>
representing the number of shares of EVB Common Stock that such BNI stock
certificates shall entitle him to pursuant to the Exchange Ratio. After the
Effective Date, each such former holder of BNI Common Stock shall have the right
to receive (i) any dividend or such distribution payable at or as of any time
after the Effective Date to holders of record of EVB Common Stock at or as of
any time after the Effective Date, and (ii) the consideration described in
Sections 2.1 and 2.3 upon the surrender of such certificate in accordance with
Section 2.2.
(b) Shares of BNI Common Stock issued and outstanding
shall, by virtue of the Share Exchange, continue to be issued and outstanding
shares shall be denoted on the books and records of BNI as held of record by
EVB.
2.2 Manner of Exchange. As promptly as practicable after the
Effective Date, EVB shall cause SSB, acting as the exchange agent ("Exchange
Agent") to send to each former shareholder of record of BNI immediately prior to
the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of BNI Common Stock (other than shares held by
shareholders who perfect their dissenter's rights as provided under Section 2.5
hereof) for the consideration set forth in Section 2.1 above. Any dividends paid
on any shares of EVB Common Stock that such shareholder shall be entitled to
receive prior to the delivery to the Exchange Agent of such shareholder's
certificates representing all of such shareholder's shares of BNI Common Stock
will be delivered to such shareholder only upon delivery to the Exchange Agent
of the certificates representing all of such shares (or indemnity satisfactory
to EVB, in its judgment, if any of such certificates are lost, stolen or
destroyed). No interest will be paid on any such fractional share checks or
dividends to which the holder of such shares shall be entitled to receive upon
such delivery.
2.3 Dividends. No dividend or other distribution payable to the
holders of record of EVB Common Stock at or as of any time after the Effective
Date shall be paid to the holder of any certificate representing shares of BNI
Common Stock issued and outstanding immediately prior to the Effective Date
until such holder physically surrenders such certificate for exchange as
provided in Section 2.3, promptly after which time all such dividends or
distributions shall be paid by EVB (without interest).
2.4 Rights of Dissenting Shareholders. Shareholders of BNI who
object to the Share Exchange will be entitled to the dissenters' rights and
remedies set forth in sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act.
ARTICLE 3
Termination
This Plan of Share Exchange may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 7 of the Agreement
and Plan of Reorganization, dated September 26, 1997, between the parties and
SSB.
A-41
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A-42
<PAGE>
Appendix B
Code of Virginia (1950), as amended
Title 13.1
Chapter 9
Article 15.
Dissenters' Rights.
ss. 13.1-729. Definitions.
In this article:
"Corporation" means the issuer of the shares held by a
dissenter before the corporate action, except that (i) with respect to
a merger, "corporation" means the surviving domestic or foreign
corporation or limited liability company by merger of that issuer, and
(ii) with respect to a share exchange, "corporation" means the
acquiring corporation by share exchange, rather than the issuer, if the
plan of share exchange places the responsibility for dissenters' rights
on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent
from corporate action under ss. 13.1-730 and who exercises that right
when and in the manner required by ss.ss. 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate action
unless exclusion would be inequitable.
"Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate
currently paid by the corporation on its principal bank loans or, if
none, at a rate that is fair and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
"Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment
of the fair value of his shares in the event of, any of the following corporate
actions:
B-1
<PAGE>
1. Consummation of a plan of merger to which the
corporation is a party (i) if shareholder approval is required for the
merger by ss. 13.1-718 or the articles of incorporation and the
shareholder is entitled to vote on the merger or (ii) if the
corporation is a subsidiary that is merged with its parent under ss.
13.1-719;
2. Consummation of a plan of share exchange to which
the corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation if the
shareholder was entitled to vote on the sale or exchange or if the
sale or exchange was in furtherance o a dissolution on which the
shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant
to court order, or (ii) a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of
sale;
4. Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
B. A shareholder entitled to dissent and obtain payment for his
shares under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with
respect to a plan of merger or share exchange or a sale or exchange of property
there shall be no right of dissent in favor of holders of shares of any class or
series which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation
issuing such shares provide otherwise;
2. In the case of a plan of merger or share exchange,
the holders of the class or series are required under the plan of
merger or share exchange to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or
membership interests and cash in lieu of fractional shares (i)
of the surviving or acquiring corporation or limited liability
company or (ii) of any other corporation or limited liability
company which, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on
a national securities exchange or held of record by at least
2,000 record shareholders or members; or
c. A combination of cash and shares or membership
interests as set forth in subdivisions 2 a and 2 b of this
subsection; or
B-2
<PAGE>
3. The transaction to be voted on is an "affiliated
transaction" and is not approved by a majority of "disinterested
directors" as such terms are defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of
the fair value of his shares shall terminate upon the occurrence of any one of
the following events:
1. The proposed corporate action is abandoned or
rescinded;
2. A court having jurisdiction permanently enjoins or
sets aside the corporate action; or
3. His demand for payment is withdrawn with the written
consent of the corporation.
ss. 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
1. He submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he
is the beneficial shareholder or over which he has power to direct
the vote.
ss. 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights
under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
B. If corporate action creating dissenters' rights under
ss. 13.1-730 is taken without a vote of shareholders, the corporation, during
the ten-day period after the effectuation of such corporate action, shall notify
in writing all record shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in ss.
13.1-734.
ss. 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights
under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (i) shall deliver to the
B-3
<PAGE>
corporation before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated and (ii) shall not
vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of
subsection A of this section is not entitled to payment for his shares under
this article.
ss. 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights
under ss. 13.1-730 is authorized at a shareholders' meeting, the corporation,
during the ten-day period after the effectuation of such corporate action, shall
deliver a dissenters' notice in writing to all shareholders who satisfied the
requirements of ss. 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and
where and when certificates for certificated shares shall be
deposited;
2. Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the payment
demand is received;
3. Supply a form for demanding payment that includes
the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action and requires that the
person asserting dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before or after that date;
4. Set a date by which the corporation must receive
the payment demand, which date may not be fewer than thirty nor more
than Sixty days after the date of delivery of the dissenters' notice;
and
5. Be accompanied by a copy of this article.
ss. 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in
ss. 13.1-734 shall demand payment, certify that he acquired beneficial ownership
of the shares before or after the date required to be set forth in the
dissenters' notice pursuant to subdivision 3 of subsection B of ss. 13.1-734,
and, in the case of certificated shares, deposit his certificates in accordance
with the terms of the notice.
B. The shareholder who deposits his shares pursuant to
subsection A of this section retains all other rights of a shareholder except to
the extent that these rights are canceled or modified by the taking of the
proposed corporate action.
C. A shareholder who does not demand payment and deposits his
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this article.
B-4
<PAGE>
ss. 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted
as to uncertificated shares retains all other rights of a shareholder except to
the extent that these rights are canceled or modified by the taking of the
proposed corporate action.
ss. 13.1-737. Payment.
A. Except as provided in ss. 13.1-738, within thirty days after
receipt of a payment demand made pursuant to ss. 13.1-735, the corporation shall
pay the dissenter the amount the corporation estimates to be the fair value of
his shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen months before the effective
date of the corporate action creating dissenters' rights, an income
statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
2. An explanation of how the corporation estimated
the fair value of the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand
payment under ss. 13.1-739; and
4. A copy of this article.
ss. 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by
ss. 13.1-737 from a dissenter unless he was the beneficial owner of the shares
on the date of the first publication by news media or the first announcement to
shareholders generally, whichever is earlier, of the terms of the proposed
corporate action, as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment
under subsection A of this section, after taking the proposed corporate action,
it shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the
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<PAGE>
fair value of the shares and of how the interest was calculated, and a statement
of the dissenter's right to demand payment under ss. 13.1-739.
ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of
his own estimate of the fair value of his shares and amount of interest due, and
demand payment of his estimate (less any payment under ss. 13.1-737), or reject
the corporation's offer under ss. 13.1-738 and demand payment of the fair value
of his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this
section unless he notifies the corporation of his demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for his shares.
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the circuit court in the city or county
described in subsection B of this section to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or
county where its principal office is located, or, if none in this Commonwealth,
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this Commonwealth, it shall commence
the proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not
residents of this Commonwealth, whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties shall be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
D. The corporation may join as a party to the proceeding
any shareholder who claims to be a dissenter but who has not, in the opinion of
the corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is
commenced under subsection B of this section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
a decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
F. Each dissenter made a party to the proceeding is entitled
to judgment (i) for the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the
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<PAGE>
corporation or (ii) for the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to withhold payment
under ss. 13.1-738.
ss. 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under
ss. 13.1-740 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters did not act in good
faith in demanding payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and expenses
of experts, excluding those of counsel, for the respective parties, in amounts
the court finds equitable:
1. Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in
favor of any other party, if the court finds that the party against
whom the fees and expenses are assessed did not act in good faith
with respect to the rights provided by this article.
C. If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
D. In a proceeding commenced under subsection A of
ss. 13.1-737 the court shall assess the costs against the corporation, except
that the court may assess costs against all or some of the dissenters who are
parties to the proceeding, in amounts the court finds equitable, to the extent
the court finds that such parties did not act in good faith in instituting the
proceeding.
B-7
<PAGE>
Appendix C
SOUTHSIDE BANK
Page
INDEPENDENT AUDITORS' REPORT C-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994:
Balance Sheets C-3
Statements of Income C-4
Statements of Shareholders' Equity C-5
Statements of Cash Flows C-6
Notes to Financial Statements C7 - C13
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996:
Balance Sheets C-14
Statements of Income C-15
Statements of Cash Flows C-16
Notes to Financial Statements C17 - C18
C-1
<PAGE>
Independent Auditors' Report
Directors and Shareholders
Southside Bank
Tappahannock, Virginia:
We have audited the accompanying balance sheets of Southside Bank as of December
31, 1996 and 1995, and the related statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our 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, such financial statements present fairly, in all material
respects, the financial position of Southside Bank as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Richmond, Virginia
January 13, 1997
C-2
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 10,132,316 $ 8,705,201
- --------------------------------------------------------------------------------------------------------------------------
Investment securities-available for sale at fair value, amortized cost
of $14,718,099 and $12,842,393, respectively 14,779,954 13,022,575
Investment securities-held to maturity at amortized cost, fair value
of $18,044,627 and $18,483,489, respectively 17,819,803 17,997,758
- --------------------------------------------------------------------------------------------------------------------------
Loans, net 128,007,809 117,447,320
- --------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 835,810 824,584
Bank premises and equipment 3,022,912 3,333,736
Accrued interest receivable 1,183,738 1,131,316
Other real estate 152,704 558,439
Federal Home Loan Bank stock 636,700 625,900
Other assets 610,607 674,413
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 177,182,353 $ 164,321,242
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Non interest bearing demand accounts $ 15,226,015 $ 15,360,017
Interest bearing deposits:
Money Market accounts 10,404,565 10,827,466
Now accounts 18,112,113 17,243,002
Savings accounts 42,811,061 39,032,737
Certificates of deposit $100,000 and over 10,188,816 8,835,853
Other time deposits 61,022,731 55,984,056
- --------------------------------------------------------------------------------------------------------------------------
Total Deposits 157,765,301 147,283,131
- --------------------------------------------------------------------------------------------------------------------------
Accrued interest payable 415,572 420,627
Other liabilities 2,165,457 1,351,705
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 160,346,330 149,055,463
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock of $5 par value per share; Authorized 1,200,000 shares:
issued and outstanding 1,018,326 and 1,023,596, respectively 5,091,630 5,117,980
Surplus 2,081,457 2,184,671
Undivided profits 9,622,112 7,844,208
Net unrealized gain on securities available for sale, net of
tax of $(21,031) in 1996 and $(61,262) in 1995 40,824 118,920
- --------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 16,836,023 15,265,779
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 177,182,353 $ 164,321,242
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
C-3
<PAGE>
Statements of Income
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 11,369,223 $ 10,564,942 $ 9,300,997
Investment securities:
U.S. Government obligations 323,542 299,569 243,926
Obligations of U. S. Government agencies 572,170 623,624 663,346
Obligations of state/political subdivisions 913,853 785,463 746,732
Other 157,996 171,325 190,562
Federal funds sold 171,199 230,708 86,958
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 13,507,983 12,675,631 11,232,521
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 6,027,624 5,963,064 4,505,587
Obligation under capital lease -- -- 3,158
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,027,624 5,963,064 4,508,745
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 7,480,359 6,712,567 6,723,776
Provision for loan losses 345,000 324,000 480,000
Net interest income after provision for loan losses 7,135,359 6,388,567 6,243,776
- --------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 730,012 693,257 617,357
Loss on sale of available for sale securities (56,406) -- (84,762)
Other operating income 376,048 326,320 266,530
- --------------------------------------------------------------------------------------------------------------------------
1,049,654 1,019,577 799,125
- --------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries 1,726,777 1,672,055 1,453,231
Employee benefits 467,927 506,956 496,136
Occupancy expense 676,726 661,583 606,391
Other operating expenses 1,802,944 1,653,783 1,652,594
- --------------------------------------------------------------------------------------------------------------------------
4,674,374 4,494,377 4,208,352
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,510,639 2,913,767 2,834,549
Income tax expense 962,096 774,634 768,265
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 2,548,543 $ 2,139,133 $ 2,066,284
- --------------------------------------------------------------------------------------------------------------------------
Net income per share $ 2.51 $ 2.10 $ 2.03
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
C-4
<PAGE>
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Common Undivided Available
Years ended December 31, 1996, 1995, and 1994 Stock Surplus Profits for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1994 $ 5,100,000 $ 2,101,846 $ 5,075,832 $ 296,888 $ 12,574,566
Net income -- -- 2,066,284 -- 2,066,284
Cash dividends declared -- -- (714,000) -- (714,000)
Change in net unrealized loss on
securities available for sale -- -- -- (479,293) (479,293)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 5,100,000 2,101,846 6,428,116 (182,405) 13,447,557
Net Income -- -- 2,139,133 -- 2,139,133
Cash dividends declared -- -- (723,041) -- (723,041)
Shares sold under dividend reinvestment plan 39,628 176,961 -- -- 216,589
Shares repurchased and retired (21,648) (94,136) -- -- (115,784)
Change in net unrealized gain on
securities available for sale -- -- -- 301,325 301,325
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 5,117,980 2,184,671 7,844,208 118,920 15,265,779
Net income -- -- 2,548,543 -- 2,548,543
Cash dividends declared -- -- (770,639) -- (770,639)
Shares sold under dividend reinvestment plan 28,970 153,309 -- -- 182,279
Shares repurchased and retired (55,320) (256,523) -- -- (311,843)
Change in net unrealized loss on
securities available for sale -- -- -- (78,096) (78,096)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 $ 5,091,630 $ 2,081,457 $ 9,622,112 $ 40,824 $ 16,836,023
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
C-5
<PAGE>
Statements Of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 2,548,543 $ 2,139,133 $ 2,066,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 581,033 532,117 484,986
Deferred tax (benefit) provision 29,006 (71,486) (11,330)
Provision for loan losses 345,000 324,000 480,000
Net loss on other real estate -- -- 12,951
Losses realized on available for sale securities 56,406 -- 84,762
Increase in accrued interest receivable (52,422) (155,246) (39,054)
Increase in other assets (56,000) (231,343) (22,621)
Increase (decrease) in accrued interest payable (5,055) 113,075 16,226
Premium amortization-securities 73,655 93,342 121,648
Discount accretion-securities (25,105) (86,742) (35,910)
Increase (decrease) in other liabilities 813,752 (195,763) 420,085
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,760,270 321,954 1,511,743
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,308,813 2,461,087 3,578,027
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales and maturities of securities
available for sale 6,007,256 5,183,944 4,754,377
Maturities of securities held to maturity 1,504,131 2,654,000 1,595,000
Proceeds from sale of other real estate 405,734 -- 112,049
Purchases of investment securities available for sale (7,970,035) (4,945,548) (1,925,284)
Purchases of investment securities held to maturity (1,344,059) (5,865,076) (647,342)
Purchases of Federal Home Loan Bank Stock (10,800) (64,800) (40,600)
Purchases of other real estate -- (358,439) --
Net increase in loans (10,905,489) (5,941,314) (14,838,577)
Purchases of bank premises and equipment (150,403) (592,114) (1,361,405)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,463,665) (9,929,347) (12,351,782)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in total deposits 10,482,170 11,278,248 9,670,855
Principal payments on capital lease obligation -- -- (71,142)
Proceeds from sale of stock 182,279 216,589 --
Repurchases and retirement of stock (311,843) (115,784)
Dividend paid (770,639) (723,041) (714,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,581,967 10,656,012 8,885,713
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,427,115 3,187,752 111,958
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 8,705,201 5,517,449 5,405,491
Cash and cash equivalents at end of year $ 10,132,316 $ 8,705,201 $ 5,517,449
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosures of cash flow information:
The bank paid $6,032,679 in interest on deposits and $990,247 in income tax
payments in 1996, $5,849,989 and $632,682, respectively, in 1995, $4,489,361 and
$1,040,348, respectively, in 1994.
- -------------------------------------------------------------------------------
See notes to financial statements.
C-6
<PAGE>
Notes to Financial Statements
December 31, 1996, 1995, and 1994
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of Southside Bank (the Bank)
conform to generally accepted accounting principles and general
practices within the banking industry. The following is a description
of the more significant of those policies:
(a) Nature of Operations
The Bank operates under a state bank charter and provides full banking
services, including commercial and consumer demand and time deposit
accounts, commercial and consumer loans, Visa and Mastercard revolving
credit accounts, drive-in banking services and automated teller machine
transactions. As a state bank, the Bank is subject to regulation of the
Federal Deposit Insurance Corporation and The Virginia State
Corporation Commission's Bureau of Financial Affairs. The area served
by the bank is primarily the counties of Essex, King & Queen, King
William, Middlesex and Caroline and services are provided by seven
branch offices.
(b) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates
(c) Cash and Cash Equivalents
The Bank's definition of cash and cash equivalents as shown in the
statement of cash flows includes Federal funds sold and other
short-term, highly liquid investments with original maturities of three
months or less.
(d) Investment Securities
The Bank has classified securities as either held to maturity or
available for sale. The Bank does not have any securities classified as
trading securities. Securities classified as held to maturity are
accounted for at amortized cost, and require the Bank to have both the
positive intent and ability to hold those securities to maturity. All
other securities are classified as available for sale and are carried
at fair value with unrealized gains and losses included in
shareholder's equity on an after tax basis. Realized gains or losses on
the sale of investments are recognized at the time of sale using the
specific identification method.
(e) Federal Home Loan Bank Stock
Federal Home Loan Bank stock is stated at cost. No ready market exists
for this stock, and it has no quoted market value. For presentation
purposes, such stock is assumed to have market value which is equal to
cost. In addition, such stock is not considered a debt or equity
security in accordance with Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity
Securities"
(f) Loans Receivable
Loans receivable that management has the ability and intent to hold for
the foreseeable future or until maturity or pay off are reported at
their outstanding principal adjusted for any charge-offs, the allowance
for loan losses and any deferred fees or costs on origination of loans.
Interest on installment loans is recognized based on the interest
method. Interest on all other major categories of loans is accrued
based upon the principal amounts outstanding. The Bank discontinues the
accrual of interest on loans after a delinquency period of 90 days.
When interest accruals are discontinued, interest credited to income in
the current year is reversed. Loan origination and commitment fees and
certain direct costs are deferred and the net amount amortized as an
adjustment of the related loan's yields. The bank is generally
amortizing these amounts over the contractual life of the related
loans. However, for mortgage loans generally made for a 15-year term,
the Bank has anticipated prepayments and uses an estimated economic
life of eight years.
(g) Allowance For Loan Losses
An allowance is maintained for losses on loans. Loan losses, net of
recoveries on loans previously charged off, are charged to the
allowance. The allowance for loan losses is based upon management's
periodic evaluation of portfolio with consideration given to the
overall loss experience, delinquency data, financial condition of the
borrowers, and such other factors that, in management's judgment,
warrant recognition in providing and adequate allowance.
(h) Impaired Loans
Effective January 1, 1995, the Bank adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", as amended by
SFAS 118, which requires that an impaired loan be measured based on the
present value of expected future cash flows discounted at the loans
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of collateral if the loan is
collateral dependent. A loan is considered impaired when it is probable
that a creditor will be unable to collect all interest and principal
payments as scheduled in the loan agreement. The Bank records interest
receipts on impaired loans as interest income only when the ultimate
collectibiltiy of the principal is not in doubt. A valuation allowance
is maintained to the extent that the measure of the impaired loans is
less than the recorded investment.
C-7
<PAGE>
(i) Foreclosed Properties
Property acquired through foreclosure is stated at the lower of the
recorded cost or the estimated fair value of the property. At the time
of foreclosure, any excess of cost over estimated fair value is charged
to the allowance for loan losses. Subsequent declines in the fair value
are recorded in a valuation account and are reflected in operations in
the year in which the decline occurred.
(j) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is charged to expense over the estimated
useful lives of the assets and is computed using the straight-line or
declining balance method for financial reporting purposes. Depreciation
for tax purposes is computed based upon accelerated methods. The costs
of major renewals or improvements are capitalized while the costs of
ordinary maintenance and repairs are charged to expense as incurred.
(k) Disclosures Concerning the Fair Value of Financial Instruments
Disclosure of the estimated fair value of financial instruments is made
in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments". The estimated fair value amounts
have been determined by the Bank using available market information and
appropriate valuation methodologies. Loan commitments are conditional
and subject to market pricing and therefore do not reflect a gain or
loss of market value. The fair value of standby letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counter parties at the reporting date. However, considerable
judgment is required to interpret market data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts.
Cash and short-term investments. The nature of these instruments and their
relatively short maturities provides for the reporting of fair value
equal to the historical cost.
Investment securities. The fair value of investment securities of based on
quoted market prices.
Loans. The estimate of the fair value of the loan portfolio is estimated based
on present values using applicable rates currently, offered on similar
products.
Deposits. The fair value of all demand accounts is the amount payable at the
report date. For all other deposits, the fair value is determined using
the discounted cash flow method. The discount rate was equal to the
rate currently offered on similar products.
(l) Income Taxes
The Bank uses an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax
payable or refunded for the period plus or minus the change during the
period in deferred tax assets and liabilities.
(m) Earnings Per Share
Earnings per share are based upon the weighted average number of shares
outstanding during the year. The number of shares used in computing
earnings per share was 1,014,281, 1,019,647 and 1,020,000 in 1996, 1995
and 1994 respectively.
(n) Impact of Recently Issued Accounting Standards
Effective January 1, 1996 the Bank adopted issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This Statement establishes accounting
standards for the impairment of long-lived assets, and certain
identifiable intangibles to be disposed of. This Statement requires
that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The implementation of this standard did not
have a significant impact on the Bank financial statements.
(o) Reclassifications
Certain reclassification have been made to prior year balances to
conform to the current year presentation.
C-8
<PAGE>
Notes to Financial Statements,(Continued)
2 Investment Securities:
The following is a comparison of amortized cost and estimated fair values of
investment securities at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale: Cost Gain Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Government obligations $ 6,527,148 $ 20,506 $ 9,683 $ 6,537,971
Obligations of U. S. Government agencies 8,190,951 82,934 31,902 8,241,983
- ------------------------------------------------------------------------------------------------------------------------------------
14,718,099 103,440 41,585 14,779,954
Held to Maturity:
Obligations of state/political subdivisions 16,183,670 267,309 71,173 16,379,806
Corporate bonds 1,636,133 28,688 -- 1,664,821
- ------------------------------------------------------------------------------------------------------------------------------------
17,819,803 295,997 71,173 18,044,627
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 32,537,902 $ 399,437 $ 112,758 $ 32,824,581
- ------------------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale: Cost Gain Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Government obligations $ 4,254,151 $ 81,475 $ -- $ 4,335,626
Obligations of U. S. Government agencies 8,588,242 158,025 59,318 8,686,949
- ------------------------------------------------------------------------------------------------------------------------------------
12,842,393 239,500 59,318 13,022,575
Held to Maturity:
Obligations of state/political subdivisions 16,610,636 483,623 60,204 17,034,055
Corporate bonds 1,387,122 62,312 -- 1,449,434
- ------------------------------------------------------------------------------------------------------------------------------------
17,997,758 545,935 60,204 18,483,489
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 30,840,151 $ 785,435 $ 119,522 $ 31,506,064
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of the amortized cost and estimated fair values of
the bank's investment securities by contractual maturity at December 31, 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale:
One year or less $ 2,503,747 $ 2,512,188
1-5 years 7,023,735 7,024,972
5-10 years 943,993 950,290
After 10 years -- --
- ------------------------------------------------------------------------------------------------------------------------------------
10,471,475 10,487,450
Mortgage-backed securities 4,246,624 4,292,504
- ------------------------------------------------------------------------------------------------------------------------------------
14,718,099 14,779,954
- ------------------------------------------------------------------------------------------------------------------------------------
Held To Maturity:
One year or less 1,651,244 1,673,166
1-5 years 8,531,884 8,632,052
5-10 years 3,904,545 3,958,533
After 10 years 3,732,130 3,780,876
- ------------------------------------------------------------------------------------------------------------------------------------
17,819,803 18,044,627
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 32,537,902 $ 32,824,581
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale were $1,443,594 for the
year ended December 31, 1996. Gross losses of $56,406 were realized on those
sales. There were no sales of securities in 1995. Proceeds from sales of
securities available for sale were $914,531 for the year ended December 31,
1994. Gross gains of $3,593 and gross losses of $88,355 were realized on those
sales. Securities with an amortized cost of $3,449,665 and $5,068,312 and market
value of $3,475,466and 5,066,301 at December 31, 1996 and 1995 respectively,
were pledged to collateralize public funds as required by law.
C-9
<PAGE>
3 Loans:
The following is a comparison of loans by type which were outstanding at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans $ 87,803,244 $ 85,502,950
Commercial, industrial and agricultural loans 10,331,732 7,937,594
Loans to individuals for household, family and other
consumer expenditures 34,064,528 28,002,068
All other loans 868,187 613,008
- ------------------------------------------------------------------------------------------------------------------------------------
Total gross loans 133,067,691 122,055,620
- ------------------------------------------------------------------------------------------------------------------------------------
Less unearned income (2,211,285) (1,579,149)
Less deferred loan fee (469,094) (477,702)
Less allowance for loan losses (2,379,503) (2,551,449)
- ------------------------------------------------------------------------------------------------------------------------------------
Total net loans $ 128,007,809 $ 117,447,320
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loans to directors and executive officers of the Bank and loans to companies in
which they have a significant interest had outstanding balances of $3,684,527
and $3,769,870 at December 31, 1996 and 1995, respectively, with additions of
$2,480,515 and curtailments of $2,565,858 in 1996. The balance of non-accrual
loans was $3,500,145 and $3,741,486 at December 31, 1996 and 1995, respectively.
If these loans had been accruing interest at their contracted rates, related
income for these loans would have been $260,271, $132,545, and $187,916 for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance of
impaired loans were $1,456,574 and $972,234 at December 31, 1996 and 1995,
respectively. The related specific valuation allowance of these loans was
$225,000 at December 31, 1995. There was no specific valuation allowance for
impaired loans at December 31, 1996. The average recorded investment in impaired
loans for the years ended December 31, 1996 and 1995 was $1,214,404 and
$856,587, respectively. During the years ended December 31, 1996 and 1995 the
Bank did not recognize any interest income on the impaired loans.
4 Allowance For Loan Losses:
The following is a summary of the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,551,449 $ 2,436,010 $ 2,015,000
Provisions charged against income 345,000 324,000 480,000
Recoveries of loans charged off 133,384 82,511 193,630
Loans charged off (650,330) (291,072) (252,620)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,379,503 $ 2,551,449 $ 2,436,010
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5 Bank Premises and Equipment:
The detail of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost:
Land $ 742,846 $ 742,846
Buildings 2,585,260 2,673,757
Furniture, fixtures and equipment 2,639,025 2,523,328
Automobiles 31,199 31,199
Construction in progress - 306,566
- ------------------------------------------------------------------------------------------------------------------------------------
5,998,330 5,971,130
- ------------------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation:
Buildings 867,586 780,903
Furniture, fixing and equipment 2,076,633 1,825,292
Automobiles 31,199 31,199
- ------------------------------------------------------------------------------------------------------------------------------------
2,975,418 2,637,394
- ------------------------------------------------------------------------------------------------------------------------------------
Book value $ 3,022,912 $ 3,333,736
</TABLE>
The depreciation charged to expense for the years ended December 31, 1996, 1995,
and 1994 amounted to $461,227, $500,869, and, $453,738, respectively.
C-10
<PAGE>
Notes to Financial Statement, (Continued)
6 Deposits
The aggregate amount of certificate of deposit with a minimum denomination of
$100,000, was approximately $10,188,816 and $8,835,853 in 1996 and 1995,
respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit were
as follows:
1997 $ 42,159,907
1998 19,769,557
1999 5,845,420
2000 2,642,958
2001 and thereafter 793,705
----------------------------------------------------
Total $ 71,211,547
7 Income Taxes:
Income taxes applicable to net income for the years ended December 31, 1996,
1995, and 1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes:
Currently payable $ 933,090 $ 846,120 $ 779,595
Deferred income tax provision (benefit) 29,006 (71,486) (11,330)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 962,096 $ 774,634 $ 768,265
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the expected tax expense with the reported
expense for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense at statutory rate$ 1,193,617 34.0% $ 990,681 34.0% $ 963,747 34.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest (241,832) (6.9)% (215,261) (7.4%) (250,280) (8.8%)
Other 8,721 .2% (1,752) (.1%) 53,483 1.9%
Environmental tax 1,590 .1% 966 .1% 1,315 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 962,096 27.4% $ 774,634 26.6% $ 768,265 27.1%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the deferred income tax asset are as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 79,230 $ 77,022
Deferred loan fees 81,557 108,744
Allowance for loan losses 683,281 741,742
- ------------------------------------------------------------------------------------------------------------------------------------
Interest on non-accrual loans 88,492 45,067
Other real estate owned 42,500 42,500
- ------------------------------------------------------------------------------------------------------------------------------------
$ 975,060 $ 1,015,075
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on available for sale securities $ (21,031) $ (61,262)
Deferred loan costs (166,131) (115,951)
FHLB dividend (7,888) (7,888)
Other 55,800 (5,390)
- ------------------------------------------------------------------------------------------------------------------------------------
(139,250) (190,491)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 835,810 $ 824,584
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-11
<PAGE>
8 Employee Benefits:
(a) Insurance and retirement plan:
The Bank has a contributory insurance and defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's compensation during the last five years of employment. The
Bank's funding policy is to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Bank's financial statements at December 31, 1996, 1995 and 1994, as of
the most recent actuarial valuation date, October 1, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$1,201,231 of $1,195,414, and $1,188,797, respectively $ (1,233,145) $ (1,212,494) $ (1,204,219)
Projected benefit obligation for service rendered to date (1,797,820) (1,680,817) (1,671,090)
Plan assets at fair value 1,999,283 1,892,625 1,534,906
Projected benefit obligation less than (in excess of) plan assets 201,463 211,808 (136,184)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 50,185 54,368 58,551
Prior service cost not yet recognized in net periodic
pension cost (404,151) (422,479) (135,842)
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost (27,723) (21,924) (69,497)
Net pension cost included the following components:
Services cost-benefits earned during the period 108,018 101,039 87,404
Interest cost on projected benefit obligations 124,340 123,956 110,632
Actual return on plan assets (income) (168,270) (136,491) (131,105)
Net amortization and deferral 1,507 13,782 5,758
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 65,595 $ 102,286 $ 72,689
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefits
obligation were 7.5%. The expected long-term rate of return on assets was 9%.
(b) Profit sharing plan:
The Bank has a qualified profit sharing plan applicable to all eligible
employees. Contributions to the Plan are made in accordance with those proposals
set forth and approved by the Board of Directors. Contributions to this Plan of
$110,000, $110,000 and $115,000 were included in expenses for the years ended
December 31, 1996, 1995, and 1994, respectively.
9 Regulatory Requirements and Restrictions:
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
C-12
<PAGE>
Notes to Financial Statement, (Continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Ratio Amount Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets) 11.45% $ 17,324,749 8.00% $ 12,100,971 10.00% $ 15,126,213
Tier I Capital
(to Risk-Weighted Assets) 11.18% 16,914,119 4.00% 6,050,485 6.00% 9,075,728
Tier I Capital
(to Average Assets) 9.47% 16,914,119 4.00% 7,142,041 5.00% 8,927,551
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total Capital
(to Risk-Weighted Assets) 10.69% $ 14,594,713 8.00% $ 10,923,476 10.00% $ 13,654,345
Tier I Capital
(to Risk-Weighted Assets) 9.53% 13,007,726 4.00% 5,461,738 6.00% 8,192,607
Tier I Capital
(to Average Assets) 7.90% 13,007,726 4.00% 6,586,162 5.00% 8,232,703
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 Financial Instruments:
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the statement of financial position. The contract
amounts of these instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instruments for commitments to extend credit and stand by
letters of credit is represented by the contractual amount of these instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Unless noted otherwise,
the Bank does not require collateral or other security to support financial
instruments with credit risk. The total contract amount of standby letters of
credit, whose contract amounts represent credit risk was $475,883 and $334,938
at December 31, 1996 and 1995, respectively. Standby letters of credit are
written conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
completely drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counter party. The total amount of unfunded loan commitments
and unused lines of credit were $2,481,580 and $9,042,368, respectively at
December 31, 1996.
The estimated fair values of the Bank's financial instruments at:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 10,132,316 $ 10,132,316 $ 8,705,201 $ 8,705,201
Investment securities-available for sale 14,779,954 14,779,954 13,022,575 13,022,575
Investment securities held to maturity 17,819,803 18,044,627 17,997,758 18.483.489
Federal Home Loan Bank stock 636,700 636,700 625,900 625,900
Loans 130,387,312 130,389,912 119,998,769 119,837,567
Less allowance for loan losses 2,379,503 2,379,503 2,551,449 2,551,449
- ------------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Demand Deposits $ 86,553,754 $ 86,553,754 $ 82,463,172 $ 82,463,172
Time Deposit 71,211,547 70,833,465 64,819,959 64,663,457
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Southside Bank
Balance Sheets
- --------------------------------------------------------------------------------
(dollars in thousands)
September 30, 1997 December 31, 1996
(unaudited)
<S> <C> <C>
Assets
Cash & Cash Equivalents $ 8,320 $ 10,132
Securities available for sale 13,880 14,780
Securities held to maturity 18,218 17,819
Loans, net 138,342 128,007
Deferred Income Taxes 847 836
Premises and Equipment 3,364 3,023
Other Real Estate 9 153
Fed Home & Bankers Bank Stock 728 637
Accrued Interest Receivable 1,309 1,184
Other Assets 728 611
-------- --------
$185,745 $177,182
Liabilities and Stockholders' Equity
Non-interest Checking $ 16,611 $ 15,226
Money Market Accounts 10,718 10,405
NOW Accounts 18,092 18,112
CD's $100M & over 10,213 10,189
CD's under $100M 63,196 61,022
Total Deposits 118,830 114,954
Accrued Interest Payable 450 416
Other Liabilities 1,794 2,165
-------- --------
Total Liabilities $166,725 $160,346
Common $ 5,094 $ 5,092
Surplus 2,096 2,081
Undivided Profit 11,810 9,622
Securities Gain (loss) 20 41
-------- --------
Total stockholders' equity $ 19,020 $ 16,836
Total Liabilities & Stockholders' Equity $185,745 $177,182
</TABLE>
C-14
<PAGE>
Southside Bank
Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands)
nine months ended Sept 30, three months ended Sept 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest Income
Loans $ 9,377 $ 8,453 $ 3,199 $ 2,867
Investment Securities
Treasuries 312 235 110 81
Agencies 335 440 99 156
Municipals 657 689 226 231
Other 105 105 50 42
Federal Funds Sold 229 116 81 20
-------- -------- -------- --------
11,015 10,038 3,765 3,397
Interest Expense
Deposits 4,914 4,481 1,690 1,475
-------- -------- -------- --------
4,914 4,481 1,690 1,475
Net Interest Income 6,101 5,557 2,075 1,922
Provision for Loan Loss 262 228 90 93
-------- -------- -------- --------
Net Int Income After Provision 5,839 5,329 1,985 1,829
Other Income
Serv Charge on Deposit Acct 554 536 190 185
Gain (loss) on Sale of Security (15) (51) 8
Other Operating Income 349 271 116 100
-------- -------- -------- --------
888 756 314 285
Other Expenses
Salaries 1,450 1,270 504 412
Benefits 212 274 71 94
Occupancy 520 484 196 171
Other Operating 1,340 1,261 443 424
-------- -------- -------- --------
3,522 3,289 1,214 1,101
Income Before Taxes 3,205 2,796 1,068 659
Income Taxes 855 684 $ 300 $ 244
-------- -------- -------- --------
Net Income $ 2,350 $ 2,112 $ 768 $ 415
Net income per share $ 2.31 $ 2.08 $ 0.76 $ 0.71
</TABLE>
C-15
<PAGE>
Southside Bank
Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands)
nine months ended September 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,350 $ 2,113
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 373 357
Deferred tax benefit (11) (95)
Provision for loan loss 262 228
Gain (loss) on available for sale securities 15 51
Increase (decrease) in accrued int receivable (125) (100)
Increase in other assets (198) (346)
Increase (decrease) in accrued int payable 35 (53)
Premium amortization of securities 41 56
Discount accretion of securities (52) (18)
Decrease in other liabilities (372) (645)
Total adjustments (32) (565)
Net cash by operating activities 2,318 1,548
Cash flows from investing activities
Net increase (dec) in investment securities 491 (532)
Proceeds from sale of other real estate 173 235
Purchases of Federal Home Loan Bank Stock (91) (11)
Purchases of other real estate
Net increase in loans (10,596) (6,713)
Purchases of bank premises and equipment (714) (99)
Net cash used in investing activities (10,737) (7,120)
Cash flows from financing activities:
Net increase in total deposits 6,716 3,981
Proceeds from sale of stock 53
Repurchases and retirement of stock (234)
Dividends paid (163) (142)
Net cash provided by financing activities 6,606 3,605
Net increase in cash and cash equivalents (1,812) (1,967)
Cash & cash equivalents at beginning of period 10,132 8,705
Cash & cash equivalents at end of period 8,320 6,738
</TABLE>
C-16
<PAGE>
SOUTHSIDE BANK
Notes to Financial Statements
September 30, 1997 and 1996 (unaudited)
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
The information contained in the financial statements is unaudited and does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results of the interim periods
presented have been made. Operating results for the nine month period ended are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1996 Annual
Report to Stockholders. Certain previously reported amounts have been
reclassified to conform to current period presentation.
2. ALLOWANCE FOR LOAN LOSSES
The following summarizes activity in the allowance for loan losses for
the nine months ended September 30, (in thousands):
1997 1996
-------------------------
Balance, January 1 $ 2,380 $ 2,552
Provisions charged to operations 262 228
Recoveries credited to allowance 345 81
Loans charged off (357) (493)
----- -----
Balance, September 30 $ 2,630 $ 2,368
=========================
3. EARNINGS PER SHARE
Earnings per share outstanding has been computed by dividing net income
by the weighted average number of shares outstanding for the period. Weighted
average shares used for the computation were 1,018,587 and 1,019,355 for the
nine months ended September 30, 1997 and 1996.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued FASB No.125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial components approach that focuses on
control of the affected asset or liability that it controls or surrenders. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. SSB is not presently expected to be impacted by this
Statement in the foreseeable future.
In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls, and other secured transactions. The FASB also agreed
to defer for one year paragraph 15 (Secured Borrowings and Collateral) under
FASB No. 125 for all transactions.
In February 1997, the FASB issued FASB No. 128, Earnings Per Share.
FASB No. 128 simplifies the calculation of earnings per share (EPS) and makes it
comparable to international standards. Under FASB No. 128, primary EPS is
replaced
C-17
<PAGE>
with a calculation known as basic EPS. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Fully diluted EPS has not changed
significantly but has been renamed diluted EPS. Under the new rules, income
available to common shareholders should be adjusted for the assumed conversion
of all potentially dilutive securities. The treasury stock method is used to
calculate the dilutive effect of options and warrants. The treasury stock method
is applied using the average market price of SSB's common stock during the
period rather than the higher of the average market price or ending market
price. The dilutive effect of convertible debt of convertible preferred stock
will be calculated using the if-converted method, which assumes conversion at
the beginning of the period of the effect is dilutive. FASB No. 128 is effective
for both interim and annual financial statements for periods ending after
December 15, 1997. Earlier application is not permitted.
In February 1997, the FASB also issued FASB No. 129, Disclosure of
Information about Capital Structure. FASB No. 129 consolidates the existing
guidance from several other pronouncements relating to an entity's capital
structure. Management does not expect the application of this pronouncement to
have a material impact on SSB's financial statements.
During June 1997, the FASB issued FASB No. 130, Reporting Comprehensive
Income. This pronouncement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. FASB No. 130 is effective
for financial statements beginning after December 15, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131,
Disclosures about Segments of an Enterprise and Related Information. FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.
C-18
<PAGE>
Appendix D
December 2, 1997
Board of Directors
Southside Bank
307 Church Lane - P.O. Box 1005
Tappahannock, Virginia 22560
Members of the Board
You have requested our opinion, from a financial point of view, as to
the fairness to Southside Bank, ("SSB") Tappahannock, Virginia and its
shareholders of the terms of the Agreement and Plan of Reorganization
("Agreement"), dated September 26, 1997, between SSB and the Bank of
Northumberland, Inc., ("BNI") Heathsville, Virginia. The terms of the Agreement
provide for an affiliation and merger of SSB, BNI, and Eastern Virginia
Bankshares, Inc., ("EVB"). Following the Reorganization, BNI and SSB each will
continue to carry on its banking business as a wholly-owned subsidiary of EVB in
substantially the same manner as before the Reorganization.
AFSI is a nationally recognized investment banking firm specializing in
the banking and financial services industry. AFSI is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, private placements and valuations for estate, corporate and other
purposes. In the past ten years, AFSI has not provided professional services
and/or products to BNI or SSB in the ordinary course of business. Furthermore,
AFSI does not contemplate any future business with SSB and/or BNI arising from
this engagement, nor has its opinion concerning the fairness, from a financial
point of view, of the terms of the Agreement been subject to indications of
future business with either SSB or BNI.
In connection with its opinion, AFSI reviewed material bearing upon the
financial operating condition of SSB and BNI including, but not limited to: (1)
the audited financial statements of SSB and BNI for the years ending 1994-1996;
(2) the financial statements of SSB and BNI for August 31, 1997; (3)
Consolidated Reports of Condition and Income of SSB and BNI for the years ending
1992-1996 and for June 30, 1997, (4) federal income tax return of SSB and BNI
for the year 1996 (5) certain other public information on SSB and BNI; (6) other
internal financial and operating information which was provided to AFSI by SSB
and BNI; (7) publicly available information concerning certain other banks and
bank holding companies, the trading markets for their securities and the nature
and terms of certain other merger and acquisition transactions believed relevant
to its inquiry; (8) discussed the foregoing as well as other matters relevant to
its inquiry, including the past and current business operations, results of
regulatory examinations, financial condition, current loan quality and trends,
and future prospects of SSB and BNI, both separately and on a combined basis
with certain officers and representatives of SSB and BNI; (9) reviewed the
reported price and trading activity for SSB Common Stock and BNI Common Stock,
compared certain financial and stock market information for SSB and BNI with
similar information for certain other companies the securities of which are
publicly traded; (10) reviewed the financial terms of certain recent business
combinations in the financial institution industry and performed such other
studies and
D-1
<PAGE>
analyses as it considered appropriate; (11) the Agreement; and (12) this Joint
Proxy Statement. AFSI also took into account its assessment of general economic,
market and financial conditions and its experience in other transactions, as
well as its experience in securities valuation and its knowledge of the banking
industry generally. AFSI's opinion was necessarily based upon conditions as they
existed and could be evaluated on the date of the opinion and the information
made available to AFSI through that date.
AFSI relied upon and assumed without independent verification the
accuracy and completeness of all of the financial and other information provided
to it by SSB and BNI or from public sources. AFSI has not made an independent
evaluation of the assets of SSB or BNI, but has relied upon the books and
records of SSB, BNI and the audited financial statements as presented to AFSI as
the valuators of the fair value of SSB. In addition, AFSI did not independently
verify and relied on and assumed that the aggregate allowances for loan losses
set forth in the balance sheet of each of SSB and BNI at August 31, 1997, were
adequate to cover such losses and complied fully with applicable law, regulatory
policy and sound banking practice as of the date of such financial statements.
Furthermore, AFSI did not independently verify the carrying values of other real
estate owned and loans classified as in-substance foreclosures of each of SSB
and BNI in their respective August 31, 1997, balance sheets and AFSI assumed
that such carrying values complied fully with applicable law, regulatory policy
and sound banking practice as of such date. AFSI was not retained to and did not
conduct a physical inspection of any of the properties or facilities of SSB or
BNI, nor did AFSI make any independent evaluation or appraisal of the assets,
liabilities or prospects of SSB or BNI, was not furnished with any such
evaluation or appraisal, and did not review any individual credit files. AFSI
also assumed that the Agreement is, and will be, in compliance with all laws and
regulations that are applicable to SSB and BNI.
In its analyses, AFSI made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of SSB and BNI. Any estimates contained in
AFSI's analyses are not necessarily indicative of future results or value, which
may be significantly more or less favorable than such estimates. AFSI's
estimates of values of companies do not purport to be appraisals or necessarily
reflect the price at which companies or their securities actually may be sold.
No company or transaction utilized in AFSI's analyses was identical to SSB or
BNI or the Agreement. Accordingly, such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments by AFSI concerning differences in financial and operating
characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that could
affect the public trading markets of the company or companies to which they are
being compared. None of the analyses performed by AFSI was assigned a greater
significance by AFSI than any other.
The following is a brief description of the analyses performed by AFSI
in connection with its opinion as described to SSB's board of directors by AFSI:
The terms of the Agreement between SSB, BNI, and EVB provide that each
share of SSB and BNI common stock will be exchanged for EVB common stock under
the exchange ratio described in the Agreement. Under the terms of the Agreement,
each share of common stock of BNI outstanding
D-2
<PAGE>
immediately prior to consummation of the Reorganization will be exchanged for
1.0000 share of EVB Common Stock. In addition, each share of common stock of SSB
outstanding immediately prior to consummation of the Reorganization will be
exchanged for 2.5984 shares of EVB Common Stock. Following the Reorganization,
BNI and SSB each will continue to carry on its banking business as a
wholly-owned subsidiary of EVB in substantially the same manner as before the
Reorganization.
Using a discounted cash flow analysis, AFSI projected SSB's cash flow
from June 30, 1997, through June 30, 2002, assuming a minimum equity capital to
asset ratio of 6.00%. AFSI also estimated the residual value of SSB's common
equity as of June 30, 2002. The steps involved in determining the discounted
cash flow value of SSB included the following: (1) the projected earnings in
excess over the amount necessary to maintain a 6.00% equity capital to asset
ratio were added to book charges such as deprecation less any projected capital
expenditures in order to determine future cash flows; (2) the future cash flows
were then converted to a present value equivalent using a discount rate of
17.96%, which was determined from the use of the Capital Asset Pricing Model
("CAPM"); (3) the residual value was then calculated by dividing the projected
cash flows for the year 2002 by the capitalization rate. The capitalization rate
not only includes all aspects of the CAPM but also reflects the long-term income
growth prospects of SSB, as well as specific company risk factors, (4) the
present value equivalent of the projected residual value was calculated using
the 17.96% discount rate; and (5) the present value of the cash flows and the
residual value were added together. The present value per fully diluted share of
SSB Common Stock resulting from this analysis was $31.84. Using the same
approach for BNI resulted in a per fully diluted share of BNI Common Stock of
$12.76.
Based on these values, the resulting exchange ratio of each share of
common stock of SSB outstanding would be for 2.5666 shares of EVB Common Stock.
Correspondingly, the resulting exchange ratio of each share of common stock of
BNI outstanding would be for 1.0000 share of EVB Common Stock. Therefore, the
exchange terms of the Agreement provide an additional 0.032 shares of EVB stock
for each share of SSB stock in comparison to the exchange ratio based on the
values of SSB and BNI determined by AFSI.
AFSI analyzed certain other mergers and acquisitions that have
consummated over the past twelve months in Virginia as well as other nearby
states (including the states of Maryland, North Carolina, South Carolina,
Kentucky, and West Virginia) involving financial institutions with assets
between $200 million and $600 million. AFSI compared the multiples produced by
this Reorganization to the median multiples for the transactions analyzed. Set
forth below are the median transaction multiples.
Selected Bank SSB BNI
Acquisitions
Price/Earnings Multiple 24.32 10.54 11.47
Price/Book Value 172.91% 182.30% 165.63%
The financial institution acquisition transactions announced for the
six-state area during the past twelve months included in the above multiples
are:
D-3
<PAGE>
<TABLE>
<CAPTION>
State of State of
Buyer Target Buyer Target Bank/Thrift
----- ------ ----- ------ -----------
<S> <C> <C> <C>
WV WV WesBanco, Inc. Commercial Bancshares Bank
SC SC Carolina First Corp. First Southeast Financial Thrift
VA MD Crestar Financial American Nat'l Bancorp Thrift
NC NC Triangle Bancorp Bank of Mecklenburg Bank
PA MD Keystone Financial First Financial Corp. West. MD Thrift
</TABLE>
AFSI's analysis showed that the range of implied valuations of SSB,
applying the median transaction multiples described above to SSB's earnings and
book value was $68.34 to $31.06 per share. Furthermore, AFSI's analysis showed
that the range of implied valuations of BNI, applying the median transaction
multiples described above to BNI's earnings and book value was $25.54 to $13.31
per share. The results produced in this analysis do not purport to be indicative
of actual values or expected values of SSB and BNI or shares of SSB and BNI
Common Stock.
AFSI also examined the operation and trading performance of SSB and BNI
in comparison to selected publicly-traded bank/bank holding companies located in
Virginia with total assets between $200 million and $600 million. The group of
companies included:
Union Bankshares Corporation
American National Bankshares Inc.
James River Bankshares, Inc.
Southern Financial Bancorp, Inc.
FNB Corporation
National Bankshares, Inc.
C&F Financial Corporation
AFSI analyzed the relative performance and outlook for SSB and BNI by
comparing certain financial and trading market information of SSB and BNI with
the group of comparable banks. AFSI compared SSB and BNI with the comparable
banks based upon selected operating statistics, including capitalization,
profitability and credit quality. Using data at, or for the 12 months ended,
June 30, 1997, the multiple of median market price to latest 12 months earnings
was 16.54 for the comparable banks. The median price to stated book value was
172.64 percent for the comparable banks. The implied market trading values for
SSB derived from such comparable company analysis utilizing the resulting median
valuation ratios ranged from approximately $46.46 to $31.01 per share. The
implied market trading values for BNI derived from such comparable company
analysis utilizing the resulting median valuation ratios ranged from
approximately $17.36 to $13.29 per share.
SSB and AFSI have entered into an arrangement relating to the services
to be provided by AFSI in connection with the Agreement. SSB has agreed to pay
AFSI on an hourly basis for its services which as of August 31, 1997, totaled
$25,514. In regards to AFSI's services in determining an opinion as to the
fairness, from a financial point of view, of the terms of the Agreement, the
cost is a contractual $10,000, plus out-of-pocket expenses. In addition, SSB
also has agreed to indemnify AFSI and its officers, directors, shareholders,
employees and agents for all of its time, expenses, and any liability incurred
as a result of AFSI's proposed engagement by means of legal action,
administrative proceedings or threat thereof, unless such action, pending or
D-4
<PAGE>
threat thereof is caused by AFSI's own unlawful conduct, breach of duty or
negligence during the course of performing AFSI's services.
AFSI, in rendering its opinion, has assumed that the transaction will
be a tax-free reorganization with no material adverse tax consequences to any of
the parties involved, or to SSB shareholders receiving holding company stock of
EVB. In addition, AFSI has assumed that in the course of obtaining the necessary
regulatory approvals for the transaction, no condition will be imposed upon SSB
or BNI that will have a materially adverse impact on the contemplated benefits
of the proposed transaction to SSB and BNI and their shareholders.
Based upon AFSI's analysis and subject to the qualifications described
herein, considering all circumstances known to us and based upon other matters
considered relevant, AFSI believes that as of the date of this letter, the terms
of the Agreement from a financial point of view are fair to SSB and its
shareholders.
AFSI hereby consents to the reference to our firm in the proxy
statement or prospectus related to the merger transaction and to the inclusion
of our opinion as an exhibit to the proxy statement or prospectus related to the
merger transaction.
On behalf of Austin Financial Services, Inc.
/s/ Dr. Douglas V. Austin
- -------------------------
Dr. Douglas V. Austin
President and CEO
D-5
<PAGE>
Appendix E
INDEX
PAGE
----
AUDITED FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT AUDITORS E-2
FINANCIAL STATEMENTS:
BALANCE SHEETS AS DECEMBER 31, 1996 AND 1995 E-3
STATEMENTS OF INCOME FOR EACH OF THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 E-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR EACH
OF THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 E-5
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 E-6 - E-7
NOTES TO FINANCIAL STATEMENTS E-8 - E-19
UNAUDITED INTERIM FINANCIAL STATEMENTS:
BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 E-20
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 E-21
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 E-22
NOTES TO INTERIM FINANCIAL STATEMENTS E-23
E-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Bank of Northumberland, Inc.
We have audited the accompanying balance sheets of Bank of
Northumberland, Inc. (the "Bank") as of December 31, 1996 and 1995, and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of Bank of
Northumberland, Inc., as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ GOODMAN & COMPANY, L.L.P.
7301 Forest Avenue
Richmond, Virginia
January 15, 1997
E-2
<PAGE>
BANK OF NORTHUMBERLAND, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,994,235 $ 3,521,358
Federal funds sold 490,000 2,930,000
Securities available-for-sale (amortized cost of
$28,240,205 and $23,221,190, respectively) 28,025,713 23,253,781
Securities held-to-maturity (fair value of
$22,093,903 and $19,186,822, respectively) 21,666,388 18,432,687
Loans receivable, net 74,695,951 71,621,104
Accrued interest receivable 1,218,544 1,160,712
Bank premises and equipment 581,100 670,059
Deferred income taxes 485,553 399,366
Income taxes receivable 128,121 39,185
Other assets 260,099 253,911
-----------------------------------------
$ 131,545,704 $ 122,282,163
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits $ 10,127,768 $ 8,586,322
Interest bearing demand deposits 29,687,521 27,286,132
Savings 12,543,567 11,847,468
Time deposits 59,737,502 56,615,040
-----------------------------------------
Total deposits 112,096,358 104,334,962
Accrued interest payable 330,537 323,810
Other liabilities 498,292 495,929
-----------------------------------------
Total liabilities 112,925,187 105,154,701
-----------------------------------------
Shareholders' equity
Common stock, $1 par value, 5,000,000 shares
authorized; 2,541,920 shares issued and
outstanding in 1996 and 1995 2,541,920 2,541,920
Capital surplus 865,420 865,420
Undivided profits 15,354,742 13,698,612
Net unrealized appreciation (depreciation)
on available-for-sale securities (141,565) 21,510
-----------------------------------------
Total shareholders' equity 18,620,517 17,127,462
-----------------------------------------
$ 131,545,704 $ 122,282,163
-----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-3
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 6,664,004 $ 6,451,537 $ 5,779,352
Interest on federal funds sold 177,537 224,165 158,260
Interest on investment securities:
Available-for-sale 1,513,475 1,298,295 958,042
Held-to-maturity 1,142,937 1,019,809 1,339,884
-----------------------------------------------------
Total interest income 9,497,953 8,993,806 8,235,538
-----------------------------------------------------
Interest expense
Savings 596,692 658,782 598,274
Interest bearing demand deposits 823,271 999,481 943,556
Certificates of deposit, $100,000 or more 213,373 180,894 135,343
Other time deposits 2,699,085 2,513,001 1,910,715
-----------------------------------------------------
Total interest expense 4,332,421 4,352,158 3,587,888
-----------------------------------------------------
Net interest income 5,165,532 4,641,648 4,647,650
Provision for loan losses (92,186) (251,473) (316,064)
-----------------------------------------------------
Net interest income after provision for loan losses 5,073,346 4,390,175 4,331,586
---------------------------------------------------
Noninterest income
Service charges on deposit accounts 215,997 208,055 209,855
Other service charges and fees 140,694 132,645 145,917
Net investment securities gains (losses) 4,079 (9,127) 32,838
Other income 74,495 85,524 56,710
-----------------------------------------------------
Total noninterest income 435,265 417,097 445,320
-----------------------------------------------------
Noninterest expenses
Salaries and employee benefits 1,177,403 1,112,872 1,103,832
Occupancy expenses 301,078 334,088 253,806
Other expenses 787,281 832,059 867,382
-----------------------------------------------------
Total noninterest expenses 2,265,762 2,279,019 2,225,020
-----------------------------------------------------
Income before income taxes 3,242,849 2,528,253 2,551,886
Income tax expense (747,885) (542,129) (524,090)
-----------------------------------------------------
Net income $ 2,494,964 $ 1,986,124 $ 2,027,796
-----------------------------------------------------
Earnings per common share $ 0.98 $ 0.78 $ 0.80
-----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-4
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
Common Capital Undivided on Available-for-
Stock Surplus Profits Sale Securities Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1993 $ 2,541,920 $ 865,420 $ 10,803,137 $ - $ 14,210,477
Adjustment of beginning balance
for change in accounting method
- net unrealized appreciation on
available-for-sale securities, net
of applicable deferred income
taxes of $65,000 - - - 106,000 106,000
Net income - 1994 - - 2,027,796 - 2,027,796
Cash dividends paid - $.21 per share - - (533,803) - (533,803)
Net unrealized depreciation on
available-for-sale securities,
net of applicable deferred
income taxes of $422,373 - - - (819,133) (819,133)
------------------------------------------------------------------------------
Balance
December 31, 1994 2,541,920 865,420 12,297,130 (713,133) 14,991,337
Net income - 1995 - - 1,986,124 - 1,986,124
Cash dividends paid - $.23 per share - - (584,642) - (584,642)
Net unrealized appreciation on
available-for-sale securities,
net of applicable deferred
income taxes of $378,453 - - - 734,643 734,643
------------------------------------------------------------------------------
Balance
December 31, 1995 2,541,920 865,420 13,698,612 21,510 17,127,462
Net income - 1996 - - 2,494,964 - 2,494,964
Cash dividends paid - $.33 per share - - (838,834) - (838,834)
Net unrealized depreciation on
available-for-sale securities,
net of applicable deferred
income taxes of $84,008 - - - (163,075) (163,075)
------------------------------------------------------------------------------
Balance
December 31, 1996 $ 2,541,920 $ 865,420 $ 15,354,742 $ (141,565) $ 18,620,517
------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-5
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received from:
Loans and leases $ 6,693,247 $ 6,352,485 $ 5,761,755
Securities available-for-sale 1,452,984 1,251,630 910,419
Securities held-to-maturity 1,112,505 1,029,437 1,392,485
Federal funds sold 177,537 224,165 158,260
Interest paid:
Depositors (4,325,694) (4,274,595) (3,579,536)
Income taxes paid (839,000) (507,396) (703,351)
Noninterest income received 407,086 387,542 445,320
Cash paid to suppliers and employees (2,113,855) (2,031,948) (2,091,678)
-------------------------------------------------------------
Net cash provided by operating activities 2,564,810 2,431,320 2,293,674
-------------------------------------------------------------
Cash flows from investing activities
Securities available-for-sale:
Proceeds from maturities 6,265,000 4,050,000 4,450,000
Proceed from sales 1,580,686 4,758,785 1,059,383
Purchases (12,860,816) (8,624,146) (2,790,261)
Securities held-to-maturity:
Proceeds from maturities and redemption 1,915,161 2,979,265 1,998,500
Purchases (5,153,735) (5,509,828) (4,692,595)
Net increase in customer loans (3,210,033) (3,559,733) (2,698,880)
Proceeds from sale of bank premises, and equipment 100 750 -
Proceeds from sales of foreclosed real estate 84,000 244,682 -
Capital expenditures (51,670) (196,437) (230,824)
Increase in other assets (23,188) (28,272) (32,163)
-------------------------------------------------------------
Net cash used in investing activities (11,454,495) (5,884,934) (2,936,840)
-------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in demand deposit accounts, interest
bearing demand deposit accounts and savings accounts 4,638,934 (3,937,477) 198,839
Net increase in time deposits 3,122,462 5,396,895 933,661
Dividends paid (838,834) (584,642) (533,803)
-------------------------------------------------------------
Net cash provided by financing activities 6,922,562 874,776 598,697
-------------------------------------------------------------
Net decrease in cash and cash equivalents (1,967,123) (2,578,838) (44,469)
Cash and federal funds sold, beginning of year 6,451,358 9,030,196 9,074,665
-------------------------------------------------------------
Cash and federal funds sold, end of year $ 4,484,235 $ 6,451,358 $ 9,030,196
-------------------------------------------------------------
</TABLE>
(Continued on next page)
E-6
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities
Net income $ 2,494,964 $ 1,986,124 $ 2,027,796
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss from equity investment in partnership 8,915 7,874 0
Depreciation 140,629 154,687 108,937
Provision for loan losses 92,186 251,473 316,064
Accretion of discounts and amortization of premiums, net (3,848) (18,772) (17,007)
Deferred taxes (2,179) (50,185) (53,807)
Net loss (gain) on sale of investment securities (4,079) 9,127 (32,838)
Net gain on sale of bank premises and equipment (100) (750) -
Gain on sales of foreclosed real estate (24,000) (37,932) -
Changes in:
Interest receivable (57,832) (117,318) 4,388
Income taxes receivable (88,936) 84,918 (124,103)
Accrued interest payable 6,727 77,563 8,352
Other liabilities 2,363 84,511 57,243
Income taxes payable - - (1,351)
------------------------------------------------------------
Net cash provided by operating activities $ 2,564,810 $ 2,431,320 $ 2,293,674
------------------------------------------------------------
</TABLE>
Supplemental disclosures of noncash financing activities
Transfers from loans to foreclosed real estate amounted to $43,000, $60,000
and $201,750 during 1996, 1995 and 1994, respectively.
The accompanying notes are an integral part of these financial statements.
E-7
<PAGE>
BANK OF NORTHUMBERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - ORGANIZATION
Bank of Northumberland, Inc. (the "Bank") was organized under the laws
of the Commonwealth of Virginia in 1910 and has operated under its original name
since its inception. The Bank, headquartered in Heathsville, Virginia, is a
state-chartered bank and a member of the Federal Reserve System. The deposits of
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC")
to the extent and subject to the limitations set forth in the Federal Deposit
Insurance Act, as amended.
The Bank is a full-service bank conducting a general commercial and
consumer banking business with its customers located throughout the Northern
Neck area of Virginia and is the bank of choice for the residents of
Northumberland County. The Bank maintains three branches which are located in
Northumberland County. Its principal banking activities include receiving
demand, savings and time deposits for personal and commercial accounts; making
commercial, agricultural, real estate and consumer loans; acting as a United
States tax depository facility; providing money transfer and cash management
services; selling traveler's checks, bank money orders; issuing letters of
credit; and investing in U.S. Treasury securities and securities of other U.S.
government agencies and corporations, state and municipal securities, and
mortgage-backed and other securities.
The earnings of the Bank are affected not only by the general economic
conditions of the Northern Neck area of Virginia, but also by the monetary and
fiscal policies of the United States and its agencies, particularly the Federal
Reserve System. The monetary policies of the Federal Reserve System influence to
a significant extent the overall growth of loans, investments, policies,
interest rates charged on loans and interest rates paid on deposits. The nature
and impact of future changes in monetary policies are often not predictable.
Flexibility is a key attribute in successfully responding to these varied
forces.
The financial services industry in the Northern Neck is highly
competitive. Bank of Northumberland competes with local financial institutions
as well as larger Virginia financial institutions. These financial institutions
include not only banks and savings associations, but also insurance companies,
brokerage houses, mortgage companies, merchandise retailers, consumer finance
companies, credit unions and diversified financial services companies that
provide many or all of the services offered by commercial banks and savings
institutions but operate without a banking charter. Therefore, these other
financial institutions are free of most of the associated regulatory
requirements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to predominant practices within the banking
industry.
Securities
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held-to-maturity" and
reflected at amortized cost. Investments that are purchased and held principally
for the purpose of selling them in the near term, if any, are classified as
"trading securities" and reflected at fair value, with unrealized gains and
losses included in earnings. Investments not classified as either of the above
are classified as "available-for-sale" and reflected at fair value, with
unrealized gains and losses excluded from operations and reported as a separate
component of shareholders' equity. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity on
held-to-maturity and available-for-sale securities. Other-than-temporary
declines in the fair value of individual held-to-maturity and available-for-sale
securities, if any, result in write-downs of the individual securities to fair
value that are charged against earnings. Gains and losses on the sale of
investment securities are recorded on the trade date and are determined using
the specific-identification method.
On October 18, 1995, the Financial Accounting Standards Board ("FASB")
announced that a one-time reassessment may be allowed in which an enterprise may
reassess the appropriateness of the classifications of all securities held at
that time. The FASB noted in this meeting that any reclassifications made as a
result of this one-time reassessment should occur no later than December 31,
1995. Accordingly, and in conjunction with this one-time reassessment, the Bank
elected to transfer on December 15, 1995, held-to-maturity securities with an
amortized cost basis of $3,744,841, and gross unrealized gains of $58,094 and
gross unrealized losses of $51,941 to the available-for-sale classification.
Loans Receivable
Loans receivable for which management has the intent and ability to
hold for the foreseeable future, or until maturity or payoff, are reported at
their principal amounts outstanding. Such principal amounts outstanding are
adjusted for any charge-offs, the allowance for loan losses, unearned discounts,
any deferred fees or costs on originated loans. Unearned discount on installment
loans is recognized as income over the terms of the loans by a method which
generally results in level rates of return on principal amounts outstanding.
Interest on other loans is credited to operations based on the principal amount
outstanding. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
(Notes continued on next page)
E-8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb any losses on existing loans
which may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans, while taking into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions which may affect a
borrower's ability to repay, overall portfolio quality, and review of specific
potential losses. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal balance is
unlikely. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments of information available to them at the
time of their examination.
The Bank adopted FASB Statement No. 114 ("FASB 114"), Accounting by
Creditors for Impairment of a Loan, as amended by FASB 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures, on
January 1, 1995. Under the new standard, a loan is considered impaired, based on
current information and events, if it is probable that the Bank will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. The adoption
of FASB 114, as amended by FASB 118 did not result in an additional provision
for loan losses.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation computed using straight line or accelerated methods over the
estimated useful lives of the assets. Estimated useful lives range from 15 to 33
years for buildings and from 4 to 20 years for equipment, furniture and
fixtures. Maintenance and repairs are charged to expense as incurred and major
improvements are capitalized. Upon sale or retirement of depreciable properties,
the cost and related accumulated depreciation are netted against proceeds and
any resulting gain or loss is reflected in income.
Other Real Estate Owned
Other real estate owned includes property acquired through foreclosure
or the acceptance of a deed in lieu of foreclosure and is included in other
assets. Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management, and these properties are carried at the lower of cost or fair value
less estimated costs to sell. Losses from the acquisition of property in
satisfaction of debt are treated as credit losses. Routine holding costs are
included in other expenses.
Pension Costs
Pension costs are charged to salaries and employee benefits as accrued.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due and
deferred taxes related primarily to differences between the basis of
available-for-sale securities, deferred loan fees, allowance for loan losses and
accrued pension expense for financial and income tax reporting.
(Notes continued on next page)
E-9
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
payable.
Use of Accounting Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
Earnings Per Common Share
Earnings per common share are based on the weighted average number of
shares outstanding during the year. The weighted average number of shares
outstanding during 1996, 1995 and 1994 were 2,541,920 as retroactively adjusted
by the 1994 stock split in the form of a dividend.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Bank considers federal
funds sold to be cash equivalents. The Bank is required to maintain reserves
with the Federal Reserve Bank of Richmond. The average reserves required for
1996 and 1995 were $571,000 and $497,000, respectively
Reclassifications
Certain reclassifications have been made to prior year amounts for
comparative purposes. These amounts do not affect net income or cash flows.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
are summarized as follows:
Available-for-sale
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,105,315 $ 21,772 $ (12,527) $ 5,114,560
U.S. Government agencies
and corporations 15,234,245 27,451 (143,359) 15,118,337
Obligations of states and
political subdivisions 410,549 1,702 (3,104) 409,147
Mortgage-backed securities 7,044,259 5,499 (111,926) 6,937,832
Other securities 445,837 - - 445,837
----------------- ----------------- ------------------ ------------------
$ 28,240,205 $ 56,424 $ (270,916) $ 28,025,713
----------------- ----------------- ------------------ ------------------
</TABLE>
(Notes continued on next page)
E-10
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (continued)
Held-to-maturity
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Government agencies
and corporations $ 200,000 $ - $ (1,125) $ 198,875
Obligations of states and
political subdivisions 21,466,388 507,738 (79,098) 21,895,028
----------------- ----------------- ------------------ ------------------
$ 21,666,388 $ 507,738 $ (80,223) $ 22,093,903
----------------- ----------------- ------------------ ------------------
</TABLE>
Available-for-sale
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 4,591,964 $ 56,664 $ (347) $ 4,648,281
U.S. Government agencies
and corporations 12,912,064 118,440 (104,648) 12,925,856
Obligations of states and
political subdivisions 203,940 6,280 - 210,220
Mortgage-backed securities 5,175,345 26,965 (74,263) 5,128,047
Other securities 337,877 3,500 - 341,377
----------------- ----------------- ------------------ ------------------
$ 23,221,190 $ 211,849 $ (179,258) $ 23,253,781
----------------- ----------------- ------------------ ------------------
</TABLE>
Held-to-maturity
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 18,182,293 $ 769,276 $ (14,722) $ 18,936,847
Other securities 250,394 - (419) 249,975
----------------- ----------------- ------------------ ------------------
$ 18,432,687 $ 769,276 $ (15,141) $ 19,186,822
----------------- ----------------- ------------------ ------------------
</TABLE>
Available-for-sale
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,937,644 $ 1,177 $ (134,447) $ 5,804,374
U.S. Government agencies
and corporations 5,988,088 - (571,795) 5,416,293
Obligations of states and
political subdivisions - - - -
Mortgage-backed securities 4,453,672 - (360,441) 4,093,231
Other securities 296,725 - (15,000) 281,725
----------------- ----------------- ------------------ ------------------
$ 16,676,129 $ 1,177 $ (1,081,683) $ 15,595,623
----------------- ----------------- ------------------ ------------------
</TABLE>
(Notes continued on next page)
E-11
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (continued)
Held-to-maturity
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,342,614 $ - $ (14,660) $ 1,327,954
U.S. Government agencies
and corporations 3,893,392 2,080 (171,323) 3,724,149
Obligations of states and
political subdivisions 17,142,827 378,838 (262,827) 17,258,838
Other securities 251,221 - (10,321) 240,900
----------------- ----------------- ------------------ ------------------
$ 22,630,054 $ 380,918 $ (459,131) $ 22,551,841
----------------- ----------------- ------------------ ------------------
</TABLE>
The amortized cost and fair value of investment securities
held-to-maturity and those which are available-for-sale at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to-Maturity Securities Available-for-Sale Securities
------------------------------------ -------------------------------------
Estimated Estimated
Amortized Market Value Amortized Cost Market Value
Cost
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,050,971 $ 1,058,064 $ 3,000,893 $ 3,008,997
Due after one year through
five years 7,606,016 7,732,118 16,088,640 15,973,142
Due after five years through
ten years 11,717,214 11,999,140 1,760,576 1,759,905
Due after ten years 1,292,187 1,304,581 345,837 345,837
----------------- ----------------- ------------------ ------------------
21,666,388 22,093,903 21,195,946 21,087,881
Mortgage-backed securities - - 7,044,259 6,937,832
----------------- ----------------- ------------------ ------------------
$ 21,666,388 $ 22,093,903 $ 28,240,205 $ 28,025,713
----------------- ----------------- ------------------ ------------------
</TABLE>
Gross realized gains and gross realized losses on sales of investment
securities were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- -----------------
<S> <C> <C> <C>
Gross realized gains on held-to-maturity securities
resulting from early call by municipalities $ 3,095 $ - $ 1,256
Gross realized gains on available-for-sale
securities 5,098 58,794 34,194
Gross realized losses on available-for-sale
securities (4,114) (67,921) (2,612)
------------------ ----------------- -----------------
$ 4,079 $ (9,127) $ 32,838
------------------ ----------------- -----------------
</TABLE>
The Bank held no trading securities as of December 31, 1996, 1995 and
1994. Investment securities with an aggregate carrying value of $2,495,481,
$3,988,799 and $2,717,284 were pledged as security for public deposits at
December 31, 1996, 1995 and 1994, respectively. The Bank did not hold investment
securities of any single issuer (other than the U.S. Government and its
agencies) that were in excess of 10% of shareholders' equity at December 31,
1996. At December 31, 1996, collateralized mortgage obligations amounting to
$1,387,327 in available-for-sale securities were comprised of FHLMC and FNMA
real estate mortgage investment conduits with an estimated average life of 10.2
years.
(Notes continued on next page)
E-12
<PAGE>
NOTE 4 - LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Commercial $ 18,864,343 $ 18,595,270
Real estate construction 1,596,044 867,752
Commercial real estate 5,243,650 5,389,548
Residential real estate 43,132,298 41,877,541
Installment 7,826,641 6,744,260
------------------ ------------------
76,662,976 73,474,371
Deduct:
Unearned discount (703,775) (590,017)
Allowance for loan losses (1,263,250) (1,263,250)
------------------ ------------------
$ 74,695,951 $ 71,621,104
------------------ ------------------
</TABLE>
At December 31, 1996, 1995 and 1994, nonaccrual loans aggregated
$370,843, $429,221 and $364,297 respectively. The amount of interest income on
these loans that would have been recognized for 1996, 1995 and 1994 is $30,424,
$64,725 and $27,349, respectively. No interest income was recognized on these
loans in 1996, 1995 and 1994.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Balance at the beginning of year $ 1,263,250 $ 1,163,250 $ 983,250
Provision charged to operations 92,186 251,473 316,064
Loans charged off (179,001) (200,305) (201,487)
Recoveries of loan previously charged off 86,815 48,832 65,423
------------------ ------------------ -----------------
$ 1,263,250 $ 1,263,250 $ 1,163,250
------------------ ------------------ -----------------
</TABLE>
At December 31, 1996, the recorded investment in nonhomogeneous loans
for which impairment has been recognized in accordance with FASB 114 totaled
$82,280, of which $61,052 related to loans with no valuation allowance, because
the loans have been partially written down through charge-offs, and $21,228
related to a loan with a corresponding valuation allowance of $21,228. For the
year ended December 31, 1996, the average recorded investment in impaired loans
was approximately $210,790. No interest income was recognized on impaired loans
during the portion of the year that they were impaired.
At December 31, 1995, the recorded investment in nonhomogeneous loans
for which impairment has been recognized totaled $339,301, of which $99,598
related to loans with no valuation allowance, because the loans had been
partially written down through charge-offs, and $239,703 related to a loan with
a corresponding valuation allowance of $180,000. In 1995, the average recorded
investment in impaired loans was approximately $339,000. No interest income was
recognized in 1995 for these loans during the period of their impairment.
NOTE 6 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
Land $ 227,328 $ 227,327
Buildings 868,441 854,181
Equipment, furniture and fixtures 1,095,897 1,060,524
------------------ -----------------
2,191,666 2,142,032
Less- accumulated depreciation (1,610,566) (1,471,973)
------------------ -----------------
$ 581,100 $ 670,059
------------------ -----------------
</TABLE>
Occupancy expense includes depreciation expense in the amounts of
$140,629, $154,087 and $108,937 for 1996, 1995 and 1994, respectively.
(Notes continued on next page)
E-13
<PAGE>
NOTE 7 - TIME DEPOSITS
Time deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
Certificates of deposit, $100,000 or more $ 7,729,024 $ 5,297,111
Other time deposits 52,008,478 51,317,929
------------------ -----------------
$ 59,737,502 $ 56,615,040
------------------ -----------------
</TABLE>
Time deposits mature as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Within three months $ 15,311,305 $ 14,267,805
Three to twelve months 27,002,938 22,988,087
One to five years 17,423,259 19,359,148
------------------ -----------------
$ 59,737,502 $ 56,615,040
------------------ -----------------
</TABLE>
NOTE 8 - INCOME TAXES
Principal components of income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal - current $ 750,065 $ 582,817 $ 577,897
Federal - deferred (2,180) (40,688) (53,807)
------------------ ------------------ -----------------
$ 747,885 $ 542,129 $ 524,090
------------------ ------------------ -----------------
</TABLE>
The income tax provision is less than the amount obtained by
application of the statutory federal corporate rate to pretax accounting income
as a result of the following items:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Income tax computed at federal statutory rates $ 1,102,568 $ 859,606 $ 867,642
Tax effects of:
Exclusion of interest income on obligations of
states and political subdivisions (343,220) -299,189 -335,554
Interest income on tax-exempt loans - (3,521) (3,969)
Officers' life insurance (2,334) (1,448) (1,084)
Other (9,129) (13,841) (3,482)
Environmental tax - 522 537
------------------ ------------------ -----------------
$ 747,885 $ 542,129 $ 524,090
------------------ ------------------ -----------------
</TABLE>
Amounts of deferred tax benefit (expense) attributable to temporary
differences are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Loan loss provision $ - $ 34,000 $ 61,093
Pension expense (4,438) 3,657 (8,078)
Deferred loan fees 2,213 2,470 (1,474)
Depreciation - - 993
Nonaccrual interest income 4,405 561 1,273
------------------ ------------------ -----------------
$ 2,180 $ 40,688 $ 53,807
------------------ ------------------ -----------------
</TABLE>
(Notes continued on next page)
E-14
<PAGE>
NOTE 8 - INCOME TAXES (continued)
The Bank has the following deferred tax assets and liabilities at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Deferred tax assets:
Unrealized depreciation in securities available-for-sale $ 72,927 $ -
Loans 340,796 340,796
Pension liability 51,412 55,850
Deferred loan fees 4,683 2,470
Nonaccrual interest receivable 15,735 11,331
------------------ -----------------
485,553 410,447
------------------ -----------------
Deferred tax liabilities -
Unrealized appreciation in securities
available-for-sale - (11,081)
------------------ -----------------
$ 485,553 $ 399,366
------------------ -----------------
</TABLE>
Income tax returns subsequent to 1992 are subject to examination by
taxing authorities.
NOTE 9 - PENSION
The Bank has a non-contributory, defined benefit pension plan for all
full-time employees over 21 years of age. Benefits are based upon years of
service (up to 40 years) and average compensation for the 5 highest consecutive
years during the last 10 years of services.
The following table sets forth the plan's funded status and amounts
recognized in the balance sheet, as of December 31, 1996 and 1995, computed as
of October 1:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Vested benefit obligation $ (506,232) $ (467,881)
------------------ -----------------
Accumulated benefit obligation $ (511,564) $ (468,407)
------------------ -----------------
Projected benefit obligation $ (956,508) $ (891,483)
Plan assets at fair value, primarily listed
stocks and U.S. Bonds 837,747 754,674
------------------ -----------------
Funded status (118,761) (136,809)
Unrecognized net obligation being amortized
over 24 years in 1996 and 1995 (5,835) (6,224)
Unrecognized net gain (167,571) (162,823)
Unrecognized prior service cost 68,175 72,720
------------------ -----------------
Accrued pension cost $ (223,992) $ (233,136)
------------------ -----------------
</TABLE>
During 1996, contributions to the Plan in the amount of $77,137 and
$73,227 were made for the plan years ending September 30, 1997 and 1996,
respectively. In 1994, contributions to the Plan in the amount of $90,115 were
made for the plan year ending September 30, 1995. No contributions were made to
the Plan during 1995. These contributions reduced accrued pension cost to
$146,855 at December 31, 1996. Accrued pension cost at December 31, 1995 was
$233,136. Accrued pension cost is included in other liabilities.
Net pension cost for 1996. 1995 and 1994 include the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 64,479 $ 65,716 $ 60,964
Interest cost on projected benefit obligations 66,784 60,276 52,129
Actual return on plan assets (11,911) (109,806) (9,959)
Expected (return) loss during the year (55,917) 59,785 (39,351)
Net amortization 648 4,156 2,574
------------------ ------------------ -----------------
Net pension cost for the year $ 64,083 $ 80,127 $ 66,357
------------------ ------------------ -----------------
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 6.0%, respectively. The expected long-term rate of
return on plan assets was 9.0%.
(Notes continued on next page)
E-15
<PAGE>
NOTE 10 - OTHER EXPENSES
For the years ended December 31, 1996, 1995 and 1994, other expenses
included the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Data processing services $ 183,679 $ 180,120 $ 176,258
Stationery, printing and supplies 153,204 145,909 121,674
Taxes other than income 149,554 160,482 128,838
FDIC premiums 2,000 116,927 221,933
Other 298,844 228,621 218,679
------------------ ------------------ -----------------
$ 787,281 $ 832,059 $ 867,382
------------------ ------------------ -----------------
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with certain of its directors,
significant shareholders and their affiliates (related parties). In the opinion
of management, such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not involve more than normal credit risk or
present other unfavorable features. The following is an analysis of the changes
in the loans to related parties during the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Borrowings at beginning of year $ 2,848,622 $ 2,796,151
Borrowings during year 1,439,580 1,058,649
Payments made during year (1,552,036) (1,006,178)
------------------ -----------------
Borrowings at end of year $ 2,736,166 $ 2,848,622
------------------ -----------------
</TABLE>
NOTE 12 - REGULATORY MATTERS
The Bank, as a member of the Federal Reserve is subject to the
dividend restrictions set forth by regulatory authorities. Under such
restrictions, the Bank may not, without the prior approval of the regulatory
authorities, declare dividends in excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior two
years. The dividends that the Bank could declare, without such approval,
amounted to $6,508,884, $6,061,377 and $6,047,324 at December 31, 1996, 1995 and
1994, respectively.
Additionally, the Bank is subject to various regulatory capital
requirements administered by the Federal Reserve System. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that the Bank meets all capital
adequacy requirements to which it is subject as of December 31, 1996.
As of September 30, 1996, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
(Notes continued on next page)
E-16
<PAGE>
NOTE 12 - REGULATORY MATTERS (continued)
The following table presents the Bank's actual capital position, the
minimum amounts and ratios required for regulatory capital adequacy purposes and
amounts that allow the Bank to be considered as well capitalized at December 31,
1996 and 1995.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ----------- ---------------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 19,613,758 28.79 % $ 5,450,735 8.00 % $ 6,813,419 10.00 %
Tier I Capital
(to Risk Weighted Assets) $ 18,762,081 27.54 % $ 2,725,368 4.00 % $ 4,088,052 6.00 %
Tier I Capital
(to Average Assets) $ 18,762,081 14.89 % $ 5,038,880 4.00 % $ 6,298,600 5.00 %
December 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 17,908,872 27.88 % $ 5,138,681 8.00 % $ 6,423,351 10.00 %
Tier I Capital
(to Risk Weighted Assets) $ 17,105,953 26.63 % $ 2,569,340 4.00 % $ 3,854,011 6.00 %
Tier I Capital
(to Average Assets) $ 17,105,953 14.32 % $ 4,777,920 4.00 % $ 5,972,400 5.00 %
</TABLE>
NOTE 13 - OFF-BALANCE-SHEET ITEMS, COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding
financial instruments, which involve elements of credit and interest rate risk,
to varying degrees, that are not recognized in the financial statements.
Commitments to extend credit, standby letters of credit, and the use of three to
five year mortgage and installment loans are some of the vehicles used by the
Bank in meeting the needs of its customers and reducing its own exposure to
fluctuations in interest rates. Notional principal amounts often are used to
express the volume of the transaction, but the amounts potentially subject to
credit risk are usually smaller.
The following table presents the contract or notional amount of each
class of instrument at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------- ------------------------------------
Variable Rate Fixed Rate Variable Rate Fixed Rate
Commitments Commitments Commitments Commitments
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Financial instruments whose
notional or contract amounts
represent credit risk (assumes
counterparty defaults and
collateral proves to be worthless):
Legally binding unfunded
commitments to extend credit $ 3,244,301 $ 935,641 $ 5,075,270 $ 831,435
Standby letters of credit 752,434 - 494,045 -
------------------ ------------------ ----------------- -----------------
$ 3,996,735 $ 935,641 $ 5,569,315 $ 831,435
------------------ ------------------ ----------------- -----------------
</TABLE>
At December 31, 1996 and 1995, the Bank was not participating in
interest rate swaps, futures, or forward and exchange rate contracts.
Commitments to extend credit are legally binding agreements to lend to a
customer which typically contain clauses that permit cancellation of the
commitment in the event of credit deterioration of the borrower. Standby letters
of credit are conditional commitments issued by the Bank to guarantee the
performance of customers to a third party. The Bank receives a nominal fee for
entering into such agreements.
To meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates, the Bank controls and monitors the
credit risk associated with commitments to extend credit and standby letters of
credit through credit approvals, and the same credit policy procedures as it
does for on-balance sheet instruments. No material losses are anticipated as a
result of these transactions.
There are no pending litigation or claims asserted against the Bank
that has required the attention of management or its legal counsel. The Bank has
been a party to various legal proceedings relating to foreclosed real estate. In
the opinion of management, based upon advice of counsel, the aggregate
liability, if any, resulting from these proceedings would not have a material
effect on the Bank's financial position or results of operations.
(Notes continued on next page)
E-17
<PAGE>
NOTE 14 - CONCENTRATIONS OF CREDIT
Concentrations of credit risk (whether on or off balance sheet)
arising from financial instruments exist in relation to certain groups of
customers. A group concentration arises when a number of counterparties have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The Bank does not have significant exposure to any individual
customer or counterparty. However, the Bank's loan portfolio is comprised of
credit extensions principally to customers in the Northern Neck area of
Virginia. Most of these customers are also depositors of the Bank.
The following table reflects the Bank's group concentration of loans
and credit commitments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Commercial Residential Installment
December 31, 1996 Property Property Small Business and Consumer Total
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Loans $ 6,839,694 $ 43,132,298 $ 18,864,343 $ 7,826,641 $ 76,662,976
Credit commitments 1,103,721 1,001,579 2,827,076 - 4,932,376
---------------- ---------------- ---------------- ---------------- ----------------
$ 7,943,415 $ 44,133,877 $ 21,691,419 $ 7,826,641 $ 81,595,352
---------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Commercial Residential Installment
December 31, 1995 Property Property Small Business and Consumer Total
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Loans $ 6,257,300 $ 41,877,541 $ 18,595,270 $ 6,744,260 $ 73,474,371
Credit commitments 1,250,812 912,963 4,236,975 - 6,400,750
---------------- ---------------- ---------------- ---------------- ----------------
$ 7,508,112 $ 42,790,504 $ 22,832,245 $ 6,744,260 $ 79,875,121
---------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
The credit risk amounts represent the maximum accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted and any collateral or security proved to be of no value.
The Bank has experienced little difficulty in accessing collateral when
required. The amounts of credit risk shown, therefore, greatly exceed expected
losses, which are included in the allowance for loan losses.
Loans secured by real estate are approximately 65% and 66% of total
loans for 1996 and 1995. Approximately 89% and 87% of these real estate loans in
1996 and 1995, respectively, are secured by 1-4 family residential real estate.
Commercial and standby letters of credit were granted primarily to commercial
borrowers.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, Disclosure about Fair Value of Financial
Instruments ("FASB 107"), requires disclosure of fair value information about
financial instruments, whether or not to be recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to individual markets and, in many cases, could not be realized in
immediate settlement. FASB 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bank.
The following methods and assumptions were used by the Bank in
estimating the fair value for its financial instruments as required by FASB 107:
Cash and Due From Banks: The carrying amount approximates fair value.
Federal Funds Sold: For federal funds sold, the carrying amount
approximates fair value.
Investment Securities: Fair values for securities are based on
published market prices, if available. For unquoted securities, the
fair value is estimated by the Bank on the basis of financial and
other information.
Loans: For equity line receivables with short-term and variable
characteristics, the total receivables outstanding approximates fair
value. This amount excludes any value related to account
relationships. The fair value of other types of loans is estimated by
discounting future cash flows using the contractual rates in effect
for similar loans at the reporting date.
Interest Receivable and Interest Payable: The carrying amount
approximates fair value.
Non-Interest Bearing Deposits: The fair value of these instruments is
the amount payable on demand at the reporting date.
(Notes continued on next page)
E-18
<PAGE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Interest Bearing Deposits: The fair value of demand deposits, savings
accounts and money market deposits with no defined maturity is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash
flows using rates currently offered for deposits of similar remaining
maturities. The intangible value of long-term relationships with
depositors is not taken into account in estimating the fair values
disclosed.
Commitments To Extend Credit and Standby and Commercial Letters of
Credit: It is not practicable to separately estimate the fair values
for off-balance-sheet credit commitments, including standby letters of
credit, due to the lack of cost-effective reliable measurement methods
for these instruments.
The estimated fair values of the Bank's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
Fair Fair
Carrying Value Value Carrying Value Value
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 3,994,235 $ 3,994,235 $ 3,521,358 $ 3,521,358
Temporary investments 490,000 490,000 2,930,000 2,930,000
Investment securities 49,692,101 50,119,616 41,686,468 42,440,603
Loans 74,695,951 74,514,992 71,621,104 71,384,835
Interest receivable 1,218,544 1,218,544 1,160,712 1,160,712
----------------- ------------------ ----------------- -----------------
$ 130,090,831 $ 130,337,387 $ 120,919,642 $ 121,437,508
----------------- ------------------ ----------------- -----------------
Liabilities
Non-interest bearing deposits $ 10,127,768 $ 10,127,768 $ 8,586,322 $ 8,586,322
Interest bearing deposits 101,968,590 101,559,114 95,748,640 96,038,686
Interest payable 330,537 330,537 323,810 323,810
----------------- ------------------ ----------------- -----------------
$ 112,426,895 $ 112,017,419 $ 104,658,772 $ 104,948,818
----------------- ------------------ ----------------- -----------------
</TABLE>
* * * * *
E-19
<PAGE>
BANK OF NORTHUMBERLAND, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
(Dollar amounts in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,820 $ 3,994
Federal funds sold 1,960 490
Securities available-for-sale 25,056 28,026
Securities held-to-maturity 21,430 21,666
Loans receivable, net 79,512 74,696
Accrued interest receivable 1,266 1,219
Bank premises and equipment 519 581
Deferred income taxes 426 486
Income taxes receivable 0 128
Other assets 621 260
---------- ----------
$ 133,610 $ 131,546
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits $ 11,395 $ 10,128
Interest bearing demand deposits 27,683 29,688
Savings 12,024 12,544
Time deposits 61,411 59,737
---------- ----------
Total deposits 112,513 112,097
Accrued interest payable 352 331
Other liabilities 316 498
---------- ----------
Total liabilities 113,181 112,926
---------- ----------
Shareholders' equity
Common stock, $1 par value, 5,000,000 shares
authorized; 2,541,920 shares issued and
outstanding in 1997 and 1996 2,542 2,542
Capital surplus 865 865
Undivided profits 17,045 15,355
Net unrealized appreciation (depreciation)
on available-for-sale securities (23) (142)
---------- ----------
Total shareholders' equity 20,429 18,620
---------- ----------
$ 133,610 $ 131,546
---------- ----------
</TABLE>
See notes to interim financial statements
E-20
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------- ---------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 1,804 $ 1,680 $ 5,307 $ 4,979
Interest on federal funds sold 29 44 52 124
Interest on investment securities:
Available-for-sale 393 383 1,226 1,110
Held-to-maturity 276 277 858 819
--------------------------------- ---------------------------------
Total interest income 2,502 2,384 7,443 7,032
--------------------------------- ---------------------------------
Interest expense
Savings 164 148 460 441
Interest bearing demand deposits 211 201 644 599
Certificates of deposit, $100,000 or more 107 120 315 276
Other time deposits 654 602 1,914 1,907
Interest on federal funds purchased 0 0 6 0
--------------------------------- ---------------------------------
Total interest expense 1,136 1,071 3,339 3,223
--------------------------------- ---------------------------------
Net interest income 1,366 1,313 4,104 3,809
Provision for loan losses 0 0 0 0
--------------------------------- ---------------------------------
Net interest income after provision for loan losses 1,366 1,313 4,104 3,809
------------------------------ ------------------------------
Noninterest income
Service charges on deposit accounts 83 79 245 239
Other service charges and fees 21 24 74 73
Net investment securities gains (losses) 0 0 (2) 3
Other income 0 0 0 15
--------------------------------- ---------------------------------
Total noninterest income 104 103 317 330
--------------------------------- ---------------------------------
Noninterest expenses
Salaries and employee benefits 269 261 795 748
Occupancy expenses 59 70 206 228
Other expenses 163 171 585 574
--------------------------------- ---------------------------------
Total noninterest expenses 491 502 1,586 1,550
--------------------------------- ---------------------------------
Income before income taxes 979 914 2,835 2,589
Income tax expense (244) (225) (686) (625)
--------------------------------- ---------------------------------
Net income $ 735 $ 689 $ 2,149 $ 1,964
--------------------------------- ---------------------------------
Earnings per common share $ 0.29 $ 0.27 $ 0.85 $ 0.77
--------------------------------- ---------------------------------
</TABLE>
See notes to interim financial statements
E-21
<PAGE>
BANK OF NORTHUMBERLAND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
<S> <C> <C>
Cash flows from operating activities
Interest received from:
Loans and leases $ 5,262 $ 4,975
Securities available-for-sale 1,193 1,001
Securities held-to-maturity 889 812
Federal funds sold 58 124
Interest paid:
Depositors (3,323) (3,221)
Income taxes paid (583) (602)
Noninterest income received 318 303
Cash paid to suppliers and employees (1,664) (1,569)
------------------------------------
Net cash provided by operating activities 2,150 1,823
------------------------------------
Cash flows from investing activities
Securities available-for-sale:
Proceeds from maturities 2,515 3,494
Proceed from sales 4,997 1,158
Purchases (4,307) (7,383)
Securities held-to-maturity:
Proceeds from maturities and redemption 3,484 1,482
Purchases (3,200) (3,395)
Net increase in customer loans (4,816) (1,338)
Proceeds from sales of foreclosed real estate 0 84
Capital expenditures (21) (16)
Increase in other assets (465) (211)
------------------------------------
Net cash used in investing activities (1,813) (6,125)
------------------------------------
Cash flows from financing activities
Net increase (decrease) in demand deposit accounts, interest
bearing demand deposit accounts and savings accounts (1,256) 2,082
Net increase in time deposits 1,673 2,297
Dividends paid (458) 0
------------------------------------
Net cash provided by financing activities (41) 4,379
------------------------------------
Net decrease in cash and cash equivalents 296 77
Cash and federal funds sold, beginning of year 4,484 6,451
------------------------------------
Cash and federal funds sold, end of year $ 4,780 $ 6,528
------------------------------------
</TABLE>
E-22
<PAGE>
BANK OF NORTHUMBERLAND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements as of and for the three and nine
months ended September 30, 1997 and September 30, 1996 have not been audited
but, in the opinion of management, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
and results of operations of the Bank as of such date and for such periods. The
unaudited financial statements should be read in conjunction with the Financial
Statements of the Bank and the Notes thereto appearing elsewhere herein. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 1997 or for any future periods.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 125, ("Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." FASB No. 125 establishes the
accounting for transfers and servicing of financial assets and extinguishment of
liabilities. There has been no impact on the financial statements taken as a
whole relating to this Statement. In accordance with the statement, an entity
recognizes financial assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. The Statement also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on the relative fair values at the
date of transfer. Servicing assets and liabilities would subsequently be
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values. This Statement is effective for
transfers and servicing of financial assets and extinguishment of liabilities
after December 31, 1996.
In October 1996, the Financial Accounting Standards Board issued FASB
Statement No. 127, which deferred for one year certain provisions of FASB No.
125 for securities lending, repurchase agreements, dollar rolls, and other
secured transactions.
In February 1997, the FASB issued FASB No. 128, "Earnings Per Share"
and FASB No. 129, "Capital Structure." FASB No. 128 simplifies the calculation
of earnings per share (EPS) and makes it comparable to international standards.
FASB No. 129 consolidates the existing guidance from several other
pronouncements relating to an entity's capital structure. FASB No. 128 is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. Earlier application is not permitted. Under FASB No.
128 basic EPS for the three and nine months ended September 30, 1997 would have
been $.29 and $.85, respectively. The Bank did not have securities or other
financial instruments that would be considered dilutive during the first nine
months of 1997.
Under FASB No. 128, primary EPS is replaced with a calculation known as
basic EPS. Basic EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Fully diluted EPS has not changed significantly but has been renamed
diluted EPS. Under the new rules, income available to common shareholders should
be adjusted for the assumed conversion of all potentially dilutive securities.
The treasury stock method is used to calculate the dilutive effect of options
and warrants. The treasury stock method is applied using the average market
price of the Bank's common stock during the period rather than the higher of the
average market price or ending market price. The dilutive effect of convertible
debt or convertible preferred stock will be calculated using the if-converted
method, which assumes conversion at the beginning of the period if the effect is
dilutive.
NOTE 3 - INCOME TAXES
The provision for income taxes is computed by applying statutory
federal rates to income before income taxes as reported in the financial
statements after deducting non-taxable items, principally tax-exempt interest
income on obligations of state and political subdivisions. The Bank is subject
to state income taxes.
NOTE 4 - PENDING MERGER
The Boards of Directors of the Bank of Northumberland and Southside
Bank have approved a Reorganization Agreement to merge these financial
institutions into Eastern Virginia Bankshares. The Reorganization Agreement
contemplates a share exchange between the respective bank's shareholders.
Shareholders of Bank of Northumberland will receive one share of Eastern
Virginia Bankshares Common Stock for each outstanding share of Bank of
Northumberland Common Stock. Shareholders of Southside Bank will receive 2.5984
shares of Eastern Virginia Bankshares Common Stock for each outstanding share of
Southside Bank Common Stock, with cash being paid in lieu of fractional shares.
E-23
<PAGE>
Appendix F
[Letterhead of Crestar Securities Corporation]
December 2, 1997
Board of Directors
Bank of Northumberland, Inc.
Route 360 Box 9
Heathsville, Virginia 22473
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Bank of Northumberland, Inc. ("BNI") of
the terms of the Agreement and Plan of Reorganization, dated as of September 26,
1997, between BNI, Southside Bank ("SSB") and Eastern Virginia Bankshares, Inc.
("EVB") and a related Plan of Share Exchange (collectively, the "Reorganization
Agreement"). Pursuant to the Reorganization Agreement, each issued and
outstanding share of BNI common stock will be exchanged for 1.0 share of EVB
common stock. The Reorganization Agreement also provides for the simultaneous
exchange of 2.5984 shares of EVB common stock for each issued and outstanding
share of SSB common stock.
Crestar Securities Corporation, as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements, and valuations for
estate, corporate and other purposes. We are familiar with BNI, having acted as
its financial advisor in connection with, and having participated in certain of
the negotiations leading to the Reorganization Agreement. Crestar Bank's
Financial Institutions Division has also provided certain correspondent banking
services to BNI from time to time and Crestar Securities Corporation's
Investment Division has sold investment securities to BNI from time to time.
In developing our opinion, we have, among other things, reviewed and
analyzed the (1) Reorganization Agreement; (2) the Registration Statement on
Form S-4, including the Joint Proxy Statement; (3) BNI's audited financial
statements for the three years ending December 31, 1996; (4) BNI's unaudited
financial statements for the six-months ended June 30, 1997 and 1996, and other
internal information relating to BNI prepared by BNI's management; (5)
information regarding the trading market for the common stocks of BNI and SSB
and the price range within which the respective stocks have traded; (6) the
relationship of prices paid to relevant financial data such as net worth,
assets,
F-1
<PAGE>
deposits, and earnings in certain bank and bank holding company mergers and
acquisitions in recent years; (7) SSB's annual report to shareholders and its
audited financial statements for the three years ending December 31, 1996; (8)
SSB's unaudited financial statements for the six-months ended June 30, 1997 and
1996, and (9) other information relating to SSB prepared by SSB's management. We
have discussed with members of management of BNI and SSB the background of the
Reorganization, reasons and basis for the Reorganization, and the business and
future prospects of BNI and SSB individually and as a combined entity. We have
also conducted such other studies, analyses and investigations, particularly of
the banking industry, and considered such other information as we deemed
appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of BNI and SSB or from public sources. We have not attempted
independently to verify such information, nor have we made any independent
appraisal of the assets of BNI or SSB. Our opinion is necessarily based on
economic, financial market and industry conditions as they exist and can be
evaluated at the date hereof.
Our opinion is directed to the Board of Directors of BNI and does not
constitute a recommendation to any shareholder of BNI as to how such shareholder
should vote at the shareholder's meeting held in connection with the
Reorganization.
Based on and subject to the foregoing, it is our opinion that, as of
the date hereof, the terms of the Reorganization Agreement are fair, from a
financial point of view, to the shareholders of BNI.
Very truly yours,
Crestar Securities Corporation
By: /s/ Charles W. Byrd, Jr.
--------------------------------
Charles W. Byrd, Jr.
Managing Director
F-2
