<PAGE>
As filed with the Securities and Exchange Commission on September 11, 1998
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
VIRGINIA CAPITAL BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
VIRGINIA 6035 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
400 GEORGE STREET
FREDERICKSBURG, VIRGINIA 22404
(540) 899-5500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SAMUEL C. HARDING, JR.
PRESIDENT
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
400 GEORGE STREET
FREDERICKSBURG, VIRGINIA 22404
(540) 899-5500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
JOSEPH A. MULDOON, JR., ESQUIRE
LORI M. BERESFORD, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
----
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----
<TABLE>
<CAPTION>
==================================================================================================
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration
Per Unit Price (2) Fee
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Common Stock
$.01 par value(1) 15,082,848 $10.00 $150,828,480 $44,495
==================================================================================================
</TABLE>
(1) Includes shares of Common Stock to be issued to the Fredericksburg Savings
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
[To be used in connection with the Syndicated Community Offering only ]
SYNDICATED PROSPECTUS SUPPLEMENT
VIRGINIA CAPITAL BANCSHARES, INC.
(PROPOSED HOLDING COMPANY FOR FREDERICKSBURG
SAVINGS BANK, F.S.B.)
__________ SHARES OF COMMON STOCK
Virginia Capital Bancshares, Inc. (the "Company"), a Virginia corporation,
is offering for sale in a syndicated community offering (the "Syndicated
Community Offering") __________ shares, at a per share price of $10.00, of its
common stock, par value $.01 per share (the "Common Stock"), to be sold upon the
conversion (the "Conversion") of Fredericksburg Savings and Loan Association,
F.A., Fredericksburg, Virginia from a federally chartered mutual savings bank to
a federally chartered stock savings bank ( Fredericksburg Savings and Loan
Association, F.A. and Fredericksburg Savings Bank, F.S.B. are hereafter referred
to as the "Bank") and the issuance of the Bank's outstanding capital stock to
the Company pursuant to a plan of conversion, (the "Plan of Conversion"). The
remaining __________ shares of the Common Stock to be sold in the Conversion
have been subscribed for in subscription and community offerings (the
"Subscription and Community Offerings") by holders of deposit accounts with the
Bank with a balance of $50 or more as of June 30, 1997, by the Fredericksburg
Savings Bank, F.S.B. Employee Stock Ownership Plan, a tax-qualified employee
benefit plan, and related trust (the "ESOP"), by holders of deposit accounts
with the Bank with a balance of $50 or more as of ______________, 1997, by
certain other account holders and borrowers of the Bank and, then, by certain
members of the general public. See "The Conversion - General." Contained
herein is the Prospectus in the form used in the Subscription and Community
Offerings. The purchase price for all shares sold in the Syndicated Community
Offering will be the same as the price paid by subscribers in the Subscription
and Community Offerings (the "Purchase Price"). The Purchase Price of $10.00
per share is the amount to be paid for each share at the time a purchase order
is submitted. See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock.
Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion. The Syndicated Community Offering will expire no
later than _______________, 199_, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199_. If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest. The minimum number of shares which may be purchased
<PAGE>
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $170,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than $300,000 in the Conversion. See
"Plan of Conversion -Subscription Rights and Limitations on Common Stock
Purchases." The Company reserves the right, in its absolute discretion, to
accept or reject, in whole or in part, any or all subscriptions in the
Syndicated Community Offering.
The Company and the Bank have engaged Trident Securities, Inc. ("Trident")
as financial advisors to assist them in the sale of the Common Stock in the
Syndicated Community Offering. It is anticipated that Trident will use the
services of other registered broker-dealers ("Selected Dealers") and that fees
to Trident and such Selected Dealers will not exceed ____% of the aggregate
Purchase Price of the shares sold in the Syndicated Community Offering. Neither
Trident nor any Selected Dealer shall have any obligation to take or purchase
any shares of Common Stock in the Syndicated Community Offering.
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market ("NASDAQ") under the symbol "VCAP." Prior
to this offering, there has not been a public market for the Common Stock, and
there can be no assurance that an active and liquid trading market for the
Common Stock will develop. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES ____ TO ____ OF THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
2
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
===================================================================================================
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
Midpoint Per Share $10.00 $ $ $
Maximum Per Share $10.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As Adjusted(5) $ $ $ $
===================================================================================================
</TABLE>
______________________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Trident for services in connection with the Subscription and
Community Offerings) and estimated compensation of Trident and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________ and
$__________ at the minimum and the maximum of the estimated price range and
may be deemed to be underwriting fees. The information under "Pro Forma
Data" in the Prospectus was based on the assumptions stated therein, which
may differ from the estimates used for this table. See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed discussion of
fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
sale of the __________ shares subscribed for at a price of $_____ per share
and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range"). The Total Minimum reflects the
sale of __________ shares at a per share price of $_____, leaving a total of
__________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due to
an increase in the Estimated Price Range of up to 15% to reflect changes in
market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
TRIDENT SECURITIES, INC.
_________________________________
The date of this Prospectus Supplement is _______________, 1997.
3
<PAGE>
PROSPECTUS
VIRGINIA CAPITAL BANCSHARES, INC.
(Proposed Holding Company for
Fredericksburg Savings Bank)
UP TO 13,965,600 SHARES OF COMMON STOCK
This offering is made as part of the plan of conversion of Fredericksburg
Savings and Loan Association, F.A., Fredericksburg, Virginia from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank to be known as Fredericksburg Savings Bank (Fredericksburg Savings
and Loan Association, F.A. and Fredericksburg Savings Bank are both referred to
herein as either the "Bank" or "Fredericksburg Savings"). In this conversion,
the Bank will become a wholly-owned subsidiary of Virginia Capital Bancshares,
Inc. (the "Company"). No shares will be sold if the minimum number of shares are
not subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Bank are not received.
There is currently no public market for the common stock. The Company has
received conditional approval for the common stock to be listed on the Nasdaq
National Market ("Nasdaq") under the symbol "VCAP" upon completion of the
conversion.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM AS ADJUSTED
8,976,000 13,965,600
PER SHARE SHARES SHARES
----------------- ----------------- -----------------------
<S> <C> <C> <C>
Offering price...................................... $10.00 $89,760,000 $139,656,000
Estimated underwriting commissions
and other expenses.............................. -- 2,000,000 2,000,000
Estimated proceeds to Company....................... -- 87,760,000 137,656,000
</TABLE>
The shares are offered first in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with the
Bank. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION RIGHT, YOU MUST
SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND CERTIFICATION, TOGETHER
WITH FULL PAYMENT FOR THE SHARES, TO THE BANK PRIOR TO THE EXPIRATION DATE,
____________, EASTERN TIME, ON _______________, 1998, UNLESS EXTENDED. All funds
received from subscribers will be held in an interest-bearing savings account at
the Bank until the completion or termination of the Conversion. Funds will be
returned promptly if the Conversion is terminated. If the Conversion is not
completed by __________, 1998 and the Office of Thrift Supervision consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. No single extension may
exceed 90 days and such extensions may not go beyond ____________, 2000.
To the extent sufficient shares to complete the conversion are not sold in
the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, other public offering.
Trident Securities, Inc. has agreed to assist the Company in selling the
shares, but does not guarantee that at least the minimum number of shares will
be sold.
=====================================================
TRIDENT SECURITIES, INC.
=====================================================
The date of this Prospectus is _____________, 1998.
<PAGE>
- --------------------------------------------------------------------------------
INSERT MAP PAGE HERE
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of Fredericksburg Savings.. References in
this document to the "Bank" or "Fredericksburg Savings" refer to Fredericksburg
Savings and Loan Association, F.A. when in mutual form and to Fredericksburg
Savings Bank upon conversion to stock form References in this document to the
"Company" refer to Virginia Capital Bancshares, Inc.
VIRGINIA CAPITAL
BANCSHARES, INC.................... The Company was recently organized as a
Virginia corporation to become a savings
and loan holding company and own all of
the capital stock of Fredericksburg
Savings Bank to be issued upon its
conversion from mutual to stock form. To
date, the Company has not engaged in any
business.
The Company's office is located at 400
George Street, Fredericksburg, Virginia
and its telephone number is (540) 899-
5500. The Bank's executive office has
the same address and phone number.
FREDERICKSBURG SAVINGS
BANK............................... The Bank which is currently a federally
chartered mutual savings and loan
association, will become a federally
chartered stock savings bank known as
Fredericksburg Savings Bank in
connection with its conversion from
mutual to stock form. At June 30, 1998,
the Bank had total assets of $472.3
million, total deposits of $373.7
million and total equity capital of
$83.5 million.
The Bank operates four banking offices,
one in the City of Fredericksburg, one
in Stafford County and two in
Spotsylvania County, Virginia. The Bank
historically has operated as a
community-oriented banking institution
primarily providing one- to four-family
residential mortgage loans and consumer
loans and a variety of retail deposit
products in its primary market area,
which consists of the City of
Fredericksburg, and Stafford,
Spotsylvania and King George Counties,
Virginia.
THE CONVERSION...................... The Bank has adopted a Plan of
Conversion which is subject to
requirements of the Office of Thrift
Supervision (the "OTS"), the primary
federal banking regulator of the Bank.
The conversion, which hereafter is
referred to as the "Conversion," is
governed by the Plan and has three major
components, as follows:
(i) The conversion of the Bank from
mutual to stock form;
(ii) The acquisition by the Company of
all of the outstanding capital stock of
the Bank;
(iii) The sale by the Company of common
stock.
The Conversion is subject to the
approval of the OTS, and approval of
members of the Bank eligible to vote at
a special meeting to be held on
_____________, 1998 (the "Special
Meeting").
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
FREDERICKSBURG SAVINGS
CHARITABLE FOUNDATION............. The Bank has established a charitable
foundation, Fredericksburg Savings
Charitable Foundation, or the
"Foundation." The Company intends to
contribute to the Foundation common
stock up to 8% of the common stock
sold in the Conversion. The authority
for the affairs of the Foundation is
vested in its Board of Directors, all of
whom are existing Directors or officers
of the Company and the Bank.
TERMS OF THE OFFERING............... The shares of common stock are offered
at a fixed price of $10.00 per share in
the Subscription Offering pursuant to
subscription rights in the following
order of priority to:
(i) Eligible Account Holders -holders
of deposit accounts at the Bank
totalling $50 or more as of June
30, 1997;
(ii) the Employee Stock Ownership Plan
of the Company and the Bank (the
"ESOP");
(iii) Supplemental Eligible Account
Holders - holders of deposit
accounts at the Bank totalling $50
or more as of ____ who are not
entitled to a first priority
subscription right; and
(iv) Other Members - holders of deposit
accounts at the Bank as of ______
who are not entitled to a higher
priority subscription right.
Shares of common stock not subscribed
for by persons having priority
subscription rights will be offered to
certain members of the general public in
a Community Offering with preference
given to natural persons residing in the
City of Fredericksburg and Stafford and
Spotsylvania and King George Counties.
EXPIRATION DATE OF
SUBSCRIPTION OFFERING............. Subscription rights will expire if not
exercised and all orders to purchase
common stock in the Subscription
Offering must be received by __:__ ____,
Eastern time, on ________, 1998, unless
extended, which is the "Expiration
Date."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS............... The subscription rights are not
transferable. Persons found to be
transferring such rights will be subject
to the forfeiture of such rights and
possible further sanctions and penalties
imposed by the OTS.
NUMBER OF SHARES OFFERED............ The Company is offering between a
minimum of 8,976,000 shares and a
maximum of 12,144,000 shares of common
stock, or up to an adjusted maximum of
13,965,600 shares if the maximum number
of shares is increased.
The number of shares offered is based
upon an independent appraisal prepared
by FinPro, Inc. ("FinPro") dated as of
____________, 1998, which estimates that
the aggregate pro forma market value of
the Company ranged from $89.8 million to
$121.4 million. (This range is referred
to as the "Estimated Price Range").
FinPro is an independent appraisal firm
experienced in appraisals of savings
institutions. Establishing the
Foundation in connection with the
Conversion will result in a lower
aggregate market valuation than if the
Conversion was completed without the
Foundation.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
The final aggregate estimated pro forma
market value of the Company will be
determined at the time of closing of the
Subscription Offering, or if all shares
are not sold in the Subscription
Offering, the closing of the Community
Offering or other subsequent offering.
Such estimated aggregate pro forma
market value is subject to change due to
changes in market and general financial
and economic conditions.
The maximum number of shares to be sold
may be increased up to the adjusted
maximum, a 15% increase over the
maximum, if the aggregate estimated pro
forma market value of the common stock
to be sold is increased.
HOW TO ORDER STOCK.................. If you have a subscription right, you
may order shares in the Subscription
Offering by delivering to the Bank a
properly executed stock order and
certification form together with full
payment for the shares ordered on or
prior to the Expiration Date. ONCE
TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT
OF THE BANK. Please make sure you review
the Prospectus carefully. To ensure that
each purchaser receives a prospectus at
least 48 hours prior to the Expiration
Date in accordance with Rule 15c2-8 of
the Securities Exchange Act of 1934, no
prospectus will be mailed any later than
five days prior to the Expiration Date
or hand delivered any later than two
days prior to such date. The Bank is not
obligated to accept subscriptions not
submitted on an original stock order
form. To ensure that subscription rights
are properly identified, persons must
list all qualifying savings accounts, as
of the respective qualifying dates, on
the stock order form. Persons who do not
list all qualifying savings accounts may
be subject to reduction or rejection of
their subscription.
Persons wishing to order shares offered
in the Community Offering also must
submit a properly executed stock order
and certification form prior to the
expiration date to be set for the
Community Offering.
FORM OF PAYMENT FOR SHARES.......... Payment for subscriptions may be made:
(i) in cash (if delivered in person);
(ii) by check, bank draft or money
order; or
(iii) by authorization of withdrawal
from deposit accounts maintained
at the Bank.
Orders for common stock in the
Subscription Offering which aggregate
$50,000 or more must be paid by official
bank or certified check or by withdrawal
authorization from a deposit account at
the Bank. No wire transfers will be
accepted.
NUMBER OF SHARES THAT MAY
BE ORDERED...................... Minimum: 25 shares ($250).
Maximum:
. No Eligible Account Holder,
Supplemental Eligible Account
Holder or Other Member may
purchase in the Subscription
Offering more than $300,000 of
common stock.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
. No person, together with associates
or persons acting in concert with
such person, may purchase in the
Community Offering more than
$300,000 of common stock.
. No person, together with associates
or persons acting in concert with
such person, may purchase in the
aggregate more than the overall
maximum purchase limitation of 1%
of the total number of shares of
Common Stock sold. However, the
ESOP may purchase up to 10% of the
Common Stock to be issued in
connection with the Conversion,
including shares issued to the
Foundation. It is intended that the
ESOP will purchase 8% of the Common
Stock issued, including shares
issued to the Foundation.
USE OF PROCEEDS..................... The Company will use 50% of the net
proceeds from the sale of common stock
to purchase all of the common stock of
the Bank to be issued in the Conversion.
The portion of net proceeds retained by
the Company will be used for general
business activities, including the loan
of funds to the ESOP (to the extent such
loan is not funded by a third party) to
enable the ESOP to purchase up to 8% of
the stock issued in connection with the
Conversion, including shares issued to
the Foundation. The Company intends
initially to invest the remaining net
proceeds primarily in short-term U.S.
Government and Agency obligations,
including adjustable-rate mortgage-
backed securities with terms of less
than five years. The Bank intends to
utilize the net proceeds from the sale
of its stock to the Company for general
business purposes, including investment
in loans and to expand its products and
services.
DIVIDEND POLICY..................... Upon Conversion, the Board of Directors
of the Company will have authority to
declare dividends on the Common Stock,
subject to statutory and regulatory
requirements. Depending on market
conditions, the Company's Board of
Directors intends to pay cash dividends
on the Common Stock; however, no
decision has been made regarding the
level of dividends or when they will be
paid, and no assurance can be given that
dividends will actually be paid.
In addition, from time to time in an
effort to manage capital to a reasonable
level, the Board of Directors may
determine to pay periodic special cash
dividends in addition to, or in lieu of,
regular cash dividends. Additionally, in
connection with the Conversion, the
Company and the Bank have committed to
the OTS that during the one-year period
following the Conversion, the Company
will not make any distribution to
stockholders that, for federal tax
purposes, would be treated as a return
of capital without prior approval of
the OTS.
BENEFITS OF THE CONVERSION TO
MANAGEMENT........................ Among the benefits to the Bank and the
Company anticipated from the Conversion
is the ability to attract and retain
personnel through the use of stock
options and other stock related benefit
programs. Subsequent to the Conversion,
the Company intends to adopt a Stock-
Based Incentive Plan for the benefit of
directors, officers and employees of the
Company and Bank. If the Stock-Based
Incentive Plan is adopted within one
year after the Conversion, the plan will
be subject to stockholders' approval at
a meeting of stockholders which may not
be held earlier than six months after
the Conversion. If adopted and approved
by stockholders, it is expected the
benefits set forth in the table below
would be available for distribution to
employees and directors pursuant to that
plan.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Additionally, an ESOP, which is a tax
qualified plan, will be established to
provide retirement benefits to
employees. Benefits under that plan will
be distributed to eligible employees
over an approximate twenty year period.
See the table below for the estimated
value of such benefits.
<TABLE>
<CAPTION>
ESTIMATED PERCENTAGE OF SHARES ISSUED,
VALUE OF INCLUDING SHARES ISSUED
SHARES(1) TO THE FOUNDATION(2)
-------------- ----------------------------
<S> <C> <C>
Employee Stock Ownership Plan ................... $ 9,123,840 8.0%
Stock-Based Incentive Plan:
Stock Awards(2)................................. 4,561,920 4.0
Stock Options................................... --(3) 10.0
</TABLE>
-------------------
(1) Assumes shares are allocated to participants at $10.00 per share
and that shares are issued in the Conversion at the midpoint of
the Estimated Price Range.
(2) Any Common Stock awarded under the Stock-Based Incentive Plan
will be awarded at no cost to the recipients.
(3) Stock options will be granted with an exercise price equal to
the fair market value of the Company's Common Stock on the day
of grant. Recipients of stock options realize value only in the
event of an increase in the price of the Common Stock of the
Company following the date of grant of the stock options.
In addition, the Company and Bank will
enter into employment agreements with
the Company's and Bank's two executive
officers. Benefits under such agreements
would only be paid if the officer were
terminated without cause or if the
officer voluntarily retired under
certain circumstances following a Change
in Control. The amounts payable under
these agreements will depend upon the
compensation paid to the officer in
recent years prior to termination. See
"Management of the Bank--Executive
Compensation."
See "Management of the Bank" for more
detail regarding these benefits.
PURCHASES BY OFFICERS
AND DIRECTORS..................... Directors and executive officers of the
Bank and the Company expect to purchase
approximately 2.06% or 1.53% of shares
of common stock to be issued in the
Conversion, including shares issued to
the Foundation, based on the estimated
minimum and maximum of such shares,
respectively.
MARKET FOR STOCK.................... As a mutual institution, the Bank has
never issued capital stock and,
consequently, there is no existing
market for the Common Stock. The Company
has received conditional approval to
have its Common Stock listed on the
Nasdaq under the symbol "VCAP" subject
to the completion of the Conversion and
compliance with certain conditions.
NO BOARD RECOMMENDATIONS............ The Bank's Board of Directors and the
Company's Board of Directors make no
recommendation to depositors or other
potential investors regarding whether
such persons should purchase the common
stock. An investment in the common stock
must be made pursuant to each investor's
evaluation of his or her best interests.
STOCK INFORMATION CENTER............ If you have any questions regarding the
Conversion, please call the Stock
Information Center at (___) ___-____.
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7
<PAGE>
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SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The selected financial and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Bank and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT
JUNE 30, AT DECEMBER 31,
---------- ----------------------------------------------------------
1998(1) 1997 1996(2) 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total Assets............................ $472,280 $471,920 $469,917 $468,759 $451,035 $447,706
Loans receivable, net(3)................ 415,986 413,032 405,145 390,541 371,269 375,229
Mortgage-backed securities.............. 1,190 1,291 1,502 1,879 2,109 2,640
Investment securities(4)................ 30,928 31,151 31,979 49,257 52,361 49,629
Cash and cash equivalents............... 9,031 11,287 15,937 11,980 11,088 6,772
Deposits................................ 373,719 377,114 375,652 386,376 376,083 380,977
FHLB advances........................... 8,000 8,000 15,000 8,000 8,000 8,000
Equity capital.......................... 83,500 80,073 73,296 68,703 62,217 54,905
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1998(1) 1997(1) 1997 1996(2) 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......................... $17,392 $17,586 $35,445 $35,230 $35,576 $32,338 $34,015
Interest expense........................ 9,620 9,568 19,418 19,535 18,997 16,620 17,978
------- ------- ------- ------- ------- ------- -------
Net interest income................... 7,772 8,018 16,027 15,695 16,579 15,718 16,037
Provision for loan losses............... 269 241 375 325 412 1,010 1,129
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses........... 7,503 7,777 15,652 15,370 16,167 14,708 14,908
Total noninterest income................ 1,276 784 1,734 1,410 1,269 1,152 1,037
Total noninterest expense............... 3,244 3,152 7,009 9,798 6,708 6,850 7,326
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle.................. 5,535 5,409 10,377 6,982 10,728 9,010 8,619
Income tax expense...................... 2,215 2,150 3,952 2,401 4,070 1,687 3,935
------- ------- ------- ------- ------- ------- -------
Net income before cumulative effect of
change in accounting principle....... 3,320 3,259 6,425 4,581 6,658 7,323 4,684
Cumulative effect of change in
accounting principle(5)............... -- -- -- -- -- -- 680
------- ------- ------- ------- ------- ------- -------
Net income........................... $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658 $ 7,323 $ 5,364
======= ======= ======= ======= ======= ======= =======
</TABLE>
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8
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------
1998(1) 1997(1) 1997 1996(2) 1995 1994 1993
--------- --------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(6)
PERFORMANCE RATIOS:
Return on average assets.................................... 1.40% 1.39% 1.36% 0.98% 1.45% 1.62% 1.19%
Return on average equity.................................... 8.12 8.71 8.39 6.42 10.17 12.61 10.26
Average interest rate spread(7)............................. 2.58 2.76 2.71 2.73 3.04 3.04 3.20
Net interest margin(8)...................................... 3.37 3.52 3.50 3.45 3.71 3.55 3.64
Net yield on average-interest earning assets................ 7.60 7.72 7.74 7.74 7.96 7.31 7.73
Net interest income after provisions for loan
losses, to total non-interest expenses.................... 231.29 246.73 223.31 156.86 241.05 214.72 203.49
Total noninterest expense to average assets................. 1.37 1.34 1.49 2.09 1.46 1.52 1.62
Efficiency ratio(9)......................................... 35.85 35.81 39.46 57.28 37.58 40.60 42.91
REGULATORY CAPITAL RATIOS(10):
Tangible capital............................................ 17.28% 17.63% 16.59% 15.29% 14.46% 13.61% 12.26%
Core capital................................................ 17.28 17.63 16.59 15.29 14.46 13.61 12.26
Risk-based capital.......................................... 30.20 30.60 28.60 27.50 24.20 25.24 23.12
ASSET QUALITY RATIOS:
Non-performing loans to total assets(11)(12)................ 0.61% 0.78% 0.60% 1.86% 1.45% 2.34% 1.50%
Non-performing loans to total loans(11)(12)................. 0.66 0.89 0.65 2.05 1.64 2.67 1.68
Non-performing assets to total assets(12)................... 1.01 1.18 1.01 2.21 1.92 2.59 2.01
Allowance for loan losses to non-performing
loans(12)................................................. 174.85% 152.26% 194.60% 63.33% 80.60% 52.46% 79.66%
NUMBER OF FULL-SERVICE BANKING FACILITIES..................... 4 4 4 4 4 4 4
</TABLE>
_____________
(1) The data presented for the six months ended June 30, 1998 and 1997 was
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. Interim results at and for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
(2) Includes effect of the one-time special assessment of $2.5 million, on a
pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
1996.
(3) Loans receivable, net, consist of loans receivable minus the allowance for
loan losses, deferred loan fees and unadvanced loan funds. The allowance
for loan losses at June 30, 1998 and December 31, 1997, 1996, 1995, 1994
and 1993 was $5.6 million, $5.5 million, $5.5 million, $5.5 million, $5.5
million and $5.4 million, respectively.
(4) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as of January 1, 1995. On December 31, 1995, a majority
of the Bank's portfolio was classified as "available-for-sale." Securities
do not include Federal Home Loan Bank of Atlanta ("FHLB-Atlanta") stock of
$3.5 million, $3.4 million, $3.2 million, $3.1 million, $4.1 million and
$4.1 million at June 30, 1998 and December 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Represents the cumulative effect, as of January 1, 1993, of the initial
application of Financial Accounting Standards Board Statement 109,
"Accounting for Income Taxes."
(6) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(7) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets (which includes
FHLB-Atlanta stock and other equity securities) and the weighted average
cost of average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(10) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation--Federal Savings
Institution Regulation--Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(11) Loans include total loans before the allowance for loan losses.
(12) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal. It
is the Bank's policy to cease accruing interest on all such loans. See
"Business of the Bank."
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9
<PAGE>
RISK FACTORS
Investors should consider the following risk factors, in addition to
those discussed elsewhere in this Prospectus before deciding whether to purchase
the Common Stock offered hereby.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.
The Bank attempts to manage its interest rate risk by seeking to
originate and retain adjustable-rate and shorter-term fixed-rate loans, and by
originating shorter-term, higher yielding consumer loans and investing in
securities with shorter stated or estimated maturities. However, in recent years
the Bank has originated primarily fixed-rate mortgage loans with terms of 15 to
30 years, which the Bank retains in its portfolio. The Bank has done this in
response to very low customer demand for adjustable-rate loans and the Bank's
concern that failure to continue to originate loans in its primary market area
would adversely affect the Bank's ability to compete against other financial
services companies in its market area over the long term. Most recently, while
the Bank has continued to emphasize 15 year fixed-rate loans, the Bank has
primarily originated 30 year fixed-rate loans due to market demand. This has
resulted in the Bank becoming significantly vulnerable to changes in interest
rates. At June 30, 1998, the Bank's gross total loans had an average weighted
maturity of 13.4 years. At such date, $117.1 million, or 26.8% of the Bank's
loans had adjustable interest rates with a weighted average maturity of 20.0
years. At June 30, 1998, the Bank had $196.7 million of certificates of deposit
with maturities of less than one year and $45.3 million of certificates of
deposit over $100,000 ("jumbo certificates of deposit"). Such jumbo certificates
of deposit tend to be less stable sources of funding as compared to money
market, savings and retail checking. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk and Market Risk Analysis." At June 30, 1998, the Bank's total interest-
bearing liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $167.8
million, representing a cumulative one-year interest sensitivity gap as a
percentage of total assets of negative 35.5%. To date, the Bank's policy of
remaining competitive, notwithstanding the potentially negative effects this
strategy may have, has not adversely affected the Bank. However, in a rapidly
rising interest rate environment, the cost of the Bank's interest-bearing
liabilities will generally increase at a rate faster than the yield on its
interest-earning assets thereby likely adversely affecting the Bank's net
interest income. The Bank's high level of capital and liquid assets could limit
the effect of such a change in interest rates, but the Bank would also be
subject to other risks. Specifically, increases in interest rates also could
adversely affect the type (fixed-rate or adjustable-rate) and amount of loans
originated by the Bank which, in turn, could adversely impact the yields earned
on the Bank's loan portfolios as well as the amount of secondary market activity
in which the Bank may engage.
Furthermore, increases in market interest rates would result in an
increase in the interest rates on the Bank's adjustable-rate loans, thereby
causing higher loan payment amounts by the borrowers which, in turn, may result
in elevated delinquencies on such loans. Increases in the level of interest
rates may also adversely affect the value of the Bank's investment securities
and other interest-earning assets and, in turn, its results of operations or
retained earnings. At June 30, 1998, the Bank's securities available-for-sale
had an estimated fair value of $30.9 million, which was $458,000 greater than
the amortized cost of $30.5 million. At the same date, the Bank's mortgage-
backed securities held-to-maturity had an estimated fair value of $1.2 million,
which was $36,000 greater than their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis," "Business of Bank--
Lending Activities--One- to Four-Family Lending" and "--Investment Activities."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At June 30, 1998, the Bank's ratio of equity capital to total assets
was 17.68%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of June 30, 1998, assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of
10
<PAGE>
stockholders' equity to total assets would have been 37.4%. The Company's
ability to deploy this new capital through investments in interest-earning
assets, such as loans and securities, which bear rates of return comparable to
its current investments, will be significantly affected by industry competition
for such investments. The Company currently anticipates that it will take time
to prudently deploy such capital. In addition, although the Bank has operated
extremely efficiently in the past and management intends to continue to control
costs, the Bank will incur additional expenses operating as a public company.
Furthermore, the addition of new products and services may result in increased
expense, including the hiring of additional personnel. As a result of these
factors, the Company's return on equity initially is expected to be below its
historical return on equity and may be below peer group institutions after the
Conversion. Additionally, due to the implementation of stock-based benefit plans
such as the ESOP and the Stock-Based Incentive Plan, the Company's future
compensation expense will be increased, thereby, adversely affecting its net
income and return on equity.
LENDING RISKS ASSOCIATED WITH NON-RESIDENTIAL REAL ESTATE, CONSTRUCTION AND
DEVELOPMENT, MULTI-FAMILY, LAND AND LAND DEVELOPMENT AND CONSUMER LOANS
At June 30, 1998, the Bank's non-residential real estate, construction
and development, land and land development, multi-family and consumer loan
portfolios totalled $70.2 million, or 16.06%, of total loans. Of this amount,
$3.4 million, or 0.78%, consisted of multi-family loans, $20.0 million, or
4.57%, consisted of construction and development loans, $35.3 million, or 8.08%,
consisted of non-residential real estate loans, which includes $12.1 million in
loans to local churches, $2.3 million or 0.53% consisted of land and land
development and $9.2 million, or 2.10%, consisted of consumer loans. These types
of loans are generally viewed as exposing the lender to greater risk of loss
than one- to four-family residential loans and, with the exception of consumer
loans, frequently have higher principal amounts. The specific risks associated
with these types of loans are discussed in "Business of the Bank -- Lending
Activities."
ESTABLISHMENT OF THE FOUNDATION
The Company intends to establish the Foundation and to contribute to it
shares of common stock equal to 8% of the shares to be sold in the Conversion.
Establishment of the Foundation is subject to the approval of the Bank's members
at a Special Meeting. If approved by members, the establishment of the
Foundation will be dilutive to the voting and ownership interests of
stockholders and will have an adverse impact on the operating results of the
Company for its year ending December 31, 1998, possibly resulting in an
operating loss for that year.
DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
be 718,080, 844,800, and 971,520 shares, with a value of $7,180,800, $8,448,000,
and $9,715,200, respectively, based on the public offering price of $10.00 per
share for the shares of common stock to be sold in the Conversion (the "Purchase
Price"). Upon completion of the Conversion and establishment of the Foundation,
the Company will have 12,144,000 shares issued and outstanding at the maximum of
the Estimated Price Range, of which the Foundation will own 971,520 shares, or
7.4% AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
NEGATIVE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of 1998. Such expense will
reduce earnings and have a material adverse impact on the Company's earnings for
the fiscal year. The amount of the contribution will range from $7.2 million to
$9.7 million, depending on the amount of common stock sold in the Conversion.
The contribution expense will be partially offset by the tax deductibility of
the expense. The Company has been advised by its independent accountants that
the contribution to the Foundation will be deductible for federal income tax
purposes, subject to a limitation based on 10% of the Company's annual taxable
income. Assuming a contribution of $8.4 million in common stock, based on the
mid-point of the Estimated Price Range, the Company estimates a net tax effected
expense of $5.2 million. If the Foundation had been established at June 30,
1998, the Bank would have reported a net loss of $1.9 million for the first six
months of 1998 rather than reporting net income of $3.3 million. In addition to
the contribution to the Foundation, the Bank may in the future continue to make
ordinary charitable contributions within its community.
11
<PAGE>
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. The Company estimates
that substantially all of the contribution to the Foundation should be
deductible for federal tax purposes over the permissible six-year period.
However, no assurance can be made that the Company will have sufficient pre-tax
income over the five-year period following the year in which the contribution is
initially made to fully utilize the carryover related to the excess
contribution. Furthermore, although the Company and the Bank have received an
opinion of their independent accountants that the Company will be entitled to
the deduction for the contribution to the Foundation, there can be no assurance
that the IRS will recognize the Foundation as a Section 501(c)(3) exempt
organization or that the deduction will be permitted. In such event, there would
be no tax benefit related to the Foundation.
POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's common stock outstanding. However, pursuant to the terms of the
contribution as mandated by the OTS, the shares of common stock held by the
Foundation must be voted in the same ratio as all other shares of the Company's
common stock on all proposals considered by the stockholders of the Company. As
a result, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event, however, that the OTS were to waive this
voting restriction and not impose other restrictions and requirements with
respect to the Foundation, the Foundation's board of directors would exercise
sole voting power over such shares. See "The Conversion--Establishment of the
Charitable Foundation--Regulatory Conditions Imposed on the Foundation." If the
Foundation's shares are combined with shares purchased directly by officers and
directors of the Company, shares held by proposed stock benefit plans, if
approved by stockholders, and shares held in the Bank's ESOP, the aggregate of
such shares could exceed 20% of the Company's outstanding common stock, which
could enable management to defeat stockholder proposals requiring 80% approval.
Consequently, in the event the voting restriction was waived, this potential
voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to all eligible employees of the Bank, and any
unallocated shares will be voted by an independent trustee, and because awards
under the proposed stock benefit plans may be granted to employees other than
executive officers and directors, management of the Company does not expect to
have voting control of all shares held or allocated by the ESOP or other stock
benefit plans. See "--Certain Anti-Takeover Provisions Which May Discourage
Takeover Attempts--Voting Control of Officers and Directors."
There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Company by the Foundation which may discourage takeover
attempts, including agreements related to voting, acquisition or disposition of
the Company's common stock. Finally, as the Foundation sells its shares of
common stock over time, its ownership interest and voting power in the Company
are expected to decrease.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only a
limited number of instances. As such, the Foundation may be subject to potential
challenges notwithstanding that the Boards of Directors of the Company and the
Bank have carefully considered the various factors involved in the establishment
of the Foundation. See "The Conversion--Establishment of the Charitable
Foundation--Purpose of the Foundation." If anyone were to institute an action
seeking to require that the Bank eliminate establishment of the Foundation, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining the elimination of the Foundation or
other equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at a Special Meeting. The Foundation will be considered as a
separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the
aggregate pro forma market value of the common stock to be sold in the
Conversion since the estimate of such amount takes into account the dilutive
impact of the issuance of shares to the Foundation. If the aggregate pro forma
market value of the common stock without the Foundation is either greater than
$139.7 million or less than $89.8 million, the Bank will establish a new
12
<PAGE>
Estimated Price Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscriptions funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be permitted
to increase, decrease, or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. See "The Conversion--Stock
Pricing." A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond ________, 2000.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings and loan
holding company, is subject to regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the Federal Deposit Insurance Corporation
("FDIC") or the Congress, could have a material impact on the Company, the Bank,
its operations or the Bank's Conversion. See "Regulation."
THRIFT RECHARTERING
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill originally reported by the House Banking
Committee would have required federal thrifts to become national banks or state
banks within two years of enactment or they would have become national banks by
operation of law. OTS would have been abolished and its functions transferred to
the bank regulatory agencies. The bill as passed by the House of
Representatives, however, did not provide for the elimination of the federal
thrift charter or OTS, but did provide that unitary savings and loan holding
companies existing or applied for after March 31, 1998 would not have the
ability to engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
holding companies existing or applied for before such date would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Senate
has not acted on the legislation but if such legislation were enacted, the
Company would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Bank is unable to predict whether the legislation will be enacted
or, given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged or the federal thrift charter
eliminated, and what effect, if any, such legislation would have on the Bank.
EXPENSES ASSOCIATED WITH ESOP AND THE STOCK-BASED INCENTIVE PLAN
If the ESOP and the Stock-Based Incentive Plan are implemented, the
Bank will recognize additional material employee compensation and benefit
expenses that stem from the shares purchased or granted to employees and
executives under those plans. The Bank cannot predict the actual amount of these
new expenses because applicable accounting practices require that they be based
on the fair market value of the shares of common stock when the expenses are
recognized. Expenses for the ESOP would be recognized when shares are committed
to be released to participants' accounts, and expenses for the Stock-Based
Incentive Plan would be recognized over the vesting period of awards made to
recipients. These expenses have been reflected in the pro forma financial
information under "Pro Forma Data" assuming the $10.00 per share purchase price
as fair market value. Actual expenses, however, will be based on the fair market
value of the common stock at the time of recognition, which may be higher or
lower than $10.00. For further discussion of these plans, see "Management of the
Bank -- Benefits -- Employee Stock Ownership Plan and Trust" and "-- Benefits --
Stock-Based Incentive Plan."
13
<PAGE>
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of common stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of common
stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such Stock Options may be satisfied by the issuance of authorized
but unissued shares. If all of the Stock Options were to be exercised using
authorized but unissued common stock and the Stock Awards granted under the
Stock-Based Incentive Plan were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted at that
time by 12.3%.
VOTING CONTROL OF EXECUTIVE OFFICERS AND DIRECTORS.
Directors and executive officers of the Bank and the Company expect to
purchase approximately 2.06% or 1.53% of the shares of Common Stock to be issued
in the Conversion, including shares issued to the Foundation, based upon the
minimum and the maximum of the Estimated Price Range, respectively. The ESOP may
be viewed as giving directors, officers and employees the potential to control
the voting of an additional 8% of the Company's common stock. In addition, the
Foundation will be funded with a contribution by the Company up to 8% of the
common stock sold in the Conversion. If a waiver of the voting restriction
imposed on such common stock is obtained from the OTS and the OTS does not
impose other restrictions, the Foundation shares may be voted as determined by
the directors of the Foundation who also will be directors or officers of the
Company and Bank. Management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's Articles
of Incorporation and Bylaws."
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING
INSTRUMENTS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of the Company's Articles of Incorporation and
Bylaws and the Bank's Stock Articles of Incorporation and Bylaws, as well as
certain federal regulations and state laws, may assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares, and certain uniform price provisions for certain
business combinations. These provisions in the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate existing management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisitions of
the Company and the Bank."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its common stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. However, there can be
no assurance that an active and liquid trading market for the common stock will
develop or, once developed, will continue, nor can there be any assurances that
purchasers of the common stock will be able to sell their shares at or above the
purchase price. The absence or discontinuance of a market for the common stock
would have an adverse impact on both the price and liquidity of the common
stock. See "Market for the Common Stock."
14
<PAGE>
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 13,965,600 shares of common stock for
an aggregate purchase price of up to $139.7 million. An increase in the number
of shares issued will decrease a subscriber's pro forma net earnings per share
and stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Bank has conducted a comprehensive review of its
systems to identify applications that could be affected by the "Year 2000" issue
and has developed an implementation plan to address the issue. The Bank has
already begun testing on its own systems. The Bank has been told that its
primary service providers anticipate all reprogramming efforts will be complete
by December 31, 1998, allowing the Bank significant time for testing. The Bank
believes that its costs related to Year 2000 will be approximately $200,000.
There can be no assurances, however, that the performance by the Bank's vendors
will be effective to remedy all potential problems. To the extent the Company's
systems are not fully Year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software would
not have a materially adverse effect on the Company's business, financial
condition, results of operations and business prospects.
COMPETITION
Due to the significant growth in the Fredericksburg area in recent
years, the Bank has encountered a significant increase in competition for both
loan origination and attracting deposits. The Bank's primary market area is
highly competitive and the Bank faces direct competition from a significant
number of financial institutions, many with a state-wide or regional presence
and, in some cases, a national presence. Many of these financial institutions
are significantly larger and have greater financial resources than the Bank. The
Bank's competition for loans comes principally from commercial banks, savings
banks, credit unions, mortgage brokers, mortgage banking companies, and
insurance companies, and most recently, from one- to four-family home builders
who not only finance their own projects, but also arrange permanent financing
for purchasers. Its most direct competition for deposits has historically come
from savings, cooperative and commercial banks and credit unions. In addition,
the Bank faces significant competition for deposits from non-bank institutions
such as brokerage firms and insurance companies in such instruments as
short-term money market funds, corporate and government securities funds, mutual
funds and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The Bank
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.
VIRGINIA CAPITAL BANCSHARES, INC.
The Company was organized under Virginia law in September 1998 at the
direction of the Board of Directors of the Bank for the purpose of acquiring all
of the capital stock to be issued by the Bank in the Conversion. The Company has
applied to the OTS to become a savings and loan holding company and, upon
approval, will be subject to regulation by the OTS. Upon consummation of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation--Holding Company Regulation." After
completion of the Conversion, the Company's assets will consist of all of the
outstanding shares of the Bank's capital stock issued to the Company in the
Conversion and that portion of the net proceeds of the Offerings retained by the
Company. The Company intends to use part of the net proceeds it retains to loan
funds to the ESOP to enable the ESOP to
15
<PAGE>
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Based on certain regulatory and market conditions, the
Company and Bank may, however, alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The Company
intends to initially invest any remaining proceeds in federal funds and short-
term U.S. Government and agency obligations. See "Use of Proceeds." Immediately
after the Conversion, the Company will have no significant liabilities.
Initially, the Company will neither own nor lease any property, but will instead
use the premises, equipment and furniture of the Bank. The management of the
Company is set forth under "Management of the Company." At the present time, the
Company does not intend to employ any persons other than officers of the Company
who are also officers of the Bank, but will utilize the support staff of the
Bank from time to time. Additional employees will be hired as appropriate to the
extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.
The Company's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.
FREDERICKSBURG SAVINGS
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences. To
a lesser extent, the Bank invests in multi-family, construction and development,
commercial real estate and consumer loans. The Bank originates one- to
four-family loans primarily for investment. At June 30, 1998, the Bank's loans,
net, totalled $415.9 million, or 88.0% of total assets. To a significantly
lesser extent, the Bank also invests in securities, primarily consisting of U.S.
Government and agency obligations and highly rated corporate bonds. At June 30,
1998, the Bank's securities portfolio totalled $32.1 million, or 0.74% of total
assets, of which $30.9 million, or 96.6%, were classified as available-for-sale.
For the six months ended June 30, 1998, the Bank's deposit accounts averaged
$375.3 million, or 95.69% of total liabilities, of which $83.1 million, or
21.45%, were savings, money market and negotiable order of withdrawal ("NOW")
accounts (collectively, "core deposits"). The Bank also uses advances from the
FHLB-Atlanta as a source of funds. At June 30, 1998, such advances totalled $8.0
million, or 2.06% of total liabilities. See "Business of the Bank."
The Bank's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.
16
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of June 30, 1998, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Stock-Based Incentive Plan are deducted from pro
forma regulatory capital.
<TABLE>
<CAPTION>
Fredericksburg Savings
Pro Forma at June 30, 1998 Based Upon the Sale
of Common Stock at $10.00 Per Share
-----------------------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 Shares
Shares Shares Shares (15% Above
(Minimum of (Midpoint of (Maximum of Maximum of
Historical at Estimated Estimated Estimated Estimated
June 30, 1998 Price Range) Price Range) Price Range) Price Range)(1)
----------------- ------------------ --------------- --------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------- -------- -------- -------- ------ -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
GAAP Capital................... $83,500 17.68% $115,747 22.94% $121,614 23.83% $127,482 24.69% $134,229 25.66%
Tangible Capital:
Capital Level................ $81,588 17.28% $113,835 22.65% $119,702 23.54% $125,570 24.41% $132,317 25.39%
Requirement.................. 7,056 1.50 7,540 1.50 7,628 1.50 7,728 1.50 7,817 1.50
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess....................... $74,532 15.78% $106,295 21.15% $112,074 22.04% $117,752 22.91% $124,500 23.89%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
Tier I Capital:
Capital Level............... $81,588 17.28% $113,835 22.65% $119,702 23.54% $125,570 24.41% $132,317 25.39%
Requirement(3).............. 14,112 3.00 15,080 3.00 15,256 3.00 15,432 3.00 15,634 3.00
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess...................... $67,476 14.28% $ 98,755 19.65% $104,446 20.54% $110,138 21.41% $116,683 22.39%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital:
Capital Level(4)(5).......... $85,131 30.20% $117,378 39.39% $123,245 40.96% $129,113 42.49% $135,860 44.22%
Requirement.................. 22,549 8.00 23,839 8.00 24,073 8.00 24,308 8.00 24,578 8.00
------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess....................... $62,582 22.20% $ 93,539 31.39% $ 99,172 32.96% $104,805 34.49% $111,282 36.22%
======= ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
____________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets. Tier
I capital levels are shown as a percentage of total adjusted assets. Risk-
based capital levels are shown as a percentage of risk-weighed assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to a
portion of the general valuation allowance of $3.5 million and any
unrealized gains on available-for-sale securities at June 30, 1998.
17
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $87.8 million and $119.4 million (or $137.7 million if the Estimated
Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such amounts.
The Company will be unable to utilize any of the net proceeds of the Offerings
until the consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings, with the remaining net proceeds to be retained by the Company. Based
on net proceeds of $103.6 million, the Company expects to utilize $51.8 million
of net proceeds to purchase the common stock of the Bank. Such portion of net
proceeds will be added to the Bank's general funds which the Bank currently
intends to utilize for general corporate purposes, including: investment in
loans, particularly residential, commercial real estate, construction and
consumer loans; investment primarily in U.S. Treasury and Agency obligations,
including one year adjustable-rate mortgage-backed securities; the repayment of
FHLB advances; funding of stock-based benefit plans; and, to a lesser extent,
investment in short-term high quality investments, such as highly rated
corporate bonds and municipal bonds. The Bank also intends to seek opportunities
to expand its products and services and intends to examine opportunities to
expand its facilities and operations through acquisitions of other financial
institutions, branch offices or other financial services companies, however, the
Bank has no specific acquisition plans at this time.
The Company intends to use a portion of the net proceeds it retains to
loan funds to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation.
Alternatively, the Company and Bank may choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The remaining
net proceeds retained by the Company will initially be invested in short-term
U.S. Treasury and Agency obligations. Based upon the sale of 8,976,000 shares or
12,144,000 shares at the minimum and maximum of the Estimated Price Range and
the issuance of shares to the Foundation, the amount of the loan to the ESOP
would be $7.8 million or $10.5 million, respectively (or $12.1 million if the
Estimated Price Range is increased by 15%) to be repaid approximately over a
twenty year period at the prevailing prime rate of interest, which currently is
8.5%. See "Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of financial institutions or
their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. The Company has no
current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation--Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to conduct stock repurchases, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. See "Regulation--Prompt Corrective Regulatory Action."
In addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and third
years following Conversion provided there are valid and compelling business
reasons for such repurchases and the OTS does not object to such repurchases.
18
<PAGE>
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
Although the Company has no current plans to repurchase its stock, in the event
the Company does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion--Certain
Restrictions on Purchase or Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Depending on market conditions, the Company's Board of
Directors intends to pay cash dividends on the Comon Stock; however no decision
has been made regarding the level of dividends that will actually be paid. In
addition, from time to time, in an effort to manage capital to a reasonable
level, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations of
dividends by the Board of Directors, if any, will depend upon a number of
factors, including the amount of net proceeds retained by the Company in the
Conversion, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
For information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Distributions" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Virginia law,
which generally provide that a Virginia corporation may make distributions to
its stockholders unless, after giving effect to the distribution, (i) the
corporation would not be able to pay its debts as they become due in the usual
course of business, or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus (unless the articles of incorporation
permit otherwise, which in the case of the Company they do not) the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the OTS.
19
<PAGE>
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on Nasdaq
under the symbol "VCAP" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on Nasdaq or that an active and liquid trading market will
develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.
20
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at June 30, 1998 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
Company Pro Forma Based Upon Sale of Common Stock
at $10.00 Per Share
---------------------------------------------------
8,976,000 10,560,000 12,144,000 13,965,600
Shares Shares Shares Shares
(Minimum of (Midpoint (Maximum (15% Above
(Minimum of of of Maximum of
Estimated Estimated Estimated Estimated
Bank Price Price Price Price
Historical Range) Range) Range) Range)(1)
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Deposits(2)................................................... $373,719 $373,719 $373,719 $373,719 $373,719
FHLB borrowings............................................... 8,000 8,000 8,000 8,000 8,000
--------- -------- --------- -------- --------
Total deposits and borrowings................................. $381,719 $381,719 $381,719 $381,719 $381,719
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none to be issued...................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 75,000,000 shares
authorized; shares to be issued as reflected.............. -- 97 114 131 151
Additional paid-in capital(3)............................... -- 87,663 103,486 119,309 137,505
Retained earnings(4)........................................ 83,216 83,216 83,216 83,216 83,216
Net unrealized gain on available-for-sale securities........ 284 284 284 284 284
Less: Expense of contribution to the Foundation,
net of taxes(5).................................. -- (4,452) (5,238) (6,023) (6,927)
Plus: Shares issued to the Foundation...................... -- 7,181 8,448 9,715 11,172
Less: Common Stock acquired by the ESOP(6)................. -- (7,755) (9,124) (10,492) (12,066)
Common Stock acquired by the Stock-Based
Incentive Plan(7)................................. -- (3,878) (4,562) (5,246) (6,033)
--------- ----------- ----------- ----------- -----------
Total stockholders' equity.................................... $83,500 $162,356 $176,624 $190,894 $207,302
======= ======== ======== ======== ========
</TABLE>
________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares pursuant to the Company's Stock-Based Incentive Plan
intended to be adopted by the Company. An amount equal to 10% of the shares
of Common Stock issued in the Conversion, including shares issued to the
Foundation, will be reserved for issuance upon the exercise of options to
be granted under the Stock-Based Incentive Plan. See "Risk Factors--
Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote 4 to the
tables under "Pro Forma Data" and "Management of the Bank--Benefits--Stock-
Based Incentive Plan."
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(5) Represents the value of the contribution of Common Stock to the Foundation
at $10.00 per share reduced by the associated tax benefits $2.7 million,
$3.2 million, $3.7 million and $4.2 million at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, based on an effective tax rate of 38%. The realization of the
federal tax benefit is limited annually to 10% of the Company's annual
taxable income, subject to the ability of the Company to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made. For state income tax purposes, the Bank will not
be able to utilize any such carry forward.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
Company. See "Use of Proceeds." The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
(7) Assumes that subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued to
the Foundation, is purchased by the Stock-Based Incentive Plan through open
market purchases at the offering price of $10.00 per share. The Common
Stock purchased by the Stock-Based Incentive Plan is reflected as a
reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
Forma Data" and "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
21
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $87.8 million and $119.4 million (or $137.7
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) Trident will receive a fee of $525,000 for its
marketing services and financial advisory role in connection with the
Conversion; and (ii) other Conversion expenses, excluding the marketing fees
paid to Trident, will be approximately $1.5 million. Actual Conversion expenses
may vary from those estimated.
Pro forma consolidated net income of the Company for the six months
ended June 30, 1998, and for the year ended December 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.41% and 5.41%
which is equivalent to the one year Treasury rate at June 30, 1998. The
calculations have been based on the one year Treasury rate, as opposed to the
Bank's yield on average assets, because the Bank will initially invest the
proceeds in short-term assets, at a lower yield, and will more effectively
invest the proceeds over time.. The tables below do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock or the effect
of any possible use of the net Conversion proceeds. The pro forma after-tax
yields for the Company and the Bank are assumed to be 3.35% and 3.35% for the
six months ended June 30, 1998 and for the year ended December 31, 1997,
respectively. All calculations were based on an effective combined federal and
state income tax rate of 38%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, as adjusted to give effect to unallocated and
uncommitted shares held by the ESOP. Historical and pro forma stockholders'
equity per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock issued in the
Conversion, including the issuance of shares to the Foundation.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Pro forma consolidated stockholders' equity represents the difference between
the stated amount of assets and liabilities of the Company. The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be stated in an amount greater than amounts that would be
available for distribution to stockholders in the event of liquidation.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the six months ended June 30, 1998 and at or
for the year ended December 31, 1997, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give effect
to the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 3 to the tables and "Management of the
Bank--Benefits--Stock-Based Incentive Plan." No effect has been given in the
tables to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock-Based Incentive Plan to be adopted by the Board
of Directors of the Company and presented to stockholders for approval at a
meeting of stockholders, nor does book value give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders or, in the event of liquidation of the
Bank, to the tax effect of the bad debt reserve and other factors. See Footnote
3 to the tables below, "The Conversion--Liquidation Rights" and "Management of
the Bank--Benefits--Stock-Based Incentive Plan." THE FOLLOWING TABLES ASSUME
THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVE
EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON
STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLES BELOW, TAKES INTO ACCOUNT
THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
22
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1998
-------------------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.00
at $10.00 at $10.00 at $10.00 Per Share
Per Share Per Share Per Share (15% above
(Minimum (Midpoint (Maximum Maximum of
of Estimated of Estimated of Estimated Estimated
Price Range) Price Range) Price Range) Price Range)(8)
------------ ------------ ----------- ---------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds............................................. $89,760 $105,600 $121,440 $139,656
Plus: Shares issued to Foundation (equal to 8% of the
stock sold in the Conversion)............................ 7,181 8,448 9,715 11,172
-------- -------- -------- --------
Pro forma market capitalization........................... $96,941 $114,048 $131,155 $150,828
======== ======== ======== ========
Gross proceeds............................................. $89,760 $105,600 $121,440 $139,656
Less: Offering expenses and commission.................... (2,000) (2,000) (2,000) (2,000)
-------- -------- -------- --------
Estimated net proceeds.................................. 87,760 103,600 119,440 137,656
Less: Common Stock acquired by the ESOP................... (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan..................................... (3,878) (4,562) (5,246) (6,033)
-------- -------- -------- --------
Estimated net proceeds, as adjusted..................... $76,127 $89,914 $103,702 $119,557
======== ======== ======== ========
Consolidated net earnings(1):
Historical................................................ $3,320 $3,320 $3,320 $3,320
Pro forma earnings on net proceeds........................ 1,275 1,506 1,737 2,003
Less: Pro forma ESOP adjustment(2)........................ (120) (141) (163) (187)
Pro forma Stock-Based Incentive Plan
adjustment(3)...................................... (240) (283) (325) (374)
-------- -------- -------- --------
Pro forma net earnings.................................. $4,235 $4,402 $4,569 $4,762
======== ======== ======== ========
Per share net earnings(1)(4):
Historical................................................ $ 0.37 $ 0.32 $ 0.27 $ 0.24
Pro forma earnings on net proceeds........................ 0.14 0.14 0.14 0.14
Less: Pro forma ESOP adjustment(2)........................ (0.01) (0.01) (0.01) (0.01)
Pro forma Stock-Based Incentive Plan
adjustment(3)...................................... (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net earnings per share........................ $ 0.47 $ 0.42 $ 0.37 $ 0.34
======== ======== ======== ========
Stockholders' equity:
Historical................................................ $ 83,500 $ 83,500 $ 83,500 $ 83,500
Estimated net proceeds.................................... 87,760 103,600 119,440 137,656
Plus: Tax benefit of Foundation(1)........................ 2,729 3,210 3,692 4,245
Less: Common Stock acquired by ESOP(2).................... (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan(3).................................. (3,878) (4,562) (5,246) (6,033)
-------- -------- -------- --------
Pro forma stockholders' equity(3)(5)(6)................. $162,356 $176,624 $190,894 $207,302
======== ======== ======== ========
Stockholders' equity per share(7):
Historical................................................ $ 8.61 $ 7.32 $ 6.37 $ 5.54
Estimated net proceeds.................................... 9.05 9.08 9.11 9.13
Plus: Tax benefit of Foundation........................... 0.28 0.28 0.28 0.28
Less: Common Stock acquired by ESOP(2).................... (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by Stock-Based
Incentive Plan(3).................................. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3)(5)(6)....... $16.74 $15.48 $14.56 $13.75
======== ======== ======== ========
Offering price as a percentage of pro forma stockholders'
equity per share.......................................... 59.74% 64.60% 68.68% 72.73%
Offering price to pro forma net earnings
per share (annualized).................................... 10.64 11.90 13.51 14.71
</TABLE>
(Footnotes on next page)
23
<PAGE>
_____________________
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in the fourth quarter of 1998 if the establishment of the
Foundation is approved. In that event, the Company will recognize an after-
tax expense for the amount of the contribution to the Foundation which is
expected to be $4.5 million, $5.2 million, $6.0 million and $6.9 million at
the minimum, midpoint, maximum, and maximum as adjusted, of the Estimated
Price Range, respectively, based on an effective tax rate of 38%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased by
the ESOP. For purposes of this table, the funds used to acquire such shares
are assumed to have been borrowed by the ESOP from the Company. See "Use of
Proceeds." The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based upon
20 equal annual installments of principal, with an assumed interest rate at
8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
to the ESOP is equivalent to the debt service requirement for the six
months ended June 30, 1998 and was made at the end of the period; (ii) that
19,388, 22,810, 26,231 and 30,166 shares at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively, were
committed to be released during the six months ended June 30, 1998 at an
average fair value of $10.00 per share in accordance with Statement of
Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. A tax rate of 38% was used for all calculations. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion, and assumes any necessary stockholder
or regulatory approval of the Stock-Based Incentive Plan has been received.
The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, either
through open market purchases, if permissible, or from authorized but
unissued shares of Common stock or treasury stock of the Company, if any.
Funds used by the Stock-Based Incentive Plan to purchase the shares will be
contributed to the Stock-Based Incentive Plan by the Bank. In calculating
the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
the shares were acquired by the Stock-Based Incentive Plan at the beginning
of the period presented in open market purchases at the Purchase Price and
that 10% of the amount contributed was an amortized expense during such
period. The issuance of authorized but unissued shares of the Company's
Common Stock to the Stock-Based Incentive Plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.8% and pro forma net earnings per share would be $0.46,
$0.41, $0.37 and $0.34 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively, and pro forma shareholders' equity per
share would be $16.10, $14.89, $13.99 and $13.22 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively. There can be
no assurance that stockholder approval of the Stock-Based Incentive Plan
will be obtained, or that the actual purchase price of the shares will be
equal to the Purchase Price. A tax rate of 38% was used for all
calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
(4) The number of shares used in the calculation of historical and pro forma
earnings per share was 8,937,942, 10,515,226, 12,092,509 and 13,906,386
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation,
or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance of
Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.43, $0.38, $0.34 and $0.31, respectively, and the pro forma
stockholders' equity per share would be $16.13, $14.99, $14.14 and $13.40,
respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) The number of shares used in the calculation of historical and pro forma
stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
15,082,848 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
24
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
------------------------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.00
at $10.00 at $10.00 at $10.00 Per Share
Per Share Per Share Per Share (15% above
(Minimum (Midpoint (Maximum Maximum of
of Estimated of Estimated of Estimated Estimated
Price Range) Price Range) Price Range) Price Range)(8)
------------- ------------ ----------- ----------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds.......................................... $ 89,760 $ 105,600 $ 121,440 $ 139,656
Plus: Shares issued to Foundation (equal to 8%
of the stock sold in the Conversion).................. 7,181 8,448 9,715 11,172
----------- ----------- ---------- ------------
Pro forma market capitalization....................... $ 96,941 $ 114,048 $ 131,155 $ 150,828
=========== =========== ========== ============
Gross proceeds.......................................... $ 89,760 $ 105,600 $ 121,440 $ 139,656
Less: Offering expenses and commission............. (2,000) (2,000) (2,000) (2,000)
Estimated net proceeds.............................. 87,760 103,600 119,440 137,656
Less: Common Stock acquired by the ESOP............ (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan.............................. (3,878) (4,562) (5,246) (6,033)
----------- ----------- ---------- ------------
Estimated net proceeds, as adjusted................. $ 76,127 $ 89,914 $ 103,702 $ 119,557
=========== =========== ========== ============
Consolidated net earnings(1):
Historical............................................ $ 6,425 $ 6,425 $ 6,425 $ 6,425
Pro forma earnings on net proceeds.................... 2,550 3,012 3,474 4,005
Less: Pro forma ESOP adjustment(2)................. (240) (283) (325) (374)
Pro forma Stock-Based Incentive Plan
adjustment(3)............................... (481) (566) (651) (748)
----------- ----------- ---------- ------------
Pro forma net earnings............................. $ 8,254 $ 8,588 $ 8,923 $ 9,308
=========== =========== ========== ============
Per share net earnings(1)(4):
Historical............................................ $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma earnings on net proceeds.................... 0.28 0.29 0.29 0.29
Less: Pro forma ESOP adjustment(2)................... (0.03) (0.03) (0.03) (0.03)
Pro forma Stock-Based Incentive Plan
adjustment(3)................................. (0.05) (0.05) (0.05) (0.05)
----------- ----------- ---------- ------------
Pro forma net earnings per share................... $ 0.92 $ 0.82 $ 0.74 $ 0.67
=========== =========== ========== ============
Stockholders' equity:
Historical............................................ $ 80,073 $ 80,073 $ 80,073 $ 80,073
Estimated net proceeds................................ 87,760 103,600 119,440 137,656
Plus: Tax benefit of Foundation(1)................. 2,729 3,210 3,692 4,245
Less: Common Stock acquired by ESOP(2)............. (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)........................... (3,878) (4,562) (5,246) (6,033)
----------- ----------- ---------- ------------
Pro forma stockholders' equity(3)(5)(6)............ $ 158,929 $ 173,197 $ 187,467 $ 203,875
=========== =========== ========== ============
Stockholders' equity per share(7):
Historical............................................ $ 8.26 $ 7.02 $ 6.11 $ 5.31
Estimated net proceeds................................ 9.05 9.08 9.11 9.13
Plus: Tax benefit of Foundation.................... 0.28 0.28 0.28 0.28
Less: Common Stock acquired by ESOP(2)............. (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)........................... (0.40) (0.40) (0.40) (0.40)
----------- ----------- ---------- ------------
Pro forma stockholders' equity per share(3)(5)(6).. $ 16.39 $ 15.18 $ 14.30 $ 13.52
=========== =========== ========== ============
Offering price as a percentage of pro forma
stockholders' equity per share......................... 61.01% 65.88% 69.93% 73.96%
Offering price to pro forma net earnings
per share............................................. 10.87 12.20 13.51 14.93
</TABLE>
(Footnotes on next page)
25
<PAGE>
- --------------
(1) Does not give effect to the non-recurring expense that will be recognized
in the fourth quarter of 1998 if the establishment of the Foundation is
approved. In that event, the Company will recognize an after-tax expense
for the amount of the contribution to the Foundation which is expected to
be $4.5 million, $5.2 million, $6.0 million and $6.9 million at the
minimum, midpoint, maximum, and maximum as adjusted, of the Estimated Price
Range, respectively, based on an effective tax rate of 38%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased by
the ESOP. For purposes of this table, the funds used to acquire such shares
are assumed to have been borrowed by the ESOP from the Company. See "Use of
Proceeds." The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based upon
20 equal annual installments of principal, with an assumed interest rate at
8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
to the ESOP is equivalent to the debt service requirement for the year
ended December 31, 1997 and was made at the end of the period; (ii) that
38,776, 45,619, 52,462 and 60,331 shares at the minimum, the midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, were committed to be released during the year ended December
31, 1997 at an average fair value of $10.00 per share in accordance with
Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. A tax rate of 38% was used for all
calculations. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion, and assumes any necessary stockholder
or regulatory approval of the Stock-Based Incentive Plan has been received.
The Stock-Based Incentive Plan intends to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, or 387,763, 456,192, 524,621 and
603,314 shares of Common Stock at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, either
through open market purchases, if permissible, or from authorized but
unissued shares of Common stock or treasury stock of the Company, if any.
Funds used by the Stock-Based Incentive Plan to purchase the shares will be
contributed to the Stock-Based Incentive Plan by the Bank. In calculating
the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
the shares were acquired by the Stock-Based Incentive Plan at the beginning
of the period presented in open market purchases at the Purchase Price and
that 20% of the amount contributed was an amortized expense during such
period. The issuance of authorized but unissued shares of the Company's
Common Stock to the Stock-Based Incentive Plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.8% and pro forma net earnings per share would be $0.90,
$0.80, $0.72 and $0.65 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively, and pro forma stockholders' equity per
share would be $15.76, $14.60, $13.74 and $13.00 at the minimum, midpoint,
maximum, and 15% above the maximum of the range, respectively. There can be
no assurance that stockholder approval of the Stock-Based Incentive Plan
will be obtained, or that the actual purchase price of the shares will be
equal to the Purchase Price. A tax rate of 38% was used for all
calculations. See "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
(4) The number of shares used in the calculation of historical and pro forma
earnings per share was 8,957,330, 10,538,035, 12,118,740 and 13,936,551
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation,
or 969,408, 1,140,480, 1,311,552 and 1,508,285 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance of
Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.83, $0.74, $0.66 and $0.60, respectively, and the pro forma
stockholders' equity per share would be $15.81, $14.71, $13.90 and $13.20,
respectively. See "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) The number of shares used in the calculation of historical and pro forma
stockholders' equity per share was 9,694,080, 11,404,800, 13,115,520 and
15,082,848 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
26
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
If the Foundation were not being established as part of the Conversion,
FinPro has estimated that the pro forma market capitalization of the Bank would
be approximately $122.0 million at the midpoint, which is approximately $8.0
million greater than the pro forma market capitalization of the Bank if the
Foundation is approved by members of the Bank and would result in approximately
a $16.4 million increase, or 15.5%, in the amount of Common Stock offered for
sale in the Conversion. The pro forma price to book ratio and pro forma price to
earnings ratio would be approximately the same under both the current appraisal
and the estimate of the value of the Company without the Foundation. Further,
assuming the midpoint of the Estimated Price Range, pro forma stockholders'
equity per share and pro forma earnings per share would be essentially the same
with the Foundation as without the Foundation. This estimate by FinPro was
prepared at the request of the OTS and is solely for purposes of providing
members with sufficient information with which to make an informed decision on
the Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting of Members that the appraisal prepared at that
time would conclude that the pro forma market value of the Company would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1998.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
--------------------- --------------------- --------------------- ---------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Estimated offering amount.................. $ 89,760 $103,700 $105,600 $122,000 121,440 $140,300 $139,656 $161,345
Pro forma market capitalization............ 96,941 103,700 114,048 122,000 131,155 140,300 150,828 161,345
Total assets............................... 551,136 561,536 565,404 577,640 579,674 593,744 596,082 612,263
Total liabilities.......................... 388,780 388,780 388,780 388,780 388,780 388,780 388,780 388,780
Pro forma stockholders' equity............. 162,356 172,756 176,624 188,860 190,894 204,964 207,302 223,483
Pro forma consolidated
net earnings............................ 4,235 4,429 4,402 4,631 4,569 4,833 4,762 5,065
Pro forma stockholders' equity
per share................................ 16.74 16.66 15.48 15.48 14.56 14.61 13.75 13.86
Pro forma consolidated net
earnings per share....................... 0.47 0.47 0.42 0.42 0.37 0.38 0.34 0.34
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share....................... 59.74% 60.02% 64.60% 64.60% 68.68% 68.45% 72.73% 72.15%
Offering price to pro forma net
earnings per share..................... 10.64x 10.64x 11.90x 11.90x 13.51x 13.16x 14.71x 14.71x
Pro forma market capitalization
to total assets........................ 17.59% 18.47% 20.17% 21.12% 22.63% 23.63% 25.30% 26.35%
Pro Forma Financial Ratios:
Return on total assets................... 1.54% 1.58% 1.56% 1.60% 1.58% 1.63% 1.60% 1.65%
Return on stockholders' equity
(annualized)........................... 5.22% 5.13% 4.98% 4.90% 4.79% 4.72% 4.59% 4.53%
Stockholders' equity to total assets..... 29.46% 30.76% 31.24% 32.70% 32.93% 34.52% 34.78% 36.50%
</TABLE>
27
<PAGE>
FREDERICKSBURG SAVINGS
STATEMENTS OF INCOME
The following Statements of Income for each of the years in the
three-year period ended December 31, 1997 have been audited by Cherry Bekaert &
Holland, L.L.P. independent certified public accountants, whose report thereon
is included elsewhere in this Prospectus. With respect to the information for
the six months ended June 30, 1998 and 1997, which is unaudited, in the opinion
of management, all adjustments necessary for a fair presentation of such interim
periods have been included and are of a normal recurring nature. Results for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These Statements of
Income should be read in conjunction with the Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
------------ --------- ------------- --------- ------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable:
Mortgage loans................................... $15,621 $15,814 $31,820 $31,402 $30,832
Consumer and other loans......................... 383 330 696 543 611
Investment securities............................... 1,388 1,442 2,929 3,285 4,133
-------- -------- -------- -------- --------
Total interest income............................ 17,392 17,586 35,445 35,230 35,576
-------- -------- -------- -------- --------
Interest expense:
Deposit accounts.................................... 9,375 9,262 18,816 19,076 18,432
FHLB advances and other borrowings.................. 245 306 602 459 565
-------- -------- -------- -------- --------
Total interest expense........................... 9,620 9,568 19,418 19,535 18,997
-------- -------- -------- -------- --------
Net interest and dividend income before
provision for loan losses...................... 7,772 8,018 16,027 15,695 16,579
Provision for loan losses.............................. 269 241 375 325 412
-------- -------- -------- -------- --------
Net interest and dividend income after
provision for loan losses...................... 7,503 7,777 15,652 15,370 16,167
-------- -------- -------- -------- --------
Noninterest income:
Loan origination fees and other service charges..... 1,174 734 1,592 1,241 1,184
Other income........................................ 102 50 142 169 85
-------- -------- -------- -------- --------
Total noninterest income......................... 1,276 784 1,734 1,410 1,269
-------- -------- -------- -------- --------
Noninterest expense:
Compensation and benefits........................... 1,637 1,782 3,726 3,949 3,602
Occupancy and equipment............................. 343 343 717 762 608
Federal deposit insurance premiums.................. 172 129 349 3,391 864
Net cost of foreclosed real estate operations....... 25 21 163 130 185
Other expense....................................... 1,067 877 2,054 1,566 1,449
-------- -------- -------- -------- --------
Total noninterest expense........................ 3,244 3,152 7,009 9,798 6,708
-------- -------- -------- -------- --------
Income before income tax expense................. 5,535 5,409 10,377 6,982 10,728
-------- -------- -------- -------- --------
Income tax expense:
Current............................................. 2,280 2,527 3,990 2,943 4,508
Deferred............................................ (65) (377) (38) (542) (438)
-------- -------- -------- -------- --------
Net income....................................... $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658
======== ======== ======== ======== ========
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses and loan fees and service charges. The Bank's
noninterest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, the
cost of foreclosed real estate operations, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.
MANAGEMENT STRATEGY
Traditionally, management's primary goal has been to control growth
and maintain the Bank's profitability, market share, asset quality and its
capital position by: (i) investing primarily in one- to four-family loans
secured by properties located in its primary market area; (ii) investing in non-
residential, construction and development and multi-family loans secured by
properties located in the Bank's primary market area, to the extent that such
loans meet the Bank's general underwriting criteria including, but not limited
to, satisfaction of certain loan-to-value ("LTV") and debt service coverage
ratios and satisfaction that the borrower is experienced in these types of real
estate projects; (iii) investing in consumer loans; (iv) investing funds not
utilized for loan investments in short-term U.S. Treasury and agency
obligations, including mortgage-backed and mortgage-related securities as well
as highly rated corporate notes and municipal bonds; and (v) building capital
while controlling operating expenses. See "Business of the Bank--Lending
Activities" and "--Securities Investment Activities." In the future, management
intends to seek growth opportunities and intends to seek means of lessening its
exposure to interest rate risk while avoiding investments the Bank believes bear
risks inconsistent with the Bank's investment policies. Management intends to
grow by expanding the products and services it offers, as necessary, in order to
improve its market share in its primary market area as well as seeking
opportunities to expand its market share and product line through acquisitions,
including, possibly, the acquisition of a commercial bank, although management
has no current plans in that regard. Currently, the Bank is seeking means to
increase its total deposits, particularly checking accounts, and has begun to
implement 24 hour banking services and, in the future, may expand its consumer
retail products. Other products and services are also being reviewed, including
products that would attract more local business to the Bank. Emphasis has been
placed on increasing the number of transaction accounts the Bank has through
aggressive advertising and expanding the variety of savings and checking
accounts available. The Bank will also seek to expand consumer loans, including
home equity loan originations. Finally, depending upon market conditions,
management may implement leverage strategies to enhance income. Such strategies
would be to increase borrowings and invest the borrowed funds in secured
investments to enhance income from the spread between the cost of the borrowed
funds and the investment yield.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates, while
not subjecting the Bank to undue credit or investment risk. The Bank monitors
its interest rate risk as such risk relates to its operating strategies. The
Bank's Board of Directors has established an Asset/Liability Committee,
responsible for reviewing its asset/liability policies and interest rate risk
position, which meets on a regular basis, and reports trends and interest rate
risk position to the
29
<PAGE>
Board of Directors on a quarterly basis. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Bank. See "Risk Factors--Sensitivity to Changes in Interest Rates."
In recent years, the Bank has become subject to increasing risk in the
event interest rates begin to rise due to the substantial levels of fixed-rate
loans the Bank has been originating due to high customer demand for such
products in the Bank's primary market area. As discussed above, the Bank has
sought to offset the interest rate risk associated with originating primarily
fixed-rate loans in a low interest rate environment by investing in short-term
U.S. Treasury and agency obligations to enable the Bank to reinvest relatively
quickly in higher yielding investments if interest rates rise. In the future,
depending upon market conditions, the Bank intends to seek opportunities to
increase its investment in short-term adjustable rate mortgage-backed securities
and may evaluate opportunities to sell long-term fixed-rate loans in the
secondary market. Currently, management believes that its high capital and level
of liquidity coupled with low operating expenses would enable the Bank to
continue operating profitably in the event of a rapid rise in interest rates, as
it would be positioned to invest in higher yielding investments to offset the
negative impact its high fixed-rate loan portfolio would have on the Bank's
earnings; however, depending upon the magnitude of any change in interest rates,
the Bank may not be able to react quickly enough to reinvest such funds and
therefore may not be able to continue to be profitable following a significant
increase in rates. The Bank may also increase borrowings which would further
enable it to invest in higher yielding instruments in an increasing rate
environment.
Gap Analysis. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At June 30, 1998, the Bank's cumulative one year interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year) as a percentage of total assets, was negative 35.53%.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of rising
interest rates, an institution with a negative gap position would be in a worse
position to invest in higher yielding assets as compared to an institution with
a positive gap position which, consequently, may result in the cost of its
interest-bearing liabilities increasing at a rate faster than its yield on
interest-earning assets than if it had a positive gap. During a period of
falling interest rates, an institution with a negative gap position would tend
to have its interest-bearing liabilities repricing downward at a faster rate
than its interest-earning assets as compared to an institution with a positive
gap which, consequently, may tend to positively affect the growth of its net
interest income.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "Gap Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1998, on the basis of contractual maturities, and scheduled rate
adjustments within a one year period and subsequent selected time intervals. The
loan amounts in the table reflect principal balances expected to be redeployed
and/or repriced as a result of contractual amortization of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Mortgage-backed securities were assumed to prepay at 30%
annually. Savings and certificate accounts were assumed to decay at 20%, 20%,
20%, 20%, 20% and 0%, and money market savings accounts were assumed to decay at
50%, 25%, 25%, 0%, 0% and 0%, for the periods of one year or less, more than one
year to two years, more than two years to three years, more than three years to
four years, more than four years to five years, and more than five years,
respectively. These assumptions are generally based on the FDIC's deposit decay
guidelines and the Bank's historical experience. Prepayment and deposit decay
rates can have a significant impact on the Bank's estimated gap. While the Bank
believes such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates
30
<PAGE>
will approximate actual future loan prepayment and deposit withdrawal activity.
See "Business of the Bank -- Lending Activities," "-- Securities Investment
Activities" and "-- Sources of Funds."
<TABLE>
<CAPTION>
MORE MORE
THAN MORE MORE THAN
1 YEAR THAN THAN 4 YEARS MORE
1 YEAR TO 2 YEARS TO 3 YEARS TO TO THAN TOTAL
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS 5 YEARS AMOUNT
---------- ----------- ----------- ---------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans(1).................... $27,846 $136,398 $ 4,395 $ 4,459 $ 6,596 $245,455 $425,149
Consumer and other loans............. 3,791 1,282 1,122 1,893 1,085 -- 9,173
Mortgage-backed and related
securities......................... 357 357 357 119 -- -- 1,190
Overnight and short term
investments....................... 8,248 -- -- -- -- -- 8,248
Investments and interest-
earning deposits(2)............... 19,012 3,535 3,307 2,305 -- 6,308 34,467
---------- ----------- ----------- ---------- ----------- ----------- --------
Total interest-earning assets..... $ 59,254 $141,572 $ 9,181 $ 8,776 $ 7,681 $251,763 $478,227
========== =========== =========== ========== =========== =========== ========
INTEREST-BEARING LIABILITIES:
Money market deposit accounts
and other transaction accounts.... 22,810 11,406 11,406 -- -- -- 45,622
Savings accounts..................... 7,563 7,563 7,564 7,564 7,564 -- 37,818
Certificate accounts................. 196,666 48,743 23,783 8,988 12,099 -- 290,279
---------- ----------- ----------- ---------- ----------- ----------- --------
Total interest-bearing deposits......... 227,039 67,712 42,753 16,552 19,663 -- 350,908
FHLB advances........................ -- 3,000 -- -- 5,000 -- 8,000
---------- ----------- ----------- ---------- ----------- ----------- --------
Total interest-bearing liabilities... $227,039 $ 70,712 $ 42,753 $ 16,552 $ 24,663 $ -- $381,722
========== =========== =========== ========== =========== =========== ========
Interest sensitivity gap................ $(167,785) $ 70,860 $ (33,572) $ (7,776) $ (16,982) $251,763 $ 96,506
========== =========== =========== ========== =========== =========== ========
Cumulative interest-rate
sensitivity gap....................... $(167,785) $ (96,925) $ (130,497) $ (138,273) $ (155,255) $ 96,508
========== ========== ========== ========== ========== =========
Cumulative interest-rate
sensitivity gap as a percentage of
total assets.......................... (35.53)% (20.52)% (27.63)% (29.28)% (32.87)% 20.43%
Cumulative interest-rate gap as
a percentage of total
interest-earning assets............... (35.08)% (20.27)% (27.29)% (28.91)% (32.46)% 20.18%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities.......................... (43.96)% (25.39)% (34.19)% (36.22)% (40.67)% 25.28%
</TABLE>
_______________________________
(1) Excludes nonaccrual loans.
(2) Includes investment securities available-for-sale and stock in
FHLB-Atlanta.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
31
<PAGE>
NET PORTFOLIO VALUE. As part of its interest rate risk analysis, the
Bank uses an interest rate sensitivity model which generates estimates of the
change in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of June 30, 1998 (the latest NPV analysis prepared by
the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES IN NPV AS % OF PORTFOLIO
BASIS POINTS (RATE SHOCK) NET PORTFOLIO VALUE VALUE OF ASSETS
--------------------------- ------------------------------------ -----------------------
NPV
AMOUNT $ CHANGE % CHANGE RATIO CHANGE(1)
---------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400....................... $39,029 $(42,383) (52.06)% 9.25% (803)
+300....................... 50,125 (31,287) (38.43) 11.53 (574)
+200....................... 61,264 (20,148) (24.75) 13.69 (358)
+100....................... 72,073 (9,339) (11.47) 15.66 (161)
Static...................... 81,412 -- -- 17.27 --
--100....................... 88,138 6,726 8.26 18.35 108
--200....................... 91,203 9,791 12.03 18.75 148
--300....................... 94,588 13,176 16.18 19.19 192
--400....................... 99,342 17,930 22.02 19.84 257
</TABLE>
_____________________
(1) Expressed in basis points.
As is the case with the Gap Table, certain shortcomings are inherent
in the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
AVERAGE BALANCE SHEETS. The following tables set forth certain
information relating to the Bank at and for the six months ended June 30, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.
32
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
AT JUNE 30, 1998 1998 1997
------------------ ----------------------------- -------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------- ---------- --------- ------- ------------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net......................... $406,890 7.68% $402,658 $15,621 7.76% $397,809 $15,814 7.96%
Consumer and other loans, net............... 9,096 8.42 8,899 383 8.60 8,256 330 8.00
Mortgage-backed and related securities...... 1,190 9.71 1,243 103 16.58 1,438 118 16.40
Overnight and short-term deposits........... 9,031 4.71 13,848 329 4.76 12,970 294 4.54
Investment securities(1).................... 34,467 4.96 34,234 956 5.58 35,158 1,030 5.86
-------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets........... 460,674 7.44% 460,882 $17,392 7.54% 455,634 $17,586 7.72%
----- ------- ----- ------- -----
Noninterest-earning assets.................... 11,606 13,127 13,186
-------- -------- --------
Total assets............................ $472,280 $474,009 $468,817
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Transaction accounts........................ $ 2,481 0.32% $ 3,524 $ 5 0.28% $ 3,113 $ 4 0.26%
Savings accounts............................ 80,959 3.25 83,136 1,320 3.18 88,135 1,417 3.22
Certificates of deposit..................... 290,279 5.71 288,687 8,050 5.58 283,856 7,841 5.52
-------- ----- -------- ------- ----- -------- ------- -----
Total deposits......................... 373,719 5.16 375,347 9,375 5.00 375,104 9,262 4.94
FHLB advances............................... 8,000 6.19 8,000 245 6.12 10,000 306 6.12
-------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing liabilities..... 381,719 5.16% 383,347 $ 9,620 5.02% 385,104 $ 9,568 4.96%
----- ------- ----- ------- -----
Other liabilities............................. 7,061 8,902 8,839
-------- -------- --------
Total liabilities...................... 388,780 392,249 393,944
Equity capital................................ 83,500 81,760 74,874
-------- -------- --------
Total liabilities and equity capital... $472,280 $474,009 $468,817
======== ======== ========
Net interest income/Net interest
rate spread(2).............................. 2.28% $ 7,772 2.52% $ 8,018 2.76%
==== ======= ==== ======= ====
Net earning assets/Net interest margin(3)..... $ 38,955 3.42% $ 77,535 3.36% $70,527 3.52%
======== ==== ======== ==== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities................. 120.68% 120.23% 118.31%
====== ====== ======
</TABLE>
_________________________
(1) Includes investment securities available-for-sale and stock in FHLB-Atlanta.
(2) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
33
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ------- ---------- ---------- --------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net............... $399,924 $ 31,820 7.96% $388,751 $ 31,402 8.08% $368,361 $ 30,832 8.37%
Consumer and other loans, net..... 8,495 696 8.19 9,271 543 5.86 10,703 611 5.71
Mortgage-backed and related
securities...................... 1,396 237 16.98 1,652 277 16.77 2,009 320 15.93
Overnight and short-term
deposits........................ 13,076 623 4.76 14,685 661 4.50 12,304 659 5.36
Investment securities(1).......... 34,851 2,069 5.94 40,868 2,347 5.74 53,907 3,154 5.85
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total interest-earning
assets...................... 457,742 $ 35,445 7.74% 455,226 $ 35,230 7.74% 447,283 $ 35,576 7.95%
-------- ----- -------- ----- -------- -----
Noninterest-earning assets.......... 13,052 13,724 11,649
-------- -------- --------
Total assets.................. $470,794 $468,950 $458,932
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Transaction accounts.............. $ 3,329 $ 7 0.21% $ 3,609 $ 6 0.17% $ 891 $ 8 0.90%
Savings accounts.................. 86,907 2,818 3.24 94,856 2,977 3.14 101,574 3,329 3.28
Certificates of deposit........... 285,410 15,991 5.60 283,944 16,093 5.67 275,907 15,095 5.47
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total deposits.................. 375,646 18,816 5.01 382,409 19,076 4.99 378,372 18,432 4.87
FHLB advances and other borrowings 9,667 602 6.23 7,417 459 6.19 8,000 565 7.06
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities................... 385,313 $ 19,418 5.04% 389,826 $ 19,535 5.01% 386,372 $ 18,997 4.92%
-------- ----- -------- ----- -------- -----
Other liabilities................. 8,897 7,719 7,062
-------- -------- --------
Total liabilities............... 394,210 397,545 393,434
Equity capital.................... 76,584 71,405 65,498
-------- -------- --------
Total liabilities and equity
capital....................... $470,794 $468,950 $458,932
======== ======== ========
Net interest income/Net interest
rate spread(2).................... $ 16,027 2.70% $ 15,695 2.73% $ 16,579 3.03%
======== ==== ======== ==== ======== ====
Net earning assets/Net interest
margin(3)......................... $ 72,429 3.50% $ 65,400 3.45% $ 60,916 3.71%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets
to interest-bearing liabilities... 118.80% 116.78% 115.77%
======= ======= =======
</TABLE>
- -----------
(1) Includes investment securities available-for-sale and stock in
FHLB-Atlanta.
(2) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
34
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO COMPARED TO
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------- ------------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------- -------- -------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net................ $ 386 $(579) $(193) $ 903 $(485) $ 418 $1,707 $(1,137) $ 570
Consumer and other loans........... 51 2 53 (45) 198 153 (82) 14 (68)
Mortgage-backed and related
securities....................... (32) 17 (15) (43) 3 (40) (57) 14 (43)
Overnight and short term
deposits......................... 40 (5) 35 (72) 34 (38) 128 (126) 2
Investment and interest-earning
deposits......................... (54) (20) (74) 345 67 (278) (763) (44) (807)
----- ----- ----- ----- ----- ----- ------ ------- -----
Total interest-earning
assets....................... $ 391 $(585) $(194) $ 397 $(182) $ 215 933 $(1,279) $(346)
===== ===== ===== ===== ===== ===== ====== ======= =====
INTEREST-BEARING LIABILITIES:
Transaction accounts............... $ 1 $ -- $ 1 $ -- $ 1 $ 1 $ 24 $ (26) $ (2)
Savings accounts................... (161) 64 (97) (250) 91 (159) (220) (132) (352)
Certificate of deposits............ 267 (58) 209 83 (185) (102) 440 558 998
Total interest-bearing
deposits..................... 107 6 113 (167) (93) (260) 244 400 644
FHLB advances...................... (122) 61 (61) 139 4 143 (41) (65) (106)
----- ----- ----- ----- ----- ----- ------ ------- -----
Total interest-bearing
liabilities.................. $ (16) $ 68 $ 52 $ (28) $ (89) $(117) $ 203 $ 335 $ 538
===== ===== ===== ===== ===== ===== ====== ======= =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Assets totalled $472.3 million at June 30, 1998, an increase of $360,000,
or .08% from total assets of $471.9 million at December 31, 1997. The increase
in assets during the six month period was due primarily to a $3.0 million
increase in the Bank's loan portfolio, which was substantially offset by
reductions in cash and cash equivalents of $2.3 million, investment securities
of $223,000 and $101,000 in mortgage-backed securities.
LOANS. The increase in total loans was primarily due to increases in real
estate mortgage and consumer installment loans, which were partially offset by a
decrease in non-residential real estate and an increase in undisbursed loan
funds. Although total mortgage loans increased $5.9 million, the level of total
real estate mortgage loans, as a percentage of total loans, remained relatively
stable at 97.90%, up slightly from 97.93% at December 31, 1997. The growth in
the Bank's real estate mortgage loan portfolio is primarily a result of the
Bank's decision to continue to originate and retain real estate loans in its
portfolio. Real estate construction loans increased from $16.0 million (3.72% of
the portfolio) at December 31, 1997 to $20.0 million (4.57% of the portfolio) at
June 30, 1998. Non-residential real estate loans decreased by $5.6 million from
$41.0 million at December 31, 1997 to $35.3 million at June 30, 1998. This was
the result of large loan payoffs in this portfolio. Undisbursed loan funds
increased from $5.0 million at December 31, 1997 to $8.7 million at June 30,
1998. This was due to the increase in these balances awaiting funding of
construction loans.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$5.5 million at December 31, 1997 to $5.6 million at June 30, 1998, an increase
of $161,000. This increase reflects the economic stability in the market area as
well as improvement in net charged off loans. The adequacy of the allowance for
loan losses is evaluated monthly by management based upon a review of
significant loans, with particular emphasis on nonperforming and delinquent
loans that management believes warrant special attention. At June 30, 1998, the
35
<PAGE>
allowance for loan losses provided coverage of 174.85% of total nonperforming
loans, down slightly from 194.60% at December 31, 1997. The balance of the
allowance is maintained at a level which is, in management's judgment,
representative of the amount of risk inherent in the loan portfolio. See
"Business -- Allowance for Loan Losses."
INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.3 million and $31.2 million, respectively,
at December 31, 1997 to $1.2 million and $30.9 million, respectively, at
June 30, 1998. These decreases were primarily due to redemptions and principal
payments of these securities totalling approximately $4.1 million during the six
months ended June 30, 1998. These repayments were offset by purchases of
securities totalling $3.7 million. Currently, management intends to continue
allowing its investment securities to mature and paydown and to reinvest the
proceeds primarily in the securities classified by the Bank as available-for-
sale and in new loans.
DEPOSITS. Total deposits decreased $3.4 million, or 0.9%, from $377.1
million at December 31, 1997 to $373.7 million at June 30, 1998. While time
deposits increased $1.0 million, or 0.27%, during the period, savings accounts
decreased $900,000, or 0.24%, money market accounts decreased $2.7 million, or
0.72%, and non-interest-bearing accounts decreased $800,000, or 0.21%.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Assets totalled $471.9 million at December 31, 1997, up $2.0 million, or
0.43%, from $469.9 million at December 31, 1996. Most of the increase was
concentrated in the loan portfolio which increased $7.9 million for the year
ending December 31, 1997 to $413.0 million, which increase was partially offset
by a reduction in cash and cash equivalents of $4.7 million. Total deposits
increased by $1.4 million, from $375.7 million at December 31, 1996 to $377.1 at
December 31, 1997. FHLB advances decreased $7.0 million from $15.0 million at
December 31, 1996 to $8.0 million at December 31, 1997.
LOANS. The increase in total loans was primarily due to increases in non-
residential real estate loans and consumer loans, which were partially offset by
decreases in the Bank's construction and development loans. Although, total
real estate mortgage loans increased $2.9 million, or 0.67%, the level of total
mortgage loans as a percentage of total loans decreased from 98.12% at
December 31, 1996 to 97.93% at December 31, 1997 due to the increase in consumer
loans. Real estate construction loans declined from $21.3 million, or 4.98% of
the portfolio, at December 31, 1996 to $16.0 million, or 3.72% of the portfolio,
at December 31, 1997. The decline in real estate construction loans resulted
from large payoffs for this type of borrowing.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses decreased by
$65,000 to $5.5 million at December 31, 1997 from December 31, 1996. This slight
reduction reflects the economic stability in the market area as well as
improvements in net charged off loans. The adequacy of the allowance for loan
losses is evaluated monthly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management believes warrant special attention. At December 31, 1997, the
allowance for loan losses provided coverage of 194.60% of total nonperforming
loans, up from 63.33% at December 31, 1996.
INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.5 million and $32.0 million, respectively,
at December 31, 1996 to $1.3 million and $31.2 million, respectively, at
December 31, 1997. These decreases were driven by redemptions and principal
payments of these securities, totalling approximately $3.0 million during the
year ended December 31, 1997. The repayments were offset by purchases of
securities totalling $2.8 million.
DEPOSITS. Total deposits increased $1.5 million, or 0.40%, from $375.7
million at December 31, 1996 to $377.1 million at December 31, 1997. Of this
total increase, certificates of deposit increased $6.4 million, or 2.2%, and
non-interest-bearing accounts increased $815,000. These increases were partially
offset by decreases in money market accounts of $4.8 million and passbook
accounts of $952,000. FHLB advances decreased from $15.0 million at December 31,
1996 to $8.0 million at December 31, 1997, which was funded through net cash
provided by operations.
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<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the six months ended June 30, 1998 increased
$61,000 compared to the six months ended June 30, 1997. This increase was
primarily a result of higher non-interest income, which increased $492,000
during the period. This increased income was partially offset by a decrease of
$246,000 in net interest income, an increase in the provision for loan losses of
$28,000, an increase in non-interest expense of $92,000 and an increase of
income tax expense of $65,000. The Bank's return on average assets (ROA) was
1.40% for the six months ended June 30, 1998, up from 1.39% for the same period
in 1997. The Bank's return on average equity (ROE) was 8.12% for the six months
ended June 30, 1998, down from 8.71% for the six months ended June 30, 1997.
INTEREST INCOME. Interest income for the six months ended June 30, 1998
decreased $194,000 to $17.4 million, from $17.6 million for the comparable
period in 1997 primarily due to a decrease in the rates on loans originated. The
average balance of mortgage loans increased $4.8 million, as compared to the
same period in 1997; however, the average yield on mortgage loans decreased from
7.96% to 7.76%. The decrease in interest income was further impacted by a
decrease in interest on investment securities of $54,000.
INTEREST EXPENSE. Interest expense increased by $52,000 during the six
months ended June 30, 1998 to $9.6 million. Interest paid on certificates of
deposit for the six months ended June 30, 1998 was $8.0 million, up from $7.8
million in 1997, which was due primarily to an increase in the average balance
of time deposits, from $283.9 million for the six months ended June 30, 1997 to
$288.7 million for the six months ended June 30, 1998.
NET INTEREST INCOME. Net interest income for the six months ended June 30,
1998 decreased $246,000 to $7.8 million from $8.0 million for the six months
ended June 30, 1997, which was primarily due to a decrease in the yield on
average interest-earning assets from 7.72% for the six months ended June 30,
1997 to 7.54% for the same period in 1998, resulting in a decrease in interest
income of approximately $194,000, which was partially offset by an increase in
average interest-earning assets of $5.2 million and a decrease in average
interest-bearing liabilities of $1.8 million during the six months ended June
30, 1998 compared to the same period in 1997. The Bank's net interest margin for
the six months ended June 30, 1998 was 3.42%, down from 3.52% for the six months
ended June 30, 1997. The yield on average earning assets decreased from 7.72% to
7.54%, while the rate paid on interest-bearing liabilities increased slightly
from 4.96% to 5.02% for the six months ended June 30, 1997 and June 30, 1998,
respectively. As a result, the Bank's interest rate spread decreased from 2.76%
to 2.52%.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$241,000 for the six months ended June 30, 1997 to $269,000 for the six months
ended June 30, 1998. This increase is primarily the result of increases in
specific reserves for commercial mortgage loans during the six months ended June
30, 1998 due to several individual lending relationships in addition to
continued growth in the Bank's loan portfolio. Although management believes the
current level of provision for loan losses is adequate, there can be no
assurance that future losses will not exceed estimated amounts or that the
provision for loan losses will not increase in future periods. See "Business of
the Bank -- Allowance for Loan Losses.
NONINTEREST INCOME. Total noninterest income increased $492,000 for the six
months ended June 30, 1998 as compared to the same period in 1997. Noninterest
income is composed primarily of loan origination and servicing fees, and deposit
account service charges. Income from loan origination fees increased from
$457,000 for the six months ended June 30, 1997 to $902,000 for the six months
ended June 30, 1998, which is primarily attributable to the overall increase in
the Bank's loan originations during this period. These fees are the income
recognized as an offset to the amount of loan origination costs incurred by the
Bank. Origination fees in excess of these costs are deferred and recognized as
income over the life of the loan. This increase was partially offset by
decreases in construction loan fees and late charges.
NONINTEREST EXPENSE. Total noninterest expense increased by $92,000 to $3.3
million for the six months ended June 30, 1998, up from $3.2 million for the
same period in 1997. Decreases in compensation and benefits of $145,000 were
offset by increases in Federal examination fees of $43,000, and other expenses
totalling $194,000. The decrease in compensation expense is directly related to
the Bank's attempts to increase the efficiencies in branch
37
<PAGE>
and other operations. The increase in other expenses is the result of increased
legal and accounting fees related to litigation involving an employment matter
which was settled in 1998.
INCOME TAXES. Income tax expense increased by $65,000 to $2.2 million for
the six months ended June 30, 1998. The increase is primarily the result of the
increase of $126,000 in income before income tax expense to $5.5 million in 1998
from $5.4 million in 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. Net income for the year ended December 31, 1997 increased by
$1.8 million, or 39%, to $6.4 million for the year ended December 31, 1997
compared to $4.6 million for the year ended December 31, 1996. Net interest
income for the years ended December 31, 1997 and 1996 was $16.0 million and
$15.7 million, respectively, due to an increase of $215,000 in interest income
for 1997 coupled by a decrease in interest expense of $117,000. Additionally,
noninterest income increased by $324,000 in 1997. In addition, noninterest
expense decreased by $2.8 million to $7.0 million for the year ended December
31, 1997 compared to $9.8 million for the prior year, reflecting the one-time
special SAIF assessment paid in 1996. The Bank's return on average assets
increased from 0.98% for the year ended December 31, 1996 to 1.36% for the year
ended December 31, 1997. The Bank's return on average equity also increased from
6.42% for the year ended December 31, 1996 to 8.39% for the year ended
December 31, 1997.
INTEREST INCOME. Interest income for the year ended December 31, 1997 was
$35.4 million, up from $35.2 million for the same period in 1996. The largest
component of interest income, as well as the increase from 1996 to 1997, is
interest on loans. Interest on loans increased from $31.9 million for the year
ended December 31, 1996 to $32.5 million for the year ended December 31, 1997.
This increase of $600,000 is primarily the result of volume increases. The
average balance of loans increased $10.4 million to $408.4 million, while the
yield on mortgage loans decreased 7 basis points from 8.08% to 7.96%, partially
offsetting the increase due to volume. The increase in interest on loans was
offset by a decrease in interest on investment securities. Interest income on
investment securities decreased $356,000. Substantially all of the decrease in
interest income on investment securities is attributed to lower volume. The
average balance of investment securities decreased from $40.9 million for the
year ended December 31, 1996 to $34.9 million for the year ended December 31,
1997.
INTEREST EXPENSE. Interest expense decreased during the year ended
December 31, 1997 to $19.4 million, from $19.5 million for the comparable period
in 1996. Substantially all of the Bank's interest expense is from interest-
bearing deposits. The largest category of interest-bearing deposits is
certificates of deposits. Interest on certificates of deposits for the year
ended December 31, 1997 was $16.0 million, down $88,000 from $16.0 million in
1996. This decrease is the result of an increase in the average balance of
certificates of deposits, from $283.9 million in 1996 to $285.4 million in 1997,
offset by a decrease of 7 basis points in the rates paid on these deposits from
5.67% in 1996 to 5.60% in 1997. Interest expense on savings accounts decreased
$159,000, from $3.0 million for the year ended December 31, 1996 to $2.8 million
for the year ended December 31, 1997. This decrease is attributable to a
decrease in the average balance of savings accounts, which decreased $7.9
million during 1997, as well as an increase of 10 basis points in the rates paid
on these savings accounts, from 3.14% to 3.24%. Interest expense on FHLB
advances increased $143,000 from $459,000 for the year ended December 31, 1996
to $602,000 for the year ended December 31, 1997. This increase is primarily
attributable to the increase in average advances outstanding from $7.4 million
for the year ended December 31, 1996 to $9.7 million for the year ended
December 31, 1997. This decrease was slightly offset by a 4 basis point increase
in the average cost of FHLB advances.
NET INTEREST INCOME. Net interest income for the year ended December 31,
1997 was $16.0 million, compared to $15.7 million for the year ended
December 31, 1996. The increase was primarily due to a decrease in average
interest-bearing liabilities of $4.5 million in conjunction with an increase in
average interest-earning assets of $2.5 million. The yield on average interest-
earning assets remained stable, while the average yield on interest-bearing
liabilities increased from 5.01% for the year ended December 31, 1996 to 5.04%
for the year ended December 31, 1997.
38
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$325,000 for the year ended December 31, 1996 to $375,000 for the year ended
December 31, 1997. This increase is primarily the result of increases in net
charge-offs from $263,000 for the year ended December 31, 1996 to $440,000 for
the year ended December 31, 1997. The average impairment of loans decreased from
$11.9 million for the year ended December 31, 1996 to $9.8 million for the year
ended December 31, 1997, mitigating the need for additional provisions for loan
losses. See "Business of the Bank -- Allowance for Loan Losses."
NONINTEREST INCOME. Total noninterest income increased $324,000 to
$1.7 million for the year ended December 31, 1997, compared to $1.4 million for
the same period in 1996. Income from loan origination fees, loan servicing and
service charges increased $351,000 from $1.2 million for the year ended
December 31, 1996 to $1.6 million for the year ended December 31, 1997. This
increase is attributed to the overall increase in the Bank's loan demand during
this time period. Other income decreased $27,000 to $142,000 for the year ended
December 31, 1997, compared to $169,000 for the same period in 1996. This
decrease was primarily the result of a decline in income recognized on the
assets funding the management deferred compensation plan of $83,000, partially
offset by increases in credit life insurance premiums of $19,000.
NONINTEREST EXPENSE. Total noninterest expense decreased $2.8 million to
$7.0 million for the year ended December 31, 1997, down from $9.8 million for
the comparable period in 1996. Decreases in compensation and benefits of
$223,000, occupancy and equipment of $45,000, and federal deposit insurance
premium of $3.1 million were offset by an increase in the net cost of foreclosed
real estate operations of $33,000 and increases in other expenses of $488,000.
The decrease in compensation expense is directly related to the Bank's
efforts to increase efficiencies in branch-banking and other operations. The
decrease in occupancy and equipment expenses reflects the reduction in
depreciation expense for fully depreciated assets. No significant acquisitions
of hardware or software were made in the year ended December 31, 1997. The
increase in the net cost of foreclosed real estate operations is the result of
several factors. During the year ended December 31, 1997, the Bank experienced a
slight narrowing of the cost of foreclosed property and the realized sale price.
At the same time, the condition of foreclosed property required additional
reserves for deferred maintenance, offset by decreased expenses in preparing
foreclosed properties for sale. The resulting net effect increased these
expenses by $33,000 over those experienced for the year ended December 31, 1996.
The decrease in federal deposit premiums was due primarily to the special SAIF
assessment of $2.5 million paid in 1996. The increase in other expenses is the
result of increased legal and accounting fees related to litigation regarding an
employment matter. This litigation has been settled and no further expenses will
be incurred.
INCOME TAXES. Income tax expense increased from $2.4 million for the year
ended December 31, 1996 to $3.9 million for the comparable period in 1997. The
increase is primarily the result of a change in deferred income tax from
$542,000 for the year ended December 31, 1996 to $38,000 for the year ended
December 31, 1997, offset by additional income before income tax expense of $3.4
million in 1997 compared to 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net income for the year ended December 31, 1996 decreased by $2.1
million to $4.6 million from $6.7 million for the year ended December 31, 1995.
This increase was primarily a result of an increase in interest expense of
$538,000 and an increase in noninterest expense of $3.1 million. The substantial
increase in noninterest expense was primarily due to the $2.5 million SAIF
assessment paid by the Bank in 1996.
INTEREST INCOME. Interest income for the year ended December 31, 1996
decreased $346,000 to $35.2 million, from $35.6 million for the same period in
1995. The largest component of interest income is interest on loans. Interest on
loans increased by $502,000 from $31.4 million for the year ended December 31,
1995 to $31.9 million for the year ended December 31, 1996. Interest income
increased primarily due to an increase in the average balance of interest-
earning assets, the effect of which was partially offset by a decrease in the
average yield on such assets. The average balance of mortgage loans increased
$20.4 million to $388.7 million, while the average yield on mortgage loans
decreased 29 basis points from 8.37% to 8.08%. This decrease in the yield earned
on mortgage loans was driven primarily by decreases in the rates on the fixed
rate mortgage portfolio as refinances of higher rate mortgages
39
<PAGE>
were experienced. See "Business of the Bank -- Mortgage Lending." The effect of
the decrease in interest on mortgage loans was further compounded by decreases
in interest on investment securities coupled with a decrease in the balance of
investment securities. Interest income on investment securities declined
$807,000. In addition, the average balance of such securities declined by $13.0
million. In addition, the average balance of mortgage-backed securities
decreased from $2.0 million for the year ended December 31, 1995 to $1.7 million
for the year ended December 31, 1996. This decrease was partially offset by an
increase in the average yield on mortgage-backed securities from 15.9% to 16.8%.
INTEREST EXPENSE. Interest expense increased during the year ended December
31, 1996 by $538,000 to $19.5 million from $19.0 million for the comparable
period in 1995. The largest category of interest-bearing deposits is
certificates of deposit. Interest on certificates of deposits for the year ended
December 31, 1996 was $16.1 million, up $1.0 million from the $15.1 million in
1995. This increase is the result of an increase in the average balance of
certificates of deposit, from $275.9 million in 1995 to $283.9 million in 1996,
combined with an increase of 20 basis points in the rates paid on these deposits
from 5.47% in 1995 to 5.67% in 1996. Interest on savings accounts decreased
$352,000 from $3.3 million in 1995 to $3.0 million in 1996. This decrease
resulted almost entirely from a $6.7 million decrease in the average balances of
savings accounts during this period from $101.6 million in 1995 to $94.9 million
in 1996. Interest expense on FHLB advances decreased $108,000 from 1995 to 1996,
which was primarily attributed to lower interest rates during the period.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
NET INTEREST INCOME. Net interest income for the year ended December 31,
1996 was $15.7 million, down $900,000 from the year ended December 31, 1995. The
decrease was primarily the result of the effects of a 21 basis point decrease in
the rates earned on earning assets from 7.95% in 1995 to 7.74% in 1996. This
reduction in yield was compounded by the effects of a 9 basis point increase in
the rates paid on average interest-bearing liabilities, from 4.92% in 1995 to
5.01% in 1996. The Bank's net interest margin for the year ended December 31,
1996 was 3.45%, down from 3.71% for the year ended December 31, 1995. The effect
of the changes in rates were partially offset by increases in volume. These
increases were composed of an increase in average interest-earning assets of
$8.0 million, offset by a $3.4 million increase in average interest-bearing
liabilities from $386.4 million for the year ended December 31, 1995 to $389.8
million for the same period in 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses of $325,000 for
the year ended December 31, 1996 decreased $87,000 from the $412,000 provision
in the year ended December 31, 1995. This decrease resulted from reduced
chargeoffs of loan balances and an improving economy in the Bank's market area.
NONINTEREST INCOME. Total noninterest income for the year ended December
31, 1996 was $1.4 million, an increase of $141,000 over the $1.3 million for the
same period in 1995. Income increases from loan origination fees and customer
service charge increases aggregating $106,000 contributed to the increases in
noninterest income.
NONINTEREST EXPENSE. Total noninterest expenses increased $3.1 million to
$9.8 million for the year ended December 31, 1996, up from $6.7 million for the
comparable period in 1995. Increases in compensation and benefits of $347,000,
occupancy and equipment of $154,000, special SAIF assessment of $2.5 million,
and other expenses of $117,000 were partially offset by reductions in net cost
of foreclosed real estate operations of $55,000. The increase in compensation
and benefits is the result of a nonfunded termination agreement with the Bank's
former chief executive officer completed during the year ended December 31,
1996. The increase in occupancy and equipment was the result of transferring
data processing from an in-house system to a service bureau during 1996. The
conversion was completed in mid-year. The increase in the FDIC assessment is the
result of legislation which mandated that all thrift institutions pay a special
SAIF assessment.
INCOME TAXES. Income tax expense decreased from $4.1 million for the year
ended December 31, 1995 to $2.4 million for the comparable period in 1996. The
decrease is primarily the result of lower net income before income tax expense
of $3.7 million in 1996 compared to 1995 and an increase in deferred taxes of
$104,000.
40
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.00%. At June 30, 1998 and December 31, 1997, the Bank's liquidity
ratios were 8.58% and 9.58%, respectively. Management's current strategy is to
maintain liquidity as close as possible to the minimum regulatory requirement
and to invest any excess liquidity in higher yielding interest-earning assets.
The Bank manages its liquidity position and demands for funding primarily by
investing excess funds in short-term investments and utilizing FHLB advances in
periods when the Bank's demands for liquidity exceed funding from deposit
inflows.
The Bank's most liquid assets are cash and cash equivalents and securities
available for sale. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At June 30, 1998, cash and cash equivalents and securities totalled $41.1
million, or 8.70% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1998, the Bank had $8.0 million in
advances outstanding from the FHLB and, at June 30, 1998, had an additional
overall borrowing capacity from the FHLB of $37.0 million. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Bank may
continue to rely on FHLB borrowings to fund asset growth.
At June 30, 1998, the Bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $36.2 million. The Bank anticipates
that it will have sufficient funds available to meet its current loan
origination commitments. Certificate accounts, including IRA and Keogh accounts,
which are scheduled to mature in less than one year from June 30, 1998, totalled
$196.7 million. Based upon historical experience, management believes the
majority of maturing certificates of deposit will remain with the Bank. In
addition, management of the Bank believes that it can adjust the offering rates
offered on certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Bank, the Bank would be able to utilize FHLB advances to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such advances exceeds the average rate
paid on deposits of similar duration.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $81.6 million, or 17.28%, of total
adjusted assets, which is above the required level of $7.1 million, or 1.5%;
core capital of $81.6 million, or 17.28%, of total adjusted assets, which is
above the required level of $14.1 million, or 3.00%; and risk-based capital of
$85.1 million, or 30.20%, of risk-weighted assets, which is above the required
level of $22.5 million, or 8.00%. See "Regulatory Capital Compliance."
YEAR 2000 COMPLIANCE
The Bank has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Bank's data
processing is performed under agreements with a service bureau, consequently the
Bank is very dependent on this service bureau to conduct its business. The Bank
has already contacted the service bureau, as well as each of its other vendors
to request time tables for Year 2000 compliance and expected costs, if any, to
be passed along to the Bank. To date, the Bank has been informed that its
service bureau and other primary service providers anticipate that all
reprogramming efforts will be completed by December 31, 1998, allowing the Bank
adequate time for testing. Certain other vendors have not yet responded,
however, the Bank will pursue other options if it appears that these vendors
will be unable to comply. The Bank believes that its costs related to Year 2000
will be approximately $200,000. Management does not expect these costs to have a
significant impact on its financial position or results of operations. However,
there can be no assurance that the vendors' systems will be Year 2000 compliant,
consequently, the Bank could incur incremental costs to convert to another
vendor.
41
<PAGE>
The risks associated with this issue go beyond the Bank's own ability to
solve Year 2000 problems. Should significant commercial customers fail to
address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge offs. In addition, should suppliers of critical
services fail in their efforts to be Year 2000 compliant, it could have
significant adverse financial results for the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result, interest
rates have a greater impact on the Bank's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income is defined in FASB Concepts Statement
6 as the "change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. This Statement requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This Statement
is effective for financial statements for periods beginning after December 15,
1997 and its implementation had no impact on financial conditions or operations.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits. This Statement
supersedes FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting
for Postretirement Benefits other than Pensions." This Statement is effective
for fiscal years beginning after December 15, 1997 and its implementation had no
impact on financial conditions or operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. This Statement amends FASB Statement No. 52, "Foreign Currency
Translation" to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It supersedes FASB Statements No. 80,
"Accounting for Futures Contracts," No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." It amends
Statement No. 107, "Disclosures about Fair Value of Financial Instruments" to
include in Statement 107 the disclosure provisions about concentrations of
credit risk from
42
<PAGE>
Statement 105. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999 and is not expected to have a material
impact on the Company.
BUSINESS OF THE BANK
GENERAL
The Bank is a community oriented savings association whose principal
business has been and continues to be attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans. In recent years,
the Bank has originated primarily fixed-rate one- to four-family loans with
terms of 15 to 30 years. To a lesser extent, the Bank invests in non-residential
real estate loans, including loans to local churches, construction and
development loans, land and land development loans, multi-family loans and
consumer loans. The Bank operates through its four full service banking offices
located in the City of Fredericksburg and Stafford and Spotsylvania Counties,
Virginia. The Bank originates loans for investment. The Bank's revenues are
derived principally from interest on its mortgage loans and, to a lesser extent,
interest on its investments, which generally include short-term U.S. Treasury
bonds and U.S. Government Agency obligations, short-term, highly rated corporate
debt securities and municipal bonds and from loan fee income. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investments.
MARKET AREA AND COMPETITION
The Bank is headquartered in Fredericksburg, Virginia and has been, and
intends to continue to be, a community oriented financial institution. The
Bank's primary market area is comprised of the City of Fredericksburg and
Spotsylvania, Stafford and King George Counties, Virginia, which are serviced
through the Bank's main office and three other full service banking offices. The
Bank's main office is located in Fredericksburg, two branch offices are located
in Spotsylvania County and one is in Stafford County. Based on the most recent
information available, the Bank had approximately one-third of the total bank
and thrift deposits in its market area.
The Bank's primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs represent the largest
type of employment in the Bank's primary market area, with jobs in
wholesale/retail trade accounting for the second largest employment sector.
Fredericksburg and surrounding communities are located between Richmond,
Virginia and Washington, D.C. and are easily accessible from Interstate 95, a
major Interstate running north to south along the Eastern seaboard. The easy
accessability to the Fredericksburg area and its close proximity to these large
cities has resulted in the Fredericksburg area being among one of the fastest
growing areas in the country in recent years. Businesses that have moved to the
area in recent years and invested substantial capital into their new locations
include Capital One Financial Corp., Intuit, Inc., Dongsung America, Inc., Mapei
Corporation, Vulcan Materials Company, SEI Birchwood, Inc. and Greenhost, Inc.
In addition, GEICO insurance has significantly expanded its presence in the area
and currently employs over 2,000 people at its Stafford County location.
Management believes that its market area continues to show economic growth with
stable to moderately increasing real estate values.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings, cooperative
and commercial banks and credit unions. In addition, the Bank faces significant
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Bank
43
<PAGE>
has also experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. Such
competitive advantage has placed increased pressure on the Bank with respect to
its loan and deposit pricing.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At June 30,
1998, gross loans totalled $437.2 million, of which $367.0 million, or 83.94%
were one- to four-family, residential mortgage loans and home equity loans. At
such date, the remainder of the loan portfolio consisted of: $35.3 million of
non-residential loans, including church loans totalling $12.1 million or 8.08%
of total loans; $20.0 million of construction and development loans, including
unadvanced loan amounts, or 4.57% of total loans; $2.3 million of land and land
development loans or 0.53% of total loans; $3.4 of multi-family loans, or 0.78%
of total loans; and $9.2 million of consumer loans, or 2.10% of total loans.
The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board ("FRB") and legislative tax policies.
44
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995
------------------- ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- --------- --------- -------- ------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family (1)....................... $367,041 83.94% $358,561 83.19% $345,799 80.94% $329,589 79.69%
Multi-family.................................. 3,396 0.78 3,455 0.80 3,453 0.81 2,340 0.57
Non-residential real estate(2).................. 35,316 8.08 40,951 9.50 44,528 10.42 44,520 10.77
Land and land development....................... 2,321 0.53 3,091 0.72 4,136 0.97 6,398 1.55
Construction and development.................... 19,960 4.57 16,046 3.72 21,285 4.98 23,545 5.69
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans........................ 428,034 97.90 422,104 97.93 419,201 98.12 406,392 98.27
-------- ------ -------- ------ -------- ------ -------- ------
Consumer and other loans........................ 9,192 2.10 8,913 2.07 8,046 1.88 7,159 1.73
-------- ------ -------- ------ -------- ------ -------- ------
Total loans....................................... 437,226 100.00% 431,017 100.00% 427,247 100.00% 413,551 100.00%
====== ====== ====== ======
Less:
Participating interests......................... 3,319 4,217 5,450 6,543
Undisbursed loan funds.......................... 8,743 4,978 8,064 8,132
Unearned discounts and deferred loan fees....... 3,539 3,312 3,045 2,855
Allowance for loan losses....................... 5,639 5,478 5,543 5,480
-------- -------- -------- --------
Loans receivable, net........................... $415,986 $413,032 $405,145 $390,541
======== ======== ======== ========
<CAPTION>
----------------------------------------
1994 1993
------------------ -------------------
Percent Percent
Amount of Total Amount of Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family (1)....................... $312,933 79.09% $315,739 79.08%
Multi-family.................................. 4,407 1.11 9,315 2.33
Non-residential real estate(2).................. 39,950 10.10 38,830 9.72
Land and land development....................... 4,375 1.12 5,454 1.37
Construction and development.................... 27,259 6.89 23,537 5.89
-------- ------ -------- ------
Total mortgage loans........................ 388,924 98.31 392,875 98.39
-------- ------ -------- ------
Consumer and other loans........................ 6,601 1.69 6,409 1.61
------ ------
Total loans....................................... 395,525 100.00% 399,284 100.00%
====== ======
Less:
Participating interests......................... 8,126 9,261
Undisbursed loan funds.......................... 7,829 6,539
Unearned discounts and deferred loan fees....... 2,764 2,900
Allowance for loan losses
5,537 5,355
------- --------
Loans receivable, net........................... $371,269 $375,229
======== ========
</TABLE>
_______________________________________
(1) Includes home equity lines of credit.
(2) Includes 36 loans to local churches totalling $12.1 million at June 30,
1998.
45
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loans at June 30, 1998. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------------------------------
ONE- TO CONSTRUCTION LAND AND
FOUR- MULTI- NON- AND LAND TOTAL
FAMILY FAMILY RESIDENTIAL DEVELOPMENT DEVELOPMENT CONSUMER LOANS
--------- ------ ----------- ----------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Amounts due:
One year or less....................... $ 2,168 $ -- $ 7 $ 19,960(1) $ 1,651 $ 2,417 $ 26,203
After one year:
More than one year to three years...... 3,939 -- 49 -- 23 2,674 6,685
More than three years to five years.... 6,111 -- 603 -- 130 3,340 10,184
More than five years to ten years...... 46,811 809 6,940 -- 314 608 55,482
More than ten years to twenty years.... 153,263 975 21,103 -- 135 153 175,629
More than twenty years................. 154,749 1,612 6,614 -- 68 -- 163,043
--------- ------- -------- --------- --------- ------- -------
Total amount due.................. $ 367,041 $ 3,396 $ 35,316 $ 19,960 $ 2,321 $ 9,192 437,226
========= ======= ======== ========= ========= =======
Less:
Participating interests............................................................................................ 3,319
Allowance for loan losses.......................................................................................... 8,743
Undisbursed loan funds............................................................................................. 3,539
Allowance for loan losses.......................................................................................... 5,639
---------
Loans, net........................................................................................................... $ 415,986
=========
</TABLE>
_______________
(1) Includes construction and development loans which will convert to one- to
four-family mortgage loans upon the completion of the construction.
The following tables set forth at June 30, 1998, the dollar amount of loans
contractually due after June 30, 1999 and whether such loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
--------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ------------ ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
One- to four-family.............................. $ 266,152 $ 98,721 $ 364,873
Multi-family..................................... 1,898 1,498 3,396
Non-residential.................................. 20,335 14,974 35,309
Construction and development..................... -- -- --
Land and land development........................ 557 113 670
--------- ----------- ---------
Total real estate loans........................ 288,942 115,306 404,248
Consumer and other loans........................... 6,775 -- 6,775
--------- ----------- ---------
Total loans........................................ $ 295,717 $ 115,306 $ 411,023
========= =========== =========
</TABLE>
ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its four
offices. In-market loan originations are generated by the Bank's marketing
efforts, which include print, radio and television advertising, lobby displays
and direct contact with local civic and religious organizations, as well as by
the Bank's present customers, walk-in customers and referrals from real estate
agents, brokers and builders. Loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures and are generally
underwritten in accordance with FNMA/FHLMC underwriting standards. The Bank
originates both adjustable-rate and fixed-rate loans. The Bank's ability to
originate fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. In recent years, the Bank has originated
primarily fixed-rate loans as a result of low customer demand for adjustable-
rate loans given the prevailing low interest rate environment.
Generally, all loans originated by the Bank are held for investment,
although currently the Bank is exploring opportunities to sell fixed-rate loans
originated by the Bank through the secondary market. The Bank generally does not
originate mortgage loans insured by the FHA and VA.
46
<PAGE>
During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $85.1 million and $55.7 million of one- to four-family mortgage
loans, respectively, all of which were retained by the Bank. In the six months
ended June 30, 1998, the Bank originated $67.2 million of one- to four-family
mortgage loans. On January 1, 1996, the Bank implemented SFAS No. 122 pursuant
to which the value of servicing rights may be recognized as an asset of the
Bank. In the six months ended June 30, 1998 and in the year ended December 31,
1997, the fair value of servicing rights under SFAS No. 122 and SFAS No. 125
were not material and were not recognized in the financial statements for those
periods.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
Beginning balance.......................................... $ 422,104 $ 419,201 $ 419,201 $ 406,392 $ 388,924
Mortgage loans originated:
One- to four-family...................................... 67,249 35,948 85,099 55,724 43,807
Multi-family............................................. -- -- -- 1,440 --
Non-residential real estate.............................. 138 733 1,763 2,384 628
Construction and development............................. 9,225 11,930 19,333 21,772 24,386
Land and land development................................ -- -- -- 503 3,473
--------- --------- --------- --------- ----------
Total mortgage loans originated........................ 76,612 48,611 106,195 81,823 72,294
Transfer of mortgage loans to foreclosed real estate..... (604) 479 (937) (4,815) --
Principal repayments..................................... (70,078) (44,127) (102,355) (64,199) (54,826)
--------- --------- --------- --------- --------
Ending balance........................................... $ 428,034 $ 424,164 $ 422,104 $ 419,201 $ 406,392
========= ========= ========= ========= ========
Consumer and other loans (gross):
Beginning balance.......................................... $ 8,913 $ 8,046 $ 8,046 $ 7,159 $ 6,601
Consumer and other loans originated...................... 3,098 3,288 6,323 6,130 7,512
Principal repayments
(2,819) (2,570) (5,456) (5,243) (6,954)
--------- --------- --------- -------- ----------
Ending balance........................................... $ 9,192 $ 8,764 $ 8,913 $ 8,046 $ 7,159
========= ========= ========= ======== ==========
</TABLE>
ONE-TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences. Most of such loans are located in the Bank's
primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, and through referrals from members of the Bank's local
communities. At June 30, 1998, the Bank's one- to four-family mortgage loans
totalled $367.0 million, or 84.85%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 73.10% were fixed-rate mortgage loans
and 26.90% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten
to 30 years. The Bank retains all of the fixed-rate residential loans that it
originates. The Bank is considering selling fixed-rate loans originated by the
Bank, but to date has not established a policy for such sales. The Bank does not
purchase one- to four-family mortgage loans.
The Bank currently offers one-year residential ARM loans with an interest
rate that adjusts annually based on the change in the relevant United States
Treasury index. The Bank also offers loans that bear fixed rates of interest for
specified periods of time and, thereafter, adjust on an annual basis. These
loans provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the
initial rate. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as the Bank's cost of funds. Borrowers of one-year
residential ARM loans are generally qualified at a rate of 2.0% above the
initial interest rate. The Bank also offers ARM loans that are convertible into
fixed-rate loans with interest rates based upon the then current market rates.
ARM loans generally pose greater credit risks than fixed-rate loans, primarily
because as interest rates rise, the required periodic payment by the borrower
rises, increasing the potential for default. However, as of June 30, 1998, the
Bank had not experienced higher default rates on these loans relative to its
other loans.
47
<PAGE>
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to four-
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. The Bank requires fire,
casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Bank.
Included in the Bank's one- to-four family loan portfolio are home equity
loans. The Bank originates home equity loans that are secured by a lien on the
borrower's residence and generally do not exceed $250,000. The Bank uses the
same underwriting standards for home equity loans as it uses for one- to four-
family residential mortgage loans. Home equity loans are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans either float at a stated margin over the prime rate or
have fixed interest rates. As of June 30, 1998, the Bank had $2.8 million, or
0.64% of the Bank's total loan portfolio outstanding, in home equity loans.
NON-RESIDENTIAL AND MULTI-FAMILY LENDING. The Bank originates non-
residential real estate loans that are generally secured by properties used for
business purposes such as office buildings, schools, nursing homes, retail
stores and churches located in the Bank's primary market area. The Bank lends to
local churches to fund construction of or renovations to church facilities. Such
loans are generally fixed-rate loans with a maximum loan to value ratio of 80%.
The Bank currently has 36 church loans totalling $12.1 million in the aggregate.
All such loans are performing in accordance with their terms. Multi-family loans
are generally secured by 5 or more unit apartment buildings located in the
Bank's primary market area. The Bank's multi-family and non-residential real
estate underwriting policies provide that such real estate loans may be made in
amounts up to 75% of the appraised value of the property, subject to the Bank's
current internal loan-to-one-borrower limit, which at June 30, 1998 was $2.5
million.
Non-residential real estate loans and multi-family loans generally have
adjustable rates and terms to maturity that do not exceed 25 years. The Bank's
current lending guidelines generally require that the property securing
commercial real estate loans and multi-family loans generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not to exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some non-residential real estate loans and multi-
family loans in the Bank's portfolio may exceed the initial loan-to-value ratio
and the current debt service ratio may exceed the initial debt service ratio.
Adjustable-rate non-residential real estate loans and multi-family loans provide
for interest at a margin over a designated index, often a designated prime rate,
with periodic adjustments, generally at frequencies of up to five years. In
underwriting non-residential real estate loans and multi-family loans, the Bank
analyzes the financial condition of the borrower, the borrower's credit history,
the reliability and predictability of the net income generated by the property
securing the loan and the value of the property itself. The Bank generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing non-
residential real estate loans and multi-family loans originated by the Bank are
performed by independent appraisers approved by the Board of Directors. At June
30, 1998, the Bank's largest non-residential real estate loan was a $1.9 million
loan secured by a local church and was performing in accordance with its terms.
At June 30, 1998, the Bank's largest multi-family loan was a $1.4 million loan
secured by an apartment complex and was performing in accordance with its terms.
Non-residential real estate loans and multi-family loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and multi-
family properties is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies a
lease term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced. The Bank seeks to minimize these risks through its
underwriting standards.
48
<PAGE>
CONSTRUCTION AND DEVELOPMENT AND LAND LENDING. The Bank originates
construction loans for the development of residential and commercial property.
Construction loans are offered primarily to experienced local developers
operating in the Bank's market area. The majority of the Bank's construction
loans are originated to finance the construction by developers of one- to four-
family residential real estate and, to a lesser extent, multi-family and
commercial real estate properties located in the Bank's primary market area.
Construction loans are generally offered with terms of up to 12 months and may
be made in amounts up to 75% of the appraised value of the property on multi-
family and commercial real estate construction and 80% on one- to four-family
residential construction. Land loans are made in amounts up to 60% of the
appraised value of the land securing the loan. Construction loan proceeds are
disbursed periodically in increments as construction progresses and as
inspections by the Bank's inspecting officers warrant. At June 30, 1998, the
Bank's largest construction and development loan was a performing loan with a
$1.0 million outstanding principal balance secured by 19 units of single family
construction located in Stafford and Spotsylvania Counties.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimated value proves to be inaccurate, the Bank may be
confronted with a property, when completed, having a value which is insufficient
to assure full repayment.
CONSUMER AND OTHER LENDING. Consumer loans at June 30, 1998 amounted to
$9.2 million, or 2.1%, of the Bank's total loans and consisted primarily of
automobile loans (new and used) and loans secured by savings accounts. Such
loans are generally originated in the Bank's primary market area and generally
are secured by deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans. Historically, the Bank has not advertised its
consumer loans and has made these loans only to existing customers.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At June 30, 1998, the Bank
had 30 consumer loans 90 days or more delinquent, whose balances totalled
$113,000.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors of the
Bank establishes the lending policies of the Bank. Such policies provide that
the Bank's President, Executive Vice President and Senior Lending Officer may
approve consumer loans up to $50,000. The Loan Committee approves all
residential loans up to $500,000. The Board approves loans in excess of
$500,000. All loans are submitted to the full Board of Directors for
ratification on a monthly basis.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and cause of delinquency and whether the borrower is habitually delinquent. When
a borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
usually attempts to obtain full payment, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not otherwise
satisfied, additional letters and telephone calls generally are made. If the
loan is still not brought current or satisfied and it becomes necessary for the
Bank to take legal action, which typically occurs after a loan is 60 days or
more delinquent, the Bank will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan
49
<PAGE>
is not brought current, paid in full, or refinanced before the foreclosure sale,
the property securing the loan generally is sold at foreclosure and, if
purchased by the Bank, becomes real estate owned and is sold by the Bank as soon
as possible.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank's Asset/Liability Committee reviews and classifies the Bank's
assets on a regular basis and the Board of Directors reviews the results of the
reports on a quarterly basis. The Bank classifies assets in accordance with the
management guidelines described above. At June 30, 1998, the Bank had $7.8
million, or 1.65% of total assets, designated as Substandard. At such date, no
assets were classified as Doubtful or Loss (in accordance with OTS regulations).
As of June 30, 1998, the Bank had a total of $1.7 million, or 0.36% of total
assets, classified loans designated as Special Mention. At June 30, 1998, all of
the Bank's classified and Special Mention assets totalled $9.5 million,
representing 2.17% of loans.
50
<PAGE>
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997
------------------------------------------ ----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- --------------------- ----------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
--------- -------- -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... 11 $ 865 24 $ 1,253 13 $ 841 31 $ 1,596
Multi-family............................. -- -- -- -- -- -- -- --
Non-residential real estate.............. -- -- -- -- -- -- 1 488
Construction and development............. -- -- 3 580 -- -- 3 604
Land and land development................ -- -- -- -- -- -- 1 1
---- ------- ---- -------- ---- ------ ---- -------
Total mortgage loans................... 11 865 27 1,833 13 841 36 2,689
Consumer and other loans................... 13 72 30 113 15 87 33 111
---- ------- ---- -------- ---- ------ ---- -------
Total loans................................ 24 $ 937 57 $ 1,946 28 $ 928 69 $ 2,800
==== ======= ==== ======== ==== ====== ==== =======
Delinquent loans to total loans............ 0.35% 0.21% 0.83% 0.45% 0.41% 0.22% 1.01% 0.65%
==== ======= ==== ======== ==== ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------------ ----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- --------------------- ----------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
--------- -------- -------- -------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...................... 17 $ 1,578 74 $ 3,827 22 $ 1,464 8 $ 681
Multi-family............................. -- -- 2 389 -- -- -- --
Non-residential real estate.............. 2 516 3 710 -- -- 2 265
Construction and development............. -- -- 4 839 1 143 4 529
Land and land development................ 1 301 1 37 1 179 1 237
---- ------- ---- -------- ---- ------- ---- -------
Total mortgage loans................... 20 2,395 84 5,802 24 1,786 15 1,712
Consumer and other loans.................. 13 111 32 343 13 108 23 326
---- ------- ---- -------- ---- ------- ---- -------
Total loans................................ 33 $ 2,506 116 $ 6,145 37 $ 1,894 38 $ 2,038
==== ======= ==== ======== ==== ======= ==== =======
Delinquent loans to total loans............ 0.49% 0.59% 1.71% 1.44% 0.52% 0.46% 0.54% 0.49%
==== ======= ==== ======== ==== ======= ==== =======
</TABLE>
51
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding non-accrual loans and REO. At June 30, 1998, the
Bank had $1.9 million of REO in its portfolio. It is the policy of the Bank to
cease accruing interest on loans 90 days or more past due and to charge off all
accrued interest. For the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996, no interest income was recorded on non-accrual
loans. For the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996, the amount of additional interest income that would have been
recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $114,000, $193,000 and $438,000,
respectively. In 1993, the Bank adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No. 118. There
were $8.5 million that met the definition of impaired loans, per SFAS 114 at
June 30, 1998. This compares to $10.7 million, $9.8 million, $11.9 million and
$10.8 million for June 30, 1997, December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- ----------
Non-accrual loans(1): (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family....................... $1,508 $2,526 $1,648 $5,366 $3,959 $ 5,211 $2,143
Non-residential real estate............... 837 577 628 1,920 1,389 3,634 3,004
Construction and development.............. -- -- -- 774 529 84 203
Land and development...................... 540 494 488 558 653 1,332 1,165
Consumer and other loans.................... 19 79 51 135 269 284 207
------- -------- -------- -------- -------- -------- --------
Total non-accrual loans................... 2,904 3,676 2,815 8,753 6,799 10,545 6,722
Loans 90 days or more past due
and accruing:
Construction and development 186 -- -- -- -- -- --
Land and land development................ 135 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Total accruing loans 90
days or more past due.................. 321 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Total non-performing loans............... 3,225 3,676 2,815 8,753 6,799 10,545 6,722
Total foreclosed real estate.................. 1,883 1,882 1,959 1,650 2,195 1,124 2,281
------- -------- -------- -------- -------- -------- --------
Total non-performing assets................... $5,108 $5,558 $4,774 $10,403 $8,994 $11,669 $9,003
======= ======== ======== ======== ======== ======== ========
Restructured loans............................ $3,923 $2,914 $3,660 $ 2,546 $3,768 $ 2,239 $ 784
======= ======== ======== ======== ======== ======== ========
Non-performing loans to
total loans................................. 0.74% 0.89% 0.65% 2.05% 1.64% 2.67% 1.68%
==== ==== ==== ==== ==== ==== ====
Total non-performing assets
to total assets............................. 1.08% 1.18% 1.01% 2.21% 1.92% 2.60% 2.01%
==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Loans are presented before allowance for loan losses.
52
<PAGE>
Restructured loans totalled $3.9 million at June 30, 1998. Restructured
loans include loans that were modified while delinquent. Although the amount due
under these loans has not been modified from the terms of the loans when
originated, certain adjustments were made to these loans to help the borrower
make payments while the loans were delinquent and to enable the Bank to avoid
foreclosure proceedings. All outstanding restructured loans are single-family
loans with balances of less than $196,000 per loan. All restructured loans are
currently performing in accordance with their terms, however, there can be no
assurance that such loans will continue to be performing loans or that the Bank
will not experience losses on such loans in the future.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of June
30, 1998, the Bank's allowance for loan losses was 1.33% of total loans as
compared to 1.33% as of December 31, 1997. The Bank had non-performing loans of
$3.2 million and $2.8 million at June 30, 1998 and December 31, 1997,
respectively. The Bank will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
53
<PAGE>
The following table sets forth activity in the Bank's allowance for
loan losses for the periods as indicated.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ..... $5,478 $5,543 $5,543 $5,480 $5,537 $5,355 $4,668
Provision for loan losses .......... 269 241 375 325 412 1,010 1,129
Charge-offs:
Mortgage loans:
One- to four-family ............ (79) (148) (260) (244) (17) (197) (412)
Non-residential real estate .... -- -- -- -- -- (619) --
Construction and development ... -- (32) (148) -- (469) -- --
Consumer loans ................... (29) (7) (32) (19) (3) (12) (38)
------ ------ ------ ------ ------ ------ ------
Total charge-offs ............ (108) (187) (440) (263) (489) (828) (450)
Recoveries ......................... -- -- -- 1 20 -- 8
------ ------ ------ ------ ------ ------ ------
Balance at end of period ........... $5,639 $5,597 $5,478 $5,543 $5,480 $5,537 $5,355
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period .... 0.03% 0.05% 0.11% 0.07% 0.13% 0.22% 0.12%
==== ==== ==== ==== ==== ==== ====
Ratio of allowance for loan losses to
net loans receivable at the end of
the period ....................... 1.33% 1.34% 1.33% 1.37% 1.40% 1.49% 1.43%
==== ==== ==== ==== ==== ==== ====
Ratio of allowance for loan losses to
non-performing loans at the end of
the period ....................... 174.85% 152.26% 194.60% 63.33% 80.60% 52.46% 79.66%
====== ====== ====== ===== ===== ===== =====
</TABLE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------------
1998 1997
------------------------------------ -------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- ----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family $ 120 2.13% 83.94% $ 119 2.13% 81.73%
Multi-family -- -- 0.78 -- -- 0.79
Non-residential real estate 410 7.27 8.08 411 7.34 10.24
Construction and development -- -- 4.57 -- -- 4.08
Land and land development -- -- 0.53 10 0.18 0.86
Consumer and other loans 80 1.42 2.10 80 1.43 2.30
Unallocated general reserves 5,029 89.18 -- 4,977 88.92 --
------ ------- ------- ----- ------ -----
Total allowance $5,639 100.00% 100.00% $5,597 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF OF OF
LOANS LOANS LOANS
PERCENT IN EACH PERCENT IN EACH PERCENT IN EACH
OF CATEGORY OF CATEGORY OF CATEGORY
ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO
TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ------- ------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family(1)......... $ 191 3.48% 83.19% $ 82 1.48% 80.94% $ 361 6.59% 79.69%
Multi-family.................. -- -- 0.80 226 4.08 0.81 226 4.12 0.57
Non-residential real estate... 220 4.02 9.50 311 5.61 10.42 92 1.68 10.77
Construction and development.. -- -- 3.72 -- -- 4.98 -- -- 5.69
Land and land development..... 67 1.22 0.72 10 0.18 0.97 11 0.20 1.55
Consumer and other loans...... 65 1.19 2.07 61 1.10 1.88 57 1.04 1.73
Unallocated general reserves.. 4,935 90.09 -- 4,853 87.55 -- 4,733 86.37 --
------ ------- ------ ------ ------- ------ ------ ------- -------
Total allowance............. $5,478 100.00% 100.00% $5,543 100.00% 100.00% $5,480 100.00% 100.00%
====== ======= ====== ====== ======= ====== ====== ======= =======
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1994 1993
------------------------- -------------------------
PERCENT PERCENT
OF OF
LOANS LOANS
PERCENT IN EACH PERCENT IN EACH
OF CATEGORY OF CATEGORY
ALLOWANCE TO ALLOWANCE TO
TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family(1)......... $ 224 4.05% 79.09% $ 195 3.64% 79.08%
Multi-family.................. 634 11.45 1.11 957 17.87% 2.33
Non-residential real estate... 506 9.14 10.10 250 4.67% 9.72
Construction and development.. -- -- 6.89 -- -- 5.89
Land and land development..... 10 0.18 1.12 -- -- 1.37
Consumer and other loans...... 55 0.99 1.69 56 1.05 1.61
Unallocated general reserves.. 4,108 74.19 -- 3,897 72.77 --
------ -------- ------- ------ -------- -------
Total allowance............. $5,537 100.00% 100.00% $5,355 100.00% 100.00%
====== ======== ======= ====== ======== =======
</TABLE>
________________________
(1) Includes home equity lines of credit.
55
<PAGE>
REAL ESTATE OWNED. At December 31, 1997 and June 30, 1998, the Bank had
$2.0 million and $1.9 million of REO, respectively. At June 30, 1998, REO
consisted of 25 one- to four-family properties, one parcel of land, one
non-residential property and one multi-family property. When the Bank acquires
property through foreclosure or by deed in lieu of foreclosure, it is initially
recorded at the lower of the recorded investment in the corresponding loan or
the fair value of the related assets at the date of foreclosure, less costs to
sell. Thereafter, if there is a further deterioration in value, the Bank
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Bank to have obtained an appraisal
on all real estate subject to foreclosure proceedings prior to the time of
foreclosure. It is the Bank's policy to require appraisals on a periodic basis
on foreclosed properties and conduct inspections on foreclosed properties. The
Bank seeks to sell its REO properties to the tenants of those properties and
encourages tenants to take advantage of this opportunity by selling the
properties at a favorable market value and with favorable loan terms, including
100% financing. Management believes this type of lending enhances the Bank's CRA
performance.
INVESTMENT ACTIVITIES
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations with terms of five years or less,
U.S. Agency obligations, including mortgage-backed securities with terms of five
years or less, municipal bonds with terms of five years or less rated by a
highly regarded rating service, such as Standard & Poors, as AA or better and
certain certificates of deposit of insured banks and savings institutions,
corporate obligations up to a maximum of 1% of the Bank's total assets that have
terms of five years or less and are rated by a highly regarded rating service,
such as Standard & Poors, as AA or better. The Bank is also authorized to invest
in mutual funds whose assets conform to the investments that the Bank is
otherwise authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily U.S. Treasury obligations, federal agency obligations and high
grade corporate debt securities) with short and intermediate terms (five years
or less) to maturity. At June 30, 1998, the weighted average term to maturity
for investment securities available-for-sale and mortgage-backed and related
securities held-to-maturity were 1.93 years and 11.12 years, respectively. See
Notes to Financial Statements for information regarding the maturities of the
Bank's securities.
At June 30, 1998 the Bank had dual indexed consolidated bonds with a
fair value of $1.9 million, which was $587,000 below the Bank's amortized cost.
These instruments were purchased in 1993 and do not comply with the Bank's
current investment policy. The Bank does not intend to invest in this type of
instrument in the future and, based upon market conditions, intends to evaluate
opportunities to divest itself of these instruments. See "Notes to Financial
Statements" for information regarding dual indexed consolidated bonds.
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of
Atlanta, the Bank is required to hold FHLB of Atlanta stock which is carried at
cost since there is no readily available market value. Historically, the Bank
has not held any securities considered to be trading securities.
56
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------------------------------------------
1998 1997 1996 1995
------------------- ----------------- ------------------ ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ------- ---------- ------- ---------- ------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale:(1)
U.S. Treasury and agency
obligations............................ $16,814 $16,875 $19,812 $19,836 $20,823 $20,803 $30,943 $31,147
Corporate obligations.................... 4,856 4,906 3,345 3,414 3,995 4,094 6,514 6,694
Other debt securities.................... 5,007 5,966 3,946 4,713 3,744 3,983 3,465 3,669
Mutual funds............................. 1,293 1,268 1,262 1,242 1,199 1,175 1,136 1,104
Duel indexed consolidated bonds.......... 2,500 1,913 2,500 1,946 2,500 1,924 7,500 6,643
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities.............. $30,470 $30,928 $30,865 $31,151 $32,261 $31,979 $49,558 $49,257
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
__________________
(1) On December 31, 1995, the Bank transferred all investment securities that
were classified as held-to-maturity to the available-for-sale category.
The amortized costs of the amounts transferred was $49.6 million with an
unrealized gain of $684,000, and an unrealized loss of $985,026. The Bank
made this transfer in response to a one-time reassessment opportunity
granted in a special report regarding the implementation of SFAS 115.
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed and mortgage-related
securities, all of which were classified as held-to-maturity at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995
------------------- ----------------- ------------------ ---------- ---------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ------- ---------- ------- ---------- ------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held-to-maturity:
Fixed rate:
FNMA pass through securities......... $ 768 $ 768 $ 838 $ 838 $1,008 $1,008 $1,197 $1,197
GNMA certificates.................... 422 458 453 497 494 537 682 741
------ ------ ------- ------- ------ ------ ------ ------
Total mortgage-backed
and related securities................. $1,190 $1,226 $1,291 $1,335 $1,502 $1,545 $1,879 $1,938
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the Bank's mortgage-backed and mortgage-
related securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
At beginning of period.............................. $1,291 $1,502 $1,502 $1,879 $2,109
Mortgage-backed securities purchased.............. -- -- -- -- --
Mortgage-backed securities sold................... -- -- -- -- --
Amortization and repayments....................... (101) (98) (211) (377) (230)
------ ------ ------ ------ ------
Balance of mortgage-backed and related
securities at end of period........................ $1,190 $1,404 $1,291 $1,502 $1,879
====== ====== ====== ====== ======
</TABLE>
57
<PAGE>
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Bank's
investment securities, and mortgage-related securities as of June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
--------------------------------------------------------------------------------------------------
ONE THREE TO MORE THAN
ONE YEAR OR LESS TO THREE YEARS FIVE YEARS FIVE YEARS
-------------------- -------------------- -------------------- -------------------
AVERAGE
WEIGHTED WEIGHTED WEIGHTED WEIGHTED REMAINING
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE YEARS TO
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD MATURITY
--------- --------- --------- --------- -------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations................. $ 9,514 5.80% $6,300 6.16% $ 500 6.49% $ 500 6.14% 1.15
Corporate obligations........ 1,000 9.75 2,500 6.08 1,356 6.40 -- 4.93 1.79
Other debt securities........ 3,717 1.96 -- -- 940 9.71 350 4.93 1.79
Mutual funds................. 1,293 2.40 -- -- -- -- -- -- 0.25
Duel indexed consolidated
bonds....................... -- -- -- -- -- 2,500 2.92 7.18
------- ------- ------ ------ ------ ----- ------ -----
Total investment
securities.................. $15,524 4.85% $8,800 6.14% $2,796 7.53% $3,350 3.61% 1.93
======= ==== ====== ==== ====== ==== ====== =====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through
securities.................. $ -- $ -- $ -- $ 768 9.60% 7.50
GNMA certificates........... -- -- -- 422 9.91 17.71
------- ------ ------ ------ -----
Total mortgage-backed and
related securities.......... $ -- $ -- $ -- $1,190 9.71% 11.12
======= ====== ====== ====== ====
<CAPTION>
AT JUNE 30, 1998
---------------------------------
TOTAL
--------------------------------
WEIGHTED
CARRYING MARKET AVERAGE
AMOUNT VALUE YIELD
-------- -------- --------
<S> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations................. $16,814 $16,875 5.97%
Corporate obligations......... 4,856 4,906 6.93
Other debt securities......... 5,007 5,966 3.63
Mutual funds.................. 1,293 1,268 2.40
Duel indexed consolidated
bonds....................... 2,500 1,913 2.92
------- ------- ----
Total investment
securities.................. $30,470 $30,928 5.33%
======= ======= ====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through
securities.................. $ 768 $ 768 9.60%
GNMA certificates............ 422 458 9.91
------- ------- ----
Total mortgage-backed and
related securities.......... $ 1,190 $ 1,226 9.71%
======= ======= ====
</TABLE>
58
<PAGE>
Sources of Funds
General. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, money market accounts, transaction accounts and time
deposits currently ranging in terms from one to five years. For the six months
ended June 30, 1998, the balance of core deposits (savings and money market
accounts) represented 22.3% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Bank's deposits are
obtained predominantly from the areas surrounding its branch offices. The Bank
has historically relied primarily on providing a higher level of customer
service and long-standing relationships with customers to attract and retain
these deposits and also relies on competitive pricing policies and advertising;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. The Bank has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The Bank
manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on its experience, the
Bank believes that its passbook and statement savings, money market accounts and
transaction accounts are relatively stable sources of deposits. The Bank's time
deposits have been a relatively stable source of funds as well, including the
$196.7 million of certificates of deposit maturing in one year or less; however,
the ability of the Bank to attract and maintain time deposits and the rates paid
on these deposits has been and will continue to be significantly affected by
market conditions. The Bank is seeking opportunities to grow its transaction
accounts through aggressive advertising, offering ATM services, and offering
interest on such accounts. The Bank also intends to expand its product line to
attract more customers, including local businesses.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) before interest credited........... $(12,770) $(7,266) $(17,354) $(29,800) $(8,139)
Interest credited.......................................... 9,375 9,262 18,816 19,076 18,432
--------- ------- --------- --------- --------
Net increase (decrease) in savings deposits................ $ (3,395) $ 1,996 $ 1,462 $(10,724) $10,293
========= ====== ========= ========= =======
</TABLE>
At June 30, 1998, the Bank had $45.3 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ----------------- ------------------
(IN THOUSANDS)
<S> <C>
3 months or less.......................................... $ 8,590
Over 3 through 6 months................................... 8,190
Over 6 through 12 months.................................. 14,500
Over 12 months............................................ 14,066
-------
Total............................................... $45,346
=======
</TABLE>
59
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for all of the dates indicated and the weighted average interest rates
on each category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
At ------------------------------------------------------------
June 30, 1998 1997 1996
----------------------------- ------------------------------------------------------------
Percent Weighted Percent Weighted Percent Weighted
of Total Average of Total Average of Total Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
--------- -------- -------- -------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts................ 2,481 0.66 0.32 3,266 0.87 -- 2,451 0.65 --
Savings............................. 80,959 21.66 3.25 84,547 22.42 3.25 90,255 24.03 3.25
--------- ------- -------- ------- ------- --------
Total........................... 83,440 22.33 3.16 87,813 23.29 3.13 92,706 24.68 3.16
--------- ------- -------- ------- ------- --------
Certificate accounts(1)(2):
Within 12 months.................. 196,666 52.62 5.60 192,592 51.07 5.74 206,995 55.10 5.57
Over 12 through 36 months......... 72,526 19.41 5.84 82,054 21.76 5.81 73,143 19.47 6.03
Over 36 months.................... 21,087 5.64 6.29 14,655 3.88 6.32 2,808 0.75 6.21
--------- ------- -------- ------- ------- --------
Total certificate accounts...... 290,279 77.67 5.71 289,301 76.71 5.79 282,946 75.32 5.70
--------- ------- -------- ------- ------- --------
Total average deposits.......... $373,719 100.00% 5.16 $377,114 100.00% 5.17 $375,652 100.00% 5.07
========= ======= ======== ======= ======= ========
<CAPTION>
At December 31,
-----------------------------
1995
-----------------------------
Percent Weighted
of Total Average
Balance Deposits Rate
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Transaction accounts................ 2,716 0.70 --
Savings............................. 97,696 25.29 3.25
--------- --------
Total........................... 100,412 25.99 3.16
--------- --------
Certificate accounts(1)(2):
Within 12 months.................. 193,460 50.07 5.63
Over 12 through 36 months......... 92,504 23.94 5.60
Over 36 months.................... -- -- 5.62
--------- --------
Total certificate accounts...... 285,964 74.01 5.62
--------- --------
Total average deposits.......... $386,376 100.00% 4.98
========= ========
</TABLE>
______________________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
60
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1998
---------------------------------------
LESS ONE
THAN TO OVER AT DECEMBER 31,
----------------------------------
AT JUNE 30, ONE THREE THREE
1998 YEAR YEARS YEARS 1997 1996 1995
--------------- ----------- ----------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%................ $ -- $ -- $ -- $ -- $ -- $ 18 $ 575
4.01% to 5.00%............ 19,299 19,299 -- -- 17,304 42,404 40,990
5.01% to 6.00%............ 243,579 166,483 72,486 4,610 233,582 183,490 139,919
6.01% to 7.00%............ 24,239 7,722 40 16,477 32,589 51,217 99,017
7.01% to 8.00%............ 3,162 3,162 -- -- 5,827 5,817 5,386
8.01% to 9.00%............ -- -- -- -- -- -- 77
Over 9.01%................ -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total................... $290,279 $196,666 $ 72,526 $ 21,087 $289,302 $282,946 $285,964
======== ======== ======== ======== ======== ======== ========
</TABLE>
BORROWINGS. As part of its operating strategy, the Bank has utilized
advances from the FHLB as an alternative to retail deposits to fund its
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when the Bank needs additional funds to satisfy loan
demand. By utilizing FHLB advances, which possess varying stated maturities, the
Bank can meet its liquidity needs without otherwise being dependent upon retail
deposits and revising its deposit rates to attract retail deposits, which have
no stated maturities (except for certificates of deposit), which are interest
rate sensitive and which are subject to withdrawal from the Bank at any time.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation--Federal Home Loan Bank System." At June 30, 1998, the Bank had $8.0
million in outstanding advances from the FHLB as compared to $8.0 million at
December 31, 1997. The Bank has overnight borrowing capacity at the FHLB of
$45.0 million and additional borrowing capacity at June 30, 1998 of $37.0
million.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX AT OR FOR THE YEAR ENDED
MONTHS ENDED JUNE 30, DECEMBER 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding (monthly).................... $8,000 $10,000 $ 9,667 $ 7,417 $ 8,000
Maximum amount outstanding at any
month-end during the period........................... 8,000 10,000 10,000 15,000 8,000
Balance outstanding at end of period..................... 8,000 10,000 8,000 15,000 8,000
Weighted average interest rate during the period......... 6.14% 6.14% 6.23% 6.18% 6.95%
Weighted average interest rate at end of period.......... 6.19% 6.19% 6.19% 6.23% 7.16%
</TABLE>
61
<PAGE>
PROPERTIES
The Bank currently conducts its business through its four full service
banking offices including its main banking office. The Bank owns all four
branches. The following table sets forth information regarding the Bank's
properties.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE TOTAL DEPOSITS
YEAR OF PROPERTY AT AT
LOCATION ACQUIRED JUNE 30, 1998 JUNE 30, 1998
- ---------------------------------------- ------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
EXECUTIVE/BRANCH OFFICE:
400 George Street...................... 1962 $1,007 $244,106
Fredericksburg, VA 22404
BRANCH OFFICES:
Route Three Branch..................... 1983 735 42,239
3600 Plank Road
Fredericksburg, VA 22407
Four Mile Fork Branch.................. 1972 483 60,531
4535 Lafayette Boulevard
Fredericksburg, VA 22408
Aquia Branch........................... 1978 401 26,843
117 Garrisonville Road
P.O. Box 382
Stafford, VA 22555
</TABLE>
The Bank also owns property for possible branch expansion located on Route
17 North, in Stafford County. The net book value of this property, as of June
30, 1998, was $____________.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of June 30, 1998, the Bank had 50 full-time employees and six part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.
62
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS or the Virginia
Department of Revenue ("DOR") in the past five years.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.
63
<PAGE>
CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
COMMONWEALTH OF VIRGINIA. The Commonwealth of Virginia imposes a tax at the
rate of 6.0% on the "Virginia taxable income" of the Bank and the Company.
Virginia taxable income is equal to federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes, and a recomputation of the bad debt reserve deduction on
reduced modified taxable income. Since the Bank and the Company will recognize
no taxable gain for federal tax purposes as a result of the Conversion, the Bank
and the Company will recognize no Virginia taxable income as a result of the
Conversion.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to test the Bank's
compliance with various regulatory requirements. In addition, the FDIC may also
conduct examinations of the Bank, at the FDIC's discretion. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS and of the Securities and Exchange Commission
(the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress has been considering the elimination of the federal thrift charter and
abolishment of the OTS. The results of such consideration, including possible
enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.
64
<PAGE>
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. In particular, certain lending authority for federal
savings associations, e.g., commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of the institution's
capital or assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At June 30, 1998, the Bank's general limit on loans-to-one borrower
was $20.9 million. At June 30, 1998, the Bank's largest aggregate amount of
loans-to-one borrower consisted of one mortgage loan and two installment loans
to a local church with a combined carrying balance of $2.1 million, of which
$2.0 million was secured by real estate and $75,044 was unsecured. Management
believes that the Bank is in compliance with all applicable loans-to-one
borrower limitations.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to either qualify as a "domestic
building and loan association," as defined in the Code, or maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of June 30, 1998,
the Bank maintained 99.99% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Institution") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
to, but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below its
capital requirements or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (recently lowered to 4%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations formerly required each savings
institution to maintain an average daily balance of short-term liquid assets at
1% of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. However, this requirement was recently eliminated. Monetary
penalties may be imposed for failure to meet the liquidity requirements. The
Bank's average liquidity ratio for the six months ended June 30, 1998 was
8.70%%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
65
<PAGE>
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, as reported in the Bank's latest quarterly Thrift Financial Report. The
assessments paid by the Bank for the year ended December 31, 1997 totalled
$________.
BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors--Financial
Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Section 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans to insiders made pursuant to a benefit or compensation program that are
widely available to all employees of the institution and do not give preference
to insiders over other employees. Regulation O also places individual and
aggregate limits on the amounts of loans the Bank may make to insiders based, in
part, on the Bank's capital position and requires that certain board approval
procedures be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
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<PAGE>
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital to total assets) ratio and an 8% risk based capital
standard. Core capital is generally defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and certain purchased credit card relationships. The OTS regulations
require that, in meeting the leverage ratio, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4% (3%
for institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above. The
components of supplementary capital generally include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.
At June 30, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at June 30, 1998 and pro forma amounts and percentages based upon
the issuance of the shares within the Estimated Price Range and assuming that a
portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital ratio of
less than 8.0% or a leverage ratio or a Tier 1 capital to risk-based assets
ratio that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital ratio less than 6.0%, a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
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<PAGE>
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance assessments of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and was generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.4
million on a pre-tax basis and $1.5 on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. Most recently, the FDIC determined to continue the 0 to 27
basis point range for the second half of 1998. SAIF members will also continue
to make the FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis, whether the federal thrift
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
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<PAGE>
The Bank's assessment rate for 1997 ranged from 6.32 to 6.50 basis points
and the regular premium paid for this period was $240,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1998 of $3.5 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance. At June 30, 1998, the Bank had $8.0 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Bank amounted to approximately $247,000, $232,000
and $240,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.43 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See
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<PAGE>
"--Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities authorized for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
Proposed legislation would, subject to certain grandfathering, limit the
activities of unitary savings and loan companies to those permissible for
multiple savings and loan holding companies. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS, and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described above. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
THRIFT RECHARTERING
The Funds Act provides that the BIF and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in Congress that would eliminate the federal thrift charter
and the OTS. A bill originally reported by the House Banking Committee would
have regained federal thrifts to become national banks or state banks within two
years of enactment or they would have become national banks by operation of law.
OTS would have been abolished and its functions transferred to the bank
regulatory agencies. The bill as passed by the House of Representatives,
however, did not provide for the elimination of the federal thrift charter or
OTS, but did provide that unitary stock savings and loan holding companies
existing or applied for after March 31, 1998 would not have the ability to
engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
stock holding companies existing or applied for before 1998 would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and BIF
will eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Bank.
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FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company currently consists of nine members
each of whom is also a director of the Bank. The Board of Directors is divided
into three classes, each of which contains approximately one-third of the Board.
The directors shall be elected by the stockholders of the Company for staggered
three year terms, or until their successors are elected and qualified. One class
of directors, consisting of Messrs. Anderson, Beck and Donahoe has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Ashby, Harding and Rowe has a term of office expiring at
the second annual meeting of stockholders and a third class, consisting of
Messrs. Hicks and McKann and Ms. Newman has a term of office expiring at the
third annual meeting of stockholders. Their names and biographical information
are set forth under "Management of the Bank--Directors."
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
Executive Position(s) Held With Company
---------- --------------------------------------------------
<S> <C>
Samuel C. Harding, Jr..... President
Peggy J. Newman........... Executive Vice President, Secretary and Treasurer
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Except for directors' meeting fees, since the formation of the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Company. Information concerning the principal occupations,
employment and other information concerning the directors and officers of the
Company during the past five years is set forth under "Management of the Bank--
Biographical Information."
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<PAGE>
MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ---- ------ ------------------------------------------------ -------- -------
<S> <C> <C> <C> <C>
H. Smith McKann 84 Chairman of the Board 1955 2001
Ronald G. Beck 62 Vice Chairman of the Board 1988 1999
Samuel C. Harding, Jr. 56 Director and President 1987 2000
Peggy J. Newman 57 Director, Executive Vice President, Secretary 1988 2001
and Treasurer
William M. Anderson, Jr. 56 Director 1988 1999
O'Conor Ashby 51 Director 1992 2000
Ernest N. Donahoe, Jr. 61 Director 1982 1999
DuVal Q. Hicks, Jr. 78 Director 1958 2001
Charles S. Rowe 73 Director 1956 2000
</TABLE>
__________________________
(1) As of June 30, 1998.
Each of the executive officers of the Bank will retain his or her office
after the Conversion until his or her re-election at the annual meeting of the
Board of Directors of the Bank, held immediately after the first annual meeting
of stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
H. Smith McKann is the President and owner of General Products Company,
Fredericksburg, Virginia. Mr. McKann has served as a director of the Bank since
1955 and has been Chairman since 1996.
Ronald G. Beck is the President of Clayborne C. Beck & Sons, Inc.,
Fredericksburg, Virginia, which sells furniture grade lumber worldwide. Mr. Beck
has served as a director of the Bank since 1988 and currently serves as Vice
Chairman of the Board.
Samuel C. Harding, Jr. serves as President of the Bank and has held that
position since 1992. Mr. Harding has been with the Bank since 1972 and was
elected director in 1987.
Peggy J. Newman serves as Executive Vice President, Secretary and Treasurer
of the Bank and has held these positions since 1992. Ms. Newman has been with
the Bank for 33 years and was elected director in 1988.
William M. Anderson, Jr. was elected to the Board in 1988 and is currently
the President of Mary Washington College, Fredericksburg, Virginia. He has
served in that position since 1982.
O'Conor Ashby is a partner in the law firm of Willis & Ashby. He has been a
partner with that firm since 1975. Mr. Ashby, who has served on the Board of the
Bank since 1992 also is currently on the Board of Medicorp Services, Inc.
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<PAGE>
Ernest N. Donahoe, Jr. Is an engineer and has been a partner with Sullivan,
Donahoe & Ingalls, P.C. since 1968. Mr. Donahoe has been a Board member of the
Bank since 1982.
DuVal Q. Hicks, Jr. is a retired attorney, formerly with Hicks, Baker and
Peterson. Mr. Hicks has been a director of the Bank since 1958.
Charles S. Rowe is a retired Editor and Co-publisher of the Free Lance-
Star, Fredericksburg, Virginia, and a former director of the Associated Press.
He has served as a director of the Bank since 1956.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets twice per month and may have additional
special meetings called in the manner specified in the Bylaws. During 1997, no
current Director attended less than 75% of the aggregate of the total number of
Board meetings and the total number of committee meetings of the Board of
Directors on which they served.
The Board of Directors of the Bank has established the following
committees:
The Executive Committee consists of Messrs. McKann, Beck and Harding, and
Ms. Newman. The purposes of this committee are to evaluate issues of major
importance to the Bank between regularly scheduled Board meetings. The Executive
Committee meets as the members deem necessary and met one time in 1997.
The Audit Committee consists of Messrs. Andersen, Ashby and Rowe. The
purpose of this committee is to oversee both internal and external audit
activities. The Audit Committee meets as the members deem necessary and met one
time in 1997.
The Loan Committee consists of Messrs. Beck, Donahoe and Harding. The
purpose of this committee is to review and approve all loan requests of less
than $500,000. The Loan Committee meets once a week.
Additionally, the Bank has a number of other management committees
including the Asset/Liability Committee, Advertising Committee, the Compensation
Committee, the Investment Committee, the Pension Committee and the Proxy
Committee.
The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Anderson,
Rowe and Ashby; the Pricing Committee consisting of the entire Board of
Directors; and the Compensation Committee consisting of Messrs. Beck, Hicks and
Harding.
COMPENSATION OF DIRECTORS OF THE BANK AND COMPANY
All directors of the Bank receive a fee of $1,700 for each regularly
scheduled monthly meeting attended. Effective August 1, 1998, such fees were
increased to $2,000 for each regularly scheduled monthly meeting attended.
Messrs. Beck and Donahoe additionally receive $400 per month for Loan Committee
meetings attended.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1997, to
the Chief Executive Officer and the highest paid executive officer of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITIONS YEAR ($) ($) ($)(2) ($)(3)
- --------------------------------------------- -------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Samuel C. Harding, Jr...................... 1997 $204,800 $20,000 -- $33,109
President (principal
executive officer)
Peggy J. Newman............................ 1997 199,800 20,000 -- 37,884
Executive Vice President,
Secretary and Treasurer
(principal financial officer)
</TABLE>
_______________
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees for Mr. Harding and Ms. Newman.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1997, the Bank had no restricted stock or stock
related plans in existence.
(3) Includes deferred compensation of 28,612 and 33,387 for Mr. Harding and Ms.
Newman, respectively under the Management Security Plan. Also includes
matching contributions of 4,497 and 4,497 to the accounts of Mr. Harding
and Ms. Newman, respectively, under the Bank's 401(k) Plan.
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with Mr. Harding and Ms. Newman (individually, the "Executive"). The Employment
Agreements are subject to the review and approval of the OTS and may be amended
as a result of such OTS review. Review of compensation arrangements by the OTS
does not indicate, and should not be construed to indicate, that the OTS has
passed upon the merits of such arrangements. The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of both Mr. Harding and Ms. Newman.
The Employment Agreements provide for a three-year term for each Executive
and shall become effective upon consummation of the Conversion. The Bank
Employment Agreements provide that, commencing on the first anniversary date of
the agreement and continuing each anniversary date thereafter, the Board of
Directors of the Bank may extend each of the agreements for an additional year
so that the remaining term shall be three years unless written notice of non-
renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company Employment Agreements
shall be extended on a daily basis unless written notice of non-renewal is given
by the Board of Directors of the Company. The Bank and the Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries, which will be effective for such Employment Agreements for
Mr. Harding and Ms. Newman will be $________ and $________, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing certain fringe benefits available
to similarly situated executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause (as described in the
agreements) at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation
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from the Bank and the Company upon (i) the failure to re-elect the Executive to
his/her current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 25 miles; (iv) liquidation or dissolution of
the Bank or the Company; or (v) a breach of the Employment Agreements by the
Bank or the Company; the Executive or, in the event of death, the Executive's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the Employment Agreements,
together with the value of certain stock-based incentives previously awarded to
the Executive. The Bank and the Company would also continue and pay for the
Executive's life and disability coverage for the remaining term of the
Employment Agreement, as well as provide medical and hospitalization coverage
until the Executive at least attains eligible Medicare age. Upon any termination
of the Executive, the Executive is subject to a covenant not to compete with the
Company or the Bank for one year.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, the Executive's beneficiary would be entitled to a
severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Bank and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both Employment Agreements provide for a severance payment
in the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on the base salaries to be paid to Mr. Harding and Ms.
Newman effective upon the consummation of the Conversion, and excluding any
benefits under any employee benefit plan which may be payable, would equal
approximately $_____ million.
Payments to the Executive under the Bank Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Virginia law, respectively.
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon consummation of the Conversion, the Bank's Board of Directors intends
to, upon consummation of the Conversion, establish the Fredericksburg Savings
Bank Employee Severance Compensation Plan (the "Severance Plan") which will
provide eligible employees with severance pay benefits in the event of a change
in control of the Bank or the Company. Management personnel with Employment
Agreements are not eligible to participate in the Severance Plan. Generally,
employees are eligible to participate in the Severance Plan if they have
completed at least six months of service with the Bank. Under the Severance
Plan, in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one year
after the change in control (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. A participant, whose employment
has terminated, will be entitled to a cash severance payment equal to one-
twelfth of his or her current annual compensation for each year of service up to
a maximum of 199% of current annual compensation. In the event the provisions of
the Severance Plan were triggered, the total amount of payments that would be
due thereunder, based solely upon current salary levels, would equal
approximately $____ million.
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INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, may elect coverage for comprehensive hospitalization,
including major medical, and are covered with long-term disability insurance.
BENEFITS
401(K) PLAN. The Bank maintains the Fredericksburg Savings and Loan
Association, F.A. Salary Savings Plan (the "401(k) Plan"), a tax-qualified
profit sharing plan with a qualified cash or deferred arrangement under Section
401(k) of the Code. The 401(k) Plan currently provides participants with savings
and retirement benefits based on employee deferrals of compensation, as well as
matching and other discretionary contributions made by the Bank. Eligible
employees may begin participating in the 401(k) Plan upon the completion of one-
half of one "Year of Service" (as defined in the 401(k) Plan) and attainment of
age 21. Participants currently may make salary reduction contributions to the
401(k) Plan up to the lesser of 20% of their compensation or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in his
or her salary reduction contributions to the 401(k) Plan. Participants become
vested in employer contributions to the 401(k) Plan at the rate of 33 1/3% per
each completed year of service. Participants also become 100% vested in their
accounts under the 401(k) Plan upon death or incurring disability (as described
in the 401(k) Plan) or attainment of their "Normal Retirement Age" (as defined
in the 401(k) Plan).
Currently, participants may invest their accounts under the 401(k) Plan in
and among four funds. The Bank may add or eliminate investment options available
under the 401(k) Plan in the future.
Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals from the 401(k) Plan under certain
circumstances. Distributions from the 401(k) Plan are generally subject to
federal and state income taxes and distributions made prior to a participant
attaining age 59 1/2 are also generally subject to a federal excise tax.
PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Eligible employees begin
participating in the Pension Plan following the completion of one year of
service (as describe in the Plan) and attainment of the age 21. A participant in
the Pension Plan generally becomes vested in his accrued benefit under the plan
upon completing five years of service. Participants also become 100% vested in
their accrual benefit under the Pension Plan upon incurring a disability (as
described in the plan) and upon the attainment of their "normal retirement age"
(as described in the Plan). The Pension Plan is funded solely through
contributions made by the Bank.
A participant's accrued benefit under the Pension Plan is actuarially
determined based on his or her years of service with the Bank and his or her
average monthly compensation (as described in the Plan), including average
monthly compensation in excess of an integration to the Social Security Taxable
Wage Base.
The table below reflects the annual pension benefit payable to a
participant in the Pension Plan, assuming various levels of "Average Monthly
Compensation" (as defined in the Pension Plan) and years of service credited as
of the participant's normal retirement age. As of January 1, 1998, Mr. Harding
and Ms. Newman had ___ and ___ years of service with the Bank, respectively, for
purposes of the Pension Plan.
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Years of Credited Service
----------------------------------------------------------
Average Annual 15 20 25 30 35
Earnings(1)
------------- ---------- ---------- --------- ---------- ---------
$ 50,000 $19,833 $26,444 $33,055 $33,055 $33,055
$ 75,000 $31,271 $41,694 $52,118 $52,118 $52,118
$100,000 $42,708 $56,944 $71,180 $71,180 $71,180
$125,000 $54,146 $72,194 $90,243 $90,243 $90,243
$150,000 $65,583 $87,444 $109,305 $109,305 $109,305
$175,000 $77,021 $102,694 $128,368 $128,368 $128,368
$200,000 $88,458 $117,944 $147,430 $147,430 $147,430
$250,000 $111,333 $148,444 $185,555 $185,555 $185,555
$300,000 $134,208 $178,944 $223,680 $223,680 $223,680
$350,000 $157,083 $209,444 $261,805 $261,805 $261,805
$400,000 $179,958 $239,944 $299,930 $299,930 $299,930
__________________________________
(1) Code Section 401(a)(17) limits the amount of compensation the Bank may
consider in computing benefits under the Pension Plan to $150,000,
effective with respect to the Pension Plan for plan years beginning on
or after January 1, 1994, as periodically adjusted ($160,000 for 1998).
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to establish
a tax-qualified employee stock ownership plan (the "ESOP") in connection with
the Conversion. Generally, eligible employees will become participants in the
ESOP upon the completion of one-half of one year of service with the Bank (with
credit given for service with the Bank prior to adoption of the plan) and
attainment of age 21. With the consent of the Bank, an affiliate of the Bank may
also adopt the ESOP for the benefit of its employees.
The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the related trust agreement. The Bank expects
the ESOP to purchase 8% of the Common Stock issued in the Conversion. As part of
the Conversion, and in order to fund the ESOP's purchase of the Common Stock
issued in the Conversion, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either the Company or a third-party lender.
The trustee of the ESOP will repay the loan principally from the Bank's
annual contributions to the ESOP over an expected period of 20 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since some participants in
the ESOP will be employees of the Bank or, alternatively, the Bank may reimburse
the Company for contributions made by the Company with respect to employees of
the Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.
The trustee of the ESOP will pledge the shares of Common Stock
purchased by the ESOP in connection with the Conversion as collateral for the
loan and will hold the shares in a suspense account under the plan. As the
trustee repays the loan, the trustee will release a portion of the shares from
the suspense account and allocate them to the accounts of active participants in
the ESOP based on each participant's compensation (as determined under the terms
of the plan) relative to all participants' compensation for the plan year. In
the event of a change in control of the Bank or the Company prior to complete
repayment of the loan, the ESOP trustee, in accordance with the terms of the
plan document, will sell enough shares of Common Stock held in the suspense
account to repay the loan in full. Upon repayment of the loan, the ESOP trustee
will then allocate all remaining shares of Common Stock held in the suspense
account to the accounts of active participants based on each participant's
account balance as of a specific date or based on some other method set forth in
the plan document.
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Participants will become vested in contributions made to the ESOP by
the Bank at the rate of 33a% per year of service with the Bank (with credit
given for service with the Bank prior to its adoption of the ESOP). Accordingly,
participants will become fully vested in their accounts under the ESOP after
completing three years of vesting service. The Bank expects that participants
will also become fully vested in their accounts under the ESOP upon the
attainment of their normal retirement age while an employee of the Bank, upon
their death or incurring a disability, upon a change in control of the Bank or
the Company, or upon termination of the plan. Benefits generally become
distributable under the ESOP and potentially become subject to income tax upon
death, retirement, disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his or her account for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. The Bank has previously taken action
to separately provide benefits to Mr. Harding and Ms. Newman that would have
accrued under the Pension Plan but for the limitation on compensation the Bank
may consider under the Pension Plan less benefits that actually accrue under the
Pension Plan for the benefit of Mr. Harding and Ms. Newman. Upon Conversion, the
Bank also intends to provide for similar benefits with respect to the 401(k)
Plan and ESOP, as well as benefits otherwise limited by other provisions of the
Code or the terms of the ESOP loan.
To provide for such benefits, the Bank intends to implement a
non-qualified deferred compensation arrangement known as a "Supplemental
Executive Retirement Plan" ("SERP"). The SERP will generally provide benefits to
eligible individuals (designated by the Board of Directors of the Bank or its
affiliates) that cannot be provided under the Pension Plan, 401(k) Plan and/or
ESOP as a result of the limitations imposed by the Code, but that would have
been provided under the Pension Plan, 401(k) Plan and/or ESOP but for such
limitations. In addition to providing for benefits lost under tax-qualified
plans as a result of limitations imposed by the Code, the SERP will also make up
lost ESOP benefits to designated individuals who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement of
an eligible individual or upon a change in control of the Bank or the Company
prior to complete repayment of the ESOP Loan, the SERP will provide the
individual with a benefit equal to what the individual would have received under
the ESOP had he remained employed throughout the term of the ESOP or had the
ESOP not been terminated prior to the scheduled repayment of the ESOP loan less
the benefits actually provided under the ESOP on behalf of such individual. An
individual's benefits under the SERP will generally become payable upon the
participant's retirement (in accordance with the standard retirement policies of
the Bank), upon the change in control of the Bank or the Company or as
determined under the applicable tax-qualified retirement plans sponsored by the
Bank.
The Bank may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Bank with respect to the SERP. The assets of the
grantor trust would remain subject to the claims of the Bank's general creditors
in the event of the Bank's insolvency until paid to the individual pursuant to
the terms of the SERP.
MANAGEMENT SECURITY PLAN. The Bank currently sponsors a non-tax
qualified deferred compensation arrangement for approximately ten employees,
including Mr. Harding and Ms. Newman, known as the Fredericksburg Savings and
Loan Association, F.A. Management Security Plan (the "Management Security
Plan"). The Management Security Plan generally provides a payment to each
covered individual upon his or her death, disability, retirement, or termination
of employment after five or more years of service. Benefits under the Management
Security Plan are based on a flat dollar amount (specified for each individual
in a separate "Benefit Agreement") multiplied by the
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individual's years of service with the Bank. Participants become fully vested in
benefits under the Management Security Plan after the completion of five years
of service with the Bank. The annual benefits for Mr. Harding and Ms. Newman are
$3,685 and $4,000, respectively, multiplied by each individual's respective
years of service with the Bank. As of January 1, 1998, Mr. Harding and Ms.
Newman had completed 27 and 33 years of service, respectively.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.
In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (1,311,552 shares
based upon the maximum of the Estimated Price Range), and intends to grant Stock
Awards in an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (524,621 shares based upon
the maximum of the Estimated Price Range). Any Common Stock awarded under the
Stock-Based Incentive Plan will be awarded at no cost to the recipients. The
plan may be funded through the purchase of Common Stock by a trust established
in connection with the Stock-Based Incentive Plan (or any separate plan(s)) or
from authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan, directors may receive only grants of Non-Statutory Stock
Options. If such plan is adopted within one year after conversion, OTS
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or the Company. Subject to OTS regulations, upon exercise of
Limited Option Rights, the recipient will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of any unexercised
Stock Option, whether exercisable or unexercisable at such
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time, and the fair market value of the shares of Common Stock subject to the
Stock Option on the date of exercise of the right in lieu of purchasing the
Common Stock underlying the Stock Option. It is anticipated that all Stock
Options granted contemporaneously with stockholder approval of the Stock-Based
Incentive Plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Code. Unless sooner terminated, the Stock-Based
Incentive Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant Stock Options with
Limited Option Rights under the plan at an exercise price equal to at least the
fair market value of the underlying Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards and Limited Stock Rights to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following the date on which the
employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may
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be exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Bank. A change in control
would generally be considered to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of interest
charged by the Bank on such loans were the Bank's cost of funds. Pursuant to
FIRREA, in 1989, the Bank discontinued its practice of making such preferential
loans to its officers and Directors. However, all such pre-FIRREA preferential
loans were "grandfathered" under FIRREA. Since the enactment of FIRREA, the Bank
has not made any preferential loans to its executive officers or Directors.
The Bank intends to implement a policy whereby it will begin to again offer
loans to executive officers and Directors. Such loans, as well as loans made to
Bank employees, will be made on the same terms and conditions offered to the
general public. If the Bank implements a policy of extending credit to executive
officers and Directors, such policy will provide that all such loans will be
made in the ordinary course of business, on substantially the same terms,
including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of June 30, 1998, the
Bank had $572,673 of loans to executive officers and Directors all of which had
balances of less than $60,000 as of June 30, 1998 or were made by the Bank in
the ordinary course of business with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares of
Common Stock are issued at the minimum and maximum of the Estimated Price Range,
including the effect of shares issued to the Foundation, and that sufficient
shares will be available to satisfy their subscriptions. The table also sets
forth the total expected beneficial ownership of Common Stock as to all
directors and executive officers as a group.
<TABLE>
<CAPTION>
AT AT
THE MINIMUM THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE PRICE RANGE
----------------------- -----------------------
AS A AS A
NUMBER PERCENT NUMBER PERCENT
OF OF SHARES OF OF SHARES
NAME AMOUNT SHARES ISSUED SHARES ISSUED
- ---- ------------ ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
H. Smith McKann......................... $300,000 $30,000 0.31% 30,000 0.23%
Ronald G. Beck.......................... 300,000 30,000 0.31 30,000 0.23
Samuel C. Harding, Jr................... 300,000 30,000 0.31 30,000 0.23
Peggy J. Newman......................... 300,000 30,000 0.31 30,000 0.23
O'Conor Ashby........................... 100,000 10,000 0.10 10,000 0.23
Ernest N. Donahoe, Jr................... 100,000 10,000 0.10 10,000 0.23
DuVal Q. Hicks, Jr...................... 300,000 30,000 0.31 30,000 0.23
Charles S. Rowe......................... 300,000 30,000 0.31 30,000 0.23
William M. Anderson, Jr................. * * * * *
---------- -------- ------ ------- ------
All Directors and Executive Officers
as a Group (9 persons).............. $2,001,000 $200,100 2.06% 200,100 1.53%
========== ======== ====== ======= ======
</TABLE>
__________________________
* Less than 0.01% of the shares of Common Stock issued.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH
AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT OF THE
FOUNDATION.
GENERAL
On July 14, 1998, the Bank's Board of Directors unanimously adopted the
Plan, pursuant to which the Bank will be converted from a federally-chartered
mutual savings and loan association to a federally-chartered capital stock
savings bank. It is currently intended that all of the outstanding capital stock
of the Bank will be held by the Company, which is incorporated under Virginia
law. The Plan was approved by the OTS, subject to, among other things, approval
of the Plan by the Bank's members. A special meeting of members has been called
for this purpose to be held on ___________, 199_.
The Company has applied for and expects to receive approval from the OTS to
become a savings and loan holding company and to acquire all of the common stock
of the Bank to be issued in the Conversion. The Company plans to purchase the
shares of issued and outstanding capital stock of the Bank in exchange for up to
50% of the net proceeds and retain the remaining net proceeds. The Conversion
will be effected only upon completion of the sale of all of the shares of Common
Stock of the Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Bank will convert from a mutual
savings and loan association to a capital stock savings bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Bank's Eligible Account Holders, the ESOP, Supplemental Eligible Account
Holders and Other Members. Upon completion of the Subscription Offering, the
Company will offer any shares of Common Stock not subscribed for in the
Subscription Offering in a Community Offering with preference given to natural
persons residing in the Bank's Local Community. It is anticipated that shares
not subscribed for in the Subscription and Community Offerings will be offered
for sale by the Company to the general public in a Syndicated Community
Offering. The Bank has the right to accept or reject, in whole or in part, any
orders to purchase shares of the Common Stock received in the Community Offering
or in the Syndicated Community Offering. See "--Community Offering" and "--
Syndicated Community Offering."
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The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$89.8 million and $121.4 million, will be determined based upon an independent
appraisal of the estimated pro forma market value of the Common Stock of the
Company. All shares of Common Stock to be issued and sold in the Conversion will
be sold at the same price. The independent appraisal will be affirmed or, if
necessary, updated at the completion of the Subscription Offering, if all shares
are subscribed for, or at the completion of the Community and/or the Syndicated
Community Offerings. The appraisal has been performed by FinPro, a consulting
firm experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for additional information as to the determination of the
estimated pro forma market value of the Common Stock.
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL ASPECTS OF THE CONVERSION.
THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE
PLAN. A COPY OF THE PLAN IS AVAILABLE FOR INSPECTION AT EACH OFFICE OF THE BANK
AND AT THE SOUTHEAST REGIONAL AND WASHINGTON, D.C. OFFICES OF THE OTS.
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the Bank's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation.
The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. At June 30, 1998, the Bank had retained earnings, determined in
accordance with GAAP, of $83.5 million, or 17.7% of total assets. Assuming that
the Company uses 50% of the net proceeds at the maximum of the Estimated Price
Range to purchase the capital stock of the Bank, the Bank's GAAP capital will
increase to $127.5 million or a ratio of GAAP capital to adjusted assets, on a
pro forma basis, of 27.0% after the Conversion. The investment of the net
proceeds from the sale of the Common Stock is expected to provide the Bank with
additional income to increase further its capital position.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Articles of Incorporation will permit the Company,
subject to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, the
Company has no plans with respect to additional offerings of securities, other
than the issuance of additional shares upon exercise of stock options under the
Stock-Based Incentive Plan or the possible issuance of authorized but unissued
shares to fund the Stock-Based Incentive Plan. Following the Conversion, the
Company will also be able to use stock-based incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's long-standing commitment to its local
community, the Bank's Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company, as further described below. The
Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank
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operates and thereby enables such communities to share in the potential growth
and success of the Company and the Bank over the long term. By further enhancing
the Bank's visibility and reputation in the communities in which it operates,
the Bank believes that the Foundation will enhance the long-term value of the
Bank's community banking franchise.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. See "Comparison of Valuation and Pro Forma Information With
No Foundation." In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "Satisfactory" Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. The
Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes and may be able to support such activities in ways that are not presently
available to the Bank. The Bank believes that the Foundation will enable the
Company and the Bank to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Boards of Directors of the Bank and Company
also believe that the funding of the Foundation with Common Stock of the Company
is a means of enabling the communities in which the Bank operates to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for continued
ties between the Foundation and Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation would also enable the
Company and the Bank to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities. The Bank expects in future periods to continue making its
ordinary charitable contributions within its communities. Such ordinary
contributions typically range between $20,000 and $30,000 per year.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of four members, all of
whom must be officers of, or members of the Board of Directors of, the Company
or the Bank or an affiliate or subsidiary of the Company or the Bank. A person
who is a director, officer or employee of the Bank, or has the power to direct
its management or policies, or otherwise owes a fiduciary duty to the Bank, and
who will also serve as a director or employee of the Foundation would be subject
to the requirements of OTS Conflicts of Interest Regulations. The initial board
of directors of the Foundation will be comprised of Messrs. Anderson, Harding
and Hicks and Ms. Newman. Such persons intend to purchase 100, 30,000, 30,000
and 30,000 shares of Common Stock in the Conversion, respectively. At the
maximum of the Estimated Price Range, such purchases equal 0.00%, 0.23%, 0.23%
and 0.23%, respectively, or 0.69% in the aggregate, of the total number of
shares to be issued in the Conversion, including shares issued to the
Foundation. On an on-going basis, a Nominating Committee of the board of
directors of the Foundation, will nominate individuals eligible for election to
the board of directors of the Foundation. The members of the Foundation, who are
comprised of its board members, will elect the directors at the annual meeting
of the Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation
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provides that the corporation is organized exclusively for charitable purposes
as set forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (i), (ii) or (iii) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
legal opinion(s) by the Company or the Foundation. In the event that the OTS
waived the voting restriction, the directors would direct the voting of the
Common Stock held by the Foundation. However, a condition to the OTS approval of
the Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of the Common
Stock held by the Foundation. There will be no agreements or understandings with
directors of the Foundation regarding the exercise of control, directly or
indirectly, over the management or policies of the Company or the Bank,
including agreements related to voting, acquisition or disposition of the
Company's stock. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.
The Company will provide office space and administrative support services
to the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Bank and the Foundation will comply with
the affiliate transaction restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act, as amended.
The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with its community in a
manner that would allow the community to share in the potential growth and
success of the Company and the Bank over the long term. The funding of the
Foundation with stock also provides the Foundation with a potentially larger
endowment than if the Company contributed cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock contribution,
would have to contribute to the Foundation in future years in order to maintain
a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future and, subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time-to-time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
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market value of the assets held by the Foundation, except where the board of
directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a long-term reduction of
the value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may be
greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the contribution of shares
to the Foundation immediately following the Conversion, the Company would have
9,694,080, 11,404,800 and 13,115,520 shares issued and outstanding at the
minimum, midpoint and maximum, respectively, of the Estimated Price Range.
Because the Company will have an increased number of shares outstanding, the
voting and ownership interests of shareholders in the Company's common stock
would be diluted by 7.4%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize the
Foundation with Common Stock in an amount up to 8% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 718,080, 844,800, 971,520 and 1,117,248 shares,
respectively, which would have a market value of $7.2 million, $8.4 million,
$9.7 million and $11.2 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. As a result of the establishment of the Foundation, the
Estimated Price Range, as estimated by FinPro, has decreased and the amount of
stock available for sale in the Offerings has also correspondingly decreased.
The amount of the decrease is 1,394,000, 1,640,000, 1,886,000 and 2,168,900
shares, or $13.9 million, $16.4 million, $18.9 million and $21.7 million, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, respectively. See "Pro Forma Data" and "Comparison of Valuation and Pro
Forma Data Information with No Foundation."
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code and will be classified
as a private foundation rather than a public charity. A private foundation
typically receives its support from one person or one corporation whereas a
public charity receives its support from the public. The Foundation will submit
a request to the IRS to be recognized as an exempt organization after approval
of the Foundation by the Bank's members at the Special Meeting being held to
consider the Conversion. As long as the Foundation files its application for
tax-exempt status within 15 months from the date of its organization and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization.
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
Under the Code, the Company may deduct up to 10% of its taxable income in any
one year and any contributions made by the Company in excess of the deductible
amount will be deductible for federal tax purposes over each of the five
succeeding taxable years. The Company and the Bank believe that the Conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
Conversion. In making such a determination, the Company and the Bank considered
the dilutive impact of the Foundation on the amount of Common Stock available to
be offered for sale in the Conversion. See "Comparison of Valuation and Pro
Forma Information with No Foundation." Based on such consideration, the Company
and Bank believe that the contribution to the Foundation in excess of the 10%
annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $176.6
million, or 31.2%, of consolidated assets and the Bank's pro forma tangible,
core and risk-based capital ratios would be 23.5%, 23.5% and 40.96%,
respectively. See "Regulatory Capital Compliance," "Capitalization" and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Company and the Bank. The Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and the
Bank's pro forma
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capital positions. As such, the Company and the Bank believe that the
contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing and that the Company will be entitled
to a deduction in the amount of the fair market value of the stock at the time
of the contribution, subject to a limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal tax purposes. Thus, while the Company expects
to receive a charitable contribution deduction of approximately $850,000 in
1998, the Company is permitted under the Code to carry over the excess
contribution over a five-year period for federal income tax purposes. Assuming
the close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that substantially all of the deduction should be deductible
over the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period following the year
in which the contribution is made to fully utilize the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank and the financial condition and operations of the
Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. See "Risk Factors--
Establishment of the Charitable Foundation." In cases of willful, flagrant or
repeated acts or failures to act which result in violations of the IRS rules
governing private foundations, a private foundation's status as a private
foundation may be involuntarily terminated by the IRS. In such event, the
managers of a private foundation could be liable for excise taxes based on such
violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of common stock by the Foundation following the Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
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stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
opinion(s) by the Company or the Foundation. There can be no assurances that
either a legal or tax opinion addressing these issues will be rendered, or if
rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the Foundation
or such other conditions or restrictions relating to the control of the Common
Stock held by the Foundation, any of which could limit the ability of the board
of directors of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval of
a majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offerings since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable regulations of the OTS. However, this ownership interest is tied to
the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors, subject
to applicable regulations of the OTS. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
after other claims, including claims of depositors to the amounts of their
deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS and
the FDIC. After the Conversion, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff.
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The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the Bank
are members of, and have voting rights in, the Bank as to all matters requiring
membership action. Upon Conversion, depositors will cease to be members and will
no longer be entitled to vote at meetings of the Bank. Upon Conversion, all
voting rights in the Bank will be vested in the Company as the sole stockholder
of the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become stockholders
of the Company through the purchase of Common Stock.
TAX EFFECTS. The Bank has received an opinion from Muldoon, Murphy &
Faucette with regard to federal income taxation and an opinion from Cherry
Bekaert & Holland with regard to Virginia taxation which provide that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or Virginia tax purposes to the Bank, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank and the
Company have retained FinPro to make such valuation. For its services in making
such appraisal, FinPro will receive a fee of $31,000, plus reasonable expenses.
The Bank and the Company have agreed to indemnify FinPro and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where FinPro liability results from its negligence or willful
misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements . FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Bank and the
economic and demographic conditions in the Bank's existing marketing area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly-traded savings banks and savings
institutions located in the Bank's primary market area; the aggregate
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size of the offering of the Common Stock; the impact of the Conversion on the
Bank's net worth and earnings potential; the proposed dividend policy of the
Company and the Bank; and the trading market for securities of comparable
institutions and general conditions in the market for such securities.
On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion, dated September 9, 1998, the estimated pro forma market
value of the Common Stock being sold in connection with the Conversion ranged
from a minimum of $89.8 million to a maximum of $121.4 million with a midpoint
of $105.6 million. Based upon the Valuation Range and the Purchase Price of
$10.00 per share for the Common Stock established by the Board of Directors, the
Board of Directors has established the Estimated Price Range of $89.8 million to
$121.4 million, with a midpoint of $105.6 million, based on the issuance of
8,976,000 to 12,144,000 shares of Common Stock. The Board of Directors of the
Company and the Bank have reviewed the appraisal of FinPro and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by FinPro in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE INDEPENDENTLY THE
ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE BANK AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME-TO-TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON STOCK AT
PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION
OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR
COMMON STOCK."
Prior to the completion of the Conversion, the maximum of the Estimated
Price Range may be increased up to 15% and the number of shares of Common Stock
to be issued in the Conversion may be increased to 13,965,600 shares due to
regulatory considerations, changes in the market and general financial and
economic conditions, without the resolicitation of subscribers. See "--
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause FinPro to conclude that the value of the
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Common Stock at the conclusion of the Conversion.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the OTS,
may terminate the Plan and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money order,
extend or hold a new Subscription and/or Community Offering, establish a new
Estimated Price Range, commence a resolicitation of subscribers or take such
other actions as permitted by the OTS in order to complete the Conversion. In
the event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription Offering would not exceed 45 days unless further
extended by the OTS for periods of up to 90 days not to extend beyond ________,
2000.
If the minimum number of shares of Common Stock are not sold through the
Subscription Offering or Community Offering, then the Bank and the Company
expect to offer the remaining shares in a Syndicated Community Offering which
would occur as soon as practicable following the close of the Community
Offering. All shares of Common Stock will be sold at the same price per share in
the Syndicated Community Offering as in the Subscription and Community
Offerings. See "--Syndicated Community Offering."
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No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, the Company and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, including those which would be involved in a
cancellation of the Syndicated Community Offering, would cause FinPro to
conclude that the aggregate value of the Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Common Stock
of the Company at the time of the Syndicated Community Offering. Any change
which would result in an aggregate purchase price which is below or more than
15% above the Estimated Price Range would be subject to OTS approval. If such
confirmation is not received, the Bank may extend the Conversion, extend, reopen
or commence new Subscription Offering, Community Offering or Syndicated
Community Offering, establish a new Estimated Price Range and commence a
resolicitation of all subscribers with the approval of the OTS or take such
other actions as permitted by the OTS in order to complete the Conversion, or
terminate the Plan and cancel the Subscription and Community Offerings and/or
the Syndicated Community Offering. In the event market or financial conditions
change so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of such
range and the Company and the Bank determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to decrease or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. A resolicitation, if any,
following the conclusion of the Subscription Offering would not exceed 45 days,
or if following the Syndicated Community Offering, 90 days, unless further
extended by the OTS for periods up to 90 days not to extend beyond ____________.
If such resolicitation is not effected, the Bank will return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by check,
bank draft or money order.
Copies of the appraisal report of FinPro, including any amendments thereto
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and FinPro's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $89.8 million to a maximum,
as increased by 15%, of $139.7 million, the number of shares of Common Stock
expected to be issued in the Conversion is between a minimum of 8,976,000 shares
and a maximum, as adjusted by 15%, of 13,965,600 shares. The actual number of
shares issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares up to 8% of the Common
Stock sold in the Conversion to fund the Foundation. Assuming the sale of shares
in the Offerings at the
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maximum of the Estimated Price Range, the Company will issue 971,520 shares of
its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 13,115,520 shares.
Of that amount, the Foundation will own 7.4%. Funding the Foundation with
authorized but unissued shares will have the effect of diluting the ownership
and voting interests of persons purchasing shares in the Conversion by 7.4%
since a greater number of shares will be outstanding upon completion of the
Conversion than would be if the Foundation were not established. See "Pro Forma
Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts (as more particularly described in the Plan and herein) in the
Bank with a balance of $50 or more as of June 30, 1997 ("Eligible Account
Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance of $50
or more as of __________, 199_ ("Supplemental Eligible Account Holders"); and
(4) members of the Bank, consisting of depositors of the Bank as of
_____________, 199_, the Voting Record Date, other than Eligible Account Holders
and Supplemental Eligible Account Holders ("Other Members"). All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of all subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under "--Limitations on Common Stock
Purchases."
Deposit accounts which will provide subscription rights to holders thereof
consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan and federal regulation,
certain deposits do not qualify as "savings accounts" including, but not limited
to, noninterest-bearing demand accounts (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering (currently $300,000
of Common Stock), one-tenth of one percent (.10%) of the total offering of
shares of Common Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit account
in the Bank with a balance of $50 or more as of June 30, 1997) and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders ($________), in each case on the Eligibility Record Date, subject to the
overall purchase limitation and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "--
Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
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Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 775,526 shares and 1,049,242 shares, based on the issuance of
9,694,080 shares and 13,115,520 shares, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering (currently $300,000 of Common Stock), one-tenth of one
percent (.10%) of the total offering of shares of Common Stock or fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights
received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the
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Community Offering (currently $300,000 of Common Stock), or one-tenth of one
percent (.10%) of the total offering of shares of Common Stock, subject to the
overall purchase limitation and exclusive of an increase in shares issued
pursuant to an increase in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on ___________, 199_, at __________, Eastern time, unless extended
for up to 45 days by the Bank or such additional periods with the approval of
the OTS. Subscription rights which have not been exercised prior to the
Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Expiration Date, unless such period is extended
with the consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45 day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and have their funds returned promptly with
interest and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond ______________.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members, the Bank has determined to offer
shares pursuant to the Plan to certain members of the general public. The
Community Offering, if conducted, may begin concurrently with, during or
promptly after the Subscription Offering. In the event a community offering is
held, a preference will be given to natural persons residing in the City of
Fredericksburg and Stafford and Spotsylvania Counties, subject to the right of
the Company to accept or reject any such orders, in whole or in part, in their
sole discretion. Persons purchasing stock in the Community Offering, together
with associates of and persons acting in concert with such persons, may purchase
up to $300,000 of Common Stock subject to the maximum purchase limitation and
exclusive of shares issued pursuant to an increase in the Estimated Price Range
by up to 15%. See "--Limitations on Common Stock Purchases." This amount may be
increased to up to a maximum of 5% or decreased to less than $170,000 at the
sole discretion of the Company and the Bank. THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT
ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR
AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the Subscription
Offering and Community Offering, such stock will be allocated first to each
Preferred Subscriber whose order is accepted by the Bank, in an amount equal to
the lesser of 100 shares or the number of shares subscribed for by each such
Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose order remains unsatisfied on a
100 shares per order basis
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until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Plan provides that
the Bank and the Company are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a state of
the United States with respect to which both of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside in such state; and (ii) the Company or the Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request that the
Company and the Bank or their officers, directors or trustees register as a
broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request to register or otherwise qualify the subscription rights or
Common Stock for sale or submit any filing with respect thereto in such state.
Where the number of persons eligible to subscribe for shares in one state is
small, the Bank and the Company will base their decision as to whether or not to
offer the Common Stock in such state on a number of factors, including the size
of accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers, salesmen or selling agents.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Trident as a consultant and financial
advisor in connection with the offering of the Common Stock and Trident has
agreed to use its best efforts to solicit subscriptions and purchase orders for
shares of Common Stock in the Offerings. Based upon negotiations between the
Bank and the Company concerning the fee structure, Trident will receive a fixed
fee of $525,000. In the event that a selected dealers agreement is entered into
in connection with a Syndicated Community Offering, the Bank will pay a fee (to
be negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees and a management fee to Trident of ___% for shares sold
by a National Association of Securities Dealers, Inc. member firms pursuant to a
selected dealers agreement; provided, however, that any fees payable to Trident
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed ____% of the Purchase Price and provided further, however, that
the aggregate fees payable to Trident and the selected dealers will not exceed
7% of the aggregate Purchase Price of the Common Stock sold by selected dealers.
Fees to Trident and to any other broker-dealer may be deemed to be underwriting
fees and Trident and such broker-dealers may be deemed to be underwriters.
Trident will also be reimbursed for its reasonable out-of-pocket expenses
incurred in its capacity as consultant and financial advisor, as well as
conversion agent, including legal fees, in an amount not to exceed $55,000.
Notwithstanding the foregoing, in the event the Offerings are not consummated or
Trident ceases, under certain circumstances after the subscription solicitation
activities are commenced, to provide assistance to the Company, Trident will be
reimbursed for its reasonable out-of-pocket expenses as described above. The
Company and the Bank have agreed to indemnify Trident for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Trident has received advances towards its
fees totaling $10,000. See "Pro Forma Data" for the assumptions used to arrive
at these estimates.
_____________ will perform proxy solicitation services, conversion agent
services and records management services for the Bank in the Conversion and will
receive a fee for these services of $_______.
Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offering in ministerial
capacities or provide clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. The Company will rely on
Rule 3a4-1 under the Exchange Act and sales of Common Stock will be conducted
within the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director or
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employee of the Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by _________, Eastern
Time, on ___________, 1998, with respect to the Subscription Offering, or by the
date set for the termination of the Community Offering, which date shall be
within 45 days after the close of the Subscription Offering, or ___________,
1998, unless extended by the Bank and the Company with the approval of the OTS,
if necessary. Stock order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. Certificates
representing shares of Common Stock purchased in the Subscription Offering must
be registered in the name of Eligible Account Holder or Supplemental Eligible
Account Holder, as the case may be. Joint stock registration will be allowed
only if the qualifying deposit account is so registered. In addition, the Bank
and Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion. The Company and the Bank have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of the Bank unless the Conversion has not been completed within 45 days after
the end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1997) and/or the Supplemental Eligibility Record Date (____________, 199_)
and/or the Voting Record Date (____________, 199_) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. Orders for Common Stock submitted by subscribers in the Subscription
Offering which aggregate $50,000 or more must be paid by official bank or
certified check, a check issued by a NASD-registered broker-dealer or by
withdrawal authorization from a deposit account of the Bank. No wire transfers
will be accepted. Interest will be paid on payments made by cash, check, bank
draft or money order at the Bank's passbook rate of interest from the date
payment is received until the completion or termination of the Conversion. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
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will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. Persons with IRAs and Qualified Plans maintained at the
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of Common Stock in the Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA funds and Qualified Plans to
purchase shares of Common Stock in the Offerings, make such purchases for the
exclusive benefit of the IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law. Shares sold prior to the receipt of a stock
certificate are the responsibility of the purchaser.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Bank, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion. For a discussion on post-Conversion restrictions of directors and
executive officers of the Bank, see "--Certain Restrictions on Purchase or
Transfer of Shares After Conversion."
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Trident acting as agent of the Company to assist the
Company and the Bank in the sale of the Common Stock. The Company and the Bank
have the right to reject orders in whole or in part in their sole discretion in
the Syndicated Community Offering. Neither Trident nor any registered broker-
dealer shall have any obligation to take or purchase any shares of the Common
Stock in the Syndicated Community Offering, however, Trident has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.
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The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $300,000 of the Common Stock; provided,
however, that shares of Common Stock purchased in the Community Offering by any
persons, together with associates of or persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated Community Offering
and be subject to an overall maximum purchase limitation of 1.0% of the shares
offered, exclusive of an increase in shares issued pursuant to an increase in
the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the approval
of the OTS. Such extensions may not be beyond _____________. See "--Stock
Pricing" above for a discussion of rights of subscribers, if any, in the event
an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $300,000 of Common
Stock, one-tenth of one percent (.10%) of the total offering of shares
of Common Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Eligible Account Holder and
the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders in each case on the Eligibility Record Date
subject to the overall maximum purchase limitation in (8) below;
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(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares
issued to the Foundation, including shares issued in the event of an
increase in the Estimated Price Range of 15% and intends to purchase
8% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$300,000 of Common Stock, one-tenth of one percent (.10%) of the total
offering of shares of Common Stock or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of
which the numerator is the amount of the Qualifying Deposit of the
Supplemental Eligible Account Holder and the denominator is the total
amount of Qualifying Deposits of all Supplemental Eligible Account
Holders in such case on the Supplemental Eligibility Record Date
subject to the overall maximum purchase limitation in (8) below;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in
the Community Offering, currently $300,000 of Common Stock, or one-
tenth of one percent (.10%) of the total offering of shares of Common
Stock subject to the overall maximum purchase limitation in (8) below;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of groups of persons acting in concert with
such persons, may purchase in the Community Offering up to $300,000 of
Common Stock subject to the overall maximum purchase limitation in (8)
below;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of or persons acting in concert
with such persons, may purchase in the Syndicated Community Offering
up to $300,000 of Common Stock subject to the overall maximum purchase
limitation in (8) below, provided further that shares of Common Stock
purchased in the Community Offering by any persons, together with
associates of and persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in
applying the $300,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above, provided that, except for the ESOP,
the overall maximum number of shares of Common Stock subscribed for or
purchased in all categories of the Conversion by any person, together
with associates of or groups of persons acting in concert with such
persons, shall not exceed 1.0% of the shares of Common Stock offered
in the Conversion and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to
15%; and
(9) No more than 25% of the total number of shares offered for sale in the
Conversion may be purchased by directors and officers of the Bank and
their associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
Offering shall not exceed, in the aggregate, 10% of the shares being offered in
the Subscription Offering. Requests to purchase additional shares of Common
Stock under this
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provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1.0% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than 0.10%, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unsatisfied subscriptions of Eligible Account Holders, exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum, with preference to
institutional investors then a preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation or
organization (other than the Bank or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or directly or indirectly a 10%
stockholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, such term shall not include any employee stock
benefit plan of the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank. Directors are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
The term "Acting in Concert" means: (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; (ii) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or (iii) a person or company which
acts in concert with another person or company ("other party") shall also be
deemed to be acting in concert with any person or company who is also acting in
concert with that other party, except that any tax-qualified employee stock
benefit plan will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.
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The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts and certificates of deposit, with a balance of $50 or more held
in the Bank on June 30, 1997 and __________, 199_, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time-to-time by the proportion of any
such reduction and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to federal income taxation and an opinion of an independent accountant
with respect to Virginia taxation, to the effect that the Conversion will not be
a taxable transaction to the Company, the Bank, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below. The federal and
Virginia tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Cherry Bekaert &
Holland has opined that the Conversion will not be a taxable transaction to the
Company, the Bank, Eligible Account Holders or Supplemental Eligible Account
Holders for Virginia income and/or franchise tax purposes. Certain portions of
both
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the federal and the state and local tax opinions are based upon the assumption
that the subscription rights issued in connection with the Conversion will have
no economic value at the time of distribution or at the time the subscriptions
are exercised.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOR and the IRS or DOR could
disagree with conclusions reached therein. In the event of such disagreement,
there can be no assurance that the IRS or DOR would not prevail in a judicial or
administrative proceeding.
FinPro has issued an opinion stating that, pursuant to its valuation,
FinPro is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS or DOR. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account Holders
or Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.
The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Bank's members approve the Plan
of Conversion, but not the creation of the Foundation, the Bank intends to
complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See "--
Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date as a stock dividend, stock split,
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or otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and executive officers of the Bank will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act
and any other applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to any stock option plan to be
established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the Company
may repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Company to become undercapitalized; and (iii) the
Company provides to the Regional Director of the OTS no later than 10 days prior
to the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. In addition, under current OTS policies, repurchases
may be allowed in the first year following Conversion and in amounts greater
than 5% in the second and third years following Conversion, provided there are
valid and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The Plan
also provides for the concurrent formation of a holding company, which form of
organization may or may not be utilized at the option of the Board of Directors
of the Bank. See "The Conversion--General." In the event that the holding
company form of organization is utilized, as described below, certain provisions
in the Company's Articles of Incorporation and Bylaws and in its management
remuneration entered into in connection with the Conversion, together with
provisions of Virginia corporate law, may have anti-takeover effects. In the
event that the holding company form of organization is not utilized, the Bank's
Stock Charter and Bylaws and management remuneration entered into in connection
with the Conversion may have anti-takeover effects as described below. In
addition, regulatory restrictions may make it difficult for persons or companies
to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Articles of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Articles of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such
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Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common Stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act and includes shares beneficially owned by such person or any of his
affiliates (as defined in the Articles of Incorporation), shares which such
person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Articles of Incorporation of the
Company further provides that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Articles of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the directors. The Articles of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Articles of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Articles of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance of
75,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates and liquidation preferences. As
a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of shares in the Conversion,
including shares contributed to the Foundation, and the issuance of additional
shares pursuant to the terms of the Stock-Based Incentive Plan and upon exercise
of stock options to be issued pursuant to the terms of the Stock-Based Incentive
Plan or Master Stock-Based Benefit Plan, which are to be established and
presented to stockholders at the first annual meeting after the Conversion.
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STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Articles of Incorporation requires the approval of the holders
of at least 80% of the Company's outstanding shares of voting stock to approve
certain "Business Combinations," as defined therein, and related transactions.
Under Virginia law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only two-thirds of the votes entitled to be cast. Under the Articles
of Incorporation, at least 80% approval of shareholders is required in
connection with any transaction involving an Interested Stockholder (as defined
below) except (i) in cases where the proposed transaction has been approved in
advance by a majority of those members of the Company's Board of Directors who
are unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Stockholder" is defined to include any individual, a group acting in
concert, corporation, partnership or other entity (other than the Company or its
subsidiaries) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This provision
of the Articles of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Articles of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 1.53% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock-Based Incentive Plan or Master Stock-Based Benefit
Plan to directors, officers and employees. As a result, assuming the Stock-Based
Incentive Plan is approved by Stockholders, directors, officers and employees
have the potential to control the voting of approximately ____% of the Company's
Common Stock, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described hereinabove.
EVALUATION OF OFFERS. The Articles of Incorporation of the Company further
provides that the Board of Directors of the Company, when evaluating any offer
of another "Person" (as defined therein) to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity, or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company, the Bank and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, the social
and economic effects of acceptance of such offer on the Company's customers and
the Bank's present and future account holders and employees; on the communities
in which the Company and the Bank operate or are located; and on the ability of
the Company to fulfill its corporate objectives as a savings and loan holding
company and on the ability of the Bank to fulfill the objectives of a federally-
chartered stock savings and loan association under applicable statutes and
regulations. By having these standards in the Articles of Incorporation of the
Company, the Board of Directors may be in a stronger position to oppose such a
transaction if the Board concludes that the transaction would not be in the best
interest of the Company, even if the price offered is significantly greater than
the then market price of any equity security of the Company.
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AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Company's Articles of Incorporation must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Articles of Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, Employee Severance Compensation Plan,
Stock-Based Incentive Plan, Stock-Based Incentive Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Company in the event of a takeover. See "Management of the Bank--
Employment Agreements" and "--Benefits--Stock-Based Incentive Plan."
The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
VIRGINIA CORPORATE LAW
The Commonwealth of Virginia has a statute designed to provide Virginia
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Article 14 of the Virginia Stock Corporation Act
("Article 14"), is intended to discourage certain takeover practices by impeding
the ability of a hostile acquiror to engage in certain transactions with the
target company.
In general, Article 14 provides that a "Person" (as defined therein) who
owns 10% or more of the outstanding voting stock of a Virginia corporation (an
"Interested Shareholder") may not consummate a merger or other affiliated
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Shareholder. The term
"affiliated transaction" is defined broadly to cover a wide range of corporate
transactions including mergers, share exchanges, dispositions of corporate
assets with an aggregate fair market value in excess of 5% of the corporation's
net worth, disposition of voting shares of the corporation with an aggregate
fair market value in excess of 5% of the aggregate fair market value of all
outstanding voting stock of the corporation, and any reclassification of
securities, including a reverse stock split, recapitalization or merger of the
corporation with its subsidiaries which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%.
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The statute exempts the following transactions from the requirements of
Article 14: (i) any affiliated transaction that is approved by a majority of the
disinterested directors (as defined therein) and by two-thirds of the voting
shares other than those shares beneficially owned by the Interested Shareholder;
or (ii) any affiliated transaction with an Interested Shareholder whose
acquisition of shares making such person an Interested Shareholder receive prior
approval of a majority of the corporation's disinterested directors (as defined
therein). A corporation may exempt itself from the requirements of the statute
by adopting an amendment to its Articles of Incorporation or Bylaws electing not
to be governed by Article 14. At the present time, the Board of Directors does
not intend to propose any such amendment.
In addition, Virginia Stock Corporation Act, Article 14.1 ("Article 14.1")
limits the voting rights of shares acquired in "Control Share Acquisitions" by
providing that shares acquired in a transaction that would cause the acquiring
person's voting strength to meet or exceed any of three thresholds (one-fifth,
one-third or a majority of voting shares) have no voting rights unless granted
by a majority vote of shares not owned by the acquiring person or any officer or
employee-director of the Virginia corporation. A Virginia corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Articles of Incorporation or Bylaws electing not to be governed by Article 14.1.
At the present time, the Board of Directors does not intend to propose any such
amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by federal regulations to protect the interests of the converted Bank and its
stockholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting
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other corporate needs which may arise. In the event of a proposed merger, tender
offer or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.
In addition, the Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other persons,
may acquire control of a savings and loan holding company unless the OTS has
been given 60 days' prior written notice and has not objected to the
transaction. The HOLA provides that no company may acquire "control of a savings
and loan holding company without the prior approval of the OTS." Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination, and regulation by the OTS. Pursuant to federal
regulations, "control" of a savings and loan holding company is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock of the company or irrevocable proxies
representing more than 25% of any class of voting stock of the company or the
ability to control the election of a majority of the directors. The regulations
also establish a rebuttable presumption of "control" upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock, of a savings and loan holding company, where certain enumerated "control
factors" are also present in the acquisition. The OTS may prohibit an
acquisition by a person of "control" if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person or (iv) the proposed acquisition would
have an adverse effect on the deposit insurance funds. Applications by a company
to acquire "control" of a savings and loan holding company are evaluated by OTS
based upon factors such as the financial and managerial resources and future
prospects of the acquirer and the institution involved, competitive factors and
the convenience and needs of the community involved. The foregoing restrictions
do not apply to the
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acquisition of the Company's capital stock by one or more tax-qualified employee
stock benefit plans, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
the Company.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 75,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of Common
Stock in connection with the Conversion and issuance of authorized but unissued
Common Stock in an amount up to 8% of the Common Stock issued in the
Conversion to the Foundation, the Company currently expects to issue up to
13,115,520 shares of Common Stock (or 15,082,848 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Bank," each share of the Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Virginia law or the Company's Articles of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of the Company and the Bank," each
holder of Common Stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Certain matters require an 80% shareholder vote. See "Restrictions on
Acquisition of the Company and the Bank."
As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion--
Liquidation Rights"), all assets of the Bank available for distribution. In the
event of liquidation, dissolution or winding up of the Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
110
<PAGE>
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time-to-time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 18,000,000 shares of
common stock, par value $1.00 per share, and 2,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in series
and classes having such rights, preferences, privileges and restrictions as the
Board of Directors may determine. Each share of common stock of the Bank will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of common stock up to the amount
authorized by the Federal Stock Charter without the approval of the Bank's
stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held, subject
to the right of shareholders to cumulate their votes for the election of
directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Articles of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after payment
of all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon) and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is _________________.
111
<PAGE>
EXPERTS
The financial statements of the Bank and its subsidiary as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, have been included in this Prospectus, in reliance upon the report of
Cherry Bekaert & Holland, independent certified public accountants, appearing
elsewhere herein, and given on the authority of said firm as experts in
accounting and auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Conversion and its valuation with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Bank and the
Company. The Commonwealth of Virginia tax consequences of the Conversion and
certain matters related to the Foundation will be passed upon for the Bank and
the Company by Cherry Bekaert & Holland. Certain legal matters will be passed
upon for Trident Securities, Inc. by Breyer & Aguggia LLP, Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 1475 Peachtree Street, NE, Atlanta, Georgia 30309.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(g) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.
A copy of the Articles of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank and the proposed Articles of
Incorporation and Bylaws of the Foundation are available without charge from the
Bank.
112
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
Contents
Page
<S> <C>
Report of Independent Auditors F-l
Balance Sheets F-2
Statements of Income 28
Statements of Comprehensive Income F-3
Statements of Changes in Equity Capital F-4
Statements of Cash Flows F-5-F-6
Notes to Financial Statements F-7-F-27
</TABLE>
Certain schedules required by OTS regulations and by Regulation
S-X are not included because they are not applicable or the
required information has been disclosed elsewhere.
Financial statements related to Virginia Capital, Inc. are not
included as it has not begun operations.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Members
Fredericksburg Savings and Loan
Association, F.A.
Fredericksburg, Virginia
We have audited the accompanying balance sheets of Fredericksburg Savings and
Loan Association, F.A. as of December 31, 1997 and 1996, and the related
statements of income, comprehensive income, changes in equity capital, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Association's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fredericksburg Savings and Loan
Association, F.A. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 29, 1998, except to Note 16,
for which the date is August 14, 1998
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-2
ASSOCIATION, F.A.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
December 31,
June 30, -------------------
1998 1997 1996
------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents (includes interest-bearing deposits of
$8,248 at June 30, 1998; $10,634 in 1997; $15,177 in 1996) $ 9,031 $ 11,287 $ 15,937
Investment securities
Held-to-maturity (fair value $1,226 at June 30, 1998; $1,335 in
1997; $1,545 in 1996) 1,190 1,291 1,502
Available-for-sale (cost $30,470 at June 30, 1998; $30,865 in
1997; $32,261 in 1996) 30,928 31,151 31,979
Federal Home Loan Bank stock, restricted, at cost 3,539 3,448 3,232
Loans receivable, net 415,986 413,032 405,145
Accrued interest receivable
Loans 2,206 2,054 1,858
Investment securities 508 543 588
Foreclosed real estate for sale, net 1,883 1,959 1,611
Property and equipment
Land 1,115 1,115 1,120
Office properties and equipment, at cost, less accumulated
depreciation ($4,119 at June 30, 1998; $3,999 in 1997;
$4,593 in 1996) 2,398 2,393 2,504
Other assets 183 269 813
Deferred tax asset 3,313 3,378 3,628
------- ------- -------
$472,280 $471,920 $469,917
======= ======= =======
LIABILITIES AND RETAINED EARNINGS
LIABILITIES
Deposits $373,719 $377,114 $375,652
Advances from Federal Home Loan Bank 8,000 8,000 15,000
Retirement obligations 5,593 5,480 4,934
Advances from borrowers for taxes and insurance 1,234 936 844
Accrued expenses and other liabilities 234 317 191
------- ------- -------
TOTAL LIABILITIES $388,780 391,847 396,621
------- ------- -------
RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED 83,216 79,896 73,471
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE,
NET OF TAX 284 177 (175)
------- ------- -------
83,500 80,073 73,296
------- ------- -------
$472,280 $471,920 $469,917
======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-3
ASSOCIATION, F.A.
STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------- ------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $3,320 $3,259 $6,425 $4,581 $6,658
----- ----- ----- ----- -----
Other comprehensive income-net of tax:
Unrealized gains (losses) on securities
available for sale 55 (199) 285 150 (192)
Less: reclassification adjustment for
gains (losses) included in net income (52) (19) (67) 138 (19)
----- ----- ----- ----- -----
Total other comprehensive income 107 (180) 352 12 (173)
----- ----- ----- ----- -----
Comprehensive income $3,427 $3,079 $6,777 $4,593 $6,485
===== ===== ===== ===== =====
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-4
ASSOCIATION, F.A.
STATEMENTS OF CHANGES IN EQUITY CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Holding Gains
(Losses) or
Retained Available for
Earnings Sale Securities Total
-------- --------------- -------
<S> <C> <C> <C>
Balances at December 31, 1994 $62,232 $ (14) $62,218
Net income 6,658 - 6,658
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - (173) (173)
------ ---- ------
Balances at December 31, 1995 68,890 (187) 68,703
Net income 4,581 - 4,581
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - 12 12
------ ---- ------
Balances at December 31, 1996 73,471 (175) 73,296
Net income 6,425 - 6,425
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - 352 352
------ ---- ------
Balances at December 31, 1997 79,896 177 80,073
Net income (unaudited) 3,320 - 3,320
Changes in net unrealized gains/(losses) on securities
held available for sale, net of reclassification
adjustment (unaudited) - 107 107
------ ---- ------
Balances at June 30, 1998 (unaudited) $83,216 $ 284 $83,500
====== ==== ======
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-5
ASSOCIATION, F.A.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 172 181 371 377 385
Provision for loan losses (269) (241) (375) (325) (412)
Increase (decrease) in provision for
loss on real estate owned 54 (10) 87 (21) 18
Discount on mortgage-backed securities (32) (29) (70) (79) (99)
Premium/discount on investment securities 9 (10) 4 (29) 40
Loan fees deferred, net 110 226 266 192 90
(Increase) decrease in deferred income taxes 8 (14) 34 (537) (332)
Loss on sale of property and equipment 29 5 16 7 5
(Gain) loss on sale of real estate owned 2 (66) (5) 34 87
(Increase) decrease in accrued interest
receivable (117) (244) (150) 358 (276)
(Increase) decrease in other assets 84 549 543 (590) (67)
Increase (decrease) in advances by borrowers
for taxes and insurance 298 143 92 (35) 136
Increase in retirement obligations 113 80 547 657 541
Increase (decrease) in other liabilities (85) 163 125 (333) 269
------- ------- ------- ------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,696 3,992 7,910 4,257 7,043
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
held-to-maturity - - - - 15,450
Proceeds from sale of securities
available-for-sale - - - 25,673 -
Proceeds from redemption of securities
available for sale 4,000 2,829 6,812 - -
Purchases FHLB stock (91) (215) (215) (158) -
Proceeds from redemption of FHLB stock - - - - 1,015
Purchase of securities held-to-maturity - - - - (12,593)
Purchase of securities available-for-sale (3,595) (2,621) (5,420) (8,347) (73)
Principal payments on mortgage-backed
securities held to maturity 130 131 281 456 329
Loan originations and principal payments, net (4,214) (7,640) (11,422) (17,487) (21,421)
Capital expenditures (181) (127) (271) (241) (464)
Proceeds from sale of real estate owned 1,392 1,781 3,214 3,528 1,313
------- ------- ------- ------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (2,559) (5,862) (7,021) 3,424 (16,444)
------- ------- ------- ------- --------
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-6
ASSOCIATION, F.A.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------- ----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings accounts $(4,370) $(1,001) $(4,894) $(7,706) $(11,253)
Net increase (decrease) in advance from
Federal Home Loan Bank - (5,000) (7,000) 7,000 -
Net increase (decrease) in certificates of deposit 977 2,998 6,355 (3,018) 21,546
------- ------- ------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,393) (3,003) (5,539) (3,724) 10,293
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,256) (4,873) (4,650) 3,957 892
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 11,287 15,937 15,937 11,980 11,088
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 9,031 $11,064 $11,287 $15,937 $11,980
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 9,620 $ 9,569 $19,419 $19,534 $18,978
======= ======= ======= ======= =======
Cash paid during the period for income taxes $ 2,165 $ 1,674 $ 3,591 $ 3,623 $ 4,166
======= ======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES
Loans transferred to real estate owned $ 1,326 $ 1,779 $ 3,209 $ 3,512 $ 1,400
======= ======= ======= ======= =======
Investment securities transferred to
available-for-sale, at fair value $ - $ - $ - $ - $49,257
======= ======= ======= ======= =======
Change in unrealized gain (loss) in value
of securities available-for-sale,
net of tax effect $ 107 $ (180) $ 352 $ 12 $ (173)
======= ======= ======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-7
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fredericksburg Savings & Loan
Association, F.A., "the Bank", are in accordance with generally accepted
accounting principles and conform to the general practices within the savings
institutions industry. The more significant of the principles used in preparing
the financial statements are briefly described below.
NATURE OF OPERATIONS
The Bank is a mutual savings and loan association with the primary business of
granting residential, commercial real estate and installment loans. As a
federally chartered savings institution, the Bank is subject to the regulation
of the Office of Thrift Supervision as well as the Federal Deposit Insurance
Corporation. The area served by the Bank is Fredericksburg, Virginia and the
surrounding counties. Services are provided at four business locations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation. Such
reclassifications had no effect on net income or retained earnings as previously
reported.
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 and disclosure of
contingent 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.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Bank considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Bank classifies its investment securities and its mortgage-backed securities
in one of three categories: held-to-maturity, available-for-sale, and trading.
Securities held-to-maturity are purchased with the intent and ability to hold to
their maturity or call date. They are carried and reported at amortized cost.
The amortization of premium and accretion of discount are recognized as
adjustments to interest income. Securities available-for-sale are those needed
to meet liquidity needs, assist in portfolio restructuring, or minimize interest
rate market risk. They are carried at their fair value, with unrealized gains
and losses reported as a separate component of capital. Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities. The Bank as a matter of policy does not trade
securities and, therefore, does not have trading securities. Gains or losses on
disposition of securities are computed on the specific identification of the
cost of each security.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-8
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES
Loans receivable are stated at the amount of unpaid principal, net of
participation or whole-loan interests owned by others, less the allowance for
loan losses, undisbursed loans in process, and net deferred loan origination
fees and discounts. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Management's periodic
determination of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Impaired loans are measured based on the present value of expected cash flows
discounted at the loan's effective interest rate, or as a practical expedient at
the loan's observable market price or fair value of the collateral if the loan
is collateral dependent. Any change in fair value is reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.
Uncollectible interest on loans is charged off, or an allowance is established
based on management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is restored, in which case the loan is returned
to accrual status.
LOAN SALES
The Bank periodically generates additional funds for lending by selling whole
and/or participating interests in real estate loans. Gains or losses on such
sales are recognized at the time of sale and are determined by the difference
between the net sales proceeds and the unpaid principal balance of the loans
sold adjusted for any yield differential, servicing fees and servicing cost
applicable to future years.
LOAN ORIGINATION FEES AND RELATED COSTS
Fees charged on the origination of real estate loans and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
the related loan's yield. Unamortized fees on loans sold are recognized as
adjustments to the basis of those loans in the year of sale.
FORECLOSED REAL ESTATE
Real estate acquired in settlement of loans is classified as held for sale and
initially recorded at the lower of cost or fair value less estimated selling
costs at the date of foreclosure. Costs relating to development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed. The portion of interest costs relating to the development of real
estate is capitalized.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-9
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND DEPRECIATION
The various classes of property and equipment are stated at cost less
accumulated depreciation computed principally by the straight-line method. The
costs of major improvements are capitalized, while the costs of maintenance and
repairs, which do not improve or extend the life of the respective properties,
are expensed currently. The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
(Years)
<S> <C>
Land -
Buildings 5 - 39
Furniture, fixtures and equipment 5 - 7
</TABLE>
INCOME TAXES
The Bank accounts for certain income and expense items differently for financial
reporting purposes than for purposes of computing income taxes currently
payable. Provisions for deferred taxes are made in recognition of such timing
differences.
The Bank has qualified under the provisions of the Internal Revenue Code which
permit it to deduct from taxable income an annual addition to the reserve for
bad debts based on the experience method. The tax bad debt reserve is
includible in taxable income of later years only if the bad debt reserves are
used subsequently for purposes other than to absorb bad debt losses. The
cumulative bad debt reserve, upon which no taxes have been paid, amounted to
$9,700 at June 30, 1998 and December 31, 1997.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
NEW ACCOUNTING PRONOUNCEMENTS
The Statement of Financial Accounting Standards No. 131 - Disclosure about
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting by public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective for
periods beginning after December 15, 1997. At this time, management does
anticipate that the adoption of this Statement will significantly impact the
Bank's financial reporting.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-10
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
The Statement of Financial Accounting Standards No. 132 -Employers' Disclosures
about Pensions and Other Postretirement Benefits -an amendment of FASB
Statements No. 87, 88, and 106
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106". SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as when Statements No. 87, 88, and 106
were originally issued. SFAS 132 does not change the measurement recognition of
the plans. This statement is effective for the periods beginning after December
15, 1997. At this time, management does anticipate that the adoption of this
Statement will significantly impact the Bank's financial reporting.
The Statement of Financial Accounting Standards No. 133 - Accounting for
Derivative Instruments and Hedging Activities
This Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The bank is evaluating the
potential impact of adopting SFAS No. 133. Management does not expect the
adoption of SFAS No. 133 to have a material adverse impact on financial
condition or results of operation. The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-11
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities and
investment securities are as follows as of June 30, 1998, and December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
June 30, 1998 (unaudited)
Mortgage Backed Securities
FNMA pass-through securities $ 768 $ - $ - $ 768
GNMA certificates 422 36 - 458
----------- ---------- ---------- --------
$ 1,190 $ 36 $ - $ 1,226
=========== ========== ========== ========
December 31, 1997
Mortgage Backed Securities
FNMA pass-through securities $ 838 $ - $ - $ 838
GNMA certificates 453 44 - 497
----------- ---------- ---------- --------
$ 1,291 $ 44 $ - $ 1,335
=========== ========== ========== ========
December 31, 1996
Mortgage Backed Securities
FNMA pass-through securities $ 1,008 $ - $ - $ 1,008
GNMA certificates 494 43 - 537
----------- ---------- ---------- --------
$ 1,502 $ 43 $ - $ 1,545
=========== ========== ========== ========
</TABLE>
FNMA pass-through securities are valued at net carrying value for fair value
purposes. Mortgage backed securities are not deemed to have a single maturity
date and no maturity grouping information has been presented.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
June 30, 1998 (unaudited)
U.S. Treasury and agency obligations $ 16,814 $ 73 $ 12 $ 16,875
Corporate securities 4,856 62 12 4,906
Other securities 5,007 982 23 5,966
Mutual fund 1,293 - 25 1,268
Dual Index Consolidated Bonds 2,500 - 587 1,913
---------- --------- --------- --------
$ 30,470 $ 1,117 $ 659 $ 30,928
========== ========= ========= ========
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-12
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE (CONCLUDED)
December 31, 1997
U.S. Treasury and agency obligations $ 19,812 $ 82 $ 58 $ 19,836
Corporate securities 3,345 70 2 3,414
Other securities 3,946 791 23 4,713
Mutual fund 1,262 - 20 1,242
Dual Index Consolidated Bonds 2,500 - 554 1,946
-------- ------ ------ -------
$ 30,865 $ 943 $ 657 $ 31,151
======== ====== ====== =======
December 31, 1996
U.S. Treasury and agency obligations $ 20,823 $ 84 $ 104 $ 20,803
Corporate securities 3,995 99 - 4,094
Other securities 3,744 283 44 3,983
Mutual fund 1,199 - 24 1,175
Dual Index Consolidated Bonds 2,500 - 576 1,924
-------- ------ ------ -------
$ 32,261 $ 466 $ 748 $ 31,979
======== ====== ====== =======
</TABLE>
The mutual fund investments are in funds that invest primarily in obligations of
the U.S. Government or its agencies.
The amortized cost and estimated fair value of investment securities at June 30,
1998 and December 31, 1997 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------------------------- -------------------------------
(Unaudited)
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
Due after five years through ten years $ 768 $ 768 $ 838 $ 838
Due after ten years 422 458 453 497
-------------- ------------- ---------- -----------
$ 1,190 $ 1,226 $ 1,291 $ 1,335
============== ============= ========== ===========
SECURITIES AVAILABLE-FOR-SALE
Equity securities $ 1,293 $ 1,268 $ 1,262 $ 1,242
Due in one year or less 11,720 12,717 14,593 15,351
Due after one year through five years 14,100 14,172 11,651 11,778
Due after five years through ten years 2,998 2,401 2,997 2,409
Due after ten years 359 370 362 371
-------------- ------------- ---------- -----------
$ 30,470 $ 30,928 $ 30,865 $ 31,151
============== ============= ========== ===========
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-13
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES (CONCLUDED)
During 1993, the Bank acquired Dual Indexed Consolidated Bonds ("DICBs") issued
by the Federal Home Loan Bank ("FHLB"). DICBs' coupon rates are determined by
the difference between the designated Constant Maturity Treasury ("CMT") and the
designated London Interbank Borrowing Rate ("LIBOR"). Interest rates on DICBs
are subject to reset annually at specified dates. This reset may result in an
interest rate less than those payable on conventional fixed rate debt securities
issued at the same time. These investments were acquired as part of the interest
rate risk management of the Bank.
The Secondary market for DICBs is affected by factors other than the credit
worthiness of the issuer. Such factors include other interest rates, volatility
of the two indices utilized, time remaining to maturity and the amount of the
outstanding bonds.
DICBs are classified by the Bank as available for sale and are recorded at fair
value with unrealized gains and losses included in Retained Earnings
Substantially Restricted. The DICBs were acquired at their face amount. The
consensus reached by the Emerging Issues Task Force ("EITF") Issue number 96-12
requires interest income recognition for these instruments based upon the
retrospective interest method. The Bank recognizes interest income based on the
actual interest payments received. The difference between the retrospective
interest method and the method utilized is immaterial.
Disclosed below are the characteristics of each issue of DICBs, the indices
utilized and period-end coupon rates and market value. The Bank's exposure to
credit risk, on these instruments, is limited to the amount paid for each DICB,
if the FHLB fails to perform.
<TABLE>
<CAPTION>
June 30, 1998
-------------------
(Unaudited)
Face Indexing Market
Issuer Maturity Amount Formula Coupon Value
- -------- ---------- -------- ---------------------------- --------- --------
<S> <C> <C> <C> <C> <C>
FHLB 08/17/05 $ 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 2.93% $ 766
FHLB 08/26/05 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.03 772
FHLB 11/18/05 500 (10 yr CMT+2.75%)-6 mo LIBOR 2.68 375
-------- --------
$ 2,500 $ 1,913
======== ========
<CAPTION>
December 31,
----------------------------------------
1997 1996
------------------- -------------------
Face Indexing Market Market
Issuer Maturity Amount Formula Coupon Value Coupon Value
- -------- ---------- -------- ---------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLB 08/17/05 $ 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.408% $ 786 3.853% $ 765
FHLB 08/26/05 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.472 788 3.940 771
FHLB 11/18/05 500 (10 yr CMT+2.75%)-6 mo LIBOR 2.764 372 3.499 369
-------- ----- ------
$ 2,500 $ 1,946 $ 1,905
======== ======= =======
</TABLE>
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-14
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1998 1997 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgage loans
One to four family $ 367,041 $ 358,561 $ 345,799
Multi-family 3,396 3,455 3,453
Non-residential real estate 35,316 40,951 44,528
Land and land development 2,321 3,091 4,136
----------- ----------- -----------
Total real estate mortgage loans 408,074 406,058 397,916
Less: Amounts owned by holders
of participating interests, net (3,319) (4,217) (5,450)
----------- ----------- -----------
Net real estate mortgage loans 404,755 401,841 392,466
----------- ----------- -----------
Real estate construction and development loans 19,960 16,046 21,285
Less: Undisbursed loan funds (8,743) (4,978) (8,064)
----------- ----------- -----------
Net real estate construction loans 11,217 11,068 13,221
----------- ----------- -----------
Other loans
Consumer and other installment loans 9,192 8,913 8,046
----------- ----------- -----------
Total other loans 9,192 8,913 8,046
----------- ----------- -----------
425,164 421,822 413,733
Less: Deferred loan fees (3,539) (3,312) (3,045)
Allowance for loan losses (5,639) (5,478) (5,543)
----------- ----------- -----------
Net loans receivable $ 415,986 $ 413,032 $ 405,145
=========== =========== ===========
</TABLE>
Amounts owned by holders of participating interests are not included in the
balance sheets. The unpaid principal balances of these loans are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1998 1997 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
FNMA, net of discount $ 1,512 $ 2,222 $ 2,638
FHLMC 750 872 1,130
Other 1,057 1,123 1,682
----------- ----------- -----------
$ 3,319 $ 4,217 $ 5,450
=========== =========== ===========
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-15
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - LOANS RECEIVABLE (CONCLUDED)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $294 and $364 at June 30, 1998 and 1997, and $215, $130 and $284
at December 31, 1997, 1996 and 1995, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- -------------------------------
1998 1997 1997 1996 1995
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 5,478 $ 5,543 $ 5,543 $ 5,480 $ 5,537
Provision charged to operations 269 241 375 325 412
Loans charged off (108) (187) (440) (263) (489)
Recoveries - - - 1 20
------- ------- ------- ------- ---------
Balance, end of period $ 5,639 $ 5,597 $ 5,478 $ 5,543 $ 5,480
======= ======= ======= ====== ========
</TABLE>
Impairment of loans having recorded investments of $8,476 at June 30, 1998,
$9,801 at December 31, 1997, $11,880 at December 31, 1996, and $10,756 at
December 31, 1995 have been recognized in conformity with FASB No. 114, as
amended by FASB No. 118. The average recorded investment in impaired loans
during 1998, 1997, 1996, and 1995 was $8,860, $10,466, $13,257, and $12,205,
respectively. The total allowance for loan losses related to these loans was
$659 on June 30, 1998, $669 and $729 on December 31, 1997 and 1996, and $807 on
December 31, 1995, respectively. Interest income foregone associated with these
loans was $114 for 1998, $193 for 1997 and $438 for 1996, and $198 for 1995.
Loans having carrying values of $1,326, $3,209 , $3,512, and $2,471 were
transferred to foreclosed real estate in 1998, 1997, 1996, and 1995,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Unspecified residential loans of approximately $208,000 at June 30, 1998 and
December 31, 1997, and approximately $199,000 at December 31, 1996 have been
pledged to the Federal Home Loan Bank under a floating blanket lien as
collateral for advances from that bank. See Note 6.
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE
Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1998 1997 1996
-------------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
Foreclosed real estate $ 2,062 $ 2,085 $ 1,650
Less allowance for losses (179) (126) (39)
------- ------ -------
$ 1,883 $ 1,959 $ 1,611
======= ======= =======
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-16
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE (CONCLUDED)
A summary of the foreclosed real estate operations is as follows:
June 30, December 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Foreclosed real estate
Foreclosed real estate
sales $ 1,392 $ 1,781 $ 3,214 $ 3,528 $ 1,313
Cost of sales 1,326 1,779 3,209 3,512 1,400
Increase (decrease) in
reserve 54 (11) 87 (21) 18
Selling and other expenses 37 34 81 167 79
------- ------- ------- ------- -------
Net loss $ (25) $ (21) $ (163) $ (130) $ (184)
======= ======= ======= ======= =======
</TABLE>
Activity in the allowance for losses for real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period $ 126 $ 39 $ 39 $ 60 $ 42
Provision for losses 95 3 167 72 112
Charge-offs (41) (13) (80) (143) (94)
Transfers - - - 50 -
------- ------- ------- ------- -------
Balance, end of period $ 180 $ 29 $ 126 $ 39 $ 60
======= ======= ======= ======= =======
</TABLE>
NOTE 5 - DEPOSITS
Deposits summarized by interest rates were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ----------------------------------------
1998 1997 1996
------------------- ------------------ -------------------
(Unaudited)
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts
(weighted average rate
of 3.25% and 3.24%) $ 37,818 10.10% $ 38,707 10.26% $ 39,659 10.56%
Non-interest bearing
deposits 2,481 0.70 3,266 0.87 2,451 0.65
Money market accounts
(weighted average rate
of 3.25% and 3.26%) 43,141 11.50 45,839 12.16 50,596 13.47
--------- ------ --------- ------ -------- ------
83,440 22.30 87,812 23.29 92,706 24.68
--------- ------ --------- ------ -------- ------
Certificates:
Up to 4.00% - - - - 18 0.01
4.01% to 5.00% 19,299 6.60 17,304 4.58 42,404 11.28
5.01% to 6.00% 243,579 61.6 233,582 61.94 183,490 48.85
6.01% to 7.00% 24,239 8.40 32,589 8.64 51,217 13.63
7.01% to 8.00% 3,162 1.10 5,827 1.55 5,817 1.55
--------- ------ --------- ------ -------- ------
290,279 77.70 289,302 76.71 282,946 75.32
--------- ------ --------- ------ -------- ------
Total deposits $ 373,719 100.00% $ 377,114 100.00% $375,652 100.00%
========= ====== ========= ====== ======== ======
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-17
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 5 - DEPOSITS (CONCLUDED)
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 was approximately $45,346 at June 30, 1998, and $21,270 and
$39,805 at December 31, 1997 and 1996, respectively. Deposits in excess of $100
are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31,1997
------------- ----------------
(Unaudited)
<S> <C> <C>
One Year or Less $ 196,666 $ 192,592
Over One Through Two Years 48,743 56,227
Over Two Through Three Years 23,760 25,827
Over Three Through Four Years 8,988 3,645
Over Four Through Five Years 12,099 10,988
Over Five Years 23 23
--------- ---------
$ 290,279 $ 289,302
========= =========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------- --------------------------
1998 1997 1997 1996 1995
------ ------ ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook savings $ 614 $ 614 $ 1,237 $ 1,336 $ 1,408
Money market 726 822 1,619 1,692 1,921
NOW 4 3 6 7 7
Certificates of deposit 8,031 7,823 15,954 16,041 15,096
----- ------ ------- ------- -------
$9,375 $9,262 $18,816 $19,076 $18,432
====== ====== ======= ======= =======
</TABLE>
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
The advances to the Bank consist of the following:
<TABLE>
<CAPTION>
December 31,
Interest June 30, --------------------
Maturity Date Rate 1998 1997 1996
------------- -------- ----------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
January 6, 1997 6.53% $ - $ - $ 5,000
November 24, 1997 5.66% - - 2,000
November 22, 1999 6.09% 3,000 3,000 3,000
November 28, 2001 6.25% 5,000 5,000 5,000
------ ------- -------
$8,000 $8,000 $15,000
====== ====== =======
</TABLE>
The Bank had approved borrowing capacity at the FHLB for $45 million as of
June 30, 1998, December 31, 1997 and 1996. The unused portion of this facility
aggregated $37 million at June 30, 1998 and December 31, 1997 and $30 million at
December 31, 1996.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-18
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 7 - RETIREMENT OBLIGATIONS
PENSION PLAN
The Bank has a qualified, noncontributory defined benefit plan covering
substantially all of its full-time employees. The benefits are based upon the
employee's average compensation during the last five years of employment. To
qualify initially, employees must have worked 1,000 hours in a twelve month
period. An employee becomes fully vested upon completion of 5 years of
qualifying service. The amounts of retirement plan expense recognized in the
Bank's statements of income for this plan totaled $169, and $108 for the six
months ended June 30, 1998 and 1997, respectively, $226 for 1997, $136 for
1996, and $426 for 1995. The Bank contributes to the plan the maximum allowable
amount in accordance with ERISA funding standards.
The Plan's assets are invested in managed stock and bond investment accounts
held by the Plan trustee and in certificates of deposit of $2,447 at June 30,
1998, $2,137 in 1997 and $2,055 in 1996 with the Bank.
The discount rate and rate of future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 7.5% and 5.5%,
respectively, and the expected long-term rates of return on assets used in the
computations was 7.00% at June 30, 1998, and 7.75% for 1997 and 1996.
The following sets forth the plan's funded status and amounts recognized in
the Bank's financial statements as of the actuarial dates of June 30, 1998,
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------
1998 1997 1996
----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Accumulated benefit obligation,
fully vested $ 2,709 $ 2,509 $ 2,627
=========== ============= ============
Projected benefit obligation $ 4,361 $ 4,061 $ 4,094
Market value of plan assets 4,902 4,761 4,712
----------- ------------- ------------
Excess of projected benefit obligation
over market value of plan assets 541 700 618
Unrecognized net transition amount 627 668 752
Unrecognized prior service cost (210) (219) (237)
Unrecognized net (gain) loss (1,192) (1,573) (1,781)
----------- ------------- ------------
Accrued pension liability (included in
retirement obligations) $ (234) $ (424) $ (648)
=========== ============= ============
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------- ------------------------------------------
1998 1997 1997 1996 1995
----------- ------------- ----------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Service cost - benefits earned
during the period $ 113 $ 106 $ 212 $ 201 $ 209
Interest cost on projected benefit
obligation 137 138 277 313 268
Expected return on plan assets (181) (170) (341) (306) (516)
Net amortization and deferral - (6) (12) 28 301
----------- ------------- ----------- ------------- ------------
Net pension expense $ 69 $ 68 $ 136 $ 236 $ 261
=========== ============= =========== ============= ============
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-19
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 7 - RETIREMENT OBLIGATIONS (CONCLUDED)
MANAGEMENT SECURITY PLAN
The Bank established a non-qualified deferred compensation plan in 1986 for
certain management personnel, known as the Fredericksburg Savings and Loan
Association, F.A. Management Security Plan. This plan is structured to provide
benefits upon retirement based on years of service to the Bank. Participants
are to receive benefits for life and are eligible for retirement at age 55. If
the participant passes away before the age of 80, the benefits shall continue to
be paid to the named beneficiary until such time the participant would have
reached such age. Deferred compensation expense amounted to $216 for the six
months ended June 30, 1998 and 1997, respectively, and $432, $297, and $426 for
the years ended December 31, 1997, 1996, and 1995, respectively. At June 30,
1998, December 31, 1997 and 1996, the balance of their management security trust
plan was approximately $5,958, $4,342 and $3,376, respectively, which is
included in investment securities classified as available-for-sale. The use of
these funds is restricted to fulfilling the deferred compensation obligation,
subject to the claims of creditors in a bankruptcy proceeding. The Bank has
recorded the assets and liabilities for the non-qualified deferred compensation
plan as gross amounts in the balance sheet.
SUPPLEMENTAL RETIREMENT AGREEMENT
During 1996, the Bank entered into a non-funded supplemental retirement
agreement with its former chairman of the board. Deferred compensation expense
related to this agreement amounted to $56 for the six months ended June 30, 1998
and 1997, $112 for 1997, and $0 for 1996.
401(K) PLAN
The Bank maintains the Fredericksburg Savings and Loan Association, F.A. Salary
Savings Plan (the "401(k) Plan"), a tax-qualified profit sharing plan with a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Eligible employees may begin participating in the 401(k) Plan upon the
completion of one-half of one "Year of Service" and attainment of age 21.
Participants may make contributions to the plan during the year, with certain
limitations placed on such contributions. The Bank is required to contribute
to the plan an amount equal to one-half the basic contribution made by a
participant to a maximum of 6% per participant. Expenses of the plan totaled
$31 and $25 for the six months ended June 30, 1998 and 1997, $58 for the year
ended December 31, 1997, $67 for the year ended December 31, 1996, and $62 for
the year ended December 31, 1995.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Bank has made loans to various officers and directors, collateralized by the
personal residences of the borrowers or their deposits in the Bank. Loans
outstanding to officers and directors totaled $2,136 at June 30, 1998, $2,302 at
December 31, 1997 and $2,350 at December 31, 1996. New loans to officers and
directors for the first six months in 1998 were approximately $331 and $225 in
1997.
Loans to executive officers and directors are generally made on the same terms
and conditions as for other loans. The Bank does not expect to incur any losses
with respect to these loans.
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------
1998 1997 1996 1995
---------- ------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Beginning balance $ 493 $ 543 $ 690 $ 612
Additions 214 - - 157
Repayments (134) (50) (147) (79)
--------- --------- ----------- ----------
Ending balance $ 573 $ 493 $ 543 $ 690
========= ========= =========== ==========
</TABLE>
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-20
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 9 - REGULATORY MATTERS
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 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 practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weighting, and other factors.
Qualitative 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 June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total core capital, tangible capital, and risk-based
capital 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.
<TABLE>
<CAPTION>
The Bank's actual capital amounts and ratios are also presented in the table.
Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ----------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Core Capital
(To total assets) $ 81,588 17.28 $ 18,888 4.00 $ 23,610 5.00
Tangible Capital
(To total assets) 81,588 17.28 7,083 1.50 14,166 3.00
Risk-Based Capital
(To risk weighted
assets) 85,131 30.20 22,549 8.00 28,186 10.00
As of December 31, 1997
Core Capital
(To total assets) 78,272 16.59 14,109 3.00 23,515 5.00
Tangible Capital
(To total assets) 78,272 16.59 7,054 1.50 14,109 3.00
Risk-Based Capital
(To risk weighted assets) 81,810 28.60 22,878 8.00 28,597 10.00
As of December 31, 1996
Core Capital
(To total assets) 71,843 15.29 14,049 3.00 23,414 5.00
Tangible Capital
(To total assets) 71,843 15.29 7,024 1.50 14,049 3.00
Risk-Based Capital
(To risk weighted assets) 75,280 27.50 21,905 8.00 27,381 10.00
</TABLE>
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-21
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 10 - OFF BALANCE SHEET RISKS
Financial instruments with off-balance sheet risk include commitments to extend
credit made in the normal course of business. These commitments to extend
credit are not shown in the accompanying financial statements. The Bank uses
the same credit policies in making commitments, evaluates each customers' credit
worthiness on a case-by-case basis and requires collateral to support financial
instruments with credit risk. Collateral held varies, but generally includes
real estate, primarily single-family homes, and in some cases, income-producing
commercial properties. At June 30, 1998, the Bank had commitments to originate
loans of approximately $23,896 and $20,038 at December 31, 1997.
Standby letters of credit are conditional commitments issued by the Bank. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. At June 30, 1998, the Bank was
conditionally committed under standby letters of credit aggregating
approximately $836 and at December 31, 1997 approximately $1,077. The Bank does
not expect to fund any of the letters of credit.
The amount of unfunded lines of credit for home equity loans was approximately
$3,020 at June 30, 1998 and $3,005 at December 31, 1997.
In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying financial
statements. In addition, the Bank is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
financial condition of the Bank.
NOTE 11 - MARKET CONCENTRATION
The Bank has a diversified loan portfolio consisting of commercial and
residential real estate and installment loans. Substantially all of the Bank's
customers are residents or operate business ventures in its market area
consisting of the Fredericksburg Standard Metropolitan Statistical Area (SMSA).
Therefore, a substantial portion of its debtors' ability to honor their
contracts is influenced by the economic conditions in this market area.
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments.
CASH AND CASH EQUIVALENTS
Fair value of cash and cash equivalents is assumed to be book value.
INVESTMENT SECURITIES
For U.S. Treasury and Agency securities, fair values are based on market prices
or dealer quotes. For other investment securities, fair value equals quoted
market price if available.
MORTGAGE-BACKED SECURITIES
Fair value of mortgage securities is assumed to be net book value for FNMA pass-
through securities and quoted market prices for GNMA certificates.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-22
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, residential
mortgage and consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.
DEPOSITS
Fair value of passbook and money market accounts is defined as the amounts
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated based on the rates currently offered for
deposits of similar maturities
ADVANCES
Fair value of advances outstanding is estimated based on the rates currently
available for advances of similar maturities.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counter parties. All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis. The fair value of these instruments is not
material.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -----------------------
(Unaudited)
Carrying Est. Fair Carrying Est. Fair Carrying Est. Fair
Value Value Value Value Value Value
---------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash $ 9,031 $ 9,031 $ 11,287 $ 11,287 $ 15,937 $ 15,937
Investment securities 30,470 30,928 30,865 31,151 32,261 31,979
Mortgage-backed securities 1,190 1,226 1,291 1,335 1,502 1,545
Loans 415,986 421,646 413,032 416,508 405,145 405,540
Financial liabilities
Deposits 373,719 372,237 377,114 376,181 375,652 374,753
Advances 8,000 7,965 8,000 7,995 15,000 15,060
</TABLE>
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-23
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 13 - INCOME TAXES
Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at June 30, 1998 and December
31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
------------ ------------------------------------
1998 1997 1996
------------ -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses $ 2,270 $ 2,116 $ 2,108
Deferred compensation 2,125 2,082 1,875
Other 31 31 361
---------- ------------- ---------------
Total gross deferred tax assets 4,426 4,229 4,344
---------- ------------- ---------------
Deferred tax liabilities
FHLB stock dividends 480 480 480
Depreciation 250 250 236
Other 383 121 -
---------- ------------ ---------------
Total gross deferred tax liabilities 1,113 851 716
---------- ------------ ---------------
Net deferred tax asset $ 3,313 $ 3,378 $ 3,628
========== ============ ===============
</TABLE>
The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the six months
ended June 30, 1998 and the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
June 30, December 31,
--------------- -------------------------------------
1998 1997 1996 1995
--------------- --------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Tax at expected rates 34.0% 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from
Tax exempt interest income (2.2) (2.0) (2.8) (2.0)
State income tax, net of federal tax benefit 3.7 3.5 3.5 3.9
Other 4.5 2.6 4.8 2.0
---------- -------- -------- -------
40.0% 38.1% 39.5% 37.9%
========== ======== ======== =======
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-24
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 13 - INCOME TAXES (CONCLUDED)
The provision for income taxes consisted of the following:
June 30, December 31,
----------------------------- --------------------------------------------------------
1998 1997 1997 1996 1995
------------ -------------- --------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense
U.S. Federal $ 2,143 $ 2,375 $ 3,437 $ 2,568 $ 4,093
State 137 152 553 375 415
------------ ------------- -------------- -------------- -----------------
Total current 2,280 2,527 3,990 2,943 4,508
------------ ------------- -------------- -------------- -----------------
Deferred tax expense
U.S. Federal (61) (354) (36) (509) (412)
State (4) (23) (2) (33) (26)
------------ ------------- -------------- -------------- -----------------
Total deferred (65) (377) (38) (542) (438)
------------ ------------- -------------- -------------- -----------------
Total expense $ 2,215 $ 2,150 $ 3,952 $ 2,401 $ 4,070
============ ============ ============== ============== =================
</TABLE>
NOTE 14 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Bank adopted SFAS No. 130, "Reporting
Comprehensive Income". Statement No. 130 required the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
The Bank holds securities as "Available for Sale" and will sell securities, or
have securities redeemed, which give rise to comprehensive income.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-25
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 14 - COMPREHENSIVE INCOME (CONCLUDED)
The components of comprehensive income are detailed below, indicating the tax
effect to each item.
<TABLE>
<CAPTION>
Tax Net of
Before Expense Tax
Tax (Benefit) Amount
------------- ------------- -------------
<S> <C> <C> <C>
For the period ended:
1995
Unrealized holding gains (losses) arising during the period $ (310) $ (118) $ (192)
Less: reclassification adjustment for gains (losses) realized
in net income (31) (12) (19)
----------- ----------- -----------
Net unrealized gains (losses) (279) (106) (173)
----------- ----------- -----------
Other comprehensive income $ (279) $ (106) $ (173)
=========== =========== ===========
1996
Unrealized holding gains (losses) arising during the period $ 242 $ 92 $ 150
Less: reclassification adjustment for gains (losses) realized
in net income 223 85 138
----------- ----------- -----------
Net unrealized gains (losses) 19 7 12
----------- ----------- -----------
Other comprehensive income $ 19 $ 7 $ 12
=========== =========== ===========
1997
Unrealized holding gains (losses) arising during period $ 460 $ 175 $ 285
Less: reclassification adjustment for gains (losses) realized
in net income 108 41 67
----------- ----------- -----------
Net unrealized gains (losses) 568 216 352
----------- ----------- -----------
Other comprehensive income $ 568 $ 216 $ 352
=========== =========== ===========
June 30, 1997 (unaudited)
Unrealized holding gains (losses) arising during period (unaudited) $ (321) $ (122) $ (199)
Less: reclassification adjustment for gains (losses) realized
in net income (unaudited) (31) (12) (19)
----------- ----------- -----------
Net unrealized gains (losses) (unaudited) (290) (110) (180)
----------- ----------- -----------
Other comprehensive income (unaudited) $ (290) $ (110) $ (180)
=========== =========== ===========
June 30, 1998 (unaudited)
Unrealized holding gains (losses) arising during period (unaudited) $ 89 $ 34 $ 55
Less: reclassification adjustment for gains (losses) realized
in net income (unaudited) (84) (32) (52)
----------- ----------- -----------
Net unrealized gains (losses) (unaudited) 173 66 107
----------- ----------- -----------
Other comprehensive income (unaudited) $ 173 $ 66 $ 107
=========== =========== ===========
</TABLE>
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-26
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 15 - SUBSEQUENT EVENTS
On January 12, 1998, agreement was reached with an individual borrower to accept
deeds in lieu of foreclosure on sixteen properties collateralizing mortgage
loans. The outstanding principal balance of these loans aggregated
approximately $627 as of December 31, 1997. During the month of January 1998,
management obtained appraisals on the above referenced properties. These
appraisals indicated that sufficient loan to value of the underlying properties
existed to not require an addition to the allowance for losses.
On January 13, 1998, the Board of Directors granted approval to borrow an
additional $10,000 from the Federal Home Loan Bank at a 10 year term. Such
advances would be collateralized by certain qualifying real estate mortgage
loans under a blanket floating lien.
NOTE 16 - PLAN OF CONVERSION
On July 14, 1998, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank. All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company"). All of the stock to be
issued in the Conversion is being offered to eligible account holders as of June
30, 1997.
The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion. The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from the
Company or a third party lender. The loan will be repaid over a period of 20
years and the collateral for the loan will be the common stock purchased by the
ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion. The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities. Establishment of the Foundation is subject to the
approval of the Bank's members at the special meeting being held to vote upon
the Conversion.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, under Federal regulations, subject to a
limitation based on 10 percent of the Company's taxable income. The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the contribution. Upon funding the Foundation, the Company
will recognize an expense in the full amount of the contribution, offset in part
by the corresponding benefit for the tax deduction, during the quarter in which
the contribution is made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support. The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.
At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-27
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 16 - PLAN OF CONVERSION (CONCLUDED)
The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the Conversion
is not consummated, costs incurred will be charged to expense. At June 30,
1998, there were no deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.
NOTE 17 - OTHER NONINTEREST EXPENSE
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Professional fees $ 261 $ 55 $ 433 $ 19 $ 29
Other non-interest expense 806 822 1,621 1,547 1,420
----------- ----------- ----------- ----------- -----------
$ 1,067 $ 877 $ 2,054 $ 1,566 $ 1,449
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIRGINIA CAPITAL BANCSHARES, INC., THE bANK OR TRIDENT SECURITIES,
INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS pROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF VIRGINIA CAPITAL BANCSHARES, INC. OR THE BANK SINCE ANY
OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
______________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................
Selected Financial and
Other Data of the Bank...............................................
Risk Factors............................................................
Virginia Capital Bancshares, Inc........................................
Fredericksburg Savings..................................................
Regulatory Capital Compliance...........................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Market for the Common Stock.............................................
Capitalization..........................................................
Pro Forma Data..........................................................
Comparison of Valuation and Pro Forma Information Wit
No Foundation........................................................
Fredericksburg Savings..................................................
Statements of Income.................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................
Business of the Bank....................................................
Federal and State Taxation..............................................
Regulation..............................................................
Management of the Company...............................................
Management of the Bank..................................................
The Conversion..........................................................
Restrictions on Acquisition of the Company
and the Bank.........................................................
Description of Capital Stock of the Company.............................
Description of Capital Stock of the Bank................................
Transfer Agent and Registrar............................................
Experts.................................................................
Legal and Tax Opinions..................................................
Additional Information..................................................
Index of Financial Statements...........................................
</TABLE>
------------------------------
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Up to 13,965,600 Shares
VIRGINIA CAPITAL
BANCSHARES, INC.
(Proposed Holding Company for
Fredericksburg Savings Bank)
COMMON STOCK
______________
PROSPECTUS
______________
_____________, 199_
TRIDENT SECURITIES, INC.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC filing fee..................................................... $ 44,495
OTS filing fee..................................................... 14,400
NASD filing fee.................................................... 15,583
Nasdaq listing fee................................................. 90,500
Printing, postage and mailing...................................... 500,000
Legal fees and expenses (including underwriter's counsel fees)..... 400,000
Accounting fees and expenses....................................... 150,000
Appraisers' fees and expenses (including business plan)............ 31,000
Marketing fees and selling commissions and Underwriter's expenses.. 580,000
Conversion agent fees.............................................. 50,000
Transfer agent fees and expenses................................... 15,000
Certificate printing............................................... 5,000
Telephone, temporary help and other equipment...................... 50,000
Blue Sky fees and expenses......................................... 10,000
Miscellaneous...................................................... 44,022
----------
TOTAL.............................................................. $2,000,000
==========
</TABLE>
______________________
(1) Unless otherwise noted, based upon the registration and issuance of
15,082,848 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Virginia Stock Corporation Act (being Chapter 9 of Title
13.1 of the Virginia Code), Articles 10 and 11 of the registrant's Articles of
Incorporation provide as follows:
TENTH:
-----
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Virginia Stock Corporation Act, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
<PAGE>
(hereinafter an "advancement of expenses"); provided, however, that, if the
Virginia Stock Corporation Act requires, an advancement of expenses incurred by
an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Virginia Stock Corporation Act. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Virginia Stock Corporation Act, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Virginia Stock Corporation Act.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
--------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 13.1-692 of the Virginia Stock
<PAGE>
Corporation Act; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Virginia Stock Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Virginia
Stock Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Fredericksburg Savings and Loan Association,
F.A. and Trident Securities, Inc.
1.2 Draft Form of Agency Agreement between Fredericksburg Savings and Loan
Association, F.A. and Trident Securities, Inc.*
2.1 Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
of Fredericksburg Savings Bank)
3.1 Articles of Incorporation of Virginia Capital Bancshares, Inc.
3.2 Bylaws of Virginia Capital Bancshares, Inc.
3.3 Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
(See Exhibit 2.1 hereto)
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.
5.1 Draft Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.2 Draft Opinion of Cherry Bekaert & Holland re: State Tax Matters
10.1 Form of Fredericksburg Savings Bank Employee Stock Ownership Trust
Agreement
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Proposed Employment Agreement between Fredericksburg Savings Bank
and certain executive officers
10.4 Form of Proposed Employment Agreement between Virginia Capital Bancshares,
Inc. and certain executive officers
10.5 Form of Proposed Fredericksburg Savings Bank Employee Severance
Compensation Plan
10.6 Form of Fredericksburg Savings Bank Supplemental Executive Retirement
Plan
23.1 Consent of Cherry Bekaert & Holland
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Fredericksburg Savings Charitable Foundation Gift Instrument
__________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fredericksburg,
Commonwealth of Virginia, on September 11, 1998.
VIRGINIA CAPITAL BANCSHARES, INC.
By: /s/ Samuel C. Harding, Jr.
--------------------------------
Samuel C. Harding, Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Samuel C. Harding, Jr. President and Director September 11, 1998
- -------------------------------
Samuel C. Harding, Jr. (principal executive officer)
/s/ Peggy J. Newman Executive Vice President, Treasurer, September 11, 1998
- -------------------------------
Peggy J. Newman Secretary and Director
(principal accounting and financial officer)
/s/ H. Smith McKann Chairman of the Board September 11, 1998
- -------------------------------
H. Smith McKann
/s/ Ronald G. Beck Vice Chairman of the Board September 11, 1998
- -------------------------------
Ronald G. Beck
/s/ William M. Anderson, Jr. Director September 11, 1998
- -------------------------------
William M. Anderson, Jr.
/s/ O'Conor Ashby Director September 11, 1998
- -------------------------------
O'Conor Ashby
/s/ Ernest N. Donahoe, Jr. Director September 11, 1998
- -------------------------------
Ernest N. Donahoe, Jr.
/s/ DuVal Q. Hicks, Jr. Director September 11, 1998
- -------------------------------
DuVal Q. Hicks, Jr.
/s/ Charles S. Rowe Director September 11, 1998
- -------------------------------
Charles S. Rowe
</TABLE>
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letter between Fredericksburg Savings and Loan Association,
F.A. and Trident Securities, Inc.
1.2 Draft Form of Agency Agreement between Fredericksburg Savings and Loan
Association, F.A. and Trident Securities, Inc.*
2.1 Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
of Fredericksburg Savings Bank
3.1 Articles of Incorporation of Virginia Capital Bancshares, Inc.
3.2 Bylaws of Virginia Capital Bancshares, Inc.
3.3 Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
(See Exhibit 2.1 hereto)
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.
5.1 Draft Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.2 Draft Opinion of Cherry Bekaert & Holland re: State Tax Matters
10.1 Form of Fredericksburg Savings Bank Employee Stock Ownership
Trust Agreement
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Proposed Employment Agreement between Fredericksburg Savings Bank
and certain executive officers
10.4 Form of Proposed Employment Agreement between Virginia Capital Bancshares,
Inc. and certain executive officers
10.5 Form of Proposed Fredericksburg Savings Bank Employee Severance
Compensation Plan
10.6 Form of Fredericksburg Savings Bank Supplemental Executive Retirement Plan
23.1 Consent of Cherry Bekaert & Holland
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Fredericksburg Savings Charitable Foundation Gift Instrument
______________________
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
EXHIBIT 1.1
[LETTERHEAD OF TRIDENT SECURITIES, INC. APPEARS HERE]
July 24, 1998
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
400 George Street
Fredericksburg, Virginia 22401
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Fredericksburg Savings and Loan Association,
F.A., Fredericksburg, Virginia (the "Association") concerning our banking
services in connection with the conversion of the Association from a mutual to a
capital stock form of organization.
Trident is prepared to assist the Association in connection with the offering of
its shares of common stock during the subscription offering and community
offering as such terms are defined in the Association's Plan of Conversion. The
specific terms of the services contemplated hereunder shall be set forth in a
definitive sales agency agreement (the "Agreement") between Trident and the
Association to be executed on the date the offering circular/prospectus is
declared effective by the appropriate regulatory authorities. The price of the
shares during the subscription offering and community offering will be the price
established by the Association's Board of Directors, based upon an independent
appraisal as approved by the appropriate regulatory authorities, provided such
price is mutually acceptable to Trident and the Association.
In connection with the subscription offering and community offering, Trident
will act as financial advisor and exercise its best efforts to assist the
Association in the sale of its common stock during the subscription offering and
community offering. Additionally, Trident may enter into agreements with other
National Association of Securities Dealers, Inc., ("NASD") member firms to act
as selected dealers, assisting in the sale of the common stock. Trident and the
Association will determine the selected dealers to assist the Association during
the community offering. At the appropriate time, Trident in conjunction with
its counsel, will conduct an examination of the relevant documents and records
of the Association as Trident deems necessary and appropriate. The Association
will make all documents, records and other information deemed necessary by
Trident or its counsel available to them upon request.
For its services hereunder, Trident will receive the following compensation and
reimbursement from the Association:
<PAGE>
TRIDENT SECURITIES, INC.
Board of Directors
July 24, 1998
Page 2
1. A management fee in the amount of $525,000.
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by Trident and the Association to reflect market requirements
at the time of the stock allocation in a Syndicated Community
Offering.
3. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Association and Trident.
4. Trident shall be reimbursed for allocable expenses incurred by them,
including legal fees, whether or not the Agreement is consummated.
Trident's out-of-pocket expenses will not exceed $25,000 and its legal
fees will not exceed $30,000. The Association will forward to Trident
a check in the amount of $10,000 as an advance payment to defray the
allocable expenses of Trident.
It further is understood that the Association will pay all other expenses of the
conversion including but not limited to its attorneys' fees, NASD filing fees,
and filing and registration fees and fees of either Trident's attorneys or the
attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, the
Association warrants that: (a) the Association has not privately placed any
securities within the last 18 months; (b) there have been no material dealings
within the last 12 months between the Association and any NASD member or any
person related to or associated with any such member; (c) none of the officers
or directors of the Association has any affiliation with the NASD; (d) except as
contemplated by this engagement letter with Trident, the Association has no
financial or management consulting contracts outstanding with any other person;
(e) the Association has not granted Trident a right of first refusal with
respect to the underwriting of any future offering of the Association stock; and
(f) there has been no intermediary between Trident and the Association in
connection with the public offering of the Association's shares, and no person
is being compensated in any manner for providing such service.
The Association agrees to indemnify and hold harmless Trident and each person,
if any, who controls the firm against all losses, claims, damages or
liabilities, joint or several and all legal or other expenses reasonably
incurred by them in connection with the investigation or defense thereof
(collectively, "Losses"), to which they may become subject under securities laws
or under the common law, that arise out of or are based upon the reorganization
or the engagement hereunder of Trident except to the extent such losses are the
result of the gross negligence or willful misconduct of Trident. If the
foregoing indemnification is unavailable for any reason, the Association agrees
to contribute to such Losses in the proportion that its financial interest in
the reorganization bears to that of the indemnified parties. If the agreement
is entered into with respect the common stock to be issued in the
reorganization, the Agreement will provide for indemnification, which will be in
<PAGE>
TRIDENT SECURITIES, INC.
Board of Directors
July 24, 1998
Page 3
addition to any rights that Trident or any other indemnified party may have at
common law or otherwise. The indemnification provision of this paragraph will
be superseded by the indemnification provisions of the Agreement entered into by
the Association and Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Association agree in principle to the contents hereof and propose to
proceed promptly, and in good faith, to work out the arrangements with respect
to the proposed offering, any legal obligations between Trident and the
Association shall be only as set forth in a duly executed Agreement. Such
Agreement shall be in form and content satisfactory to Trident and the
Association, as well as their counsel, and Trident's obligations thereunder
shall be subject to, among other things, there being in Trident's opinion no
material adverse change in the condition or obligations of the Association or no
market conditions which might render the sale of the shares by the Association
hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$10,000. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ R. Lee Burrows, Jr.
-----------------------------
R. Lee Burrows, Jr.
Managing Director
Agreed and accepted to this 14/th/ day
of August, 1998
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
By: /s/ Samuel C. Harding, Jr.
-------------------------------
Samuel C. Harding, Jr.
President
RLB:cs
<PAGE>
EXHIBIT 2.1
- --------------------------------------------------------------------------------
PLAN OF CONVERSION
FOR
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
- --------------------------------------------------------------------------------
<PAGE>
PLAN OF CONVERSION
FOR
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of
Fredericksburg Savings and Loan Association, F.A. ("ASSOCIATION") from a
federally-chartered mutual savings and loan association to a federally-chartered
capital stock savings bank to be named Fredericksburg Savings Bank. The board of
Directors of the ASSOCIATION currently contemplates that all of the stock of the
ASSOCIATION shall be held by a corporation (the "Holding Company"). The Board of
Directors has carefully considered the alternatives available to the ASSOCIATION
with respect to its corporate structure and has determined that a mutual to
stock conversion as described in this Plan is in the best interests of the
ASSOCIATION, its depositors and the community served by the ASSOCIATION. The
Board of Directors believes that the decline in mutuality is placing mutual
savings associations, such as the ASSOCIATION, at a disadvantage to the
increasing base of stock thrift and commercial bank institutions. The
restructuring of the ASSOCIATION into the capital stock form of organization
will enable the ASSOCIATION to compete more effectively with commercial banks
and other financial institutions for new business opportunities, and as a stock
institution, to increase its equity capital base and access the capital markets
when needed and to enhance the
<PAGE>
ASSOCIATION'S ability to expand its franchise and the products it offers. The
use of the Holding Company, if so utilized, would also provide greater
organizational and operating flexibility. Shares of capital stock of the
ASSOCIATION will be sold to the Holding Company and the Holding Company will
offer the Conversion Stock upon the terms and conditions set forth herein to the
Eligible Account Holders, the Employee Plans established by the ASSOCIATION or
Holding Company, Supplemental Eligible Account Holders and Other Members in the
respective priorities set forth in this Plan. Any shares of Conversion Stock not
subscribed for by the foregoing classes of persons will be offered for sale to
certain members of the public either directly by the ASSOCIATION and the Holding
Company through a Community Offering or a Syndicated Community Offering or
through an underwritten firm commitment public offering or through a combination
thereof. In the event that the ASSOCIATION decides not to utilize the Holding
Company in the conversion, Conversion Stock of the ASSOCIATION, in lieu of the
Holding Company, will be sold as set forth above and in the respective
priorities set forth in this Plan. In addition to the foregoing, the ASSOCIATION
and the Holding Company, as part of this Plan, intend to implement stock option
plans and other stock benefit plans and will provide employment or severance
agreements to certain management employees and certain other compensation to the
directors, officers and employees of the ASSOCIATION as described in the
prospectus for the Conversion Stock.
In furtherance of the ASSOCIATION's long term commitment to its community,
this Plan provides for the establishment of a foundation (the "Foundation") as
part of the Conversion. The Foundation is intended to complement the
ASSOCIATION's existing community reinvestment activities in a manner that will
allow the communities in which the ASSOCIATION operates to
2
<PAGE>
share in the potential growth and profitability of the Holding Company and the
ASSOCIATION over the long term. Consistent with the ASSOCIATION's goal, the
Holding Company intends to donate to the Foundation from its authorized but
unissued common stock of up to 8.0% of the number of shares sold in the
Conversion. The establishment of the Foundation is subject to the approval of
the Voting Members of the ASSOCIATION. In the event the Foundation is not
approved, the ASSOCIATION may determine to complete the Conversion without the
Foundation.
This Plan, which has been unanimously approved by the Board of Directors of
the ASSOCIATION, must also be approved by the affirmative vote of a majority of
the total number of outstanding votes entitled to be cast by Voting Members of
the ASSOCIATION at a special meeting to be called for that purpose. Prior to
the submission of this Plan to the Voting Members for consideration, the Plan
must be approved by the Office of Thrift Supervision (the "OTS").
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a Savings
--------------
Account in the ASSOCIATION.
Acting in Concert - The term "Acting in Concert" means (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except
3
<PAGE>
that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per share
---------------------
price at which the Conversion Stock is ultimately sold in accordance with the
terms hereof.
Associate - The term Associate when used to indicate a relationship with
---------
any person, means (i) any corporation or organization (other than the
ASSOCIATION or a majority-owned subsidiary of the ASSOCIATION) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10 percent or more of any class of equity securities, (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity except
that for the purposes of Sections 9 and 14 hereof, the term "Associate" does not
include any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified Employee Stock
Benefit Plan, and (iii) any relative or spouse of such person, or any relative
of such spouse, who has the same home as such person or who is a Director or
Officer of the ASSOCIATION or the Holding Company, if utilized, or any of its
parents or subsidiaries.
Association - The term ASSOCIATION means Fredericksburg Savings and Loan
-----------
Association, F.A., Fredericksburg, Virginia and after its conversion to stock
form, Fredericksburg Savings Bank.
4
<PAGE>
Community Offering - The term Community Offering means the offering for
------------------
sale to certain members of the general public directly by the ASSOCIATION or the
Holding Company, if utilized, of any shares of Conversion Stock not subscribed
for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the common stock offered
----------------
and issued by the Holding Company or the $1.00 par value Common Stock offered
and issued by the ASSOCIATION, if the Holding Company form of organization is
not utilized, upon conversion.
Director - The term Director means a member of the Board of Directors of
--------
the ASSOCIATION and, where applicable, a member of the Board of Directors of the
Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any person
-----------------------
holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
-----------------------
for determining Eligible Account Holders in the ASSOCIATION and is June 30,
1997.
Employees - The term Employees means all Persons who are employed by the
---------
ASSOCIATION but does not include an Officer or Director.
Employee Plans - The term Employee Plans means the Tax Qualified Employee
--------------
Stock Benefit Plans approved by the Board of Directors of the ASSOCIATION.
Estimated Price Range - The term Estimated Price Range means the range of
---------------------
minimum and maximum aggregate values determined by the Board of Directors of the
ASSOCIATION within which the aggregate amount of Common Stock sold in the
Conversion will fall. The Estimated Price Range will be within the estimated
pro forma market value of the Conversion Stock as
5
<PAGE>
determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
----
Holding Company - The term Holding Company means the corporation formed for
---------------
the purpose of acquiring all of the shares of capital stock of the ASSOCIATION
to be issued upon its conversion to stock form unless the Holding Company form
of organization is not utilized. Shares of common stock of the Holding Company
will be issued in the conversion to Participants and others in a Subscription,
Community, Syndicated Community, or underwritten firm commitment public
offering, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
---------------------
retained by the ASSOCIATION to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Local Community - The term Local Community means all counties in which the
---------------
ASSOCIATION has its home office or a branch office.
Member - The term Member means any Person or entity who qualifies as a
------
member of the ASSOCIATION pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department of
---
the Treasury and its successors.
Officer - The term Officer means an executive officer of the ASSOCIATION
-------
which includes the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and Controller and any person performing
functions similar to those performed by the foregoing persons.
6
<PAGE>
Order Form - The term Order Form means any form together with attached
----------
cover letter, sent by the ASSOCIATION to any Participant or Person containing
among other things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections regarding
subscriptions for Conversion Stock in the Subscription and Community Offerings.
Other Member - The term Other Member means any person who is a Member of
------------
the ASSOCIATION (other than an Eligible Account Holder or Supplemental Eligible
Account Holder) at the close of business on the Voting Record Date.
Participants - The term Participants means the Eligible Account Holders,
------------
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a partnership,
------
an association, a joint-stock company, a trust (including Individual Retirement
Accounts and KEOGH Accounts), any unincorporated organization, a government or
political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the ASSOCIATION as it
----
exists on the date hereof and as it may hereafter be amended in accordance with
its terms.
Preferred Subscribers - The term Preferred Subscribers means those members
---------------------
of the general public which are natural persons residing in the ASSOCIATION's
Local Community.
Qualifying Deposit - The term Qualifying Deposit means the balance of each
------------------
Savings Account of $50 or more in the ASSOCIATION at the close of business on
the Eligibility Record Date or the Supplemental Eligibility Record Date,
whichever may be the case. Savings Accounts with total deposit balances of less
than $50 shall not constitute a Qualifying Deposit.
SEC - The term SEC refers to the United States Securities and Exchange
---
Commission.
7
<PAGE>
Savings Account - The term Savings Account has the same meaning as in
---------------
Section 561.42 of the Rules and Regulations of the OTS and includes certificates
of deposit.
Special Meeting of Members - The term Special Meeting of Members means the
--------------------------
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Subscription Offering - The term Subscription Offering means the offering
---------------------
of Conversion Stock for purchase through Order Forms to Participants.
Subscription Price - The term Subscription Price means the amount per share
------------------
of Conversion Stock to be paid initially by Participants in the Subscription
Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
------------------------------------
Record Date means the supplemental record date for determining Supplemental
Eligible Account Holders of the ASSOCIATION. The Supplemental Eligibility
Record Date shall be the last day of the calendar quarter preceding the OTS'
approval of the application for conversion.
Supplemental Eligible Account Holder - The term Supplemental Eligible
------------------------------------
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except officers, directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community Offering
-----------------------------
means the offering of Conversion Stock following the Subscription and Community
Offerings through a syndicate of broker-dealers.
8
<PAGE>
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified Employee
-----------------------------------------
Stock Benefit Plan means any defined benefit plan or defined contribution plan,
such as an employee stock ownership plan, stock bonus plan, profit-sharing plan
or other plan, which, with its related trust, meets the requirements to be
"qualified" under Section 401 of the Internal Revenue Code. A "Non-Tax-Qualified
Employee Stock Benefit Plan" is any defined benefit plan or defined contribution
plan which is not so qualified.
Voting Members - The term Voting Members means those persons qualifying as
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voting members of the ASSOCIATION pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
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the Directors in accordance with OTS regulations for determining eligibility to
vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by a vote of not less than two-thirds (2/3) of
the Board of Directors of the ASSOCIATION, the Plan shall be submitted together
with all other requisite material to the OTS for its approval. Notice of the
adoption of the Plan by the Board of Directors of the ASSOCIATION and the
submission of the Plan to the OTS for its approval will be published in a
newspaper having general circulation in each community in which an office of the
ASSOCIATION is located and copies of the Plan will be made available at each
office of the ASSOCIATION for inspection by the Members. Upon receipt of notice
from the OTS to do so, the ASSOCIATION also will cause to be published a notice
of the filing with the OTS of an application to convert in accordance with the
provisions of the Plan. Following approval by the OTS, the Plan will be
submitted to a vote of the Voting Members at the Special Meeting of
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Members called for that purpose. Upon approval of the Plan by a majority of the
total outstanding votes of the Voting Members, the ASSOCIATION will take all
other necessary steps pursuant to applicable laws and regulations to convert the
ASSOCIATION to stock form. The conversion must be completed within 24 months of
the approval of the Plan by the Voting Members, unless a longer time period is
permitted by governing laws and regulations.
The Board of Directors of the ASSOCIATION intends to take all necessary
steps to form the Holding Company, including the filing of an Application on
Form H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. In
the event that the Holding Company is utilized, upon conversion the ASSOCIATION
will issue capital stock to the Holding Company and the Holding Company will
issue and sell the Conversion Stock in accordance with this Plan.
The Board of Directors of the ASSOCIATION may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 will be withdrawn from the SEC, the
ASSOCIATION will take all steps necessary to complete the conversion from the
mutual to the stock form of organization, including filing any necessary
documents with the OTS, and will issue and sell the Conversion Stock in
accordance with this Plan. In such event, any subscriptions or orders received
for Conversion Stock of the Holding Company shall be deemed to be subscriptions
or orders for Conversion Stock of the ASSOCIATION without any further action by
the ASSOCIATION or the subscribers for the Conversion Stock, unless any such
further action is required by the SEC or the OTS, in which case the ASSOCIATION
shall take such necessary action to complete the Conversion. Any
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references to the Holding Company in this Plan shall mean the ASSOCIATION in the
event the Holding Company is eliminated in the Conversion.
The Board of Directors of the ASSOCIATION also intend to take all necessary
steps to establish the Foundation, and to fund such Foundation in the manner set
forth in Section 7A hereof, subject to the approval of the Voting Members.
The Conversion Stock will not be insured by the FDIC. The ASSOCIATION will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 to be filed with the SEC. The ASSOCIATION shall be a
wholly-owned subsidiary of the Holding Company unless the Holding Company is
eliminated in the Conversion.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the Conversion within the time
period specified in Section 3.
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Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to
the Special Meeting of Members and, in that event, the Community Offering may
also be commenced prior to the Special Meeting of Members. The offer and sale of
Conversion Stock prior to the Special Meeting of Members shall, however, be
conditioned upon approval of the Plan by the Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, as provided in Section 13 of this Plan in a manner that will achieve
the widest distribution of the Conversion Stock as determined by the
ASSOCIATION. The sale of all Conversion Stock subscribed for in the
Subscription and Community Offerings will be consummated simultaneously on the
date the sale of Conversion Stock in the Syndicated Community Offering is
consummated and only if all unsubscribed for Conversion Stock is sold.
The ASSOCIATION may elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Subscription
and Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined jointly by the Board of Directors
of the ASSOCIATION and the Board of Directors of the Holding Company, if the
holding company form of organization is utilized, immediately prior to the
commencement of the Subscription and Community Offerings, subject to adjustment
thereafter if necessitated by market or financial conditions, with the approval
of the OTS, if necessary. In particular, the total number of shares may be
increased by up to 15%
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of the number of shares offered in the Subscription and Community Offering if
the Estimated Price Range is increased subsequent to the commencement of the
Subscription and Community Offering to reflect changes in market and financial
conditions.
All shares sold in the Conversion will be sold at a uniform price per share
referred to in this Plan as the Actual Purchase Price. The aggregate purchase
price for all shares of Conversion Stock will not be inconsistent with the
estimated consolidated pro forma market value of the ASSOCIATION or the Holding
Company, if utilized. The estimated consolidated pro forma market value of the
ASSOCIATION or the Holding Company, if utilized, will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Price Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and the
purchase price per share may be increased or decreased by the ASSOCIATION. In
the event that the aggregate purchase price of the Conversion Stock is below the
minimum of the Estimated Price Range, or materially above the maximum of the
Estimated Price Range, resolicitation of purchasers may be required provided
that up to a 15% increase above the maximum of the Estimated Price Range will
not be deemed material so as to require a resolicitation. Up to a 15% increase
in the number of shares to be issued which is supported by an appropriate change
in the estimated pro forma market value of the ASSOCIATION or the Holding
Company, if utilized, will not be deemed to be material so as to require a
resolicitation of subscriptions. In the event that the aggregate purchase price
of the Conversion Stock is below the minimum of the Estimated Price Range or in
excess of 15% above the maximum of the Estimated Price Range, and a
resolicitation is required, such resolicitation shall be effected in such
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manner and within such time as the ASSOCIATION shall establish, with the
approval of the OTS, if required.
Based upon the independent valuation as updated prior to the commencement
of the Subscription and Community Offerings, the Board of Directors of the
Holding Company, (if a holding company form of organization is utilized) and the
Board of Directors of the ASSOCIATION will fix the Subscription Price and the
range of the number of shares to be offered. If upon completion of the
Subscription and Community Offerings all of the Conversion Stock is subscribed
for, or if because of a limited number of unsubscribed shares or otherwise a
Syndicated Community Offering cannot be effected, the total number of shares of
Conversion Stock to be issued and sold will be jointly determined by the
ASSOCIATION and Holding Company (if a holding company form of organization is
utilized) as follows: (a) the estimated aggregate pro forma market value of the
ASSOCIATION or the Holding Company, as the case may be, immediately after
conversion as determined by the Independent Appraiser, expressed in terms of a
specific aggregate dollar amount rather than as a range, upon completion of the
Subscription and Community Offerings or other sale of all of the Conversion
Stock shall be divided by (b) the Actual Purchase Price.
If there is a Syndicated Community Offering of shares of Conversion Stock
not subscribed for in the Subscription and Community Offerings, the price per
share at which the Conversion Stock is sold in such Syndicated Community
Offering shall be the Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the ASSOCIATION and Holding Company, if utilized, and to the OTS
that, to the best knowledge of the Independent
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Appraiser, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause the Independent Appraiser to conclude that the
aggregate value of the Conversion Stock at the Actual Purchase Price is
incompatible with its estimate of the aggregate consolidated pro forma market
value of the Holding Company or the ASSOCIATION if no Holding Company is
utilized. If such confirmation is not received, the ASSOCIATION may cancel the
Subscription and Community Offerings and/or the Syndicated Community Offering,
extend the Conversion, establish a new Subscription Price Range and/or Estimated
Price Range, extend, reopen or hold new Subscription and Community Offerings
and/or Syndicated Community Offering or take such other action as the OTS may
permit.
The Conversion Stock to be issued in the Conversion shall be fully paid and
nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE ASSOCIATION
Upon the consummation of the sale of all of the Conversion Stock, and in
the event that a holding company form of organization is utilized, the Holding
Company will purchase from the ASSOCIATION all of the capital stock of the
ASSOCIATION to be issued by the ASSOCIATION in the Conversion in exchange for
the Conversion proceeds that are not permitted to be retained by the Holding
Company.
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable. The ASSOCIATION believes that the
Conversion proceeds will provide economic strength to the Holding Company and
the ASSOCIATION for the future in a highly competitive and regulated environment
and would facilitate expansion through acquisitions, diversification into
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other related businesses and for other business and investment purposes,
including the payment of dividends and future repurchases of Conversion Stock as
permitted by the OTS. If during the Conversion process the Board of Directors of
the ASSOCIATION determines not to complete the Conversion utilizing a holding
company form of organization, capital stock of the ASSOCIATION will be issued
and sold in accordance with the Plan. The above activities may also be engaged
in by the ASSOCIATION if the Holding Company is eliminated.
7A. ESTABLISHMENT AND FUNDING OF FOUNDATION
As part of the Conversion, the Holding Company and the ASSOCIATION intend
to establish a Foundation that will qualify as an exempt organization under
Section 501(c)(3) of the Internal Revenue Code and to donate to the Foundation
up to 8.0% of the number of shares of Common Stock sold in the Conversion. The
Foundation is being formed in connection with the Conversion in order to
complement the ASSOCIATION's existing community reinvestment activities and to
share with the communities in which the ASSOCIATION operates a part of the
ASSOCIATION's financial success as a community-minded, financial services
institution. The funding of the Foundation with Common Stock of the Holding
Company accomplishes this goal as it enables such communities to share in the
potential growth and profitability of the Holding Company and the ASSOCIATION
over the long-term.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the ASSOCIATION operates, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The board of
directors of the Foundation will be responsible for establishing the polices
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of the Foundation with respect to grants or donations, consistent with the
stated purposes of the Foundation. The Foundation will annually distribute total
grants to assist charitable organizations or to fund projects within its local
community of not less than 5% of the average fair value of Foundation assets
each year. In order to serve the purposes for which it was formed and maintain
its 501(c)(3) qualification, the Foundation may sell, on an annual basis, a
limited portion of the Common Stock contributed to it by the Holding Company.
The establishment and funding of the Foundation as part of the Conversion
is subject to the approval of the Voting Members by an affirmative vote of a
majority of the votes eligible to be cast by Voting Members in person or by
proxy at the Special Meeting. In the event that the ASSOCIATION's Members
approve this Plan, but not the Foundation, the ASSOCIATION may determine to
complete the Conversion without the establishment of the Foundation and may do
so without amending this Plan or obtaining any further vote of the ASSOCIATION's
Members. Failure of the Voting Members to approve the Foundation may materially
affect the pro forma market value of the ASSOCIATION. In such an event, the
ASSOCIATION may establish a new Estimated Price Range and commence a
resolicitation of subscribers. For comparison purposes, Voting Members will be
provided with a projection of the pro forma market value of the Conversion
Stock, an Estimated Price Range and certain selected pro forma financial data
that would result if the Conversion were consummated without establishment of
the Foundation.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount
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up to the greater of: the amount permitted to be subscribed for in the Community
Offering which amount, pursuant to Section 12, currently is $300,000 of the
Conversion Stock offered, but which may be increased to 5% or decreased to less
than $300,000 without the further approval of members or resolicitation of
subscribers; one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock; or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in each
case on the Eligibility Record Date, subject to the maximum purchase limitation
specified in Section 14A and the minimum purchase limitation specified in
Section 14C and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holders. Any shares remaining after that allocation
will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
Qualifying Deposit of each Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all Eligible
Account Holders whose subscriptions remain
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unsatisfied. If the amount so allocated exceeds the amount subscribed for by any
one or more Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second priority
after the filling of subscriptions of Eligible Account Holders, nontransferable
subscription rights to purchase in the Subscription Offering the number of
shares of Conversion Stock requested by such Employee Plans. If, after the
filling of subscriptions of Eligible Account Holders, a sufficient number of
shares are not available to fill the subscriptions by such Employee Plans, the
subscription by such Employee Plans shall be filled to the maximum extent
possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up to
15%, the additional shares may be sold to the Employee Plans subject to the
provisions of Section 14.
The Employee Plans shall not be deemed to be an associate or affiliate of
or Person Acting in Concert with any Director or Officer of the Holding Company
or the ASSOCIATION.
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10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $300,000 of the Conversion Stock offered,
but which may be increased to 5% or decreased to less than $300,000 without the
further approval of members or resolicitation of subscribers; one-tenth of one
percent (.10%) of the total offering of Conversion Stock; or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock to be issued by a fraction of which
the numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Supplemental Eligible Account Holders in the
ASSOCIATION on the Supplemental Eligibility Record Date, subject to the maximum
purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, the remaining shares of
Conversion Stock shall be allocated among the subscribing Supplemental Eligible
Account Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Conversion Stock equal to the lesser of 100
shares or the number of
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shares subscribed for by the Supplemental Eligible Account Holder. Any shares
remaining after that allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that the amount of the Qualifying Deposit of each Supplemental
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Supplemental Eligible
Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
C. Subscription rights received by an Eligible Account Holder pursuant to
Section 8 shall be applied in partial satisfaction of the subscription rights to
be received as a Supplemental Eligible Account Holder pursuant to this Section
10.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth priority
after the filling of subscriptions of the Eligible Account Holders, the Employee
Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $300,000
of the Conversion Stock offered, but which may be increased to 5% or decreased
to less than $300,000 without the further approval of members or resolicitation
of subscribers; or one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock, subject to the maximum
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purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the remaining shares of Conversion Stock shall be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Other Members, the excess shall be
reallocated (one or more times as necessary) among those remaining Other Members
whose subscriptions are still not fully satisfied on the same principle until
all available shares have been allocated or all subscriptions satisfied.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
which may subscribe together with any Associate or group of persons Acting in
Concert for up to $300,000 of the shares of Conversion Stock offered subject to
the Maximum
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Overall Purchase Limitation as specified in Section 14A and the minimum purchase
limitation specified in Section 14C and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up to
15%; provided, however, that the amount permitted to be purchased in the
Community Offering may be increased to 5% of the Conversion Stock; or decreased
to less than $300,000 without the further approval of members or resolicitation
of subscribers. The shares may be made available in the Community Offering
through a direct community marketing program which may provide for utilization
of a broker, dealer, consultant or investment banking firm, experienced and
expert in the sale of savings institution securities. Such entities may be
compensated on a fixed fee basis or on a commission basis, or a combination
thereof. Any excess of shares will be available for purchase by the general
public with preference given to Preferred Subscribers. The ASSOCIATION shall
make distribution of the Conversion Stock to be sold in the Community Offering
in such a manner as to promote the widest distribution of Conversion Stock. The
ASSOCIATION reserves the right to reject any or all orders, in whole or in part,
which are received in the Community Offering.
If the subscribers in the Community Offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among the subscribers in the manner
which permits each such person to the extent possible, to purchase the number of
shares necessary to make his total allocation of Conversion Stock equal to the
lesser of 100 shares or the number of shares subscribed for by such persons.
Thereafter, unallocated shares will be allocated among the subscribers whose
subscriptions remain unsatisfied on a 100 shares per order basis until all such
orders have been filled or the remaining shares have been allocated. The
ASSOCIATION may establish all other terms and conditions of
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such offer. It is expected that the Community Offering will commence
concurrently with the Subscription Offering. The Community Offering must be
completed within 45 days after the completion of the Subscription Offering
unless otherwise extended by the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the ASSOCIATION, in a manner that will achieve the widest distribution of the
Conversion Stock subject to the right of the ASSOCIATION to accept or reject in
whole or in part all subscriptions in the Syndicated Community Offering. In the
Syndicated Community Offering, any person together with any Associate or group
of persons Acting in Concert may purchase up to $300,000 of the total number of
shares of Conversion Stock offered subject to the maximum purchase limitation
specified in Section 14A and the minimum purchase limitation specified in
Section 14C and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%; provided, however,
that this amount may be increased to 5% or decreased to less than $300,000
without the further approval of members or resolicitation of subscribers. The
shares purchased by any Person together with any Associate or group of persons
Acting in Concert pursuant to Section 12 shall be counted toward meeting the
maximum percentage of shares permitted to be purchased pursuant to this Section.
Provided that the Subscription Offering has commenced, the ASSOCIATION may
commence the Syndicated Community Offering at any time after the mailing to the
Members of the Proxy Statement to be used in connection with the Special Meeting
of Members, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the
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approval of this Plan by the Voting Members. If the Syndicated Community
Offering is not sooner commenced pursuant to the provisions of the preceding
sentence, the Syndicated Community Offering will be commenced as soon as
practicable following the date upon which the Subscription and Community
Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the
ASSOCIATION shall have the right to sell any shares of Conversion Stock
remaining following the Subscription and Community Offerings in an underwritten
firm commitment public offering. The provisions of Section 14 hereof shall not
be applicable to sales to underwriters for purposes of such an offering but
shall be applicable to the sales by the underwriters to the public. The price
to be paid by the underwriters in such an offering shall be equal to the Actual
Purchase Price less an underwriting discount to be negotiated among such
underwriters and the ASSOCIATION, which will in no event exceed an amount deemed
to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the ASSOCIATION, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS.
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14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13, the following
limitations shall apply to all purchases of shares of Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
shall not exceed 1.0% of the Conversion Stock offered (the "Maximum Overall
Purchase Limitation"), except for the Employee Plans which may subscribe for up
to 10% of the Conversion Stock issued and except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Sections 8 and 10 herein, respectively;
provided, however, in the event that the Maximum Overall Purchase Limitation is
increased to more than 2.0% of the shares of Conversion Stock offered, orders
for Conversion Stock in the Community Offering and in the Syndicated Community
Offering (or, alternatively an underwritten firm commitment public offering), if
any, shall, as determined by the ASSOCIATION, first be filled to a maximum of
2.0% of the total number of shares of Conversion Stock offered and thereafter
remaining shares shall be allocated on an equal number of shares basis per order
until all orders have been filled.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the Conversion by Officers and Directors of the
ASSOCIATION and their Associates in the aggregate shall not exceed 25% of the
total number of shares of Conversion Stock issued.
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C. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares of
Conversion Stock which when multiplied by the price per share shall not exceed
$500, as determined by the Board.
If the number of shares of Conversion Stock otherwise allocable pursuant to
Sections 8, 10, 11, 12 and 13, to any Person or that Person's Associates would
be in excess of the maximum number of shares permitted as set forth above, the
number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his or her Associates complies with the above maximums, and such maximum number
of shares shall be reallocated among that Person and his or her Associates as
they may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the ASSOCIATION and the Holding Company, without further approval of the
Members, may decrease or increase the purchase limitations in this Plan,
provided that the maximum purchase limitations may not be increased to a
percentage in excess of 5%. Notwithstanding the foregoing, the Maximum Overall
Purchase Limitation may be increased up to 9.99% provided that orders for
Conversion Stock exceeding 5% of the shares being offered shall not exceed, in
the aggregate,
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10% of the total offering. If the ASSOCIATION or the Holding Company, as the
case may be, increases the maximum purchase limitations, the ASSOCIATION or the
Holding Company, as the case may be, is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the ASSOCIATION or the Holding Company, as the case may be, resolicit certain
other large subscribers.
In the event shares of Conversion stock are sold in excess of the maximum
of the Estimated Price Range, (the "Adjusted Maximum") such shares will be
allocated in the following order of priority: (i) to fill the Employee Plans'
subscription to the Adjusted Maximum; (ii) in the event that there is an over
subscription at the Eligible Account Holder level, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum in
accordance with Section 8; (iii) in the event there is an over subscription at
the Supplemental Eligible Account Holder level, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an over
subscription at the Other Member level, to fill unfulfilled subscriptions of
Other Members exclusive of the Adjusted Maximum in accordance with Section 11;
and (v) to fill unfulfilled Subscriptions in the Community Offering exclusive of
the Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Directors and Officers of the
ASSOCIATION and the Holding Company shall not be deemed to be Associates or a
group affiliated with each other or otherwise Acting in Concert solely as a
result of their being Directors or Officers of the ASSOCIATION or the Holding
Company.
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Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of common stock of the ASSOCIATION or the Holding
Company, as the case may be, except from a broker-dealer registered with the
SEC. This provision shall not apply to negotiated transactions involving more
than one percent of the outstanding shares of common stock of the ASSOCIATION or
the Holding Company, as the case may be, the exercise of any options pursuant to
a stock option plan or purchases of common stock of the ASSOCIATION or the
Holding Company, as the case may be, made by or held by any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of
the ASSOCIATION or the Holding Company (including the Employee Plans) which may
be attributable to any Officer or Director. As used herein, the term
"negotiated transaction" means a transaction in which the securities are offered
and the terms and arrangements relating to any sale are arrived at through
direct communications between the seller or any person acting on its behalf and
the purchaser or his investment representative. The term "investment
representative" shall mean a professional investment advisor acting as agent for
the purchaser and independent of the seller and not acting on behalf of the
seller in connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
ASSOCIATION, together with a properly completed and executed Order Form, or
purchase order in the case of the Syndicated
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<PAGE>
Community Offering, on or prior to the expiration date specified on the Order
Form or purchase order, as the case may be, unless such date is extended by the
ASSOCIATION; provided, however, that if the Employee Plans subscribe for shares
during the Subscription Offering, such plans will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of
Conversion Stock subscribed for by such plans at the Actual Purchase Price upon
consummation of the Conversion, provided that, in the case of the employee stock
ownership plan ("ESOP") there is in force from the time of its subscription
until the consummation of the Conversion, a loan commitment from the Holding
Company or an unrelated financial institution to lend to the ESOP, at such time,
the aggregate Subscription Price of the shares for which it subscribed. The
ASSOCIATION may make scheduled discretionary contributions to an Employee Plan
provided such contributions do not cause the ASSOCIATION to fail to meet its
regulatory capital requirement.
Notwithstanding the foregoing, the ASSOCIATION and the Holding Company, if
utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the Conversion Stock for
which they are subscribing in the Community Offering at any time prior to 48
hours before the completion of the Conversion, unless such 48 hour period is
waived by the ASSOCIATION and the Holding Company, in their sole discretion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Subscription and Community Offerings may pay for the shares subscribed for
by authorizing the ASSOCIATION on the Order Form to make a withdrawal from the
subscriber's Savings Account at the ASSOCIATION in an
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amount equal to the purchase price of such shares. Such authorized withdrawal,
whether from a savings passbook or certificate account, shall be without penalty
as to premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be cancelled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Savings Account but may not be used by the subscriber until the Conversion Stock
has been sold or the 45-day period (or such longer period as may be approved by
the OTS) following the Subscription and Community Offering has expired,
whichever occurs first. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the purchase price per share. Interest will continue to be earned on
any amounts authorized for withdrawal until such withdrawal is given effect.
Interest will be paid by the ASSOCIATION at not less than the passbook annual
rate on payments for Conversion Stock received in cash or by check or money
order. Such interest will be paid from the date payment is received by the
ASSOCIATION until consummation or termination of the Conversion. If for any
reason the Conversion is not consummated, all payments made by subscribers in
the Subscription, Community and Syndicated Community Offerings will be refunded
to them with interest. In case of amounts authorized for withdrawal from Savings
Accounts, refunds will be made by cancelling the authorization for withdrawal.
The ASSOCIATION is prohibited by regulation from knowingly making any loans or
granting any lines of credit for the purchase of stock in the Conversion, and
therefore, will not do so.
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16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding Company
and ASSOCIATION has been declared effective by the OTS and the SEC, if the
holding company form of organization is utilized, Order Forms will be
distributed to all Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders and Other Members at their last known
addresses appearing on the records of the ASSOCIATION for the purpose of
subscribing to shares of Conversion Stock in the Subscription Offering and will
be made available for use by those Persons entitled to purchase in the Community
Offering. Notwithstanding the foregoing, the ASSOCIATION may elect to send
Order Forms only to those Persons who request them after such notice as is
approved by the OTS and is adequate to apprise all Eligible Account Holders, the
Employee Plans, Supplemental Eligible Account Holders and Other Members of the
pendency of the Subscription Offering has been given. Such notice may be
included with the proxy statement for the Special Meeting of Members and may
also be included in a notice of the pendency of the Conversion and the Special
Meeting of Members sent to all Eligible Account Holders and Supplemental
Eligible Account Holders in accordance with regulations of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus (if a
holding company form of organization is utilized) or the Offering Circular (if
the holding company form of organization is not utilized) describing the Holding
Company, if utilized, the ASSOCIATION, the Conversion Stock and the Subscription
and Community Offerings. Each Order Form will contain, among other things, the
following:
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A. A specified date by which all Order Forms must be received by the
ASSOCIATION, which date shall be not less than twenty (20), nor more than forty-
five (45) days, following the date on which the Order Forms are mailed by the
ASSOCIATION, and which date will constitute the termination of the Subscription
Offering;
B. The Subscription Price per share for shares of Conversion Stock to be
sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
subscription rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of shares of Conversion Stock for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus or Offering Circular, as the case may be, prior to
execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the ASSOCIATION withdraw said amount from the subscriber's Savings Account
at the ASSOCIATION) to the ASSOCIATION; and
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G. A statement to the effect that the executed Order Form, once received
by the ASSOCIATION, may not be modified or amended by the subscriber without the
consent of the ASSOCIATION.
Notwithstanding the above, the ASSOCIATION and the Holding Company will not
accept orders received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
ASSOCIATION by the United States Postal Service or the ASSOCIATION is unable to
locate the addressee, (b) are not received back by the ASSOCIATION or are
received by the ASSOCIATION after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment, except in the case of institutional investors in the Community
Offering, by delivering irrevocable orders together with a legally binding
commitment to pay in cash, check, money order or wire transfer the full amount
of the purchase price prior to 48 hours before the completion of the Conversion
for the shares of Conversion Stock subscribed for (including cases in which
savings accounts from which withdrawals are authorized are insufficient to cover
the amount of the required payment), or (e) are not mailed pursuant to a "no
mail" order placed in effect by the account holder, the subscription rights of
the person to whom such rights have been granted will lapse as though such
person failed to return the contemplated Order Form within the time period
specified thereon; provided, however, that the ASSOCIATION may, but will not be
required to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares
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by such date as the ASSOCIATION may specify. The interpretation of the
ASSOCIATION of terms and conditions of the Plan and of the Order Forms will be
final, subject to the authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the ASSOCIATION or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (l) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the ASSOCIATION or the Holding Company, as the case may
be, which has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for
the ASSOCIATION or the Holding Company, as the case may be, not to recognize or
effect any
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transfer of any certificate or record of ownership of any such shares in
violation of the restriction on transfer; and
(iii) Any shares of capital stock of the ASSOCIATION or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the ASSOCIATION shall
have the exclusive voting rights with respect to the ASSOCIATION as specified in
its charter. The holders of the common stock of the Holding Company (if a
holding company form of organization is utilized) shall have the exclusive
voting rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The ASSOCIATION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion ("Liquidation Account"). The liquidation account will be
maintained by the ASSOCIATION for the benefit of the Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the ASSOCIATION. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Savings Account, hold a
related inchoate interest in a portion of the Liquidation Account balance, in
relation to his Savings Account balance at the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as hereinafter provided.
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In the unlikely event of a complete liquidation of the ASSOCIATION (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the Liquidation Account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
ASSOCIATION's capital stock. No merger, consolidation, bulk purchase of assets
with assumption of Savings Accounts and other liabilities, or similar
transactions with an FDIC-insured institution, in which the ASSOCIATION is not
the surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the Liquidation Account shall be assumed by the
surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and/or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the ASSOCIATION. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below. For Savings Accounts in existence at
both dates, separate subaccounts shall be determined on the basis of the
Qualifying Deposits in such Savings Account on such record dates. Such initial
subaccount balances shall not be increased but shall be subject to downward
adjustment as described below.
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If, at the close of business on any annual closing date, commencing on or
after the effective date of Conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account, the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the
ASSOCIATION.
21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE ASSOCIATION
Upon Conversion, each Savings Account Holder having a Savings Account at
the ASSOCIATION prior to the Conversion will continue to have a Savings Account,
without payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
Conversion.
After the Conversion, the ASSOCIATION will succeed to all the rights,
interests, duties and obligations of the ASSOCIATION before the Conversion,
including but not limited to all rights and interests of the ASSOCIATION in and
to its assets and properties, whether real,
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personal or mixed. The ASSOCIATION will continue to be a member of the Federal
Home Loan Bank System and all its insured savings deposits will continue to be
insured by the FDIC to the extent provided by applicable law.
22. RESTRICTIONS ON ACQUISITION OF THE ASSOCIATION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of the Conversion, no Person, other than the Holding
Company (if a holding company form of organization is utilized), shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of any class of an equity security of the ASSOCIATION without the prior
written consent of the OTS.
B. 1. The charter of the ASSOCIATION contains a provision stipulating
that no person, except the Holding Company (if a holding company form of
organization is utilized), for a period of five years following the date of the
Conversion shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
ASSOCIATION, without the prior written approval of the OTS. In addition, such
charter may also provide that for a period of five years following the
Conversion, shares beneficially owned in violation of the above-described
charter provision shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to
stockholders for a vote. In addition, special meetings of the stockholders
relating to changes in control or amendment of the charter may only be called by
the Board of Directors, and shareholders shall not be permitted to cumulate
their votes for the election of directors.
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2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock who beneficially owns in excess of 10% of
such outstanding shares be entitled or permitted to any vote in respect to any
shares held in excess of 10%. In addition, the Certificate of Incorporation and
Bylaws of the Holding Company provide for staggered terms of the directors,
noncumulative voting for directors, limitations on the calling of special
meetings, a fair price provision for certain business combinations and certain
notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. (S)78c(a)(10).
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23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The ASSOCIATION shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS. Otherwise, the ASSOCIATION may declare dividends,
make capital distributions or repurchase its capital stock in accordance with
applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to solicitation of proxies from Members to vote on the Plan by a
two-thirds vote of the ASSOCIATION's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the ASSOCIATION's Board of Directors at any time prior to the Special Meeting of
Members to vote on the Plan, and at any time thereafter with the concurrence of
the OTS.
By adoption of the Plan, the Members of the ASSOCIATION authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the ASSOCIATION will be voting to
adopt a Federal Stock Bank Charter and Bylaws for a Federal Stock Savings Bank
attached as Exhibits I and II to this Plan. The effective date of the
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ASSOCIATION's stock charter and bylaws shall be the date of issuance and sale of
the Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The Conversion of the ASSOCIATION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining a Federal Stock Savings Bank Charter for the ASSOCIATION and sale of
all Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
ASSOCIATION or the Holding Company, as the case may be, will register the
securities issued in connection with the Conversion pursuant to the Securities
Exchange Act of 1934 and will not deregister such securities for a period of at
least three years thereafter, except that the maintenance of registration for
three years requirement may be fulfilled by any successor to the ASSOCIATION or
any holding company of the ASSOCIATION. In addition, the ASSOCIATION or Holding
Company, as the case may be, will use its best efforts to encourage and assist a
market-maker to establish and maintain a market for the Conversion Stock and to
list those securities on a national or regional securities exchange or the
NASDAQ system.
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The ASSOCIATION will make reasonable efforts to comply with the securities
laws of all States in the United States in which Persons entitled to subscribe
for shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which both of
the
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following apply: A. a small number of Persons otherwise eligible to subscribe
for shares under the Plan reside in such state and; B. the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the ASSOCIATION or the Holding Company, as the case may
be, under the securities laws of such state, to register as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale in
such state and such registration or qualification would be impracticable for
reasons of cost or otherwise.
29. EXPENSES OF CONVERSION
The ASSOCIATION shall use its best efforts to assure that expenses incurred
by it in connection with the Conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The Conversion of the ASSOCIATION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the ASSOCIATION of rulings of the United States
Internal Revenue Service and any applicable state taxing authority, or opinions
of counsel, substantially to the effect that the Conversion will not result in
any adverse federal or state tax consequences to Eligible Account Holders or to
the ASSOCIATION and the Holding Company before or after the Conversion;
(b) The sale of all of the Conversion Stock offered in the Conversion; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
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31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
ASSOCIATION shall be final, subject to the authority of the OTS.
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FEDERAL STOCK CHARTER
FOR
FREDERICKSBURG SAVINGS BANK
Section 1. Corporate Title.
The full corporate title of the bank is Fredericksburg Savings Bank
(the "BANK").
Section 2. Office.
The home office shall be located in the City of Fredericksburg, in the
Commonwealth of Virginia.
Section 3. Duration.
The duration of the BANK is perpetual.
Section 4. Purpose and Powers.
The purpose of the BANK is to pursue any or all of the lawful objectives of
a Federal savings bank chartered under Section 5 of the Home Owners' Loan Act
and to exercise all the express, implied, and incidental powers conferred
thereby and by all acts amendatory thereof and supplemental thereto, subject to
the Constitution and laws of the United States as they are now in effect, or as
they may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
Section 5. Capital Stock.
The total number of shares of all classes of the capital stock which the
BANK has the authority to issue is twenty million (20,000,000), all of which
eighteen million (18,000,000) shall be common stock, par value $1.00 per share
and of which two million (2,000,000) shall be preferred stock, par value $1.00
per share. The shares may be issued from time to time as authorized by the
Board of Directors without further approval of shareholders except as otherwise
provided in this Section 5 or to the extent that such approval is required by
governing law, rule, or regulation. The consideration for the issuance of the
shares shall be paid in full before their issuance and shall not be less than
the par value. Neither promissory notes nor future services shall constitute
payment or part payment for the issuance of shares of the BANK. The
consideration for the shares shall be cash, tangible or intangible property (to
the extent direct investment in such property would be permitted), labor or
services actually performed for the
<PAGE>
BANK, or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined by
the Board of Directors of the BANK, shall be conclusive. In the case of a stock
dividend, that part of the retained earnings of the BANK that is transferred to
common stock or paid-in capital accounts upon the issuance of shares as a stock
dividend shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the BANK or in
connection with the conversion of the BANK from the mutual to the stock form of
capitalization, no shares of capital stock (including shares issuable upon
conversion, exchange, or exercise of other securities) shall be issued, directly
or indirectly, to officers, directors, or controlling persons of the BANK other
than as part of a general public offering or as qualifying shares to a director,
unless their issuance or the plan under which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: Provided, That
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this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
Board of Directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision that would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation
of the BANK with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or
business in exchange for securities of a corporation other than the
BANK if the preferred stock is exchanged for securities of such
other corporation: Provided, That no provision may require such
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approval for transactions undertaken with the assistance or pursuant
to the direction of the Office or the Federal Deposit Insurance
Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5
(or in any supplementary sections hereto), including any amendment
which would create or enlarge any class or series ranking prior
thereto in rights and preferences. An amendment which increases the
number of authorized shares of any class or series of capital stock,
or substitutes the surviving BANK in a merger or consolidation for
the BANK, shall not be considered to be such an adverse change.
2
<PAGE>
A description of the different classes and series (if any) of the BANK's
capital stock and a statement of the designations, and the relative rights,
preferences, and limitations of the shares of each class of and series (if any)
of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
------------
supplementary sections hereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common
stock shall be entitled to one vote for each share held by each
holder, except as to the cumulation of votes for the election of
directors, unless the charter otherwise provides that there shall be
no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of
dividends, the full amount of dividends and of sinking fund, or
retirement fund, or other retirement payments, if any, to which such
holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out
of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
BANK, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in
kind, the assets of the BANK available for distribution remaining
after: (i) payment or provision for payment of the BANK's debts and
liabilities; (ii) distributions or provision for distributions in
settlement of its liquidation account; and (iii) distributions or
provision for distributions to holders of any class or series of stock
having preference over the common stock in the liquidation,
dissolution, or winding up of the BANK. Each share of common stock
shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred Stock. The BANK may provide in supplementary sections to
---------------
its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and
issued in series, with each series separately designated so as to
distinguish the shares thereof from the shares of all other series and
classes. The terms of each series shall be set forth in a
supplementary section to the charter. All shares of the same class
shall be identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
3
<PAGE>
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date(s), the payment date(s) for dividends, and
the participating or other special rights, if any, with respect
to dividends;
(c) The voting powers, full or limited, if any, of the shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which,
such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event
of voluntary or involuntary liquidation, dissolution, or winding
up of the BANK;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including
the price(s) at which such shares may be redeemed or purchased
through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock
of the BANK and, if so, the conversion price(s) or the rate(s) of
exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and
conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The Board of Directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
4
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Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the Board of Directors, the BANK shall
file with the Secretary of the Office a dated copy of that supplementary section
of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
Section 6. Preemptive Rights.
Holders of the capital stock of the BANK shall not be entitled to
preemptive rights with respect to any shares of the BANK which may be issued.
Section 7. Liquidation Account.
Pursuant to the requirements of the Office's regulations (12 C.F.R.
563b.3), the BANK shall establish and maintain a liquidation account for the
benefit of its savings account holders as of June 30, 1997 and
[_________________] ("eligible savers"). In the event of a complete liquidation
of the BANK, it shall comply with such regulations with respect to the amount
and the priorities on liquidation of each of the BANK's eligible saver's
inchoate interest in the liquidation account, to the extent it is still in
existence: provided, that an eligible saver's inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the BANK's shareholders.
Section 8. Certain Provisions Applicable for Five Years.
Notwithstanding anything contained in the BANK's charter or bylaws to the
contrary, for a period of five years from the date of completion of the
conversion of the BANK from mutual to stock form, the following provisions shall
apply:
A. Beneficial Ownership Limitation. No person shall directly or
-------------------------------
indirectly offer to acquire or acquire the beneficial ownership of
more than 10 percent of any class of any equity security of the BANK.
This limitation shall not apply to a transaction in which the BANK
forms a holding company without change in the respective beneficial
ownership interests of the BANK's shareholders other than pursuant to
the exercise of any dissenter and appraisal rights, the purchase of
shares by underwriters in connection with a public offering, or the
purchase of shares by a tax-qualified employee stock benefit plan
which is exempt from the approval requirements under Section
574.3(c)(1)(vi) of the Office Regulations.
In the event shares are acquired in violation of this Section 8, all
shares beneficially owned by any person in excess of 10 percent shall
be considered "excess shares" and shall not be counted as shares
entitled to vote and shall not be voted by any
5
<PAGE>
person or counted as voting shares in connection with any matters
submitted to the shareholders for a vote.
For the purposes of this Section 8, the following definitions apply:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint
stock company, a trust, any unincorporated organization or
similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of the equity
securities of the BANK.
(ii) The term "offer" includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender offer for, or
request or invitation for tenders of, a security or interest in
a security for value.
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(iv) The term "acting in concert" means (a) knowing participation in
a joint activity or conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (b) a
combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
B. Cumulative Voting Limitation. Shareholders shall not be permitted to
cumulate their votes for the election of directors.
C. Call for Special Meetings. Special meetings of shareholders relating
to changes in control of the BANK or amendments to its charter shall
be called only at the direction of the Board of Directors.
Section 9. Directors.
The BANK shall be under the direction of a Board of Directors. The
authorized number of directors, as stated in the BANK's bylaws, shall be not be
less than five nor more than 15 except when a greater number or lesser number is
approved by the Office or his or her delegate.
6
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Section 10. Amendment of Charter.
Except as provided in Section 5, no amendment, addition, alteration,
change, or repeal of this charter shall be made, unless such is proposed by the
Board of Directors of the BANK, approved by the shareholders by a majority of
the votes eligible to be cast at a legal meeting, unless a higher vote is
otherwise required, and approved or preapproved by the Office.
FREDERICKSBURG SAVINGS
BANK
Attest: _______________________ By: ___________________________
Peggy J. Newman Samuel C. Harding, Jr.
Secretary President
OFFICE OF THRIFT SUPERVISION
Attest: _______________________ By: ___________________________
Secretary to the Office Director
Declared effective on
the _____ day of __________, 199_
7
<PAGE>
FEDERAL STOCK BYLAWS
FOR
FREDERICKSBURG SAVINGS BANK
ARTICLE I - HOME OFFICE
The home office of Fredericksburg Savings Bank ("Bank") shall be at
400 George Street, Fredericksburg, in the Commonwealth of Virginia.
ARTICLE II - SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
-----------------------------
shareholders shall be held at the home office of the Bank or at such other
convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Bank for
--------------------------
the election of directors and for the transaction of any other business of the
Bank shall be held annually within 150 days after the end of the Bank's fiscal
year on the thirtieth day of September if not a legal holiday, and if a legal
holiday, then on the next day following which is not a legal holiday, at or at
such other date and time within such 150-day period as the board of directors
may determine.
Section 3. Special Meetings. Special meetings of the shareholders for any
----------------------------
purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the Bank addressed to the chairman
of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
-------------------------------
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
board of directors adopts another written procedure for the conduct of meetings.
The board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day, and
------------------------------
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the
<PAGE>
address as it appears on the stock transfer books or records of the Bank as of
the record date prescribed in section 6 of this article II with postage prepaid.
When any shareholders' meeting, either annual or special, is adjourned for 30
days or more, notice of the adjourned meeting shall be given as in the case of
an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than 30 days or of the business to
be transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
---------------------------------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days and, in case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
------------------------
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Bank shall make a complete list of the shareholders of record
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each. This
list of shareholders shall be kept on file at the home office of the Bank and
shall be subject to inspection by any shareholder of record or the shareholder's
agent at any time during usual business hours for a period of 20 days prior to
such meeting. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to inspection by any shareholder of
record or any shareholder's agent during the entire time of the meeting. The
original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders. In lieu of making the shareholder list available for
inspection by shareholders as provided in the preceding paragraph, the board of
directors may elect to follow the procedures prescribed in (S)552.6(d) of the
Office's regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Bank
------------------
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the charter. Directors, however, are elected by a
plurality of the votes cast at an election of directors.
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<PAGE>
Section 9. Proxies. At all meetings of shareholders, a shareholder may
-------------------
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------------------
ownership stands in the name of two or more persons, in the absence of written
directions to the Bank to the contrary, at any meeting of the shareholders of
the Bank any one or more of such shareholders may cast, in person or by proxy,
all votes to which such ownership is entitled. In the event an attempt is made
to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such and
present in person or by proxy at such meeting, but no votes shall be cast for
such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------------------
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares outstanding in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares held in trust in an IRA or Keogh Account, however, may by voted by the
Bank if no other instructions are received. Shares outstanding in the name of a
receiver may be voted by such receiver, and shares held by or under control of a
receiver may be voted by such receiver without the transfer into his or her name
if authority to do so is consigned in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Bank nor shares held
by another Corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation are held by the Bank, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time for purposes of any meeting.
Section 12. Inspectors of Election. In advance of any meeting of
----------------------------------
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed
3
<PAGE>
the chairman of the board or the president may, or on the request of not fewer
than 10 percent of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper
for conduct the election or vote with fairness to all shareholders.
Section 13. Nominating Committee. The board of directors shall act as a
--------------------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the Bank at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 14. New Business. Any new business to be taken up at the annual
------------------------
meeting shall be stated in writing and filed with the secretary of the Bank at
least five days before the date of the annual meeting, and all business so
stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
Section 15. Informal Action by Shareholders. Any action required to be
-------------------------------------------
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be
4
<PAGE>
taken without a meeting if consent in writing, setting forth the action so
taken, shall be given by all of the shareholders entitled to vote with respect
to the subject matter.
ARTICLE III - BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Bank shall be
--------------------------
under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2 . Number and Term. The board of directors shall consist of nine
---------------------------
(9) and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
----------------------------
shall be held without other notice than this bylaw following the annual meeting
of shareholders. The board of directors may provide, by resolution, the time
and place, for the holding of additional regular meetings without other notice
than such resolution. Directors may participate in a meeting by means of a
conference telephone or similar communications device through which all persons
participating can hear each other at the same time. Participation by such means
shall constitute presence in person for all purposes.
Section 4. Qualification. Each director shall at all times be the
-------------------------
beneficial owner of not less than 100 shares of capital stock of the Bank unless
the Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
----------------------------
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the Bank's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
making use of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given to
------------------
each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the Bank receives notice of delivery if electronically transmitted. Any
director may waive notice of any
5
<PAGE>
meeting by a writing filed with the secretary. The attendance of a director at a
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice of waiver of
notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by section
------------------
2 of this article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors; but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by section 5 of this article III.
Section 8. Manner of Acting. The act of the majority of the directors
----------------------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
------------------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a
-----------------------
written notice of such resignation to the home office of the Bank addressed to
the chairman of the board or the president. Unless otherwise specified, such
resignation shall take effect upon receipt by the chairman of the board or the
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors may
---------------------
be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated salary
------------------------
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
attendance at committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Bank who is present
---------------------------------
at a meeting of the board of directors at which action on any bank matter is
taken shall be presumed to have assented to the action taken unless his or her
dissent or abstention shall be entered in the minutes
6
<PAGE>
of the meeting or unless he or she shall file a written dissent to such action
with the person acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the secretary of the
Bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
--------------------------------
expressly for that purpose, any director may be removed only for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the charter or supplemental
sections thereto, the provisions of this section shall apply, in respect to the
removal of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding shares
as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted by a
-----------------------
majority of the full board, may designate the chief executive officer and two or
more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors
---------------------
is not in session, shall have and may exercise all of the authority of the board
of directors except to the extent, if any, that such authority shall be limited
by the resolution appointing the executive committee; and except also that the
executive committee shall not have the authority of the board of directors with
reference to: the declaration of dividends; the amendment of the charter or
bylaws of the Bank, or recommending to the shareholders a plan of merger,
consolidation, or conversion; the sale, lease, or other disposition of all or
substantially all of the property and assets of the Bank otherwise than in the
usual and regular course of its business; a voluntary dissolution of the Bank; a
revocation of any of the foregoing; or the approval of a transaction in which
any member of the executive committee, directly or indirectly, has any material
beneficial interest.
Section 3. Tenure. Subject to the provisions of section 8 of this article
------------------
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
--------------------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
7
<PAGE>
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
------------------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
------------------------------------
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled
---------------------
by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive committee
------------------------------------
may be removed at any time with or without cause by resolution adopted by a
majority of the full board of directors. Any member of the executive committee
may resign from the executive committee at any time by giving written notice to
the president or secretary of the Bank. Unless otherwise specified, such
resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
---------------------
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
----------------------------
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - OFFICERS
Section 1. Positions. The officers of the Bank shall be a president, one
---------------------
or more vice presidents, a secretary, and a treasurer or comptroller, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The offices of the
secretary and treasurer or comptroller may be held by the same person and a vice
president may also be either the secretary or the treasurer or comptroller. The
board of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the Bank may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers and
duties as
8
<PAGE>
generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Bank shall be
---------------------------------------
elected annually at the first meeting of the board of directors held after each
annual meeting of the shareholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until a successor has been duly elected and qualified
or until the officer's death, resignation or removal in the manner hereinafter
provided. Election or appointment of an officer, employee, or agent shall not of
itself create contractual rights. The board of directors may authorize the Bank
to enter into an employment contract with any officer in accordance with
regulations of the Office; but no such contract shall impair the right of the
board of directors to remove any officer at any time in accordance with section
3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
-------------------
whenever in its judgment the best interests of the Bank will be served thereby,
but such removal, other than for cause, shall be without prejudice to the
contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
---------------------
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
------------------------
from time to time by the board of directors.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the
---------------------
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the Bank to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Bank. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Bank and
-----------------
no evidence of indebtedness shall be issued in its name unless authorized by the
board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks; Drafts. etc. All checks, drafts, or other orders for
-------------------------------
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Bank shall be signed by one or more officers, employees or agents of
the Bank in such manner as shall from time to time be determined by the board of
directors.
Section 4. Deposits. All funds of the Bank not otherwise employed shall be
--------------------
deposited from time to time to the credit of the Bank in any duly authorized
depositories as the board of directors may select.
9
<PAGE>
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
-----------------------------------
capital stock of the Bank shall be in such form as shall be determined by the
board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Bank
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Bank itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the owner
of shares and date of issue, shall be entered on the stock transfer books of the
Bank. All certificates surrendered to the Bank for transfer shall be cancelled
and no new certificate shall be issued until the former certificate for a like
number of shares has been surrendered and cancelled, except that in the case of
a lost or destroyed certificate, a new certificate may be issued upon such terms
and indemnity to the Bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
------------------------------
Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the Bank. Such transfer shall be made only on surrender for cancellation of the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the Bank shall be deemed by the Bank to be the owner for
all purposes.
ARTICLE VIII - FISCAL YEAR
The fiscal year of the Bank shall end on the thirtieth day of June of each
year. The appointment of accountants shall be subject to annual ratification by
the shareholders.
ARTICLE IX - DIVIDENDS
Subject to the terms of the Bank's charter and the regulations and orders
of the Office, the board of directors may, from time to time, declare, and the
Bank may pay, dividends on its outstanding shares of capital stock.
ARTICLE X - CORPORATE SEAL
The board of directors shall provide the Bank seal which shall be two
concentric circles between which shall be the name of the Bank. The year of
incorporation or an emblem may appear in the center.
10
<PAGE>
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of the
Office and shall be effective after: (i) approval of the amendment by a majority
vote of the authorized board of directors, or by a majority vote of the votes
cast by the shareholders of the Bank at any legal meeting, and (ii) receipt of
any applicable regulatory approval. When the Bank fails to meet its quorum
requirements, solely due to vacancies on the board, then the affirmative vote of
a majority of the sitting board will be required to amend the bylaws.
11
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
VIRGINIA CAPITAL BANCSHARES, INC.
FIRST: The name of the Corporation is Virginia Capital Bancshares, Inc.
-----
sometimes referred to as the "Corporation").
SECOND: The name of the Corporation's Registered Agent is Samuel C.
------
Harding, Jr., who is a resident of the Commonwealth of Virginia and is named
herein as an initial director of the Corporation. The post office address of
the Corporation's registered agent is 400 George Street, Fredericksburg,
Virginia 22404, located in the City of Fredericksburg.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the Virginia Stock
Corporation Act.
FOURTH:
------
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is eighty million (80,000,000)
consisting of:
1. Five million (5,000,000) shares of Preferred Stock, par value
one cent ($.01) per share (the "Preferred Stock"); and
2. Seventy-five million (75,000,000) shares of Common Stock, par
value one cent ($.01) per share (the "Common Stock").
B. Except to the extent to which the Board of Directors shall have
specified voting power with respect to any other class of stock and except
as otherwise provided by law, the exclusive voting power shall be vested in
the Common Stock, the holders thereof being entitled to one vote for each
share of such Common Stock standing in his or her name on the books of the
Corporation. Subject to any rights and preferences of any other class of
stock, holders of Common Stock are entitled to such dividends as may be
declared by the Board of Directors out of funds lawfully available
therefor. Upon any liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, holders of Common
Stock are entitled to receive pro rata the remaining assets of the
Corporation after the holders of any class of stock ranking prior to the
Common Stock have been paid in full any sums to which they may be entitled.
C. Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board of
Directors, each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be identical.
<PAGE>
The voting powers and the preferences and relative, participating, optional
and other special rights of each such series, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any
and all other series at any time outstanding; and the Board of Directors of
the Corporation is hereby expressly granted authority to fix by amendment
to these Articles of Incorporation (which amendment, pursuant to Virginia
law, may become effective without stockholder action) adopted prior to the
issuance of any shares of a particular series of Preferred Stock, the
voting powers and the designations, preferences and relative, optional and
other special rights, and the qualifications, limitations and restrictions
of such series, including, but without limiting the generality of the
foregoing, the following:
1. The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which
number may be increased or decreased (but not below the
number of shares then outstanding) from time to time by like
action of the Board of Directors;
2. The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series
shall be paid, the extent of the preference or relation, if
any, of such dividends payable on any other class or classes
or series of the same or other classes of stock and whether
(and the dates from which) such dividends shall be
cumulative or noncumulative;
3. The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for,
shares of any other class or classes or of any series of the
same or any other class or classes of stock of the
Corporation or any other corporation and the terms and
conditions of such conversion or exchange;
4. Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices
and the time or times at which, and the terms and conditions
on which, Preferred Stock of such series may be redeemed;
5. The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding up of the Corporation;
6. The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of
such series; and
2
<PAGE>
7. The voting powers, if any, of the holders of such series of
Preferred Stock.
D. 1. Notwithstanding any other provision of these Articles of
Incorporation, in no event shall any record owner of any
outstanding Common Stock which is beneficially owned,
directly or indirectly, by a person who, as of any record
date for the determination of stockholders entitled to vote
on any matter, beneficially owns in excess of 10% of the
then-outstanding shares of Common Stock (the "Limit"), be
entitled, or permitted to any vote in respect of the shares
held in excess of the Limit. The number of votes which may
be cast by any record owner by virtue of the provisions
hereof in respect of Common Stock beneficially owned by such
person beneficially owning shares in excess of the Limit
shall be a number equal to the total number of votes which a
single record owner of all Common Stock beneficially owned
by such person would be entitled to cast, (subject to the
provisions of this Article FOURTH) multiplied by a fraction,
the numerator of which is the number of shares of such class
or series which are both beneficially owned by such person
and owned of record by such record owner and the denominator
of which is the total number of shares of Common Stock
beneficially owned by such person owning shares in excess of
the Limit.
2. The following definitions shall apply to this Section C of
this Article FOURTH:
a. "Affiliate" shall have the meaning ascribed to it in
Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, as in
effect on the date of filing of these Articles of
Incorporation.
b. "Beneficial ownership" shall be determined pursuant to
Rule 13d-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, (or
any successor rule or statutory provision), or, if said
Rule 13d-3 shall be rescinded and there shall be no
successor rule or provision thereto, pursuant to said
Rule 13d-3 as in effect on the date of filing of these
Articles of Incorporation; provided, however, that a
person shall, in any event, also be deemed the
"beneficial owner" of any Common Stock:
(1) which such person or any of its affiliates
beneficially owns, directly or indirectly; or
3
<PAGE>
(2) which such person or any of its affiliates has:
(i) the right to acquire (whether such right is
exercisable immediately or only after the passage
of time), pursuant to any agreement, arrangement
or understanding (but shall not be deemed to be
the beneficial owner of any voting shares solely
by reason of an agreement, contract, or other
arrangement with this Corporation to effect any
transaction which is described in any one or more
of clauses 1 through 5 of Section A of Article
EIGHTH of these Articles of Incorporation
("Article EIGHTH")), or upon the exercise of
conversion rights, exchange rights, warrants, or
options or otherwise, or (ii) sole or shared
voting or investment power with respect thereto
pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but
shall not be deemed to be the beneficial owner of
any voting shares solely by reason of a revocable
proxy granted for a particular meeting of
stockholders, pursuant to a public solicitation of
proxies for such meeting, with respect to shares
of which neither such person nor any such
Affiliate is otherwise deemed the beneficial
owner); or
(3) which are beneficially owned, directly or
indirectly, by any other person with which such
first mentioned person or any of its Affiliates
acts as a partnership, limited partnership,
syndicate or other group pursuant to any
agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing
of any shares of capital stock of this
Corporation; and provided further, however, that:
(1) no Director or Officer of this Corporation (or
any Affiliate of any such Director or Officer)
shall, solely by reason of any or all of such
Directors or Officers acting in their capacities
as such, be deemed, for any purposes hereof, to
beneficially own any Common Stock beneficially
owned by any other such Director or Officer (or
any Affiliate thereof); and (2) neither any
employee stock ownership or similar plan of this
Corporation or any subsidiary of this Corporation,
nor any trustee with respect thereto or any
Affiliate of such trustee (solely by reason of
such capacity of such
4
<PAGE>
trustee), shall be deemed, for any purposes
hereof, to beneficially own any Common Stock held
under any such plan. For purposes only of
computing the percentage of beneficial ownership
of Common Stock of a person, the outstanding
Common Stock shall include shares deemed owned by
such person through application of this subsection
but shall not include any other Common Stock which
may be issuable by this Corporation pursuant to
any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise. For all
other purposes, the outstanding Common Stock shall
include only Common Stock then outstanding and
shall not include any Common Stock which may be
issuable by this Corporation pursuant to any
agreement, or upon the exercise of conversion
rights, warrants or options, or otherwise.
c. The "Limit" shall mean 10% of the then-outstanding
shares of Common Stock.
d. A "person" shall include an individual, a firm, a group
acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock
company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of
securities or any other entity.
3. The Board of Directors shall have the power to construe and
apply the provisions of this section and to make all
determinations necessary or desirable to implement such
provisions, including but not limited to matters with
respect to: (i) the number of shares of Common Stock
beneficially owned by any person; (ii) whether a person is
an affiliate of another; (iii) whether a person has an
agreement, arrangement, or understanding with another as to
the matters referred to in the definition of beneficial
ownership; (iv) the application of any other definition or
operative provision of the section to the given facts; or
(v) any other matter relating to the applicability or effect
of this section.
4. The Board of Directors shall have the right to demand that
any person who is reasonably believed to beneficially own
Common Stock in excess of the Limit (or holds of record
Common Stock beneficially owned by any person in excess of
the Limit) supply the Corporation
5
<PAGE>
with complete information as to: (i) the record owner(s) of
all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit;
and (ii) any other factual matter relating to the
applicability or effect of this section as may reasonably be
requested of such person.
5. Except as otherwise provided by law or expressly provided in
this Section C, the presence, in person or by proxy, of the
holders of record of shares of capital stock of the
Corporation entitling the holders thereof to cast a majority
of the votes (after giving effect, if required, to the
provisions of this Section C) entitled to be cast by the
holders of shares of capital stock of the Corporation
entitled to vote shall constitute a quorum at all meetings
of the stockholders, and every reference in these Articles
of Incorporation to a majority or other proportion of
capital stock (or the holders thereof) for purposes of
determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to
such majority or other proportion of the votes (or the
holders thereof) then entitled to be cast in respect of such
capital stock.
6. Any constructions, applications, or determinations made by
the Board of Directors pursuant to this section in good
faith and on the basis of such information and assistance as
was then reasonably available for such purpose shall be
conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this
Section C shall be found to be invalid, prohibited or
unenforceable for any reason, the remaining provisions (or
portions thereof) of this Section shall remain in full force
and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken
herefrom or otherwise rendered inapplicable, it being the
intent of this Corporation and its stockholders that each
such remaining provision (or portion thereof) of this
Section C remain, to the fullest extent permitted by law,
applicable and enforceable as to all stockholders, including
stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
6
<PAGE>
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers
and authority expressly conferred upon them by statute or by these Articles
of Incorporation or the Bylaws of the Corporation, the Directors are hereby
empowered to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called
only by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board or as otherwise provided in the Bylaws. The
term "Whole Board" shall mean the total number of authorized directorships
(whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board for
adoption).
E. The holders of the Common Stock have no pre-emptive rights or
other rights to subscribe to any other shares of Common Stock or other
securities of the Corporation. Holders of the Common Stock or any other
equity securities of the Corporation have no right to cumulate votes for
the election of directors.
SIXTH:
-----
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board. The Directors shall be divided into three
classes, as nearly equal in number as reasonably possible, with the term of
office of the first class to expire at the first annual meeting of
stockholders, the term of office of the second class to expire at the
annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the annual meeting of stockholders two
years thereafter with each Director to hold office until his or her
successor shall have been duly elected and qualified. At each annual
meeting of stockholders following such initial classification and election,
Directors elected to succeed those Directors whose terms expire shall be
elected for a term of office to expire at the third succeeding annual
meeting of stockholders after their election with each Director to hold
office until his or her successor shall have been duly elected and
qualified.
B. Subject to the rights of holders of any series of Preferred Stock
outstanding, the newly created directorships resulting from any increase in
the authorized number of Directors or any vacancies in the Board of
Directors resulting from death, resignation,
7
<PAGE>
retirement, disqualification, removal from office or other cause may be
filled only by a majority vote of the Directors then in office, though less
than a quorum, and Directors so chosen shall hold office for a term
expiring at the next annual meeting of stockholders at which Directors are
elected and until their successors shall be elected and qualified. No
decrease in the number of Directors constituting the Board of Directors
shall shorten the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any meeting
of the stockholders of the Corporation shall be given in the manner
provided in the Bylaws of the Corporation.
D. Subject to the rights of holders of any series of Preferred Stock
then outstanding, any Director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least 80 percent of the voting power
of all of the then-outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving
effect to the provisions of Article FOURTH of these Articles of
Incorporation ("Article FOURTH")), voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
-------
repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by these Articles of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation.
EIGHTH:
------
A. In addition to any affirmative vote required by law or these
Articles of Incorporation, and except as otherwise expressly provided in
this Article EIGHTH:
1. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with: (i) any Interested
Stockholder (as hereinafter defined); or (ii) any other
corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an
Interested Stockholder; or
8
<PAGE>
2. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder, or any
Affiliate of any Interested Stockholder, of any assets of
the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined) equaling or exceeding
25% or more of the combined assets of the Corporation and
its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions)
of any securities of the Corporation or any Subsidiary to
any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an
aggregate Fair Market Value (as hereinafter defined)
equaling or exceeding 25% of the combined Fair Market Value
of the outstanding common stock of the Corporation and its
Subsidiaries, except for any issuance or transfer pursuant
to an employee benefit plan of the Corporation or any
Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of
an Interested Stockholder or any Affiliate of any Interested
Stockholder; or
5. any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any other transaction (whether or not with
or into or otherwise involving an Interested Stockholder)
which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Corporation
or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate of any
Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the
voting power of the then-outstanding shares of stock of the Corporation
entitled to vote in the election of Directors (the "Voting Stock") (after
giving effect to the provisions of Article FOURTH), voting together as a
single class. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that a lesser percentage may be
specified, by law or by any other provisions of these Articles of
Incorporation, in any agreement with any national securities exchange or
otherwise.
9
<PAGE>
The term "Business Combination" as used in this Article EIGHTH shall
mean any transaction which is referred to in any one or more of paragraphs
1 through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of the
outstanding shares of capital stock entitled to vote after giving effect to
the provisions of Article FOURTH, or such vote (if any), as is required by
law or by these Articles of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being
received by the stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the following
paragraph 1 is met or, in the case of any other Business Combination, all
of the conditions specified in either of the following paragraphs 1 or 2
are met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter
defined).
2. All of the following conditions shall have been met:
a. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the
Business Combination of consideration other than cash
to be received per share by the holders of Common Stock
in such Business Combination shall at least be equal to
the higher of the following:
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested Stockholder
or any of its Affiliates for any shares of Common
Stock acquired by it: (i) within the two-year
period immediately prior to the first public
announcement of the proposal of the Business
Combination (the "Announcement Date"); or (ii) in
the transaction in which it became an Interested
Stockholder, whichever is higher; or
(2) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the
Interested Stockholder became an Interested
Stockholder (such latter date is referred to in
this
10
<PAGE>
Article EIGHTH as the "Determination Date"),
whichever is higher.
b. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the
Business Combination of consideration other than cash
to be received per share by holders of shares of any
class of outstanding Voting Stock other than Common
Stock shall be at least equal to the highest of the
following (it being intended that the requirements of
this subparagraph (b) shall be required to be met with
respect to every such class of outstanding Voting
Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of
Voting Stock):
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested Stockholder
for any shares of such class of Voting Stock
acquired by it: (i) within the two-year period
immediately prior to the Announcement Date; or
(ii) in the transaction in which it became an
Interested Stockholder, whichever is higher; or
(2) (if applicable) the highest preferential amount
per share to which the holders of shares of such
class of Voting Stock are entitled in the event of
any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(3) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
c. The consideration to be received by holders of a
particular class of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as
the Interested Stockholder has previously paid for
shares of such class of Voting Stock. If the Interested
Stockholder has paid for shares of any class of Voting
Stock with varying forms of consideration, the form of
consideration to be received per share by holders of
shares of such class of Voting Stock shall
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be either cash or the form used to acquire the largest
number of shares of such class of Voting Stock
previously acquired by the Interested Stockholder. The
price determined in accordance with subparagraph B.2 of
this Article EIGHTH shall be subject to appropriate
adjustment in the event of any stock dividend, stock
split, combination of shares or similar event.
d. After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of
such Business Combination: (1) except as approved by a
majority of the Disinterested Directors (as hereinafter
defined), there shall have been no failure to declare
and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any
outstanding stock having preference over the Common
Stock as to dividends or liquidation; (2) there shall
have been: (i) no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary
to reflect any subdivision of the Common Stock), except
as approved by a majority of the Disinterested
Directors; and (ii) an increase in such annual rate of
dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the
effect of reducing the number of outstanding shares of
the Common Stock, unless the failure to so increase
such annual rate is approved by a majority of the
Disinterested Directors, and (3) neither such
Interested Stockholder or any of its Affiliates shall
have become the beneficial owner of any additional
shares of Voting Stock except as part of the
transaction which results in such Interested
Stockholder becoming an Interested Stockholder.
e. After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder
shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax
advantages provided, directly or indirectly, by the
Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
f. A proxy or information statement describing the
proposed Business Combination and complying with the
requirements
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of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (or any subsequent
provisions replacing such Act, and the rules or
regulations thereunder) shall be mailed to stockholders
of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or
not such proxy or information statement is required to
be mailed pursuant to such Act or subsequent
provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a firm, a group
acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock company,
a trust, an unincorporated organization or similar company,
a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities or any other
entity.
2. "Interested Stockholder" shall mean any person (other than
the Corporation or any Holding Company or Subsidiary
thereof) who or which:
a. is the beneficial owner, directly or indirectly, of
more than 10% of the voting power of the outstanding
Voting Stock; or
b. is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the
date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the
then outstanding Voting Stock; or
c. is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within
the two-year period immediately prior to the date in
question beneficially owned by any Interested
Stockholder, if such assignment or succession shall
have occurred in the course of a transaction or series
of transactions not involving a public offering within
the meaning of the Securities Act of 1933, as amended.
3. For purposes of this Article EIGHTH, "beneficial ownership"
shall be determined in the manner provided in Section C of
Article FOURTH hereof.
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4. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of
1934, as in effect on the date of filing of these Articles
of Incorporation.
5. "Subsidiary" means any corporation of which a majority of
any class of equity security is owned, directly or
indirectly, by the Corporation; provided, however, that for
the purposes of the definition of Interested Stockholder set
forth in Paragraph 2 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned, directly
or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors prior
to the time that the Interested Stockholder became an
Interested Stockholder, and any Director who is thereafter
chosen to fill any vacancy of the Board of Directors or who
is elected and who, in either event, is unaffiliated with
the Interested Stockholder and in connection with his or her
initial assumption of office is recommended for appointment
or election by a majority of Disinterested Directors then on
the Board of Directors.
7. "Fair Market Value" means:
a. in the case of stock, the highest closing sales price
of the stock during the 30-day period immediately
preceding the date in question of a share of such stock
on the National Association of Securities Dealers
Automated Quotation System or any system then in use,
or, if such stock is admitted to trading on a principal
United States securities exchange registered under the
Securities Exchange Act of 1934, as amended, Fair
Market Value shall be the highest sale price reported
during the 30-day period preceding the date in
question, or, if no such quotations are available, the
Fair Market Value on the date in question of a share of
such stock as determined by the Board of Directors in
good faith, in each case with respect to any class of
stock, appropriately adjusted for any dividend or
distribution in shares of such stock or any stock split
or reclassification of outstanding shares of such stock
into a greater number of shares of such stock or any
combination or reclassification of outstanding shares
of such stock into a smaller number of shares of such
stock; and
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<PAGE>
b. in the case of property other than cash or stock, the
Fair Market Value of such property on the date in
question as determined by the Board of Directors in
good faith.
8. Reference to "Highest Per Share Price" shall in each case
with respect to any class of stock reflect an appropriate
adjustment for any dividend or distribution in shares of
such stock or any stock split or reclassification of
outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification
of outstanding shares of such stock into a smaller number of
shares of such stock.
9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than
cash to be received" as used in Subparagraphs (a) and (b) of
Paragraph 2 of Section B of this Article EIGHTH shall
include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the
holders of such shares.
D. A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine for the purposes of this Article
EIGHTH, on the basis of information known to them after reasonable inquiry:
(a) whether a person is an Interested Stockholder; (b) the number of shares
of Voting Stock beneficially owned by any person; (c) whether a person is
an Affiliate or Associate of another; and (d) whether the assets which are
the subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation or
any Subsidiary in any Business Combination has an aggregate Fair Market
Value equaling or exceeding 25% of the combined Fair Market Value of the
Common Stock of the Corporation and its Subsidiaries. A majority of the
Disinterested Directors shall have the further power to interpret all of
the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
F. Notwithstanding any other provisions of these Articles of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the Voting Stock required by law, these
Articles of Incorporation or any Preferred Stock Designation, the
affirmative vote of the holders of at least 80 percent of the voting power
of all of the then-outstanding shares of the Voting Stock (after giving
effect to the provisions of Article FOURTH), voting together as a single
class, shall be required to alter, amend or repeal this Article EIGHTH.
15
<PAGE>
NINTH: The Board of Directors of the Corporation, when evaluating any
-----
offer of another Person (as defined in Article EIGHTH hereof) to: (A) make a
tender or exchange offer for any equity security of the Corporation; (B) merge
or consolidate the Corporation with another corporation or entity; or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, those factors that Directors of any subsidiary of the Corporation
may consider in evaluating any action that may result in a change or potential
change in the control of the subsidiary, and the social and economic effect of
acceptance of such offer: on the Corporation's present and future customers and
employees and those of its Subsidiaries (as defined in Article EIGHTH hereof);
on the communities in which the Corporation and its Subsidiaries operate or are
located; on the ability of the Corporation to fulfill its corporate objective as
a savings and loan holding company under applicable laws and regulations; and on
the ability of its subsidiary savings bank to fulfill the objectives of a stock
form savings bank under applicable statutes and regulations.
TENTH:
-----
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or
an Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Virginia Stock Corporation Act, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith; provided, however, that, except
as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however,
that, if the Virginia Stock Corporation Act requires, an
16
<PAGE>
advancement of expenses incurred by an indemnitee in his or her capacity as
a Director or Officer (and not in any other capacity in which service was
or is rendered by such indemnitee, including, without limitation, services
to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in
a suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the indemnitee has not met any applicable
standard for indemnification set forth in the Virginia Stock Corporation
Act. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Virginia Stock
Corporation Act, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders)
that the indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on
the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right
which any person may have
17
<PAGE>
or hereafter acquire under any statute, the Corporation's Articles of
Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the
Corporation or subsidiary or Affiliate or another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Virginia Stock
Corporation Act.
F. The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
--------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 13.1-692 of the Virginia Stock Corporation
Act; or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Virginia Stock Corporation Act is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Virginia Stock
Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
-------
provision contained in these Articles of Incorporation in the manner prescribed
by the laws of the Commonwealth of Virginia and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of these Articles of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by these Articles of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH
or Article TENTH.
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THIRTEENTH: The name and mailing address of the sole incorporator are as
----------
follows:
Name Mailing Address
---- --------------------------------
Samuel C. Harding, Jr. 400 George Street
P.O. Box 748
Fredericksburg, Virginia 22404
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the Commonwealth of Virginia, do make, file and
record these Articles of Incorporation and do certify that the facts herein
stated are true, and accordingly, have hereto set my hand this 4th day of
September, 1998.
/s/ Samuel C. Harding, Jr.
___________________________________
Samuel C. Harding, Jr.
Incorporator
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EXHIBIT 3.2
VIRGINIA CAPITAL BANCSHARES, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
--------- --------------
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
--------- ----------------
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of Directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
--------- ------------------
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Virginia Stock Corporation Act or the Articles of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
--------- ------
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Articles of Incorporation), shall constitute a quorum for
<PAGE>
all purposes, unless or except to the extent that the presence of a larger
number may be required by law. Where a separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person or
represented by proxy (after giving effect to the provisions of Article FOURTH of
the Corporation's Articles of Incorporation) shall constitute a quorum entitled
to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present in person or by proxy constituting a quorum, then except as otherwise
required by law, those present in person or by proxy at such adjourned meeting
shall constitute a quorum, and all matters shall be determined by a majority of
the votes cast at such meeting.
Section 5. Organization.
--------- ------------
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
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(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedures at the meeting, including such regulation
of the manner of voting and the conduct of discussion as seem to him or her in
order. The date and time of the opening and closing of the polls for each
matter upon which the stockholders will vote at the meeting shall be announced
at the meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting: (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than ninety (90) days prior to the date of the annual meeting; provided,
however, that in the event that less than one hundred (100) days' notice or
prior public disclosure of the date of the meeting is given or made to
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stockholders, notice by the stockholder to be timely must be received not later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. A stockholder's notice to the Secretary shall set forth as to each
matter such stockholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business; (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder; and
(iv) any material interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The Officer of the Corporation or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only: (i) by or at the direction of the Board of Directors; or (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); and (ii) as to the stockholder giving
the notice (x) the name and address, as they appear on the Corporation's books,
of such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request
of the Board of Directors, any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible
3
<PAGE>
for election as a Director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The Officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she shall so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
Section 7. Proxies and Voting.
--------- ------------------
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate
one or more persons as alternate inspectors to replace any inspector who fails
to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Articles of Incorporation, all other
matters shall be determined by a majority of the votes cast.
Section 8. Stock List.
--------- ----------
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
4
<PAGE>
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
--------- ------------------------------------------
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and Limitations.
--------- ------------------------------------------------------
The business and affairs of the Corporation shall be under the direction of
its Board of Directors. The number of Directors who shall constitute the Whole
Board shall be such number as the Board of Directors shall from time to time
have designated, except that in the absence of such designation shall be nine.
The Board of Directors shall annually elect a Chairman of the Board from among
its members who shall, when present, preside at its meetings.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, Directors elected to
succeed those Directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election, with each Director to hold office until his or her successor
shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
--------- -----------------------------------------
Subject to the rights of the holders of any class or series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which Directors are elected and until
such Director's successor shall have been duly elected and qualified. No
5
<PAGE>
decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent Director.
Section 3. Regular Meetings.
--------- ----------------
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
--------- ----------------
Special meetings of the Board of Directors may be called by one-third (1/3)
of the Directors then in office (rounded up to the nearest whole number), by the
Chairman of the Board or the President or, in the event that the Chairman of the
Board or President are incapacitated or otherwise unable to call such meeting,
by the Secretary, and shall be held at such place, on such date, and at such
time as they, or he or she, shall fix. Notice of the place, date, and time of
each such special meeting shall be given each Director by whom it is not waived
by mailing written notice not less than five (5) days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
--------- ------
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend
any meeting, a majority of those present may adjourn the meeting to another
place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
--------- -------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
-------------------
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
6
<PAGE>
Section 8. Powers.
--------- ------
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any Officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any Officer upon
any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for Directors, Officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(8) To adopt from time to time regulations, not inconsistent with
these Bylaws, for the management of the Corporation's business and affairs;
and
(9) To fix the Compensation of officers and employees of the
Corporation and its subsidiaries as it may determine.
Section 9. Compensation of Directors.
--------- -------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
7
<PAGE>
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
--------- ------------------------------------
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for these committees and any others provided for herein,
elect a Director or Directors to serve as the member or members, designating, if
it desires, other Directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so
designated may exercise the power and authority of the Board of Directors to
declare a dividend and to authorize the issuance of stock if the resolution
which designates the committee or a supplemental resolution of the Board of
Directors shall so provide. In the absence or disqualification of any member of
any committee and any alternate member in his or her place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
Section 2. Conduct of Business.
--------- -------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors which such quorum determined by a majority of the Board may be one-
third of such members and all matters considered by such committees shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
---------- --------------------
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of not less than three (3) members. The Nominating Committee shall
have authority: (a) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii)
of Article I of these Bylaws in order to determine compliance with such Bylaw;
and (b) to recommend to the Whole Board nominees for election to the Board of
Directors to replace those Directors whose terms expire at the annual meeting of
stockholders next ensuing.
8
<PAGE>
ARTICLE IV - OFFICERS
Section 1. Generally.
--------- ---------
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a Chairman of the Board, Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board shall be chosen from among the Directors. Any
number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen but
any Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall have
such powers and duties as generally pertain to their respective Offices, subject
to the specific provisions of this ARTICLE IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
--------- ----------------------------------
The Chairman of the Board, subject to the provisions of these Bylaws and to
the direction of the Board of Directors, when present shall preside at all
meetings of the stockholders of the Corporation. The Chairman of the Board
shall perform such duties designated to him by the Board of Directors and which
are delegated to him or her by the Board of Directors by resolution of the Board
of Directors.
Section 3. President and Chief Executive Officer.
--------- -------------------------------------
The President and Chief Executive Officer shall have general responsibility
for the management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of President and Chief Executive Officer or which are delegated to
him or her by the Board of Directors. Subject to the direction of the Board of
Directors, the President and Chief Executive Officer shall have power to sign
all stock certificates, contracts and other instruments of the Corporation which
are authorized and shall have general supervision of all of the other Officers
(other than the Chairman of the Board), employees and agents of the Corporation.
Section 4. Vice President.
---------- --------------
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the Vice
Presidents shall perform the duties and exercise
9
<PAGE>
the powers usually incident to their respective offices and/or such other duties
and powers as may be properly assigned to them by the Board of Directors, the
Chairman of the Board or the President. A Vice President or Vice Presidents may
be designated as Executive Vice President or Senior Vice President.
Section 5. Secretary.
--------- ---------
The Secretary or Assistant Secretary shall issue notices of meetings, shall
keep their minutes, shall have charge of the seal and the corporate books, shall
perform such other duties and exercise such other powers as are usually incident
to such office and/or such other duties and powers as are properly assigned
thereto by the Board of Directors, the Chairman of the Board or the President.
Subject to the direction of the Board of Directors, the Secretary shall have the
power to sign all stock certificates.
Section 6. Treasurer.
---------- ----------
The Treasurer shall be the Comptroller of the Corporation and shall have
the responsibility for maintaining the financial records of the Corporation. He
or she shall make such disbursements of the funds of the Corporation as are
authorized and shall render from time to time an account of all such
transactions and of the financial condition of the Corporation. The Treasurer
shall also perform such other duties as the Board of Directors may from time to
time prescribe. Subject to the direction of the Board of Directors, the
Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
--------- -----------------------------------------
The Board of Directors may appoint one or more Assistant Secretaries and
such other Officers who shall have such powers and shall perform such duties as
are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
---------- --------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
10
<PAGE>
ARTICLE V - STOCK
Section 1. Certificates of Stock.
--------- ---------------------
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board or the President, and by
the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
--------- ------------------
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
--------- -----------
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the next day preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
--------- --------------------------------------
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof
11
<PAGE>
of such loss, theft or destruction and concerning the giving of a satisfactory
bond or bonds of indemnity.
Section 5. Regulations.
--------- -----------
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
--------- -------
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
--------- -------
A written waiver of any notice, signed by a stockholder, Director, Officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, Director, Officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
--------- --------------------
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
--------- --------------
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
an assistant to the Treasurer.
12
<PAGE>
Section 3. Reliance Upon Books, Reports and Records.
--------- ----------------------------------------
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
--------- -----------
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
--------- ------------
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two (2) days prior to the meeting. The stockholders shall also have power
to amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Articles of Incorporation, any
Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these Bylaws.
The above Bylaws are effective as of September 4, 1998, the date of
incorporation of Virginia Capital Bancshares, Inc.
13
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
PAR VALUE $.01 SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
VIRGINIA CAPITAL BANCSHARES, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA
THIS CERTIFIES THAT
S P E C I M E N
is the owner of:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE OF
VIRGINIA CAPITAL BANCSHARES, INC.
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Articles of Incorporation of the Corporation and any amendments thereto (copies
of which are on file with the Transfer Agent), to all of which provisions the
holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. The shares represented by this Certificate are
not insured by the Federal Deposit Insurance Corporation or any other government
agency.
IN WITNESS THEREOF, Virginia Capital Bancshares, Inc. has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.
Dated: [SEAL]
President Secretary
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC.
The shares represented by this certificate are subject to a limitation
contained in the Articles of Incorporation to the effect that in no event shall
any record owner of any outstanding common stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
the outstanding shares of common stock (the "Limit") be entitled or permitted to
any vote in respect of shares held in excess of the Limit.
The Board of Directors of the Corporation is authorized by resolution(s),
from time to time adopted, to provide for the issuance of serial preferred stock
in series and to fix and state the voting powers, designations, preferences and
relative, participating, optional, or other special rights of the shares of each
such series and the qualifications, limitations and restrictions thereof. The
Corporation will furnish to any shareholder upon request and without charge a
full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively voted on
any matter. The affirmative vote of the holders of at least 80% of the voting
stock of the Corporation, voting together as a single class, shall be required
to approve certain business combinations and other transactions, pursuant to the
Articles of Incorporation or to amend certain provisions of the Articles of
Incorporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFTS MIN ACT - __________ custodian__________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
____________________
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _________________________________________________________ Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
DATED ________________________ ___________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED: __________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 5.1
DRAFT
September __, 1998
Board of Directors
Virginia Capital Bancshares, Inc.
400 George Street
Fredericksburg, Virginia 22404
Re: The offering of up to 13,965,600 shares of
Virginia Capital Bancshares, Inc. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Virginia law
in connection with the conversion of Fredericksburg Savings and Loan
Association, F.A. (the "Bank"), a federally-chartered savings and loan
association, from the mutual form of ownership to a federally-chartered capital
stock savings bank to be named Fredericksburg Savings Bank (the "Conversion"),
and the related subscription offering, community offering and syndicated
community offering (the "Offerings") by Virginia Capital Bancshares, Inc., a
Virginia corporation (the "Company"), of up to 12,144,000 shares of its common
stock, par value $.01 per share ("Common Stock"), (13,965,600 shares if the
Estimated Valuation Range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings) and the
issuance of 971,520 shares to Fredericksburg Savings Charitable Foundation (the
"Foundation"), a privately-owned charitable foundation formed by the Company,
(1,117,248 shares if the estimated value range is increased up to 15% to reflect
changes in market and financial conditions following commencement of the
Offerings).
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's articles of incorporation filed with the
State Corporation Commission of Virginia on September 4, 1998 (the "Articles of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
September 11, 1998 (the "Registration Statement"); a consent of the sole
incorporator of the Company; the gift instrument whereby shares will be granted
to the Foundation; the ESOP trust agreement and the ESOP loan agreement;
resolutions of the Board of Directors of the Company (the "Board") concerning
the organization of the Company, the Offerings and designation of a Pricing
Committee of the Board, and the form of stock certificate approved by the Board
to represent shares of Common Stock. We have also been furnished a certificate
of the State Corporation Commission of Virginia certifying the Company's good
standing as a Virginia corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Articles of Incorporation.
<PAGE>
Board of Directors
Virginia Capital Bancshares, Inc.
September __, 1998
Page 2
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Company; (d) the terms of the Loan will
be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Virginia law, it is our opinion that:
1. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP Trust) and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion will be duly
authorized and, when such shares are sold and paid for or granted (in the case
of the Foundation) in accordance with the terms set forth in the Prospectus and
such resolution of the Pricing Committee, and certificates representing such
shares in the form provided to us are duly and properly issued, will be validly
issued, fully paid and nonassessable.
The following provisions of the Articles of Incorporation may not be given
effect by a court applying Virginia law, but in our opinion the failure to give
effect to such provisions will not affect the duly authorized, validly issued,
fully paid and nonassessable status of the Common Stock:
1. (a) Subsections D.3 and D.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply
the provisions of those Articles, subsection D.4 of Article
FOURTH, to the extent that subsection obligates any person to
provide to the Board the information such subsection authorizes
the Board to demand, subsection D.1 of Article FOURTH, to the
extent that subsection limits the amount of shares of Common
Stock a stockholder may vote, and the provision of Subsection D.7
of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent,
<PAGE>
Board of Directors
Virginia Capital Bancshares, Inc.
September __, 1998
Page 3
if any, that a court applying Virginia law were to impose
equitable limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and the Form AC and to the use of the name of our firm
where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 8.1
DRAFT
________________, 1998
Board of Directors
Virginia Capital Bancshares, Inc.
408 George Street
Fredericksburg, Virginia 22401-5816
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
408 George Street
Fredericksburg, Virginia 22401-5816
Re: Certain Federal Tax Consequences of the Conversion of Fredericksburg
Savings and Loan Association, F.A. from a federally chartered Mutual
Savings and Loan Association to a federally chartered Stock Savings
Bank and the Offer and Sale of Common Stock of Virginia Capital
Bancshares, Inc. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax consequences of
the proposed conversion of Fredericksburg Savings and Loan Association, F.A.
(the "Association") from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank to be known as
Fredericksburg Savings Bank (the "Converted Bank") and the acquisition
of the Converted Bank's capital stock by Virginia Capital Bancshares, Inc., a
Virginia corporation (the "Holding Company"), pursuant to the plan of conversion
adopted by the Board of Directors on July 14, 1998 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
______________, 1998
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received certain standard representations of the Holding
Company and the Association concerning the Holding Company and the Association
as well as the transaction ("Representations"). These Representations are
required to be furnished prior to the execution of this letter and again prior
to the closing of the Conversion. We will rely upon the accuracy of the
Representations of the Holding Company and the Association and the statements of
facts contained in the examined documents, particularly the Plan of Conversion.
We have also assumed the authenticity of all signatures, the legal capacity of
all natural persons and the conformity to the originals of all documents
submitted to us as copies. Each capitalized term used herein, unless otherwise
defined, has the meaning set forth in the Plan of Conversion. We have assumed
that the Conversion will be consummated strictly in accordance with the terms of
the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided
by the Holding Company and the Association are incorporated in this letter as
part of the statement of the facts.
Fredericksburg Savings and Loan Association, F.A., with an administrative
office in Fredericksburg, Virginia, is a federally chartered mutual savings and
loan association. As a mutual savings and loan association, the Association has
never been authorized to issue stock. Instead, the proprietary interest in the
reserves and undivided profits of the Association belong to the deposit account
holders of the Association, hereinafter sometimes referred to as "depositors." A
depositor of the Association has a right to share, pro rata, with respect to the
withdrawal value of his respective deposit account in any liquidation proceeds
distributed in the event the Association is ever liquidated. In addition, a
depositor of the Association is entitled to interest on his account balance as
fixed and paid by the Association.
In order to provide organizational and economic strength to the
Association, the Board of Directors has adopted the Plan of Conversion whereby
the Association will convert itself into a federally chartered stock savings
bank (the "Converted Bank"), the stock of which will be held entirely by the
Holding Company. Assuming that the Holding Company form of organization is
utilized, the Holding Company will acquire the stock of the Converted Bank by
purchase, in exchange for the Conversion proceeds that are not permitted to be
retained by the Holding Company. The Holding Company will apply to the Office
of Thrift Supervision ("OTS") to retain up to 50% of the proceeds received from
the Conversion. The aggregate sales price of the Common Stock issued in the
Conversion will be based on an independent appraiser's valuation of the
estimated pro forma market value of the Common Stock of the Converted Bank. The
Conversion and sale of the Common Stock will be subject to approval by the OTS
and the approval of the Voting Members.
<PAGE>
Board of Directors
______________, 1998
Page 3
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Converted Bank shall establish
at the time of Conversion a liquidation account in an amount equal to its net
worth as of the latest practicable date prior to Conversion. The liquidation
account will be maintained by the Converted Bank for the benefit of the Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain their Savings Accounts at the Converted Bank. Each Eligible Account
Holder and Supplemental Eligible Account Holder shall, with respect to his
Savings Account, hold a related inchoate interest in a portion of the
liquidation account balance, in relation to his Savings Account balance on the
Eligibility Record Date and/or Supplemental Eligibility Record Date or to such
balance as it may be subsequently reduced, as provided in the Plan of
Conversion.
In the unlikely event of a complete liquidation of the Converted Bank (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the Converted
Bank's capital stock. No merger, consolidation, purchase of bulk assets with
assumption of Savings Accounts and other liabilities, or similar transaction
with an FDIC institution, in which the Converted Bank is not the surviving
institution, shall be deemed to be a complete liquidation for this purpose. In
such transactions, the liquidation account shall be assumed by the surviving
institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Converted Bank intend to establish a charitable foundation (the
"Foundation") that will qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and to
donate to the Foundation up to 8.0% of the number of shares of Common Stock sold
in the Conversion. The establishment and funding of the Foundation as part of
the Conversion is subject to the approval of the Voting Members of the Converted
Bank at the Special Meeting of Members. In the event that the Foundation does
not receive the prerequisite approval, the Association may determine to complete
the Conversion without the Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Converted
Bank's existing community reinvestment activities so as to allow the local
community to share in the growth and profitability of the Holding Company and
the Converted Bank over the long term.
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Converted Bank's Local Community, including, but
not limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-
<PAGE>
Board of Directors
______________, 1998
Page 4
for-profit community groups and other types of organizations or civic minded
projects. The Foundation will annually distribute total grants and donations to
assist charitable organizations or to fund projects within its local community
of not less than 5% of the average fair value of the Foundation assets each
year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity of
the Converted Bank) deemed to be surrendered in exchange therefor.
(b) If an individual's total deposits in the Association equal or exceed
$50 as of the Eligibility Record Date or the Supplemental Eligibility
Record Date, then no amount of that individual's total deposits will
be excluded from participating in the liquidation account. The fair
market value of the deposit accounts of the Association which have a
balance of less than $50 on the Eligibility Record Date or the
Supplemental Eligibility Record Date will be less than 1% of the total
fair market value of all deposit accounts of the Association.
(c) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Converted Bank will
own all of the outstanding interests in the liquidation account and
will own such interest solely by reason of their ownership of deposits
in the Association immediately before the Conversion.
(d) After the Conversion, the Converted Bank will continue the business of
the Association in the same manner as prior to the Conversion. The
Converted Bank has no plan or intention and the Holding Company has no
plan or intention to cause the Converted Bank to sell its assets other
than in the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in the
ordinary course of business.
<PAGE>
Board of Directors
______________, 1998
Page 5
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of the
Association immediately prior to the Conversion, plus the net proceeds
from the sale of the Converted Bank's common stock to the Holding
Company and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
Plans.
(h) The Association, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the Internal
Revenue Code.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Association in the Conversion will be
issued or acquired at a discount. However, shares may be given to
certain Directors and employees as compensation by means of the
Employee Plans. Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Association, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Association which will be
assumed by the Converted Bank and any liabilities to which the
transferred assets are subject.
(k) The Association is not under the jurisdiction of a bankruptcy or
similar court in any Title 11 or similar case within the meaning of
section 368(a)(3)(A) of the Internal Revenue Code.
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the
Conversion, the Association does not have any plan or intention to
issue additional shares of its stock following the transaction.
Further, no shares of preferred stock of the Converted Bank will be
issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital
<PAGE>
Board of Directors
______________, 1998
Page 6
stock of the Converted Bank, nor will there be any securities
outstanding which are convertible into the capital stock of the
Converted Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Association has utilized a reserve for bad debts in accordance
with section 593 and, following the Conversion, to the extent allowed
under the Code, the Converted Bank shall maintain a reserve for bad
debts in accordance with the applicable provisions of the Internal
Revenue Code.
(p) The Association currently satisfies the 60% "qualified assets" test of
section 7701(a)(19) of the Internal Revenue Code. Management expects
the Converted Bank to be able to continue to satisfy the test in the
future. The Converted Bank will also satisfy the "qualified thrift
lender" tests set out in sections 301 and 303 of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Association will each
pay expenses of the transaction attributable to them and will not pay
any expenses solely attributable to the depositors or to the Holding
Company shareholders.
(r) The exercise price of the subscription rights received by the
Association's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase Holding
Company Common Stock will be equal to the fair market value of the
stock of the Holding Company at the time of the completion of the
Conversion as determined by an independent appraisal.
(s) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Association arise solely
by virtue of the fact that they are account holders in the
Association.
(t) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
(u) The liabilities of the Association assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are subject
were incurred by the Association in the ordinary course of its
business and are associated with the assets transferred.
<PAGE>
Board of Directors
______________, 1998
Page 7
(v) The Association currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years. The Association has neither generated nor carried forward a
net operating loss for federal tax purposes in the past ten tax years.
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended, including applicable regulations
thereunder and current judicial and administrative authority. Any future
amendments to the Code or applicable regulations, or new judicial decisions or
administrative interpretations, any of which could be retroactive in effect,
could cause us to modify our opinion. No opinion is expressed herein with
regard to the federal, state, or city tax consequences of the Conversion under
any section of the Code except if and to the extent specifically addressed.
FEDERAL TAX OPINION
-------------------
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a depositor in
a mutual savings and loan association is more nominal than real,
unlike that of a shareholder of a corporation, the Conversion of the
Association from a mutual savings and loan association to a stock
savings bank is a tax-free reorganization since it is a mere change in
identity, form or place of organization within the meaning of section
368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B. 78).
Neither the Association nor the Converted Bank shall recognize gain or
loss as a result of the Conversion. The Association and the Converted
Bank shall each be "a party to a reorganization" within the meaning of
section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from the
Holding Company in exchange for shares of the Converted Bank's capital
stock or by the Holding Company upon the receipt of money from the
sale of its Common Stock (Section 1032(a) of the Code).
<PAGE>
Board of Directors
______________, 1998
Page 8
(3) The basis of the assets of the Association in the hands of the
Converted Bank shall be the same as the basis of such assets in the
hands of the Association immediately prior to the Conversion (Section
362(b) of the Code).
(4) The holding period of the assets of the Association in the hands of
the Converted Bank shall include the period during which the
Association held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Association on
the issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted Bank
in exchange for their deposit accounts in the Association or to the
other depositors on the issuance to them of withdrawable deposit
accounts (Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a)). Gain realized, if any, by the
Eligible Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other depositors of the Association will be the same as the basis
of their deposit accounts in the Association surrendered in exchange
therefor (Section 358(a)(1) of the Code). The basis of the interests
in the liquidation account of the Converted Bank to be received by the
Eligible Account Holders and Supplemental Eligible Account Holders of
the Association shall be zero (Rev. Rul. 71-233, 1971-1 C.B. 113). The
basis of the Holding Company Common Stock to its stockholders will be
the purchase price thereof plus the basis, if any, of nontransferable
subscription rights (Section 1012 of the Code). Accordingly, assuming
the nontransferable subscription rights have no value, the basis of
the Common Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The holding
period of the
<PAGE>
Board of Directors
______________, 1998
Page 9
Common Stock purchased pursuant to the exercise of subscription rights
shall commence on the date on which the right to acquire such stock
was exercised (Section 1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have a fair market value of zero. We understand that you have
received a letter from FinPro, Inc. that the subscription rights do not have any
value. We express no view regarding the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause
us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form AC
and Form S-1 Registration Statement of Virginia Capital Bancshares, Inc. and the
references to and summary of this opinion in such Form AC and Form S-1
Registration Statement.
Sincerely,
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 8.2
DRAFT
[LOGO APPEARS HERE]
September 10, 1998
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
Fredericksburg, Virginia
RE: HOLDING COMPANY FORMATION AND STOCK ISSUANCE
--------------------------------------------
Ladies and Gentlemen:
We have been requested to express our opinion concerning the Virginia
income tax consequences relating to the proposed conversion of Fredericksburg
Savings and Loan Association, F.A. (the "Bank") from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank
to be known as Fredericksburg Savings Bank, F.S.B. (the "Converted Bank"), and
the formation of a holding company to be known as Virginia Capital Bancshares,
Inc. (the "Holding Company"), which will acquire the outstanding stock of the
Converted Bank.
You have submitted to us a copy of the Federal income tax opinion ("Federal
Opinion") relating to the federal income tax consequences of the proposed
transaction prepared by your counsel, Muldoon, Murphy & Faucette of Washington,
D.C.
Our opinion regarding the Virginia income tax consequences of the proposed
transaction is based on the same facts and conditions contained in the Federal
Opinion dated September 10, 1998. It is also based on existing Virginia tax law
which is subject to change. We have not reviewed the legal documents necessary
to effectuate the steps to be undertaken, and we assume that all steps will be
properly effectuated under state and Federal law and will be consistent with the
legal documentation.
In our opinion, the Virginia income tax consequences of the proposed
transaction are the same as the federal income tax consequences of the proposed
transaction identified in the Federal Opinion.
The State of Virginia has adopted federal taxable income, as currently
amended, as the starting point for computing Virginia taxable income. Income tax
terms are defined in relation to the Internal Revenue Code of 1986, as amended
[Code of Virginia, Sec. 58.1-402(A)]. Taxpayers are required to use the same
taxable year and accounting methods as are used in computing federal taxable
income [Code of Virginia, Sec. 58.1-440(A)].
<PAGE>
Board of Directors
Fredericksburg Savings and Loan Association
September 10, 1998
Page 2
Several specific modifications to Federal taxable income are enumerated in
the Code of Virginia in determining taxable income for Virginia purposes;
however, there are no specific modifications which apply to the proposed
transaction.
Our opinion as expressed above is rendered only with respect to the
Virginia income tax consequences of the specific matters discussed herein, and
we express no opinion with respect to any other Virginia income tax matter or
any other Federal, state, local or foreign tax matter relating to the proposed
transaction. Our opinion is based on the facts and conditions as stated herein,
whether directly or by reference to the Federal Opinion. If any of the foregoing
is not entirely complete or accurate, it is imperative that we be informed
immediately, as the inaccuracy or incompleteness could have a material effect on
our conclusions. In rendering our opinion, we are relying upon the relevant
provisions of the Internal Revenue Code of 1986, as amended, and Code of
Virginia, as amended, the regulations and rules thereunder and judicial and
administrative interpretations thereof, which are subject to change or
modifications by subsequent legislative, regulatory, administrative, or judicial
decisions. Any such changes could also have an effect on the validity of our
opinion. We undertake no responsibility to update or supplement our opinion. Our
opinion is not binding on the Internal Revenue Service or the Virginia
Department of Revenue, nor can any assurance be given that any of the foregoing
parties will not take a contrary position or that our opinion will be upheld if
challenged by such parties.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Richmond, Virginia
<PAGE>
EXHIBIT 10.1
TRUST AGREEMENT
BETWEEN
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
AND
____________________________________
FOR THE
FREDERICKSBURG SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP TRUST
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Section 1 Creation of Trust 1
Section 2 Investment of Trust Fund and
Administrative Powers of the
Trustee 2
Section 3 Compensation and Indemnification
of Trustee and Payment of Expenses
and Taxes 7
Section 4 Records and Valuation 8
Section 5 Instructions from Committee 9
Section 6 Change of Trustees 10
Section 7 Miscellaneous 11
</TABLE>
<PAGE>
This TRUST AGREEMENT dated______________, 199_, BETWEEN Fredericksburg
Savings and Loan Association, F.A. a federally-chartered savings and loan
association with its principal office at 400 George Street, Fredericksburg,
Virginia 22404 (hereinafter called the "Company"), AND___________________,
with offices at _________________________________ (hereinafter called the
"Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, effective January 1, 199__, the Company approved and adopted an
employee stock ownership plan for the benefit of its employees, Fredericksburg
Savings Bank Employee Stock Ownership Plan, (hereinafter called the "Plan"); and
WHEREAS, the Company has authorized the execution of this Trust Agreement
and has appointed___________________ as Trustee of the Trust Fund created
pursuant to the Plan; and
WHEREAS, ______________________ has agreed to act as trustee and to hold
and administer the assets of the Plan in accordance with the terms of this Trust
Agreement;
NOW, THEREFORE, the Company and the Trustee agree as follows:
Section 1. Creation of Trust.
------------------
1.1 Trustee. _______________________ shall be trustee of the Trust Fund
-------
created in accordance with and in furtherance of the Plan, and shall serve as
Trustee until its removal or resignation in accordance with Section 6.
1.2 Trust Fund. The Trustee hereby agrees to accept contributions from
-----------
the Employer as defined in the Plan and amounts transferred from other qualified
retirement plans from time to time in accordance with the terms of the Plan.
All such property and contributions, together with income thereon and increments
thereto, shall constitute the "Trust Fund" to be held in accordance with the
terms of the Trust Agreement.
1.3 Incorporation of Plan. An instrument entitled " Fredericksburg
----------------------
Savings Bank Employee Stock Ownership Plan" is incorporated herein by reference,
and this Trust Agreement shall be interpreted consistently with that Plan. All
words and phrases defined in that Plan shall have the same meaning when used in
this Trust Agreement.
1.4 Name. The name of this trust shall be "Fredericksburg Savings Bank
-----
Employee Stock Ownership Trust."
1.5 Nondiversion of Assets. In no event shall any part of the corpus or
-----------------------
income of the Trust Fund be used for, or diverted to, purposes other than for
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan, except
-1-
<PAGE>
to the extent that assets may be returned to the Employer in accordance with the
Plan where the Plan fails to qualify initially under Section 401(a) of the Code,
or where they are attributable to contributions made by mistake of fact or
conditioned upon their deductibility.
Section 2. Investment of Trust Fund and Administrative Powers of the
---------------------------------------------------------
Trustee.
- --------
2.1 Stock and Other Investments. The basic investment policy of the Plan
----------------------------
shall be to invest primarily in Stock of the Employer for the exclusive benefit
of the Participants and their Beneficiaries. The Committee shall have full and
complete investment authority and responsibility with respect to the purchase,
retention, sale, exchange, and pledge of Stock and the payment of Acquisition
Loans, and the Trustee shall not deal in any way with Stock except in accordance
with the written instructions of the Committee. The Trustee shall invest, or
keep invested, all or a portion of the Trust Fund in Stock, and shall pay
Acquisition Loans out of assets of the Trust Fund, as instructed from time to
time by the Committee. The Trustee shall invest any balance of the Trust Fund
(the "Investment Fund") in such other property as the Committee, in its sole
discretion, shall deem advisable, subject to any delegation of such investment
responsibility pursuant to Section 2.2. Nothing contained herein shall provide
investment discretion authority or any like kind responsibility in regard to the
assets of the Trust Fund.
In connection with instructions to acquire Stock, the Trustee may purchase
newly issued or outstanding Stock from an Employer or any other holders of
Stock, including Participants, Beneficiaries, and Plan fiduciaries. All
purchases and sales of Stock shall be made by the Trustee at fair market value
as determined by the Committee in good faith and in accordance with any
applicable requirement under ERISA. Such purchases may be made with assets of
the Trust Fund, with funds borrowed for this purpose (with or without guarantees
of repayment to the lender by an Employer), or by any combination of the
foregoing.
Notwithstanding any other provision of this Trust Agreement or the Plan,
neither the Committee nor Trustee shall make any purchase, sale, exchange,
investment, pledge, valuation, or loan, or take any other action involving those
assets for which it is responsible which (i) is inconsistent with the policy of
the Plan and Trust, (ii) is inconsistent with the prudence and diversification
requirements set forth in Sections 404(a)(1)(B) and (C) of ERISA (to the extent
such requirements apply to an employee stock ownership plan and trust), (iii) is
prohibited by Section 406 or 407 of ERISA, or (iv) would impair the
qualification of the Plan or the exemption of the Trust under Sections 401 and
501 of the Code.
2.2 Delegation of Investment Responsibility. The Committee may, by
----------------------------------------
written notice, direct the Trustee to segregate any portion or all of the
Investment Fund into one or more separate accounts for each of which full
investment responsibility will be delegated to an investment manager appointed
in such notice pursuant to Section 402(c)(3) of ERISA (hereinafter a "Manager").
For any separate account where the Trustee is to maintain custody of the assets,
the Trustee and the Manager shall agree upon procedures for the transmittal of
-2-
<PAGE>
investment instructions from the Manager to the Trustee, and the Trustee may
provide the Manager with such documents as may be necessary to authorize the
Manager to effect transactions directly on behalf of the segregated account.
Further, the Committee may, by written notice, direct the Trustee to
segregate any portion or all of the Investment Fund into one or more separate
accounts for each of which full investment responsibility will be delegated to
an insurance company through one or more group annuity contracts, deposit
administration contracts, or similar contracts, which may provide for
investments in any commingled separate accounts established under such
contracts. An insurance company shall be a Manager with respect to any amounts
held under such a contract except to the extent the insurer's assets are not
deemed assets of the Plan and Trust Fund pursuant to Section 401(b)(2) of ERISA.
The allocation of amounts held under such a contract among the insurer's general
account and one or more individual or commingled separate accounts shall be
determined by the Company except as otherwise agreed by the Company and the
insurer.
Any Manager shall have all of the powers given to the Trustee pursuant to
Section 2.3 with respect to the portion of the Trust Fund committed to its
investment discretion and control. The Trustee shall be responsible for the
safekeeping of any assets which remain in its custody, but in no event shall the
Trustee be under any duty to question or make any inquiry or suggestion
regarding the action or inaction of a Manager or an insurer or the advisability
of acquiring, retaining, or disposing of any asset of a segregated account. The
Employer shall indemnify and hold the Trustee harmless from any and all costs,
damages, expenses, and liabilities which the Trustee may incur by reason of any
action taken or omitted to be taken by the Trustee upon directions from the
Committee, a Manager, or an insurer pursuant to this Section 2.2.
2.3 Trustee Powers. In addition to and not by way of limitation upon the
---------------
fiduciary powers granted to it by law, the Trustee shall have the following
specific powers, subject to the limitations set forth in Section 2.1:
2.3-1 to receive, hold, manage, invest and reinvest the money or other
property which constitutes the Trust Fund, without distinction between principal
and income;
2.3-2 to hold funds uninvested temporarily without liability for interest
thereon, and to deposit funds in one or more savings or similar accounts with
any banks and savings and loan associations which are insured by an
instrumentality of the federal government, including the Trustee if it is such
an institution.
2.3-3 at the direction of the Committee, to invest or reinvest the whole
or any portion of the money or other property which constitutes the Trust Fund
in such common or preferred stocks, investment trust shares, mutual funds,
commingled trust funds, partnership interests, bonds, notes, or other evidences
of indebtedness, and real and personal property as the Trustee in its absolute
judgment and discretion may deem to be for the best interests of the Trust Fund,
regardless of nondiversification to the extent that such nondiversification is
clearly prudent, and
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<PAGE>
regardless of whether any such investment or property is authorized by law
regarding the investment of trust funds, of a wasting asset nature, temporarily
nonincome producing, or within or without the United States;
2.3-4 to invest in common and preferred stocks, bonds, notes, or other
obligations of any corporation or business enterprise in which an Employer or
its owners may own an interest;
2.3-5 at the direction of the Committee, to exchange any investment or
property, real or personal, for other investments or properties at such time and
upon such terms as the Trustee shall deem proper;
2.3-6 at the direction of the Committee, to sell, transfer, convey or
otherwise dispose of any investment or property, real or personal, for cash or
on credit, in such manner and upon such terms and conditions as the Trustee
shall deem advisable, and no person dealing with the Trustee shall be under any
duty to inquire as to the validity, expediency, or propriety of any such sale or
as to the application of the purchase money paid to the Trustee;
2.3-7 to hold any investment or property in the name of the Trustee, with
or without the designation of any fiduciary capacity, or in name of a nominee,
or unregistered, or in such other form that title may pass by delivery;
provided, however, that the Trustee's records always show that such investment
or property belongs to the Trust Fund and the Trustee shall not be relieved
hereby of its responsibility to maintain safe custody of the Trust Fund;
2.3-8 to organize one or more corporations to hold, manage, or liquidate
any property, including real estate, owned or acquired by the Trust Fund if in
the sole discretion of the Trustee the organization of such corporation or
corporations is for the best interest of the Trust;
2.3-9 to extend the time for payment of, to modify, to renew, or to
release security from any mortgage, note or other evidence of indebtedness, or
to take advantage of or waive any default; to foreclose mortgages and bid in
property under foreclosure or to take title to property by conveyance in lieu of
foreclosure, either with or without the payment of additional consideration;
2.3-10 to vote in person or by proxy all stocks and other securities
having voting privileges; to exercise or refrain from exercising any option or
privilege with respect to stocks and other securities, including any right or
privilege to subscribe for or otherwise to acquire stocks and other securities;
or to sell any such right or privilege; to assent to and join in any plan of
refinance, merger, consolidation, reorganization or liquidation of any
corporation or other enterprise in which this Trust may have an interest, to
deposit stocks and other securities with any committee formed to effectuate the
same, to pay any expense incidental thereto, to exchange stocks and other
securities for those which may be issued pursuant to any such plan, and to
retain as an investment the stocks and other securities received by the Trustee;
and to deposit any investment in a voting trust; notwithstanding the preceding,
participants and beneficiaries shall
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<PAGE>
be entitled to direct the manner in which stock allocated to their respective
accounts are to be voted on all matters. All stock which has been allocated to
participant's accounts for which the Trustee has received no written direction
and all unallocated Employer securities will be voted by the Trustee in direct
proportion to any participant directions received and solely in the interest of
the participants and beneficiaries. Whenever such voting rights are to be
exercised, the Employer, the Committee and the Trustee shall see that all
participants and beneficiaries are provided with adequate opportunity to deliver
their instructions to the Trustee regarding voting of stock allocated to their
accounts. The instructions of the participants with respect to the voting of
allocated shares hereunder shall be confidential;
2.3-11 to abandon any property, real or personal, which the Trustee shall
consider to be worthless or not of sufficient value to warrant its keeping or
protecting; to abstain from the payment of taxes, water rents, assessments,
repairs, maintenance, and upkeep of any such property; to permit any such
property to be lost by tax sale or other proceedings, and to convey any such
property for a nominal consideration or without consideration;
2.3-12 to borrow money from an Employer or from others (including the
Trustee), and to enter into installment contracts, for the purchase of Stock
upon such terms and conditions and at such reasonable rates of interest as the
Committee may deem to be advisable, to issue its promissory notes as Trustee to
evidence such debt, to secure the payment of such notes by pledging any property
of the Trust Fund, and to authorize the holders of any such notes to pledge them
to secure obligations of the holders and in connection therewith to repledge any
assets of the Trust as security therefor; provided that, with respect to any
extension of credit to the Trust involving, as a lender or guarantor, an
Employer or another "disqualified person" within the meaning of Section
4975(e)(2) of the Code --
(a) each loan or installment contract is primarily for the benefit of
Participants and Beneficiaries of the Plan;
(b) any interest on a loan or installment contract does not exceed a
reasonable rate;
(c) the proceeds of any loan shall be used only to acquire Stock, to
repay the loan, or to repay a previous loan meeting these
conditions, and the subject of any installment contract shall be
only the Trust's purchase of Stock;
(d) any collateral pledged to a creditor by the Trustee shall consist
only of the assets purchased with borrowed funds or received in
accordance with an installment contract and the creditor shall have
no recourse against the Trust Fund except with respect to the
collateral (although the creditor may have recourse against an
Employer as guarantor);
(e) payments with respect to a loan or installment contract shall be
made only from those amounts contributed by the Employer to the
Trust Fund, from amounts earned on such contributions, and from
cash dividends received on unallocated Stock held by the Trust as
collateral for such an obligation; and
(f) upon the payment of any portion of balance due on a loan or upon
any installment payment, a proportionate part of any assets
originally pledged as collateral for
-5-
<PAGE>
such indebtedness shall be released from encumbrance in accordance
with the applicable provisions of the Plan and the Committee shall
at least annually advise the Trustee of the number of shares of
Stock so released and the proper allocation of such shares under
the terms of the Plan;
2.3-13 to manage and operate any real property which shall at any time
constitute an asset of the Trust Fund; to make repairs, alterations, and
improvements thereto; to insure such property against loss by fire or other
casualty; to lease or grant options for the sale of such property, which lease
or option may be for a period of time which may extend beyond the life of this
Trust; and to take any other action or enter into any other contract respecting
such property which is consistent with the best interests of the Trust;
2.3-14 to pay any and all reasonable and normal expenses incurred in
connection with the exercise of any power, right, authority or discretion
granted herein, and, upon prior notice to the Company, to employ and compensate
agents, investment counsel, custodians, actuaries, attorneys, and accountants in
such connection;
2.3-15 to employ and consult with any legal counsel, who also may be
counsel to an Employer or the Administrator, with respect to the meaning or
construction of this Trust Agreement, the extent of the Trustee's obligations
and duties hereunder, and whether the Trustee should take or decline to take a
particular action hereunder, and the Trustee shall be fully protected with
respect to any action taken or omitted by it in good faith pursuant to such
advice;
2.3-16 to defend any action or proceeding instituted against the Trust
Fund, to institute any action on behalf of the Trust Fund, and to compromise or
submit to arbitration any dispute concerning the Trust Fund;
2.3-17 to make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted;
2.3-18 to commingle the Trust Fund created pursuant hereto, in whole or in
part, in a single trust with all or any portion of any other trust fund,
assigning an undivided interest to each such commingled trust fund, provided
that such commingled trust is itself exempt from taxation pursuant to Section
501(a) of the Code, or its successor Section; and provided further that the
trust agreement governing such commingled trust shall be deemed incorporated by
reference in the Plan;
2.3-19 where two or more trusts governed by this Trust Agreement have an
undivided interest in any property, to credit the income from such property to
such trusts in proportion to their undivided interests, and when non pro rata
distributions of property or money are made from such trusts, to make
appropriate adjustments to the undivided fractional interests of such trusts;
-6-
<PAGE>
2.3-20 to invest all or any portion of the Trust Fund in one or more group
annuity contracts, deposit administration contracts, and other such contracts
with insurance companies, including any commingled separate accounts established
under such contracts;
2.3-21 generally, with respect to all cash, stocks and other securities,
and property, both real and personal, received or held in the Trust Fund by the
Trustee, to exercise all the same rights and powers as are or may be lawfully
exercised by persons owning cash, or stocks and other securities, or such
property in their own right; and to do all other acts, whether or not expressly
authorized, which it may deem necessary or proper for the protection of the
Trust Fund; and
2.3-22 whenever more than two persons shall qualify to act as co-trustees,
to exercise and perform every power (including discretionary powers), authority
or duty by the concurrence of a majority of them the same effect as if all had
joined therein, except that the unanimous vote of such persons shall be
necessary to determine the number (one or more) and identity of persons who may
sign checks, make withdrawals from financial institutions, have access to safe
deposit boxes, or direct the sale of trust assets and the disposition of the
proceeds.
2.4 Brokerage. If permitted in writing by the Committee, the Trustee
----------
shall have the power and authority to be exercised in its sole discretion at any
time and from time to time to issue and place orders for the purchase or sale of
securities with qualified brokers and dealers. Such orders may be placed with
such qualified brokers and/or dealers who also provide investment information or
other research or statistical services to the Trustee in its capacity as a
fiduciary or investment manager for other clients.
Section 3. Compensation and Indemnification of Trustee and Payment of
----------------------------------------------------------
Expenses and Taxes.
- -------------------
3.1 Fees and Expenses from Fund. Compensation of Trustee. In
---------------------------
consideration for rendering services pursuant to this Trust Agreement the
Trustee shall be paid fees in accordance with the Trustee's fee schedule as in
effect from time to time. Fee changes resulting in fee increases shall be
effective upon not less than 30 days' notice to the Company. In addition, the
Trustee shall be reimbursed for any reasonable expenses, including reasonable
attorneys' fees, incurred in the administration of the Trust created hereby.
Fees and expenses shall be allocated to Participant Accounts, if any, unless
paid directly by the Employer. All compensation and expenses of the Trustee
shall be paid out of the Trust Fund or by the Employer as specified in the Plan.
If and to the extent the Trust Fund shall not be sufficient, such compensation
and expenses shall be paid by the Employer upon demand. If payment is due but
not paid by the Employer, such amount shall be paid from the assets of the Trust
Fund. The Trustee is hereby empowered to withdraw all such compensation and
expenses which are 60 days past due from the Trust Fund, and, in furtherance
thereof, liquidate any assets of the Trust Fund, without further authorization
or direction from or by any person.
-7-
<PAGE>
3.2 Indemnification. Notwithstanding any other provision of this Trust
----------------
Agreement, any individual designated as a trustee hereunder shall be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
individual in connection with any claim made against him or in which he may be
involved by reason of his being, or having been, a trustee hereunder, to the
extent such amounts are not satisfied by insurance maintained by the Employer,
except liability which is adjudicated to have resulted from the gross negligence
or willful misconduct of the Trustee by reason of any action so taken. Further,
any corporate trustee and its officers, directors and agents may be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
persons and/or corporation in connection with any claim made against it or them
or in which it or them may be involved by reason of its being, or having been, a
trustee hereunder as may be agreed between the Employer and such trustee, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.
3.3 Expenses. All expenses of administering this Trust and the Plan,
---------
whether incurred by the Trustee or the Committee, shall be paid by the Trustee
from the Trust Fund to the extent such expenses shall not have been assumed by
the Employer.
3.4 Taxes. All taxes that may be levied or assessed upon or in respect of
------
the Trust Fund shall be paid from the Trust Fund. The Trustee shall notify the
Committee of any proposed or final assessments of taxes and may assume that any
such taxes are lawfully levied or assessed unless the Committee advises it in
writing to the contrary within fifteen days after receiving the above notice
from the Trustee. In such case, the Trustee, if requested by the Committee in
writing, shall contest the validity of such taxes in any manner deemed
appropriate by the Committee; the Employer may itself contest the validity of
any such taxes, in which case the Committee shall so notify the Trustee and the
Trustee shall have no responsibility or liability respecting such contest. If
either party to this Agreement contests any such proposed levy or assessments,
the other party shall provide such information and cooperation as the party
conducting the contest shall reasonably request.
Section 4. Records and Valuation.
----------------------
4.1 Records. The Trustee, and any investment manager appointed pursuant
--------
to Section 2.2, shall maintain accurate and detailed records and accounts of all
investments, receipts, disbursements and other transactions made by it with
respect to the Trust Fund, and all accounts, books and records relating thereto
shall be open at all reasonable time to inspection and audit by the Committee
and the Employer.
4.2 Valuation. From time to time upon the request of the Committee, but
----------
at least annually as of the last day of each Plan Year, the Trustee shall
prepare a balance sheet of the
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<PAGE>
Investment Fund in accordance with Section 8.2 of the Plan and shall deliver
copies of the balance sheet to the Committee and the Employer.
4.3 Discharge of Trustee. Ninety days after the filing of any balance
---------------------
sheet under Section 4.2 or any accounting under Section 6, the Trustee shall be
forever released and discharged from any liability or accountability other than
for gross negligence or wilful misconduct on the part of the Trustee to anyone
with respect to the transactions shown or reflected in such balance sheet or
accounting, except with respect to any acts or transactions as to which the
Committee, within such ninety-day period, files written objections with the
Trustee. The written approval of the Committee of any balance sheet or
accounting so filed by the Trustee, or the Committee's failure to file written
objections within ninety days, shall be a settlement of such balance sheet or
accounting as against all persons, and shall forever release and discharge the
Trustee from any liability of accountability to anyone with respect to the
transactions shown or reflected in such balance sheet or accounting other than
liability arising out of the Trustee's gross negligence or wilful misconduct. If
a statement of objections is filed by the Committee and the Committee is
satisfied that its objections should be withdrawn or if the balance sheet or
accounting is adjusted to its satisfaction, the Committee shall indicate its
approval of the balance sheet or accounting in a written statement filed with
the Trustee and the Trustee shall be forever released and discharged from any
liability of accountability to anyone in accordance with the immediately
preceding sentence. If an objection is not settled by the Committee and the
Trustee, the Trustee may start a proceeding for a judicial settlement of the
balance sheet or accounting in any court of competent jurisdictions; the only
parties that need be joined in such a proceeding are the Trustee, the Committee,
the Employer and any other parties whose participation is required by law.
4.4 Right to Judicial Settlement. Nothing in this Agreement shall prevent
-----------------------------
the Trustee from having its account settled by a court of competent jurisdiction
at any time. The only parties that need be joined in any such proceeding are the
Employer, the Committee, the Trustee and any other parties whose participation
is required by law.
Section 5. Instructions from Committee.
----------------------------
5.1 Certification of Members and Employees. From time to time the Company
---------------------------------------
shall certify to the Trustee in writing the names of the individuals comprising
the Committee and shall furnish to the Trustee specimens of their signatures and
the signatures of their agents, if any. The Trustee shall be entitled to presume
that the identities of such individuals and their agents are unchanged until it
receives a certification from the Company notifying it of any changes.
5.2 Instructions to Trustee.
------------------------
(a) The Trustee shall pay benefits and administrative expenses under the
Plan only when it receives (and in accordance with) written instructions of the
Committee indicating the amount of the payment and the name and address of the
recipient in accordance with the terms of the Plan. The Trustee need not inquire
into whether any payment the Committee instructs it to make
-9-
<PAGE>
is consistent with the terms of the Plan or applicable law or otherwise proper.
Any payment made by the Trustee in accordance with such instructions shall be a
complete discharge and acquittance to the Trustee. If the Committee advises the
Trustee that benefits have become payable with respect to a Participant's
interest in the Trust Fund but does not instruct the Trustee as to the manner of
payment, the Trustee shall hold the Participant's interest in the Trust until it
receives written instructions from the Committee as to the manner of payment.
The Trustee shall not pay benefits from the Trust Fund without such
instructions, even though it may be informed from other sources, including,
without limitation, a Participant or Beneficiary, that benefits are payable
under the Plan. The Trustee shall have no responsibility to determine when, to
whom or in what amount benefits and expenses are payable under the Plan.
Further, the Trustee shall have no power, authority or duty to interpret the
Plan or inquire into the decisions or determinations of the Committee, or to
question the instructions given to it by the Committee. If the Committee so
directs, the Trustee shall segregate amounts payable with respect to the
interest in the Plan of any Participant and administer them separately from the
rest of the Trust Fund in accordance with the Committee's instructions.
(b) The Trustee may require the Committee to certify in writing that any
payment of benefits or expenses it instructs the Trustee to make pursuant to
Section 5.2(a) above is: (i) in accordance with the terms of the Plan and/or
(ii) one which the Committee is authorized by the Plan and any other applicable
instruments to direct and/or (iii) made for the exclusive purpose of providing
benefits to Participants and Beneficiaries, or defraying reasonable expenses of
Plan administration and/or (iv) not made to a party in interest (within the
meaning of ERISA Section 3(14)), and/or (v) not a prohibited transaction (within
the meaning of Code Section 4975 and ERISA Section 406). If the Trustee
requests, instructions to pay benefits shall be made by the Committee on forms
prepared by the Trustee to include any or all of the above representations. The
Trustee shall be fully protected in relying on the truth of any such
representation by the Committee and shall have no duty to investigate whether
such representations are correct or to see to the application of any amounts
paid to and received by the recipient.
5.3 Plan Change. In the event of an amendment, merger, division, or
------------
termination of the Plan, the Trustee shall continue to disburse funds and to
take other proper actions in accordance with the instructions of the Committee.
Section 6. Change of Trustees.
-------------------
The Company may at any time remove any person or entity serving as a
trustee hereunder by giving to such person or entity written notice of removal
and, if applicable, the name and address of the successor trustee. Any person or
entity serving as a trustee hereunder may resign at any time by giving written
notice to the Company. Any such removal or resignation shall take effect within
30 days after notice has been given by the trustee or by the Company, as the
case may be. Within those 30 days, the removed or resigned trustee shall
transfer, pay over and deliver any portion of the Trust Fund in its possession
or control (less an appropriate reserve for any unpaid fees, expenses, and
liabilities) and all pertinent records to the successor or remaining
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<PAGE>
trustee; provided, however, that any assets which are invested in a collective
fund or in some other manner which prevents their immediate transfer shall be
transferred and delivered to the successor trustee as soon as may be
practicable. Thereafter, the removed or resigned trustee shall have no liability
for the Trust Fund or for its administration by the successor or remaining
trustee, but shall render an accounting to the Committee of its administration
of the Trust Fund to the date on which its trusteeship shall have been
terminated. The Company may also, upon 30 days' notice to each person currently
serving as a trustee, appoint one or more persons to serve as co-trustees
hereunder.
Section 7. Miscellaneous.
--------------
7.1 Right to Amend. This Trust Agreement may be amended from time to time
---------------
by an instrument executed by the Company; provided, however, that any amendment
affecting the powers, duties or liabilities of the Trustee must be approved by
the Trustee, and provided, further, that no amendment may divert any portion of
the Trust Fund to purposes other than the exclusive benefit of the Participants
and their Beneficiaries prior to the satisfaction of all liabilities for
benefits. Any amendment shall apply to the Trust Fund as constituted at the time
of the amendment as well as to that portion of the Trust Fund which is
subsequently acquired.
7.2 Compliance with ERISA. In the exercise of its powers and the
----------------------
performance of its duties, the Trustee shall act in good faith and in accordance
with the applicable requirements under ERISA. Except as may be otherwise
required by ERISA, the Trustee shall not be required to furnish any bond in any
jurisdiction for the performance of its duties and, if a bond is required
despite this provision, no surety shall be required on it.
7.3 Nonresponsibility for Funding. The Trustee shall be under no duty to
------------------------------
enforce the payment of any contributions and shall not be responsible for the
adequacy of the Trust Fund to satisfy any obligations for benefits, expenses,
and liabilities under the Plan.
7.4 Reports. The Trustee shall file any report which it is required by
--------
law to file with any governmental authority with respect to this Trust, and the
Committee shall furnish to the Trustee whatever information is necessary to
prepare the report.
7.5 Dealings with Trustee. Persons dealing with the Trustee, including
----------------------
but not limited to banks, brokers, dealers, and insurers, shall be under no
obligation to inquire concerning the validity of anything which the Trustee
purports to do, nor need any person see to the proper application of any money
paid or any property transferred upon the order of the Trustee or to inquire
into the Trustee's authority as to any transaction.
7.6 Limitation Upon Responsibilities. The Trustee shall have no
---------------------------------
responsibilities with respect to the Plan or Trust other than those specifically
enumerated or explicitly allocated to it under this Trust Agreement or the
provisions of ERISA. All other responsibilities are retained
-11-
<PAGE>
and shall be performed by one or more of the Employer, the Committee, and such
advisors or agents as they choose to engage.
The Trustee may execute any of the trusts or powers hereof and perform any
of its duties by or through attorneys, agents, receivers or employees and shall
not be answerable for the conduct of the same if chosen with reasonable care and
shall be entitled to advice of counsel concerning all matters of trust hereof
and the duties hereunder, and may in all cases pay such reasonable compensation
to all such attorneys, agents, receivers and employees as may reasonably be
employed in connection with the trusts hereof. The Trustee may act upon the
opinion or advice of any attorney (who may be the attorney for the trustee or
attorney for the Committee), approved by the Trustee in the exercise of
reasonable care. The Trustee shall not be responsible for any loss or damage
resulting from any action or non-action in good faith in reliance upon such
opinion or advice.
The Trustee shall be protected in acting upon any notice, request, consent,
certificate, order, affidavit, letter, telegram or other paper or document
believed to be genuine and correct and to have been signed or sent by the proper
person or persons, and the Trustee shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing but
may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained.
The Trustee shall not be liable for other than its gross negligence or
willful misconduct. Except in the case of gross negligence or wilful misconduct
on the part of the Trustee, the Trustee in its corporate capacity shall not be
liable for claims of any persons in any manner regarding the Plan; such claims
shall be limited to the Trust Fund. Unless the Trustee participates knowingly
in, or knowingly undertakes to conceal, an act or omission of the Committee or
any other fiduciary, knowing such act or omission to be a breach of fiduciary
responsibility, the Trustee shall be under no liability for any loss of any kind
which may result by reason of such act or omission.
Before taking any action hereunder at the request or direction of the
Committee, the Trustee may require that indemnity in form and amount
satisfactory to the Trustee be furnished for the reimbursement of any and all
costs and expenses to which it may be put including, without limitation,
reasonable attorneys' fees and to protect it against all liability, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.
No provision of this Agreement shall require the Trustee to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or powers.
7.7 Qualification of Plan and Trust. The Trustee shall be fully protected
--------------------------------
in assuming that the Plan and Trust meet the requirements of Code Section 401
and 501, respectively, and all the
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<PAGE>
applicable provisions of ERISA unless it is advised to the contrary in writing
by the Committee or a governmental agency.
7.8 Party in Interest Information. The Employer shall provide the Trustee
------------------------------
with such information concerning the relationship between any person or
organization and the Plan as the Trustee reasonably requests in order to
determine whether such person or organization is a party in interest with
respect to the Plan within the meaning of ERISA Section 3(14).
7.9 Disputes. If a dispute arises as to the payment of any funds or
---------
delivery of any assets by the Trustee, the Trustee may withhold such payment or
delivery until the dispute is determined by a court of competent jurisdiction or
finally settled in writing by the parties concerned.
7.10 Successor Trustees. This Trust Agreement shall apply to any person
-------------------
who shall be appointed to succeed the person currently appointed as the Trustee;
and any reference herein to the Trustee shall be deemed to include any one or
more individuals or corporations or any combination thereof who or which shall
at any time act as a co-trustee or as the sole trustee.
7.11 Governing State Law. This Trust Agreement shall be interpreted in
--------------------
accordance with the laws of the Commonwealth of Virginia to the extent those
laws may be applicable under the provisions of ERISA.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ATTEST: FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
_________________________ By: ___________________________
Corporate Secretary Samuel J. Harding, Jr.
President
ATTEST: ______________________
as TRUSTEE
_________________________ By: ___________________________
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<PAGE>
Exhibit 10.2
[VIRGINIA CAPITAL BANCSHARES, INC. LETTERHEAD]
Mr. Samuel J. Harding. Jr.
Fredericksburg Savings and Loan Association, F.A.
400 George Street
Fredericksburg, Virginia 22404
Dear Mr. Harding:
This letter confirms Virginia Capital Bancshares, Inc.'s commitment to fund
a leveraged ESOP in an amount up to $________________. The commitment is
subject to the following terms and conditions:
1. Lender: Virginia Capital Bancshares, Inc. (the "Company").
------
2. Borrower: Fredericksburg Savings Bank Employee Stock Ownership
--------
Plan.
3. Trustee: _________________________
-------
4. Security: Unallocated shares of stock of the Company held in the
--------
Fredericksburg Savings Bank Employee Stock Ownership
Plan.
5. Maturity: Up to ____ years
--------
6. Amortization: Equal annual principal and interest payments
------------
7. Pricing: The Prime Rate as published in the Wall Street
-------
Journal on the date of the loan transaction.
8. Interest Payments: Annual on a 360 day basis.
-----------------
9. Prepayment: Voluntary prepayments are permitted at any time.
----------
10. Conditions Precedent to Closing: Receipt by the Company of all
-------------------------------
supporting loan documents in a form and with terms and conditions
satisfactory to the Company and its counsel. Consummation of the
transaction will also be contingent upon no
<PAGE>
material adverse change occurring in the condition of Fredericksburg
Savings Bank or the Company.
11. Closing Date: Not later than ____________, 199__ unless such date is
------------
waived by the Company.
If the terms and conditions are agreeable to you, please indicate your
acceptance by signing the enclosed copy and returning it to my attention.
Sincerely,
Lending Officer
Accepted on Behalf of
Fredericksburg Savings Bank
By: _________________________________ Date: _____________________
Samuel C. Harding, Jr.
President
<PAGE>
FORM OF
FREDERICKSBURG SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP TRUST
LOAN AND SECURITY AGREEMENT
Fredericksburg Savings Bank
400 George Street
Fredericksburg, Virginia 22404
___________, 199__
Gentlemen:
The undersigned, _____________________ ("Trustee"), not individually but
solely as Trustee under the Fredericksburg Savings Bank Employee Stock Ownership
Trust (the "Trust") effective ___________, 199__ (the "Borrower"), applies to
you, __________________ (hereinafter referred to as the "Lender") for your
commitment, subject to all of the terms and conditions hereof and on the basis
of the representations hereinafter set forth, to make a loan available to the
Borrower as hereinafter set forth. The term "Bank" as used herein refers to the
sponsoring employer of the Fredericksburg Savings Bank Employee Stock Ownership
Plan (the "ESOP").
SECTION ONE. THE TERM LOAN.
1.1 AMOUNT AND TERMS. Subject to and upon the terms and conditions herein
----------------
set forth, the Lender agrees to lend amounts to the Borrower, (the "Loan") from
time to time during the period of this agreement up to but not including the
maturity date of December 31, 20___, in an aggregate principal amount (the "Loan
Amount") sufficient to permit the Borrower to acquire a number of shares
("Shares") of common stock, par value $0.01 ("Common Stock") of Virginia Capital
Bancshares, Inc., a Virginia corporation, and the Holding Company of the Bank,
equal to 8% of the Shares issued in connection with the conversion of the Bank
from the mutual to stock form (the "Conversion") including the shares issued to
the Fredericksburg Savings Charitable Foundation, a charitable foundation being
established in connection with the Conversion.
The Loan is intended to be an "exempt loan" as described in Section 4975(d)
of the Internal Revenue Code of 1986, as amended (the "Code"), as defined in
Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"), as
described in Section 408(b)(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and as described in Department of Labor Regulations
Section 2550.408b-3 (collectively, the "Exempt Loan Rules").
<PAGE>
1.2 THE NOTE. The disbursement of the Loan pursuant to Section 1.1 hereof
--------
shall be made against and evidenced by a promissory note of the Borrower in the
form annexed hereto as Exhibit A (the "Note"), such Note to bear interest as
hereinafter provided, and to mature in ___________ (___) equal annual
installments consisting of both principal and interest amortized over a
__________ (___) year period in an amount sufficient to repay all borrowed
amounts plus interest, commencing on December 31, 199__ and on the last day of
each and every December each year thereafter, except that the final installment
in the amount of all principal and interest not sooner paid shall be due on
December 31, 20___, the final maturity thereof.
Without regard to the principal amount of the Note stated on its face, the
actual principal amount at any time outstanding and owed by the Borrower on
account of the Note shall be the amount of the disbursement of the Loan made by
the Lender under Section 1.1 hereof less all payments of principal actually
received by the Lender. The amount of such disbursement made by the Lender and
any repayments of principal thereof shall be recorded by the Lender on its books
or records or, at its option, endorsed on the reverse side of the Note by the
Lender and the unpaid principal balance at any time so recorded or endorsed by
the Lender shall be prima facie evidence in any court or other proceedings
brought to enforce the Note of the principal amount remaining unpaid thereon.
1.3 EXEMPT LOAN RULES. Notwithstanding anything to the contrary contained
------------------
in this Loan and Security Agreement (the "Agreement") or in the Note, the
Borrower shall be obligated to make repayments of the Loan only to the extent
that such repayments when added to the repayments theretofore made during the
applicable plan year would not exceed an amount which would cause the
limitations of Section 415 of the Code to be exceeded for any ESOP participant.
Except as set forth in the next succeeding sentence and to the extent
permitted by applicable law, including, without limitation, the Exempt Loan
Rules, the principal amount of the Loan and any interest thereon shall be
payable solely from contributions (other than contributions of employer
securities) made to the Trust in accordance with the ESOP, and cash dividends
received on the Shares, to enable the Borrower to pay its obligations under the
Loan and from earnings attributable to the Shares and the investment of such
contributions and dividends.
The Lender acknowledges and agrees that it shall have no other recourse
against the Borrower for repayment of the Loan and that it shall have no
recourse against assets of the ESOP included in the Trust other than pursuant to
Sections 3 and 8 hereof.
SECTION TWO. INTEREST AND FEES.
2.1 INTEREST RATE. The Loan shall bear interest (which the Borrower
-------------
hereby promises to pay) prior to maturity (whether by lapse of time,
acceleration or otherwise) at a rate per annum equal at all times to the
"Interest Rate" defined for purposes of this Agreement to mean the lowest prime
rate reported in the Wall Street Journal on the date of the Conversion.
2
<PAGE>
2.2 BASIS AND PAYMENT DATES. All interest accruing on the Note prior to
-----------------------
maturity shall be due and payable on a annual basis on the last day of each year
(commencing December 31, 199__) and at maturity (unless prepaid in whole prior
to such date, then on the date of such prepayment in whole) and interest
accruing after maturity shall be due and payable upon demand. All interest on
the Note shall be computed on the basis of a year of 360 days.
SECTION THREE. COLLATERAL.
3.1 GRANT OF SECURITY INTEREST-PLEDGED SHARES. The Borrower hereby
-----------------------------------------
grants, pledges and assigns to the Lender all Shares of the issued and
outstanding common stock, par value $.01 per share all of which were either (i)
purchased by the Borrower from the proceeds of the disbursement of the Loan;
(ii) acquired by the Borrower with the proceeds of a prior exempt loan within
the meaning of Section 54.4975-7(b) of the Regulations, and pledged as
collateral for such prior exempt loan, where the balance of such prior exempt
loan has been repaid with the proceeds of the disbursement of the Loan (the
"Pledged Shares" being hereinafter referred to as the "Collateral"). The
Pledged Shares shall be evidenced by a stock certificate. The assignment and
pledge herein granted and provided for is made and given to secure and shall
secure the prompt payment of principal of and interest on the Note as and when
the same becomes due and payable and the payment, observance and performance of
any and all obligations and liabilities arising under or provided for in this
Agreement or the Note or any of them in each instance as the same may be amended
or modified and whether now existing or hereafter arising.
3.2 FURTHER ASSURANCES. The Borrower covenants and agrees that it will at
------------------
any time and from time to time as requested by the Lender execute and deliver
such further instruments and perform such other acts as the Lender may
reasonably deem necessary or desirable to provide for or perfect the lien of the
Lender in the Collateral hereunder.
3.3 VOTING. Upon the occurrence of a Default as defined in Section 9
------
hereunder, the Lender shall have the right to transfer the Collateral or any
part thereof into its name or into the name of its nominee. The Lender shall
not be entitled to vote the Pledged Shares unless and until an Event of Default
has occurred and so long as the same shall not have been waived by the Lender.
3.4 PARTIAL RELEASES. The Lender agrees, provided always that no Default
----------------
shall have occurred and be continuing, as promptly as is practicable after
December 31 in each year (the period commencing the date hereof and ending
December 31 and each subsequent 12-month period ending on December 31 being
hereinafter referred to as a "Plan Year"), to release that number of Pledged
Shares then being held to secure the Loan which is equal to the number of such
Pledged Shares held as of the last day of the Plan Year multiplied by a
fraction, the numerator of which is the aggregate amount of all principal and
interest payments made on the Note during the Plan Year and the denominator of
which is the sum of the numerator plus the unpaid principal and interest of the
Note as of the last day of such Plan Year.
3
<PAGE>
SECTION FOUR. PAYMENTS.
4.1 PLACE AND APPLICATION. All payments of principal, interest, fees and
---------------------
all other amounts payable hereunder shall be made to the Lender at 400 George
Street, Fredericksburg, Virginia 22404 for the account of the Lender (or at such
other place for the account of the Lender as the Lender may from time to time in
writing specify to the Borrower) in immediately available and freely
transferable funds at the place of payment. All payments shall be paid in full
without setoff or counterclaim and without reduction for and free from any and
all taxes, levies, duties, fees, charges, deductions, withholdings, restrictions
or conditions of any nature imposed by any government or any political
subdivision or taxing authority thereof.
4.2 PREPAYMENTS. The Borrower shall have the privilege of prepaying in
-----------
whole or in part the Note at any time upon giving three (3) Business Days' prior
notice to the Lender, each such prepayment to be made by the payment of the
principal amount to be prepaid and accrued interest thereon to the date fixed
for prepayment. The term "Business Day" shall mean any day on which savings
institutions are generally open for business in Virginia, other than Saturday
and Sunday. All such prepayments shall be made without premium or penalty.
Prepayments shall first be applied to the several installments of the Note in
the inverse order of their respective maturities.
SECTION FIVE. REPRESENTATIONS AND WARRANTIES.
The Borrower, to the best of its knowledge, represents and warrants to the
Lender as follows:
5.1 The Trust is a duly organized, validly existing employee stock
ownership trust.
5.2 The proceeds of the disbursement of the Loan shall be applied in their
entirety to the payment of the purchase price for the Pledged Shares.
5.3 The Borrower has full right, power and authority to enter into this
Agreement, to make the borrowings hereunder provided for, to issue the Note in
evidence thereof and to perform each and all of the matters and things herein
and therein provided for and this Agreement does not, and the Note when issued
will not, nor will the performance or observance by the Borrower of any of the
matters or things herein or therein provided, contravene any provision of law or
the Trust or any other covenant or agreement affecting the Trust or any of its
assets. Once acquired by the Trust, the Pledged Shares will be fully paid and
non-assessable and will be owned by the Borrower free and clear of all liens,
charges and encumbrances whatsoever, except for any lien of Lender provided for
herein.
4
<PAGE>
5.4 Except as disclosed to the Lender in writing, there is no litigation
or governmental proceeding pending, nor to the knowledge of the Borrower
threatened, against the ESOP and Trust.
5.5 The ESOP and Trust have no material liabilities, whether absolute or
contingent, except for those heretofore disclosed to the Lender.
SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender represents and warrants that:
6.1 The Lender is a corporation duly organized under the laws of the
Commonwealth of Virginia, and is validly existing and in good standing under the
laws of the Commonwealth of Virginia. The Lender has full power and authority
and legal right to make and perform this Agreement.
6.2 The execution, delivery and performance by the Lender of this
Agreement have been duly authorized by all necessary action by the Lender, and
is not in violation of, and will not violate, any provisions of law applicable
to the Lender, any rules, regulations or orders applicable to the Lender or any
judgments or decrees binding upon the Lender. This Agreement is a valid and
legally binding obligation of the Lender enforceable against the Lender in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
credits' rights generally and the general principles of equity (regardless of
whether considered in a proceeding at law or in equity).
6.3 No authorizations, approvals or consents of, and no filings or
registrations with, any governmental regulatory authority or agency are required
for the execution, delivery or performance by the Lender of this Agreement, or
any transaction contemplated hereby, or for the validity or enforceability
against the Lender hereof except as have already been received or accomplished.
6.4 The execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated hereby will not violate, conflict
with or constitute a default under (i) any of the provisions of the Lender's
Certificate of Incorporation or Bylaws, (ii) any provision of any agreement,
instrument, order, arbitration award, judgment or decree to which the Lender is
a party or by which it is or its assets are bound (iii) any statute, rule or
regulation of any federal, state or local government or agency applicable to the
Lender, except in any such case described in (i), (ii), (iii) above, for any
such conflicts, violations, defaults which either individually or in the
aggregate do not have a material adverse effect on the business properties of
the Lender and its subsidiaries, taken as a whole.
6.5 The Bank has taken such actions as are required by applicable law to
be taken by it to establish the ESOP and the Trust.
5
<PAGE>
6.6 There is no action, suit, investigation or proceeding pending, or to
the best knowledge of the Holding Company or the Bank, threatened against or
affecting the ESOP before any court or governmental department, agency or
instrumentality.
6.7 The Loan will be an "exempt loan" as that term is defined under
Section 54.4975-7(b)(1)(iii) of the Regulations, provided the ESOP Committee
determines that the interest rate is not more than reasonable; and the
transactions contemplated by this Agreement which are "prohibited transactions"
within the meaning of Section 4975 of the Code or Section 406(a) of ERISA are
subject to exemption pursuant to Section 4975(d)(3) of the Code and Section 408
of ERISA.
6.8 Except as otherwise provided in this Agreement, the Shares are not
subject to any restriction on transfer under applicable Federal securities law
and may be freely traded over-the-counter.
6.9 DETERMINATION LETTER. The Bank shall apply for a determination letter
from the Internal Revenue Service that the Plan and the Trust, taken together,
qualify as an employee stock ownership plan for purposes of Section 4975(e)(7)
of the Code and the rules and regulations thereunder.
6.10 The Bank or its affiliates shall make contributions to the ESOP
sufficient to enable the Trustee to make payments on the Loan as prescribed by
Section 4.01(b) and related provisions of the ESOP document.
SECTION SEVEN. CONDITIONS PRECEDENT.
The obligation of the Lender to make the Loan shall be subject to
satisfaction of the following conditions precedent:
7.1 The Lender shall have received executed originals of this Agreement
and the Note duly signed and properly completed.
7.2 The Lender shall have received either (i) the certificate evidencing
all the Pledged Shares together with duly executed blank stock power therefore
or (ii) if such Pledged Shares are not yet available, a duly executed agreement
to pledge such stock in the form attached hereto as Exhibit B (in which event
such certificate and stock power will be delivered within 6 days of the date of
the Lender makes the Loan).
7.3 The Lender shall have received copies (executed or certified, as may
be appropriate) of all legal documents or proceedings taken in connection with
the execution and delivery of this Agreement and the Note.
6
<PAGE>
SECTION EIGHT. COVENANTS.
Borrower covenants and agrees that so long as any amount remains unpaid on
the Note or the Commitment is outstanding, except to the extent compliance in
any case or cases is waived in writing by the Lender:
8.1 COMPLIANCE. The Borrower will comply with all requirements of the
----------
Code, ERISA and any other law, rule or regulation applicable to it as such laws,
rules or regulations affect the ESOP or the Trust.
8.2 REPORTS.
-------
(a) The Borrower will maintain a system of accounting for the ESOP
and the Trust in accordance with sound accounting practice and will, from
time to time, furnish to the Lender and its duly authorized
representatives, such information and data with respect to the financial
condition of the ESOP and the Trust as the Lender may reasonably request.
(b) Without any request the Borrower will furnish to the Lender
promptly after knowledge thereof shall have come to the attention of the
Borrower, written notice of the occurrence of any Default or Event of
Default hereunder or of any threatened or pending litigation or
governmental proceeding against the Plan or the Trust.
SECTION NINE. DEFAULT AND REMEDIES.
9.1 DEFAULT. Any one or more of the following shall constitute Default
--------
hereunder:
(a) As of the date when due, the Borrower fails to make payment of
principal and/or interest with respect to the Note or any other amounts
payable under this Agreement within five (5) business days of the date when
due;
(b) As of the date proven false, the Borrower makes any
representation, warranty or statement herein or in connection with the
making of the Loan which proves to be incorrect in any material respect;
(c) As of the date the Borrower fails to perform or observe any term,
covenant or agreement (other than those referred to in subparts (a) and
(b), inclusive, of this Section 9.1) contained in this Agreement and such
failure continues unremedied for a period of 30 days after notice to the
Borrower by the Lender or any other holder of the Note;
(d) As of the date of termination of the ESOP if such termination is
prior to the expiration of the term of this Agreement.
7
<PAGE>
9.2 LIMITATIONS ON USE OF TRUST ASSETS. When any Default described in
-----------------------------------
subsections (a) to (c), of Section 9.1 has occurred and is continuing, the
Lender or the holder of the Note shall have no rights to assets of the Trust
other than (i) contributions (other than contributions of employer securities)
that are made by the Lender to enable the Borrower to meet its obligations
pursuant to the Loan, cash dividends received by the Borrower on the Pledged
Shares and earnings attributable to the investment of such contributions and
dividends and (ii) the Pledged Stock; provided further, however, that the value
of Trust assets transferred to the Lender as a result of a Default shall not
exceed the amount of the repayment then in default, and, provided further, that
so long as the Lender is a "party in interest" within the meaning of ERISA
Section 3(14) or a "disqualified person" within the meaning of Section
4975(e)(2) of the Code, a transfer of Trust assets upon default shall be made
only if, and to the extent of, the Borrower's failure to meet the loan's payment
schedule.
9.3 RIGHTS UPON DEFAULT. When Default has occurred and is continuing the
--------------------
Lender may, in addition to such other rights or remedies as it may have, then or
at any time or times thereafter exercise with respect to the Collateral any and
all of the rights, options and remedies of a secured party under the
________________ including without limitation the sale of all or any part of the
Collateral at any brokers' board or any public or private sale, provided,
however that the Lender shall only be able to exercise such rights and remedies
to the extent of all interest and principal payments which are due and payable
as of the date of the Default and provided further that prior to such exercise
the Lender shall release from the Collateral so much thereof as it would have
been required to release under Section 3.4 hereof if the period from the
previous December 31 to the date of such release constituted a Plan Year and no
Default had occurred. The net proceeds of any such sale, after deducting all
costs and expenses incurred in the collection, protection, sale and delivery of
the Collateral (which expenses Borrower promises to pay) shall be applied first
to the payment of any costs and expenses incurred by the Lender in selling or
otherwise disposing of the Collateral, second, to the payment of the principal
of and the interest on the Note, and, third, ratably as among any other items of
the indebtedness hereby secured. Any surplus remaining after the full payment
and satisfaction of the foregoing shall be returned to the Borrower or to
whomsoever a court of competent jurisdiction shall determine to be entitled
thereto. Any requirement of said _______________ as to reasonable notice shall
be met by the Lender personally delivering or mailing notice (by certified mail
- - return receipt requested) to the Borrower at its address as provided in
Section 10.6 hereof at least ten (10) days prior to the event giving rise to the
requirement of such notice. In connection with any offer, solicitation or sale
of the Collateral, the Lender may restrict bidders and otherwise proceed in
whatever manner it reasonably believes appropriate in order to comply or assure
compliance with applicable legal requirements pertaining to the offer and sale
of securities of the same type as the Collateral.
9.4 ERISA RESTRICTIONS. The number of shares of Pledged Stock as to which
-------------------
the Lender may exercise the rights set forth in this Section 9 may not exceed
that number of shares (then remaining subject to pledge hereunder) which is then
equal in current value to the amount in default under the Note. The remedies
set forth in this Section 9 may only be exercised to the
8
<PAGE>
extent consistent with the restrictions on remedies set forth in Section
408(b)(3) of ERISA and the regulations thereunder and Section 4975(d)(3) of the
Code and the regulations thereunder.
SECTION TEN. MISCELLANEOUS.
10.1 HOLIDAYS. If any principal of the Note shall fall due on Saturday,
--------
Sunday or on another day which is a legal holiday for savings institutions in
the Commonwealth of Virginia interest at the rate the Note bears for the period
prior to maturity shall continue to accrue on such principal from the stated due
date thereof to and including the next succeeding Business Day on which the same
is payable.
10.2 NO WAIVER, CUMULATIVE REMEDIES. No delay or failure on the part of
------------------------------
the Lender or the part of the holder of the Note in the exercise of any power
or right shall preclude any other or further exercise thereof, or the exercise
of any other power or right, and the rights and remedies hereunder of the Lender
and of any holder of the Note are cumulative to, and not exclusive of, any
rights or remedies which any of them would otherwise have.
10.3 AMENDMENTS, ETC. No amendment, modification, termination or waiver
----------------
of any provision of this Agreement or of the Note nor consent to any departure
by the Borrower therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Lender, and then such consent, modification or
waiver shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other further notice or demand in similar or
other circumstances.
10.4. SURVIVAL OF REPRESENTATIONS. All representations and warranties
---------------------------
made herein or in certificates given in connection with the Loan shall survive
the execution and delivery of this Agreement and of the Note, and shall continue
in full force and effect with respect to the date as of which they were made as
long as any credit is in use or available hereunder.
10.5 PAYMENTS. So long as the Lender is the holder of the Note, the
--------
Borrower will promptly and punctually pay the principal of and interest on the
Note without presentment of the Note and without any notation of any such
payment being made on the Note.
10.6 ADDRESSES FOR NOTICES. All communications provided for herein shall
---------------------
be in writing and shall be deemed to have been given or made when served
personally or when deposited in the United States mail addressed, if to the
Borrower at _____________________, __________________, Attn: _______________,
with a copy to __________________, _________________, Attn: _______________; if
to the Lender at 400 George Street, Fredericksburg, Virginia 22404 Attn: Samuel
C. Harding, Jr., with a copy to Muldoon, Murphy & Faucette, 5101 Wisconsin
Avenue, N.W., Washington, D.C. 20016, Attn: Joseph Muldoon, Esq. or at such
other address as shall be designated by any party hereto in a written notice to
each other party pursuant to this Section 10.6.
9
<PAGE>
10.7 HEADINGS. Article and Section headings used in this Agreement are
--------
for convenience or reference only and are not a part of this Agreement for any
other purpose.
10.8 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is
--------------------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such unenforceability without impairing the enforceability of
the remaining provisions hereof affecting the enforceability of such provision
in any other jurisdiction.
10.9 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, and by different parties hereto on separate counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.
10.10 BINDING NATURE, GOVERNING LAW, ETC. This Agreement shall be binding
-----------------------------------
upon the Borrower and its successors and assigns and shall inure to the benefit
of the Lender and the benefit of its successors and assigns, including any
subsequent holder of the Note. To the extent not preempted by Federal law, this
Agreement and the rights and duties of the parties hereto shall be construed and
determined in accordance with the laws of the Commonwealth of Virginia without
regard to principles of conflicts of laws. This Agreement constitutes the
entire understanding of the parties with respect to the subject matter hereof
and any prior agreements, whether written or oral, with respect thereto are
superseded hereby.
10.11 CONCERNING THE BORROWER. The term "Borrower" as used herein shall
-----------------------
mean and include the undersigned as Trustee of the Trust and its successors in
trust not individually but solely as Trustee under that certain Fredericksburg
Savings Bank Employee Stock Ownership Trust effective ___________, 199__, by and
between the undersigned and Fredericksburg Savings Bank and this Agreement shall
be binding upon the undersigned and its successors and assigns and upon the
trust estate. The undersigned assumes no personal or individual liability or
responsibility for payment of the indebtedness evidenced by the Note or for
observance or performance of the covenants and agreements herein contained or
for the truthfulness of the representations and warranties herein contained, the
undersigned having executed this Agreement and the Note solely in its capacity
as trustee as aforesaid to bind the undersigned, its successors in trust and the
trust estates.
10.12 LIMITED LIABILITY. Anything contained herein or in the Note to the
-----------------
contrary notwithstanding, the sole and only recourse of the Lender and any other
holder of the Note for payment of the obligations hereunder and under the Note ,
as against the Borrower for the payment of the obligations hereunder and under
the Note shall be to (i) the Collateral, (ii) contributions, other than employer
securities not constituting Collateral hereunder, made to the ESOP and the Trust
by sponsoring employers to enable the Borrower to meet its obligations hereunder
and under the Note, and (iii) earnings attributable to the Pledged Shares and to
the investment of such employer contributions, but only to the extent of the
failure of the Borrower to meet the payment schedule of the Loan provided for
herein. The Trust assets may be transferred to Lender upon the occurrence of a
Default hereunder only upon and to the extent of
10
<PAGE>
the failure of the Plan to meet the payment schedule of the Loan. In no event
may the value of the Trust assets so transferred exceed the amount of the
Default.
10.13 LENDER'S DUTY OF CARE. It is agreed and understood that the
---------------------
Lender's duty with respect to the Collateral shall be solely to use reasonable
care in the custody and preservation of the Collateral in the Lender's
possession, which shall not include any steps necessary to preserve rights
against prior parties.
All provisions in this Agreement shall be construed so as to maintain (i)
the ESOP as a qualified leveraged employee stock ownership plan under Sections
401(a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under
Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the
Exempt Loan Rules.
[Remainder of this page intentionally left blank]
11
<PAGE>
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this ____ day of _________, 199__
_____________________, and its successors in trust, as
Trustee under that certain Fredericksburg Savings Bank
Employee Stock Ownership Trust effective __________,
199__, by and between the undersigned and
Fredericksburg Savings Bank
By: /s/
------------------------
Accepted and agreed to at Fredericksburg, Virginia as of the date last
above written.
By: /s/
------------------------
12
<PAGE>
EXHIBIT A
PROMISSORY NOTE
Amount sufficient to satisfy the Loan Amount __________, 199__
Fredericksburg, Virginia
For VALUE RECEIVED, the undersigned, _____________________, not
individually but solely as Trustee under that certain Fredericksburg Savings
Bank Employee Stock Ownership Trust effective ___________, 199__, by and between
the undersigned ("Borrower") and Fredericksburg Savings Bank promises to pay to
the order of _________________. (the "Lender") at its office at 400 George
Street, Fredericksburg, Virginia 22404, the aggregate unpaid principal amount of
all loan amounts or advances under the loan made to the Borrower under Section
1.1 of the Loan and Security Agreement hereinafter referred to in ___________
(__) consecutive annual equal installments, consisting of both principal and
interest, amortized over a _________ (__) year period in an amount sufficient to
repay all borrowed amounts plus interest, payable annually on December 31, and
on the last day of each and every December in each year thereafter, except that
the final installment in the amount of all principal and interest not sooner
paid shall be due on December 31, 20__, the final maturity hereof.
The Borrower promises to pay interest (computed on the basis of a year of
360 days) at said office on the balance of principal from time to time remaining
outstanding and unpaid hereon at the rate per annum equal at all times to the
Interest Rate as defined in Section 2.1 of the Loan and Security Agreement (as
defined below) on the last business day of each and every December, commencing
December 31, 199_, and in each year thereafter and on the final maturity date of
this Note. On demand, the Borrower promises to pay interest on any overdue
principal hereof (whether by lapse of time, acceleration, or otherwise) until
paid at the stated rate.
This Note is issued under the terms and provisions of that certain
Fredericksburg Savings Bank Employee Stock Ownership Trust Loan and Security
Agreement bearing even date herewith by and between the Borrower and the Lender
(the "Loan and Security Agreement") and this Note and the holder hereof are
entitled to all the benefits and security provided for by or referred to in such
Loan and Security Agreement.
This Note may be declared due prior to its express maturity and voluntary
prepayments may be made hereon, all in the events, on the terms and in the
manner as provided in such Loan and Security Agreement.
Recourse for the payment of this Note has been limited by the provisions of
the Loan and Security Agreement and this Note is expressly made subject to such
provisions. This Note shall be governed by and construed in accordance with the
laws of Illinois without regard to principles of conflicts of laws. The
Borrower hereby waives presentment for payment and demand.
<PAGE>
Upon the occurrence of Default as such term is defined in the Loan and
Security Agreement at the option of the Lender, all amounts payable by the
Borrower to the Lender under the terms of this Note may immediately become due
and payable by the Borrower to the Lender pursuant to the provisions of Section
9.3 of the Loan and Security Agreement, and the Lender shall have all of the
rights, powers, and remedies available under the terms of this Note, any of the
other documents evidencing and securing this Loan and all applicable laws. The
Borrower and all endorsers, guarantors, and other parties who may now or in the
future be primarily or secondarily liable for the payment of the indebtedness
evidenced by this Note hereby severally waive presentment, protest and demand,
notice of protest, notice of demand and of dishonor and non-payment of this Note
and expressly agree that this Note and any payment hereunder may be extended
from time to time without in any way affecting the liability of the Borrower,
guarantors and endorsers.
_____________________ and its successors in
trust, as Trustee under that certain
Fredericksburg Savings Bank Employee Stock
Ownership Trust effective ___________, 199__
by and between the undersigned and
Fredericksburg Savings Bank
By:
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<PAGE>
EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by_______________________, ("Lender")
to the undersigned ("Borrower"), the receipt whereof is hereby acknowledged and
subject to the terms and provisions of the Loan and Security Agreement described
below, the Borrower does hereby grant a security interest to said Lender in the
instruments or negotiable documents hereafter described ("Collateral"), in all
of which Collateral the Borrower warrants that the Borrower has good, valid and
effective rights to the ownership and possession thereof and to the grant of the
security interest hereby made:
All Shares of the common stock, par value $.01 per share, of Virginia
Capital Bancshares, Inc., a Virginia corporation, acquired with the proceeds
of the Loan Amount.
Borrower agrees to deliver said collateral to said Lender as soon as
practicable after Borrower=s receipt of one or more certificates therefor.
Said security interest secures the payment of all indebtedness and
liabilities as undertaken in the Loan and Security Agreement to which this is a
part, now existing or hereafter arising, and the Lender has all the rights with
respect to said Collateral and said security interest as more fully set forth in
the form of secured note or notes executed and delivered by the undersigned to
said Lender prior hereto or contemporaneously herewith.
This agreement, including matters of interpretation and construction, and
the rights of the Lender and the duties and obligations of the debt hereunder
are to be determined in accordance with the laws of the Commonwealth of
Virginia, particularly the Uniform Commercial Code, except where preempted by
federal law.
Dated at Fredericksburg, Virginia on the _____ day of ______, 199__.
_____________________, and its successors in
trust, as Trustee under that certain
Fredericksburg Savings Bank Employee Stock
Ownership Trust effective ___________, 199__, by
and between the undersigned and Fredericksburg
Savings Bank
By:
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<PAGE>
Exhibit 10.3
FORM OF BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of____________, 199__, by
and among Fredericksburg Savings Bank (the "Bank"), a federally chartered stock
savings bank, with its principal administrative office at, 400 George Street,
Fredericksburg, Virginia 22404, Virginia Capital Bancshares, Inc., a corporation
organized under the laws of the Commonwealth of Virginia, the holding company
for the Bank (the "Holding Company"), and ___________________ ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as______________ and___________________ of the Bank. Executive shall render
administrative and management services to the Bank such as are customarily
performed by persons situated in a similar executive capacity. During said
period, Executive also agrees to serve, if elected, as an officer and director
of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be thirty-six (36) months unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the Agreement
is to be extended.
<PAGE>
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Bank, or materially affect
the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $___________
per year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any tax-qualified retirement or welfare benefit plan
or any other deferred compensation arrangement maintained by the Bank. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board, delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Bank shall also provide Executive, at no premium cost
to Executive, with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank. In addition, Executive shall be
entitled to incentive compensation and bonuses as provided in any plan or
arrangement of the Bank in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all Bank employees on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under all plans relating to
stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Bank to its senior
executives and key management
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<PAGE>
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a termination governed by Section 5(a) hereof, or Termination
for Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Bank's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as ___________and _______________, unless consented to by
the Executive, (B) a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (C) a
relocation of Executive's principal place of employment by more than____ miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (D) a material reduction in the benefits and perquisites to
the Executive from those being provided as of the effective date of this
Agreement, unless consented to by the Executive, (E) a liquidation or
dissolution of the Bank or Holding Company, or (F) breach of this Agreement by
the Bank. Upon the occurrence of any event described in clauses (A), (B), (C),
(D), (E) or (F), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a sum equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the Event of Termination not occurred, plus the value as
calculated by a recognized firm customarily performing such valuation, of any
stock options or related rights which as of the Date of Termination have been
granted to Executive but are not exercisable by Executive and the value of any
restricted stock or related rights which have been granted to Executive; but in
which Executive does not have a non-forfeitable or fully-vested interest as of
the Date of Termination; and (ii) all benefits, including health insurance in
accordance with Section 3(b) that would have
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<PAGE>
been provided to Executive for the remaining term of the this Agreement had an
Event of Termination not occurred; provided, however, that any payments
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pursuant to this subsection and subsection 4(c) below shall not, in the
aggregate, exceed three times Executive's average annual compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years. In the event the Bank is not in compliance
with its minimum capital requirements or if such payments pursuant to this
subsection (b) would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to an Event of Termination,
such payments shall be made in a lump sum as of the Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
25% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the
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<PAGE>
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board, or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity; provided, however, that such an
event listed above will be deemed to have occurred or to have been effectuated
upon the receipt of all required regulatory approvals not including the lapse of
any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than ____
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the Base Salary and bonuses in accordance with Section 3(a)
of this Agreement that would have been paid to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred, plus the value, as calculated by a recognized firm customarily
performing such valuation, of any stock option or related rights which as of the
Date of Termination have been granted to Executive, but are not exercisable by
Executive and the value of restricted stock awards or related rights which have
been granted to Executive, but which Executive does not have a non-forfeitable
or fully vested interest as of the Date of Termination and all benefits,
including health insurance, in accordance with Section 3(b) that would have been
provided to Executive for the remaining term of this Agreement had the event
described in Subsection (b) of this Section 5 not occurred; or 2) three (3)
times Executive's Average Annual Compensation (as defined herein) for the five
(5) most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five (5) years. Such "Average Annual Compensation"
shall include all taxable income paid by the Bank, including but not limited to,
Base Salary, commissions, and bonuses, as well as contributions on Executive's
behalf to any pension and/or profit sharing plan, retirement payments, directors
or committee fees and fringe benefits paid or to be paid to the Executive in any
such year and payment of any expense items without accountability or business
purpose or that do not meet the Internal Revenue Service requirements for
deductibility by the Bank; provided, however, that any payment under this
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provision and subsection 5(d) below shall not exceed three (3) times the
Executive's average annual compensation. In the event the Bank is not in
compliance with its minimum capital requirements or if such payments would cause
the Bank's capital to be reduced below its minimum regulatory capital
requirements, such payments
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<PAGE>
shall be deferred until such time as the Bank or successor thereto is in capital
compliance. At the election of the Executive, which election is to be made prior
to a Change in Control, such payment shall be made in a lump sum as of the
Executive's Date of Termination. In the event that no election is made, payment
to the Executive will be made in approximately equal installments on a monthly
basis over a period of thirty-six (36) months following the Executive's
termination. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance at no premium cost to the Executive, except to
the extent that such coverage may be changed in its application for all Bank
employees on a non-discriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options and related limited
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<PAGE>
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and any unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
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<PAGE>
10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank.
Further, Executive may disclose information regarding the business activities of
the Bank to the OTS and the Federal Deposit Insurance Corporation ("FDIC")
pursuant to a formal regulatory request. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Bank will be entitled
to an injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if
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such amounts and benefits due from the Bank are not timely paid or provided by
the Bank, such amounts and benefits shall be paid or provided by the Holding
Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated_________________,
1998, between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
Payments pursuant to this Agreement and the Holding Company Agreement shall be
allocated in proportion to the services rendered and time expended on such
activities by Executive as determined by the Holding Company and the Bank on a
quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
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15. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1); the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or his designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
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16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of _____________ without regards to
principles of conflicts of law of this state, but only to the extent not
superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
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21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R. Part
359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
23. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, Fredericksburg Savings Bank and Virginia Capital
Bancshares, Inc. have caused this Agreement to be executed and their seals to be
affixed hereunto by their duly authorized officers and directors, and Executive
has signed this Agreement, on the_____ day of _________________, 199__.
ATTEST: FREDERICKSBURG SAVINGS BANK
________________________ By:________________________________
President
[SEAL]
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
(Guarantor)
________________________ By:________________________________
President
[SEAL]
WITNESS:
________________________ ___________________________________
Executive
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EXHIBIT 10.4
FORM OF HOLDING COMPANY
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of ______________, 199__
by and between Virginia Capital Bancshares, Inc. (the "Holding Company"), a
corporation organized under the laws of Virginia with its principal offices at
400 George Street, Fredericksburg, Virginia 22404 and _____________________
("Executive"). Any reference to "Institution" herein shall mean Fredericksburg
Savings Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as _______________and _____________________ of the Holding Company. The
Executive shall render administrative and management services to the Holding
Company such as are customarily performed by persons in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer or director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community, professional and
civic
<PAGE>
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as ______________ and ____________________ of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company
or its Subsidiaries of $____________________ per year ("Base Salary"). Base
Salary shall include any amounts of compensation deferred by Executive under any
tax-qualified retirement or welfare benefit plan or any other deferred
compensation arrangement maintained by the Holding Company and its Subsidiaries.
Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or by a Committee of the
Board delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Holding Company shall also provide Executive,
at no premium cost to Executive, with all such other benefits as provided
uniformly to permanent full-time employees of the Holding Company and its
Subsidiaries. In addition, Executive shall be entitled to incentive compensation
and bonuses as provided in any plan or arrangement of the Holding Company or its
Subsidiaries in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted stock
awards, stock purchases, pension, thrift, supplemental retirement, profit-
sharing, employee
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stock ownership, group life insurance, medical and other health and welfare
coverage, education, cash or stock bonuses that are now or hereafter made
available by the Holding Company or its Subsidiaries to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all
reasonable travel and other reasonable expenses incurred in the performance of
Executive's obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as ____________ and ___________________, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities with the Holding Company or its Subsidiaries, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than ____ miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D), (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the Event of Termination not occurred, plus the value as calculated by a
recognized firm
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customarily performing such valuation, of any stock options or related rights
which as of the Date of Termination have been granted to Executive but are not
exercisable by Executive and the value of any restricted stock or related rights
which have been granted to Executive; but in which Executive does not have a
non-forfeitable or fully-vested interest as of the Date of Termination; and (ii)
all benefits, including health insurance in accordance with Section 3(b) that
would have been provided to Executive for the remaining term of this Agreement
had an Event of Termination not occurred. At the election of the Executive,
which election is to be made prior to an Event of Termination, such payments
shall be made in a lump sum. In the event that no election is made, payment to
the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he
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were a member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Institution or
the Holding Company or similar transaction occurs or is effectuated in which the
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods, or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Institution with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Institution or
the Holding Company shall be distributed, or (E) a tender offer is made for 20%
or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his principal place of employment by more than ___
miles from its location immediately prior to the change in control, unless such
termination is because of his death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the Base Salary and bonuses in accordance with Section 3(a) of this Agreement
that would have been paid to Executive for the remaining term of this Agreement
had the event described in Subsection (b) of this Section 5 not occurred, plus
the value, as calculated by a recognized firm customarily performing such
valuation, of any stock option or related rights which as of the Date of
Termination have been granted to Executive, but are not exercisable by Executive
and the value of restricted stock awards or related rights which have been
granted to Executive, but which Executive does not have a non-forfeitable or
fully vested interest as of the Date of Termination and all benefits, including
health insurance, in accordance with Section 3(b) that would have been provided
to Executive for the remaining term of this Agreement had the event described in
Subsection (b) of this Section 5 not occurred; or (ii) three (3) times
Executive's Average Annual Compensation (as defined herein) for the five (5)
preceding taxable years that Executive has been employed by the Holding Company
or its Subsidiaries or such lesser number of years in the event Executive shall
have been employed with the Holding Company or its Subsidiaries less than five
(5) years. Such Average Annual Compensation shall include all taxable income
paid by the Holding Company or its Subsidiaries, including but not limited to,
Base Salary, commissions and bonuses, as well as contributions on
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behalf of Executive to any pension and profit sharing plan, severance payments,
directors or committee fees and fringe benefits paid or to be paid to the
Executive during such years. At the election of the Executive, which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to the Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the marginal rate
of any applicable state and federal income tax and the Non-
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
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7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be
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extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
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(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated_______________,
199__, between Executive and the Institution, such compensation payments and
benefits paid by the Institution will be subtracted from any amount due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Institution Agreement shall be allocated in
proportion to the level of activity and the time expended on such activities by
the Executive as determined by the Holding Company and the Institution on a
quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
9
<PAGE>
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Virginia
without regards to principles of conflicts of law of this state.
10
<PAGE>
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Virginia law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to
11
<PAGE>
perform the Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Holding Company would be required to
perform if no such succession or assignment had taken place.
12
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Virginia Capital Bancshares, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the _______ day of _________, 199__.
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
____________________ By: _________________________________
Secretary For the Entire Board of Directors
[SEAL]
WITNESS:
____________________ By: _________________________________
Secretary Executive
13
<PAGE>
EXHIBIT 10.5
FORM OF
FREDERICKSBURG SAVINGS BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of the Fredericksburg Savings Bank Employee Severance
Compensation Plan is to assure for Fredericksburg Savings Bank (the "Bank") the
services of Employees of the Bank in the event of a Change in Control
(capitalized terms are defined in section 2.1) of Virginia Capital Bancshares,
Inc. (the "Holding Company") or the Bank. The benefits contemplated by the Plan
recognize the value to the Bank of the services and contributions of the
Employees of the Bank and the effect upon the Bank resulting from the
uncertainties of continued employment, reduced Employee benefits, management
changes and relocations that may arise in the event of a Change in Control of
the Bank or the Holding Company. The Bank's and the Holding Company's Boards of
Directors believe that it is in the best interests of the Bank and the Holding
Company to provide Employees of the Bank who have been with the Bank for a
minimum of _____ (__) year with such benefits in order to defray the costs and
changes in Employee status that could follow a Change in Control. The Board of
Directors believes that the Plan will also aid the Bank in attracting and
retaining highly qualified individuals who are essential to its success and the
Plan's assurance of fair treatment of the Bank's Employees will reduce the
distractions and other adverse effects on Employees' performance in the event of
a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as the
"Fredericksburg Savings Bank Employee Severance Compensation Plan."
1.2 Applicability of Plan
---------------------
The benefits provided by this Plan shall be available to all Employees of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those executive officers who have entered into, or
who enter into in the future, and continue to be subject to an employment or
change in control agreement with the Employer.
<PAGE>
1.3 Contractual Right to Benefits
-----------------------------
This Plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder, enforceable by the
Participant against the Employer.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
(a) "Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12
months ended the date as of which Annual Compensation is to be determined, which
are or would be includable in the gross income of the Participant receiving the
same for federal income tax purposes.
(b) "Bank" means Fredericksburg Savings Bank or any successor as provided
for in Article VII hereof.
(c) "Change in Control" shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act or
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency) as in effect on the date hereof (provided
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or
<PAGE>
(C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity.
(d) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Board that it is either not possible
to determine if or when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of said
employees lifetime.
(e) "Effective Date" means the date the Plan is approved by the Board of
Directors of the Bank, or such other date as the Board of Directors of the Bank
shall designate in its resolution approving the Plan.
(f) "Employee" means any Employee of the Bank or any subsidiary of the
Bank or any parent of the Bank who has completed at least _____ Year of Service
with the Bank, or any subsidiary thereof, provided, however, that any Employee
who is covered or hereinafter becomes covered by an employment contract or
change in control agreement with the Employer shall not be considered to be an
"Employee" for purposes of this Plan.
(g) "Employer" means the Bank or a subsidiary of the Bank or a parent of
the Bank which has adopted the Plan pursuant to Article VI hereof.
(h) "ERISA" means Employee Retirement Income Security Act of 1974, as
amended.
(i) "Expiration Date" means the date ten (10) years from the Effective
Date, unless the Plan is earlier terminated pursuant to Section 8.2 of the Plan
or extended pursuant to Section 8.1 of the Plan.
(j) "Termination for Cause" shall include termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or violation of any final cease-and desist
order, or material breach of any provision of the plan. In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institutions industry.
(k) "Leave of Absence" and "LOA" mean (i) the taking of an authorized or
approved leave of absence under the provisions of the federal Family and Medical
Leave Act ("FMLA"), (ii) any state law providing qualitatively similar benefits
as the FMLA, or (iii) a leave of absence authorized under the policies of the
Bank. "Leave of Absence" and "LOA" are defined in this paragraph for the
exclusive purposes of this Plan.
<PAGE>
(l) "Payment" means the payment of severance compensation as provided for
in Article IV hereof.
(m) "Participant" means an Employee who meets the eligibility requirements
of Article III.
(n) "Plan Year" means the period beginning on the Effective Date and
ending on December 31 and the 12 consecutive-month period ending each year
thereafter.
(o) "Plan" means this Fredericksburg Savings Bank Employee Severance
Compensation Plan.
(p) "Year of Service" means each consecutive 12 month period, beginning
with an Employee's date of hire in which an Employee is credited with at least
one hour of service in each of the 12 calendar months in such period. The taking
of a LOA shall not eliminate a period of time from being a Year of Service if
such period of time otherwise qualifies as such. Further if a particular 12
month period of time would not otherwise qualify under the Plan as a Year of
Service because one hour of service is not credited during each month of such
period due to the taking of a LOA, then such period of time shall be deemed to
be a Year of Service for all other purposes of this Plan.
2.2 Applicable Law
--------------
The laws of the Commonwealth of Virginia shall be the controlling law in
all matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term Participant shall include all Employees of the Employer who have
completed at least _____ (__) Year of Service with the Employer at the time of
any termination pursuant to Section 4.2 of this Plan. Notwithstanding the
foregoing, persons who have entered into and continue to be covered by an
employment contract or change in control agreement with the Employer shall not
be entitled to participate in this Plan.
<PAGE>
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to receipt
of a Payment shall remain a Participant in this Plan until the full amount of
such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his respective Employer a
Payment in the amount provided in Section 4.3 of the Plan if there has been a
Change in Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 4.2 of the Plan, whether the termination of
employment is voluntary or involuntary. A Participant shall not be entitled to a
Payment if termination occurs by reason of death, voluntary retirement,
voluntary termination other than for reasons specified in Section 4.2 of the
Plan, Disability, or as a result of Termination for Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
if employment by an Employer is terminated, voluntarily or involuntarily, for
any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control.
(b) The Employer materially changes the Participant's function,
duties or responsibilities which would cause the Participant's position to be
one of lesser responsibility, importance or scope with the Employer than
immediately prior to the change in control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty (30) miles from the location of the Participant's job
or office immediately prior to the Change in Control provided that such new
location is not closer to the Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control,
provided, however, that a material reduction in benefits and perquisites
generally provided to all Employees of the Employer on a nondiscriminatory basis
would not trigger a payment pursuant to this Plan.
<PAGE>
(e) A successor to the Bank fails or refuses to assume the Employer's
obligations under this Plan, as required by Article VII.
(f) The Bank or any successor to the Bank breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Termination for Cause.
4.3 Amount of Payment
-----------------
(a) Each Participant entitled to a Payment under this Plan shall
receive from the Bank, a lump sum cash payment equal to _________ of his Annual
Compensation for each year of service up to a maximum of _____% of Annual
Compensation.
(b) Notwithstanding the provisions of paragraph (a) above, if a
Payment to a Participant who is a "Disqualified Individual" shall be in an
amount which includes an "Excess Parachute Payment," the Payment hereunder to
that Participant shall be reduced to the maximum amount which does not include
an Excess Parachute Payment. The terms "Disqualified Individual" and "Excess
Parachute Payment" shall have the same meanings as under Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor provision thereto.
The Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty (20) business days after the termination of the
Participant's employment. If any Participant should die after termination of the
employment but before all amounts have been paid, such unpaid amounts shall be
paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee
<PAGE>
of an Employer, whether existing now or hereafter, under any benefit, incentive,
retirement, stock option, stock bonus, stock ownership or any employment
agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of Directors of the Bank, this Plan may be
adopted by any "Subsidiary" or "Parent" of the Bank. Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent. The term "Subsidiary" means any corporation in which the Bank, directly
or indirectly, holds a majority of the voting power of its outstanding shares of
capital stock. The term "Parent" means any corporation which holds a majority of
the voting power of the Bank's outstanding shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Employer shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this plan, in the same manner and to the same extent that the Employer would be
required to perform if no such succession or assignment had taken place.
<PAGE>
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2 of the
Plan, or unless extended for an additional period or periods by resolution
adopted by the Board of Directors of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of Directors of the Bank, unless a Change in Control
has previously occurred. If a Change in Control occurs, the Plan no longer shall
be subject to amendment, change, substitution, deletion, revocation or
termination in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board of
Directors. A proper amendment of the Plan automatically shall effect a
corresponding amendment to each Participant's rights hereunder. A proper
termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under
this Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit of,
Employee and the Bank and their respective successors and assigns.
<PAGE>
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Employer may terminate an Employee's employment at any time, but
any termination by the Employer, other than Termination for Cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. Employee shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as otherwise provided
hereunder.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1), all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations under the Plan shall be terminated, except to the
extent determined that continuation of the Plan is necessary for the continued
operation of the Bank:
(a) by the Director or her designee, at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or
<PAGE>
(b) by the Director or her designee, at the time the Director or her
designee approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
10.6 Any payments made to a Participant pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATIVE PROVISIONS
11.1 Plan Administrator. The administrator of the Plan shall be under the
-------------------
supervision of the Board of Directors of the Bank or a Committee appointed by
the Board of Directors of the Bank (the "Board"). It shall be a principal duty
of the Board to see that the Plan is carried out in accordance with its terms,
for the exclusive benefit of persons entitled to participate in the Plan without
discrimination among them. The Board will have full power to administer the Plan
in all of its details subject, however, to the requirements of ERISA if the Plan
is subject to such requirements. For this purpose, the Board's powers will
include, but will not be limited to, the following authority, in addition to all
other powers provided by this Plan: (a) to make and enforce such rules and
regulations as it deems necessary or proper for the efficient administration of
the Plan; (b) to interpret the Plan, its interpretation thereof in good faith to
be final and conclusive on all persons claiming benefits under the Plan; (c) to
decide all questions concerning the Plan and the eligibility of any person to
participate in the Plan; (d) to compute the amount of Payment that will be
payable to any Participant or other person in accordance with the provisions of
the Plan, and to determine the person or persons to whom such benefits will be
paid; (e) to authorize Payments; (f) to appoint such agents, counsel,
accountants, consultants and actuaries as may be required to assist in
administering the Plan; and (g) to allocate and delegate its responsibilities
under the Plan and to designate other persons to carry out any of its
responsibilities under the Plan, any such allocation, delegation or designation
to be by written instrument and in accordance with Section 405 of ERISA if
applicable.
11.2 Named fiduciary. The Board will be a "named fiduciary" for purposes
----------------
of Section 402(a)(1) of ERISA with authority to control and manage the operation
and administration of the Plan, and will be responsible for complying with all,
if any, of the reporting and disclosure requirements of Part 1 of Subtitle B of
Title I of ERISA.
11.3 Claims and review procedures.
-----------------------------
(a) Claims procedure. If any person believes he is being denied any
-----------------
rights or benefits under the Plan, such person may file a claim in writing with
the Board. If any such claim is wholly or partially denied, the Board will
notify such person of its decision in writing.
<PAGE>
Such notification will be written in a manner calculated to be understood by
such person and will contain (i) specific reasons for the denial, (ii) specific
reference to pertinent Plan provisions, (iii) a description of any additional
material or information necessary for such person to perfect such claim and an
explanation of why such material or information is necessary and (iv)
information as to the steps to be taken if the person wishes to submit a request
for review. Such notification will be given within 90 days after the claim is
received by the Board (or within 180 days, if special circumstances require an
extension of time for processing the claim, and if written notice of such
extension and circumstances is given to such person within the initial 90 day
period). If such notification is not given within such period, the claim will be
considered denied as of the last day of such period and such person may request
a review of his claim.
(b) Review procedure. Within 60 days after the date on which a
-----------------
person receives a written notice of a denied claim (or, if applicable, within 60
days after the date on which such denial is considered to have occurred) such
person (or his duly authorized representative) may (i) file a written request
with the Board for a review of his denied claim and of pertinent documents and
(ii) submit written issues and comments to the Board. The Board will notify such
person of its decision in writing. Such notification will be written in a manner
calculated to be understood by such person and will contain specific reasons for
the decision as well as specific references to pertinent Plan provisions. The
decision on review will be made within 60 days after the request for review is
received by the Board (or within 120 days, if special circumstances require an
extension of time for processing the requests such as an election by the Board
to hold a hearing, and if written notice of such extension and circumstances is
given to such person within the initial 60 day period). If the decision on
review is not made within such period, the claim will be considered denied.
11.4 Nondiscriminatory exercise of authority. Whenever, in the
----------------------------------------
administration of the Plan, any discretionary action by the Board is required,
the Board shall exercise its authority in a nondiscriminatory manner so that all
persons similarly situated will receive substantially the same treatment.
11.5 Indemnification of Board. The Bank will indemnify and defend to the
-------------------------
fullest extent permitted by law any person serving on the Board or as a member
of a committee designated as Board (including any person who formerly served as
a Board member or as a member of such committee) against all liabilities,
damages, costs and expenses (including attorneys fees and amounts paid in
settlement of any claims approved by the Bank) occasioned by any act or omission
to act in connection with the Plan, if such act or omission is in good faith.
<PAGE>
11.6 Benefits solely from general assets. The benefits provided hereunder
------------------------------------
will be paid solely from the general assets of the Employer. Nothing herein will
be construed to require the Employer or the Board to maintain any fund or
segregate any amount for the benefit of any Participant, and no Participant or
other person shall have any claim against, right to, or security or other
interest in, any fund, account or asset of the Employer from which any payment
under the Plan may be made.
Having been adopted by its Board of Directors on _____, 199__, this Plan is
executed by its duly authorized officers this _______ day of _________________,
199__.
Attest FREDERICKSBURG SAVINGS BANK
______________________________ By: ___________________________
Corporate Secretary President
<PAGE>
EXHIBIT 10.6
FORM OF
FREDERICKSBURG SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
FORM OF
FREDERICKSBURG SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
TABLE OF CONTENTS
Article I - Introduction.................................................
Article II - Definitions.................................................
Article III - Eligibility and Participation..............................
Article IV - Benefits....................................................
Article V - Accounts.....................................................
Article VI - Supplemental Benefit Payments...............................
Article VII - Claims Procedures..........................................
Article VIII - Amendment and Termination.................................
Article IX - General Provisions..........................................
Article X - Required Regulatory Provisions...............................
i
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ARTICLE I
INTRODUCTION
SECTION 1.01 PURPOSE, DESIGN AND INTENT.
--------------------------
(a) The purpose of the Fredericksburg Savings Bank Supplemental Executive
Retirement Plan (the "Plan") is to assist Fredericksburg Savings Bank (the
"Bank") and its affiliates in retaining the services of key employees until
their retirement, to induce such employees to use their best efforts to
enhance the business of the Bank and its affiliates, and to provide certain
supplemental retirement benefits to such employees.
(b) The Plan, in relevant part, is intended to constitute an unfunded "excess
benefit plan" as defined in Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended. The Plan is specifically designed to
provide certain key employees with retirement benefits that would have been
payable under the various tax-qualified retirement plans sponsored by the
Bank but for the limitations placed on the benefits and contribution under
such plans by various provisions of the Internal Revenue Code of 1986, as
amended.
1
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ARTICLE II
DEFINITIONS
SECTION 2.01 DEFINITIONS. In this Plan, whenever the context so indicates,
-----------
the singular or the plural number and the masculine or feminine gender shall be
deemed to include the other, the terms "he," "his," and "him," shall refer to a
Participant or Beneficiary, as the case may be, and, except as otherwise
provided, or unless the context otherwise requires, the capitalized terms shall
have the following meanings:
(a) "AFFILIATE" means any "parent corporation" or any "subsidiary corporation"
of the Bank, as such terms are defined in Sections 424(e) and 424(f),
respectively, of the Code.
(b) "APPLICABLE LIMITATIONS" means one of the following:
(i) the maximum limitation on annual benefits payable by a qualified
defined benefit plan under Section 415(b) of the Code;
(ii) the maximum limitations on annual additions to a qualified
defined contribution plan under Section 415(c) of the Code;
(iii) the maximum limitation on the aggregate projected annual benefits
payable by qualified defined benefit plans and the annual
additions to qualified defined contribution plans under Section
415(e) of the Code;
(iv) the maximum limitation on the annual amount of compensation that
may, under Section 401(a)(17) of the Code, be taken into account
in determining contributions to and benefits under qualified
plans; and
(v) the maximum limitations, under Sections 401(k), 401(m), or 402(g)
of the Code, on pre-tax contributions that may be made to a
qualified defined contribution plan.
(c) "BANK" means Fredericksburg Savings Bank, and its successors.
(d) "BOARD OF DIRECTORS" means the Board of Directors of the Bank.
(e) "CHANGE IN CONTROL" means with respect to the Bank or the Company, an event
of a nature that: (i) would be required to be reported in response to Item 1 of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Exchange Act; or (ii) results in a "change in
control" of the Bank or the Company within the meaning of the Home Owners' Loan
Act of 1933, as amended, the Federal Deposit Insurance Act or the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of "change in control" as set forth under the rules and
regulations of the OTS, the Committee shall substitute its judgment for that of
the OTS); or (iii)
2
<PAGE>
without limitation such a Change in Control shall be deemed to have occurred at
such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank
or the Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased by the
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors of either the Bank or the
Company on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination, in the case of the Company, for election by the Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Company or similar transaction occurs in which the Bank or Company is not
the resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(f) "CODE" means the Internal Revenue Code of 1986, as amended.
(g) "COMMITTEE" means the person(s) designated by the Board of Directors,
pursuant to Section 9.02 of the Plan, to administer the Plan.
(h) "COMMON STOCK" means the common stock of the Company.
(i) "COMPANY" means Virginia Capital Financial Corp., and its successors.
(j) "ELIGIBLE INDIVIDUAL" means any Employee of the Bank or an Affiliate who
participates in the ESOP or the Pension Plan, as the case may be, and whom the
Board of Directors determines is one of a "select group of management or highly
compensated employees," as such phrase is used for purposes of Sections 101,
201, and 301 of ERISA.
(k) "EMPLOYEE" means any person employed by the Bank or an Affiliate.
(l) "EMPLOYER" means the Bank or Affiliate that employs the Employee.
(m) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(n) "ESOP" means the Fredericksburg Savings Bank Employee Stock Ownership Plan,
as amended from time to time.
3
<PAGE>
(o) "ESOP ACQUISITION LOAN" means a loan or other extension of credit incurred
by the trustee of the ESOP in connection with the purchase of Common Stock on
behalf of the ESOP.
(p) "ESOP VALUATION DATE" means any day as of which the investment experience
of the trust fund of the ESOP is determined and individuals' accounts under the
ESOP are adjusted accordingly.
(q) "EFFECTIVE DATE" means [JANUARY 1, 1998].
(r) "PARTICIPANT" means an Eligible Employee who is entitled to benefits under
the Plan.
(s) "PENSION PLAN" means the Fredericksburg Savings and Loan Association Fixed
Benefit Pension Plan, as amended from time to time.
(t) "PLAN" means this Fredericksburg Savings Bank Supplemental Executive
Retirement Plan.
(u) "RETIREMENT" means termination of employment at any time following the
satisfaction the requirements for early or normal retirement under either the
ESOP or the Pension Plan, as appropriate.
(v) "SAVINGS PLAN" means the Fredericksburg Savings and Loan Association Salary
Savings Plan, as amended from time to time.
(w) "SUPPLEMENTAL ESOP ACCOUNT" means an account established by an Employer,
pursuant to Section 5.01 of the Plan, with respect to a Participant's
Supplemental ESOP Benefit.
(x) "SUPPLEMENTAL ESOP BENEFIT" means the benefit credited to a Participant
pursuant to Section 4.01 of the Plan.
(y) "SUPPLEMENTAL PENSION ACCOUNT" means an account established by an Employer,
pursuant to Section 5.03 of the Plan, with respect to a Participant's
Supplemental Pension Benefit.
(z) "SUPPLEMENTAL PENSION BENEFIT" means the benefit earned by a Participant
pursuant to Section 4.03 of the Plan.
(aa) "SUPPLEMENTAL SAVINGS BENEFIT" means the benefit credited to a Participant
pursuant to Section 4.04 of the Plan.
(bb) "SUPPLEMENTAL SAVINGS ACCOUNT" means an account established by an Employer,
pursuant to Section 5.04 of the Plan, with respect to a Participant Supplement
Savings Benefit.
(cc) "SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT" means an account established by an
Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's
Supplemental Stock Ownership Benefit.
4
<PAGE>
(dd) "SUPPLEMENTAL STOCK OWNERSHIP BENEFIT" means the benefit credited to a
Participant pursuant to Section 4.02 of the Plan.
5
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.01 ELIGIBILITY AND PARTICIPATION.
-----------------------------
(a) Each Eligible Employee may participate in the Plan. An Eligible Employee
shall become a Participant in the Plan upon designation as such by the
Board of Directors. An Eligible Employee whom the Board of Directors
designates as a Participant in the Plan shall commence participation as of
the date established by the Board of Directors. The Board of Directors
shall establish an Eligible Employee's date of participation at the same
time it designates the Eligible Employee as a Participant in the Plan.
(b) The Board of Directors may, at any time, designate an Eligible Employee as
a Participant for any or all supplemental benefits provided for under
Article IV of the Plan.
6
<PAGE>
ARTICLE IV
BENEFITS
SECTION 4.01 SUPPLEMENTAL ESOP BENEFIT.
-------------------------
As of the last day of each plan year of the ESOP, the Employer shall credit the
Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal
to the excess of (a) over (b), where:
(a) Equals the annual contributions made by the Employer and/or the number of
shares of Common Stock released for allocation in connection with the
repayment of an ESOP Acquisition Loan that would otherwise be allocated to
the accounts of the Participant under the ESOP for the applicable plan year
if the provisions of the ESOP were administered without regard to and of the
Applicable Limitations; and
(b) Equals the annual contributions made by the Employer and for the number of
shares of common stock released for allocation in connection with the
repayment of an ESOP Acquisition Loan that are actually allocated to the
accounts of the Participant under the provisions of the ESOP for that
particular plan year after giving effect to any reduction of such allocation
required by the limitations imposed by any of the Applicable Limitations.
SECTION 4.02 SUPPLEMENTAL STOCK OWNERSHIP BENEFIT.
------------------------------------
(a) Upon a Participant's Retirement from the Employer, the Employer shall credit
to the Participant's Supplemental Stock Ownership Account a Supplemental
Stock Ownership Benefit equal to (i) less (ii), the result of which is
multiplied by (iii), where:
(i) Equals the total number of shares of Common Stock acquired with the
proceeds of all ESOP Acquisition Loans (together with any dividends,
cash proceeds, or other medium related to such ESOP Acquisition Loans)
that would have been allocated or credited for the benefit of the
Participant under the ESOP and/or this Plan, as the case may be, had
the Participant continued in the employ of the Employer through the
first ESOP Valuation Date following the last scheduled payment of
principal and interest on all ESOP Acquisition Loans outstanding at
the time of the Participant's Retirement; and
(ii) Equals the total number of shares of Common Stock acquired with the
proceeds of all ESOP Acquisition Loans (together with any dividends,
cash proceeds, or other medium related to such ESOP acquisition Loans)
and allocated for the benefit of the Participant under the ESOP as of
the first ESOP Valuation Date following the Participant's Retirement;
and
(iii) Equals the higher of the closing price of the Common Stock as of:
7
<PAGE>
(A) The first ESOP Valuation Date following the Participant's
Retirement, or
(B) The last day of the Participant's employment with the Employer.
(b) For purposes of clause
(i) of subsection (a) of this Section 4.02, the total number of shares of
Common Stock shall be determined by multiplying the sum of (i) and
(ii) by (iii), where: (i) equals the average of the total shares of
Common Stock acquired with the proceeds of an ESOP Acquisition Loan
and allocated for the benefit of the Participant under the ESOP as of
three most recent ESOP Valuation Dates preceding the Participant's
Retirement (or lesser number if the Participant has not participated
in the ESOP for three full years),
(ii) equals the average number of shares of Common Stock credited to the
Participant's Supplemental ESOP Account for the three most recent plan
years of the ESOP (such that the three recent plan years coincide with
the three most recent ESOP Valuation Dates referred to in (i) above);
and
(iii) equals the total number of scheduled annual payments remaining on the
ESOP Acquisition Loans as of the Participant's Retirement.
(c) In the event of a Change in Control:
(i) A Participant's Retirement shall be deemed to have occurred as of the
effective date of the Change in Control, as determined by the Board of
Directors, regardless of whether the Participant continues in the
employ of the Employer following the Change in Control; and
(ii) The determination of fair market value of the Common Stock shall be
made as the effective date of the Change in Control.
SECTION 4.03 SUPPLEMENTAL PENSION BENEFIT.
----------------------------
A Participant or, in the event of his death, his beneficiary, whose retirement
or survivor benefits under the Pension Plan are limited by one or more of the
Applicable Limitations shall be entitled to a supplemental retirement benefit or
survivor benefit (Supplemental Pension Benefit) under this Plan in an amount
equal to the excess of:
(i) the benefit to which he would be entitled under the Pension Plan in
the absence of the Applicable Limitations, computed as of the day the
Participant separates from service with the Employer on the basis of
the benefit form elected under the Pension Plan; over
8
<PAGE>
(ii) the actual benefit to which he is entitled under the Pension Plan,
computed as of the day the Participant separates from service with the
Employer on the basis of the benefit form elected under the Pension
Plan;
provided, however, that, if the Plan is terminated with respect to a Participant
prior to his separation from service with the Employer, such Supplemental
Pension Benefit shall not exceed the Supplemental Pension Benefit that would
have been payable under this Section 4.03, on the basis of the benefit form
elected under the Pension Plan, if his separation from service had occurred as
of the date of the termination of the Plan.
SECTION 4.04 SUPPLEMENTAL SAVINGS BENEFIT.
----------------------------
A Participant's Supplemental Savings Benefit under the Plan shall be equal to
the excess of (a) over (b), where:
(a) is matching contributions that would otherwise be allocated to an account
of the Participant under the Savings Plan for a particular year if the
provisions of the Savings Plan were administered without regard to any of
the Applicable Limitations; and
(b) is the matching contributions made by the Employer that are actually
allocated to an account of the Participant under the provisions of the
Savings Plan for that particular year after giving effect to any reduction
of such allocation required by any of the Applicable Limitations.
9
<PAGE>
ARTICLE V
ACCOUNTS
SECTION 5.01 SUPPLEMENTAL ESOP BENEFIT ACCOUNT.
---------------------------------
For each Participant who is credited with a benefit pursuant to Section 4.01 of
the Plan, the Employer shall establish, as a memorandum account on its books, a
Supplemental ESOP Account. Each year, the Committee shall credit to the
Participant's Supplemental ESOP Account the amount of benefits determined under
Section 4.01 of the Plan for that year. The Committee shall credit the account
with an amount equal to the appropriate number of shares of Common Stock or
other medium of contribution that would have otherwise been made to the
Participant's accounts under the ESOP but for the limitations imposed by the
Code. Shares of Common Stock shall be valued under this Plan in the same manner
as under the ESOP. Cash contributions credited to a Participant's Supplemental
ESOP Account shall be credited annually with interest at a rate equal to the
combined weighted return provided to the Participant's non-stock accounts under
the ESOP.
SECTION 5.02 SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT.
------------------------------------
The Employer shall establish, as a memorandum account on its books, a
Supplemental Stock Ownership Account. Upon a Participant's Retirement or in the
event of a Change in Control, the Committee shall credit to the Participant's
Supplemental Stock Ownership Account the amount of benefits determined under
Section 4.02 of the Plan. The Committee shall credit the account with an amount
equal to the appropriate number of shares of Common Stock or other medium of
contribution that would have otherwise been made to the Participant's accounts
under the ESOP but for the Participant's Retirement. Shares of Common Stock
shall be valued under this Plan in the same manner as under the ESOP. Cash
contributions credited to a Participant's Supplemental ESOP Account shall be
credited annually with interest at a rate equal to the combined weighted return
provided to the Participant's non-stock accounts under the ESOP.
SECTION 5.03 SUPPLEMENTAL PENSION ACCOUNT.
----------------------------
RESERVED
SECTION 5.04 SUPPLEMENTAL SAVINGS ACCOUNT.
----------------------------
The Employer shall establish a memorandum account, the "Supplemental Savings
Account" for each Participant on its books, and each year the Committee will
credit the amount of contributions determined under Section 4.04 of the Plan.
Contributions credited to a Participant's Supplemental Savings Account shall be
credited monthly with interest at a rate equal to the combined weighted return
provided to the Participant's matching contribution account under the Savings
Plan.
10
<PAGE>
ARTICLE VI
SUPPLEMENTAL BENEFIT PAYMENTS
SECTION 6.01 PAYMENT OF SUPPLEMENTAL ESOP BENEFIT.
------------------------------------
(a) A Participant's Supplemental ESOP Benefit shall be paid to the Participant
or in the event of the Participant's death, to his beneficiary in the same
form, time and medium (i.e., cash and/or shares of Common Stock) as his
benefits are paid under the ESOP.
(b) A Participant shall have a non-forfeitable right to the Supplemental ESOP
Benefit credited to him under this Plan in the same percentage as he has to
benefits allocated to him under the ESOP at the time the benefits become
distributable to him under the ESOP.
SECTION 6.02 PAYMENT OF SUPPLEMENTAL STOCK OWNERSHIP BENEFIT.
-----------------------------------------------
(a) A Participant's Supplemental Stock Ownership Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, time and medium (i.e., cash and/or shares of Common Stock)
as his benefits are paid under the ESOP.
(b) A Participant shall always have a fully non-forfeitable right to the
Supplemental Stock Ownership Benefit credited to him under this Plan.
SECTION 6.03 PAYMENT OF SUPPLEMENTAL PENSION BENEFIT.
---------------------------------------
(a) A Participant's Supplemental Pension Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, and at the same time as his benefits are paid under the
Pension Plan.
(b) A Participant shall have a non-forfeitable right to his Supplemental Pension
Benefit under this Plan in the same percentage as he has to his accrued
benefits under the Pension Plan at the time the benefits become
distributable to him under the Pension Plan.
SECTION 6.04 PAYMENT OF SUPPLEMENTAL SAVINGS BENEFIT.
---------------------------------------
(a) A Participant's Supplemental Savings Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, and at the same time as his benefits are paid under the
Savings Plan.
(b) A Participant shall have a non-forfeitable right to his Supplemental Savings
Benefit under this Plan in the same percentage as he has to his accrued
benefits under the Pension Plan at the time the benefits become
distributable to him under the Savings Plan.
11
<PAGE>
SECTION 6.05 ALTERNATIVE PAYMENT OF BENEFITS.
-------------------------------
Notwithstanding the other provisions of this Article VI, a Participant may, with
prior written consent of the Committee and upon such terms and conditions as the
Committee may impose, request that the Supplemental ESOP Benefit and/or the
Supplemental Stock Ownership Benefit and/or the Supplemental Pension Benefit
and/or Supplemental Savings Benefit to which he is entitled, and the survivor
benefit to which his beneficiary under the Pension Plan may be entitled under
Section 4.03 be paid commencing at a different time, over a different period, in
a different form, or to different persons, than the benefit to which he or his
beneficiary may be entitled under the ESOP or the Pension Plan; provided,
however, that in the event of any difference with respect to his Supplemental
Pension Benefit, the benefit actually paid under this Section 6.04 shall be the
actuarial equivalent (as determined based on applicable tables, factors, and
assumption set forth in the Pension Plan) of the benefit that would be paid in
accordance with the provisions of Section 6.03 of the Plan.
12
<PAGE>
ARTICLE VII
CLAIMS PROCEDURES
SECTION 7.01 CLAIMS REVIEWER.
---------------
For purposes of handling claims with respect to this Plan, the "Claims Reviewer"
shall be the Committee, unless the Committee designates another person or group
of persons as Claims Reviewer.
SECTION 7.02 CLAIMS PROCEDURE.
----------------
(a) An initial claim for benefits under the Plan must be made by the Participant
or his or her beneficiary or beneficiaries in accordance with the terms of
this Section 7.02.
(b) Not later than ninety (90) days after receipt of such a claim, the Claims
Reviewer will render a written decision on the claim to the claimant, unless
special circumstances require the extension of such 90-day period. If such
extension is necessary, the Claims Reviewer shall provide the Participant or
the Participant's beneficiary or beneficiaries with written notification of
such extension before the expiration of the initial 90-day period. Such
notice shall specify the reason or reasons for the extension and the date by
which a final decision can be expected. In no event shall such extension
exceed a period of ninety (90) days from the end of the initial 90-day
period.
(c) In the event the Claims Reviewer denies the claim of a Participant or any
beneficiary in whole or in part, the Claims Reviewer's written notification
shall specify, in a manner calculated to be understood by the claimant, the
reason for the denial; a reference to the Plan or other document or form
that is the basis for the denial; a description of any additional material
or information necessary for the claimant to perfect the claim; an
explanation as to why such information or material is necessary; and an
explanation of the applicable claims procedure.
(d) Should the claim be denied in whole or in part and should the claimant be
dissatisfied with the Claims Reviewer's disposition of the claimant's claim,
the claimant may have a full and fair review of the claim by the Committee
upon written request submitted by the claimant or the claimant's duly
authorized representative and received by the Committee within sixty (60)
days after the claimant receives written notification that the claimant's
claim has been denied. In connection with such review, the claimant or the
claimant's duly authorized representative shall be entitled to review
pertinent documents and submit the claimant's views as to the issues, in
writing. The Committee shall act to deny or accept the claim within sixty
(60) days after receipt of the claimant's written request for review unless
special circumstances require the extension of such 60-day period. If such
extension is necessary, the Committee shall provide the claimant with
written notification of such extension before the expiration of such initial
60-day period. In all events, the Committee shall act to deny or accept the
claim within 120 days of the receipt of the claimant's written request for
review. The action of the
13
<PAGE>
Committee shall be in the form of a written notice to the claimant and its
contents shall include all of the requirements for action on the original
claim.
(e) In no event may a claimant commence legal action for benefits the claimant
believes are due the claimant until the claimant has exhausted all of the
remedies and procedures afforded the claimant by this Article VII.
14
<PAGE>
ARTICLE VIII
AMENDMENT AND TERMINATION
SECTION 8.01 AMENDMENT OF THE PLAN.
---------------------
The Bank may from time to time and at any time amend the Plan; provided,
however, that such amendment may not adversely affect the rights of any
Participant or beneficiary with respect to any benefit under the Plan to which
the Participant or beneficiary may have previously become entitled prior to the
effective date of such amendment without the consent of the Participant or
beneficiary. The Committee shall be authorized to make minor or administrative
changes to the Plan, as well as amendments required by applicable federal or
state law (or authorized or made desirable by such statutes); provided, however,
that such amendments must subsequently be ratified by the Board of Directors.
SECTION 8.02 TERMINATION OF THE PLAN.
-----------------------
The Bank may at any time terminate the Plan; provided, however, that such
termination may not adversely affect the rights of any Participant or
beneficiary with respect to any benefit under the Plan to which the Participant
or beneficiary may have previously become entitled prior to the effective date
of such termination without the consent of the Participant or beneficiary. Any
amounts credited to the supplemental accounts of any Participant shall remain
subject to the provisions of the Plan and no distribution of benefits shall be
accelerated because of termination of the Plan.
15
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE.
----------------------------------------------------------
The right of a Participant or any beneficiary to receive a distribution under
this Plan shall be an unsecured claim against the general assets of the Bank or
its Affiliates and neither a Participant nor his designated beneficiary or
beneficiaries shall have any rights in or against any amount credited to any
account under this Plan or any other assets of the Bank or an Affiliate. The
Plan at all times shall be considered entirely unfunded both for tax purposes
and for purposes of Title I of ERISA. Any funds invested hereunder shall
continue for all purposes to be part of the general assets of the Bank or an
Affiliate and available to its general creditors in the event of bankruptcy or
insolvency. Accounts under this Plan and any benefits which may be payable
pursuant to this Plan are not subject in any manner to anticipation, sale,
alienation, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of a Participant or a Participant's beneficiary. The
Plan constitute a mere promise by the Bank or Affiliate to make benefit payments
in the future. No interest or right to receive a benefit may be taken, either
voluntarily or involuntarily, for the satisfaction of the debts of, or other
obligations or claims against, such Participant or beneficiary, including claims
for alimony, support, separate maintenance and claims in bankruptcy proceedings.
SECTION 9.02 COMMITTEE AS PLAN ADMINISTRATOR.
-------------------------------
(a) The Plan shall be administered by the Committee designated by the Board of
Directors.
(b) The Committee shall have the authority, duty and power to interpret and
construe the provisions of the Plan as it deems appropriate. The Committee
shall have the duty and responsibility of maintaining records, making the
requisite calculations and disbursing the payments hereunder. In addition,
the Committee shall have the authority and power to delegate any of its
administrative duties to employees of the Bank or Affiliate, as they may
deem appropriate. The Committee shall be entitled to rely on all tables,
valuations, certificates, opinions, data and reports furnished by any
actuary, accountant, controller, counsel or other person employed or
retained by the Bank with respect to the Plan. The interpretations,
determination, regulations and calculations of the Committee shall be final
and binding on all persons and parties concerned.
SECTION 9.03 EXPENSES.
--------
Expenses of administration of the Plan shall be paid by the Bank or an
Affiliate.
SECTION 9.04 STATEMENTS.
----------
The Committee shall furnish individual annual statements of accrued benefits to
each Participant, or current beneficiary, in such form as determined by the
Committee or as required by law.
16
<PAGE>
SECTION 9.05 RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
----------------------------------------
(a) The sole rights of a Participant or beneficiary under this Plan shall be to
have this Plan administered according to its provisions, to receive whatever
benefits he or she may be entitled to hereunder.
(b) Nothing in the Plan shall be interpreted as a guaranty that any funds in any
trust which may be established in connection with the Plan or assets of the
Bank or an Affiliate will be sufficient to pay any benefit hereunder.
(c) The adoption and maintenance of this Plan shall not be construed as creating
any contract of employment or service between the Bank or an Affiliate and
any Participant or other individual. The Plan shall not affect the right of
the Bank or an Affiliate to deal with any Participants in employment or
service respects, including their hiring, discharge, compensation, and
conditions of employment or other service.
SECTION 9.06 INCOMPETENT INDIVIDUALS.
-----------------------
The Committee may from time to time establish rules and procedures which it
determines to be necessary for the proper administration of the Plan and the
benefits payable to a Participant or beneficiary in the event that such
Participant or beneficiary is declared incompetent and a conservator or other
person legally charged with that Participant's or beneficiary's care is
appointed. Except as otherwise provided herein, when the Committee determines
that such Participant or beneficiary is unable to manage his or her financial
affairs, the Committee may pay such Participant's or beneficiary's benefits to
such conservator, person legally charged with such Participant's or
beneficiary's care, or institution then contributing toward or providing for the
care and maintenance of such Participant or beneficiary. Any such payment shall
constitute a complete discharge of any liability of the Bank or an Affiliate and
the Plan for such Participant or beneficiary.
SECTION 9.07 SALE, MERGER, OR CONSOLIDATION OF THE BANK.
------------------------------------------
The Plan may be continued after a sale of assets of the Bank, or a merger or
consolidation of the Bank into or with another corporation or entity only if and
to the extent that the transferee, purchaser or successor entity agrees to
continue the Plan. Additionally, upon a merger, consolidation or other change
in control any amounts credited to Participant's deferral accounts shall be
placed in a grantor trust to the extent not already in such a trust. In the
event that the Plan is not continued by the transferee, purchaser or successor
entity, then the Plan shall be terminated subject to the provisions of Section
7.2 of the Plan. Any legal fees incurred by a Participant in determining
benefits to which such Participant is entitled under the Plan following a sale,
merger, or consolidation of the Bank or an Affiliate of which the Participant is
an Employee or, if applicable, a member of the Board of Directors, shall be paid
by the resulting or succeeding entity.
17
<PAGE>
SECTION 9.08 LOCATION OF PARTICIPANTS.
------------------------
Each Participant shall keep the Bank informed of his or her current address and
the current address of his or her designated beneficiary or beneficiaries. The
Bank shall not be obligated to search for any person. If such person is not
located within three (3) years after the date on which payment of the
Participant's benefits payable under this Plan may first be made, payment may be
made as though the Participant or his or her beneficiary had died at the end of
such three-year period.
SECTION 9.09 LIABILITY OF THE BANK AND ITS AFFILIATES.
----------------------------------------
Notwithstanding any provision herein to the contrary, neither the Bank nor any
individual acting as an employee or agent of the Bank shall be liable to any
Participant, former Participant, beneficiary, or any other person for any claim,
loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Bank or any such
employee or agent of the Bank.
SECTION 9.10 GOVERNING LAW.
-------------
All questions pertaining to the construction, validity and effect of the Plan
shall be determined in accordance with the laws of the United States and to the
extent not preempted by such laws, by the laws of Virginia.
18
<PAGE>
ARTICLE X
REQUIRED REGULATORY PROVISIONS
SECTION 10.01 REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The Employer may terminate an Employee's employment at any time, but any
termination by the Employer, other than termination for cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. An Employee shall not have the right to receive compensation or other
benefits for any period after a termination for cause as otherwise provided
hereunder.
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(3) or (g)(1), the Bank's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1) all obligations of the Bank
under this Plan shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the Participants.
(e) All obligations of the Bank under this Plan shall be terminated, except
to the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the OTS (or his
designee), the FDIC or the Resolution Trust Corporation, at the time the FDIC
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of the Federal Deposit Insurance Act,
12 U.S.C. Section 1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Participants pursuant to this Plan, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k),
12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
19
<PAGE>
This Plan has been duly adopted this _________ day of _____, 199____.
20
<PAGE>
EXHIBIT 23.1
[LOGO OF CHERRY BEKAERT & HOLLAND APPEARS HERE]
The Board of Directors
Fredericksburg Savings and Loan Association, F.A
We consent to the use in the registration statement on Form S-1 of Virginia
Capital Bancshares, Inc. and the application for conversion on Form AC of
Fredericksburg Savings & Loan Association, F.A, of our report dated January 29,
1998, accept to Note 16, for which the date is August 14, 1998, with respect to
the financial statements of Fredericksburg Savings and Loan Associates, F.A as
of December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997 included herein, the use of our opinion as to the
Virginia income tax consequences of the offering as described therein and
included herein and to the reference to our firm under the heading "Experts" in
the prospectus.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
September 8, 1998
<PAGE>
EXHIBIT 23.2
CONSENT
We hereby consent to the references to this firm and our opinions in: the
Registration Statement on Form S-1 filed by Virginia Capital Bancshares, Inc.
(the "Company"), Fredericksburg, Virginia, and all amendments thereto; in the
Form H-(e)1 for the Company, and all amendments thereto; and in the Application
for Conversion on Form AC filed by Fredericksburg Savings and Loan Association,
F.A. (the "Bank"), and all amendments thereto, relating to the conversion of the
Bank from a federally-chartered mutual savings and loan association to a
federally-chartered stock savings bank, the concurrent issuance of the Bank's
outstanding capital stock to the Company, a holding company formed for such
purpose, and the offering of the Company's common stock.
MULDOON, MURPHY & FAUCETTE
/s/ Muldoon, Murphy & Faucette
Dated this 11th day of
September, 1998
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF FINPRO APPEARS HERE]
Board of Directors
Virginia Capital Bancshares, Inc.
Fredericksburg Savings and Loan Association, F.A.
400 George St.
Fredericksburg, Virginia 22404
Dear Board Members:
We hereby consent to the use of our firm's name, FinPro, Inc. ("FinPro") in the
Form S-1 Registration Statement and Amendments thereto of Virginia Capital
Bancshares, Inc. so filed with the Securities and Exchange Commission, the Form
AC Application for Conversion and the prospectus included therein filed by
Fredericksburg Savings and Loan Association, F.A., and any amendments thereto,
for the Valuation Appraisal Report ("Report") regarding the valuation of
Fredericksburg Savings and Loan Assoication, F.A., provided by FinPro, and our
opinion regarding subscription rights filed as exhibits to the Form S-1 and Form
AC referred to below. We also consent to the use of our firm's name and the
inclusion of, summary of and references to our Report and Opinion in the
prospectus included in the Form S-1, and any amendments thereto.
Very Truly Yours,
/s/ Kenneth G. Emerson
Kenneth G. Emerson
Director
Liberty Corner, New Jersey
September 9, 1998
<PAGE>
[LETTERHEAD OF FINPRO APPEARS HERE]
September 9, 1998
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
400 George Street
Fredericksburg, Virginia 22404
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the meanings
given such terms in the Plan of Conversion (the "Plan") adopted by the Board of
Directors of Fredericksburg Savings and Loan Association, F.A. (the
"Association"), and Virginia Capital Bancshares, Inc., ("the Company") whereby
the Association and the Company will reorganize into the stock holding company
structure form of organization, and issue shares of Common Stock of, Virginia
Capital Bancshares, Inc. in a Subscription Offering, Eligible Public
Shareholders Offering and a Community Offering.
We understand that in accordance with the Plan, Subscription Rights to purchase
shares of the Company's Common Stock are to be issued to (i) Eligible Account
Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; (iv) Other
Members; and (v) directors, officers and employees of the Association,
collectively referred to as the "Recipients". Based solely on our observation
that the Subscription Rights will be available to such Recipients without cost,
will be legally non-transferable and of short duration, and will afford the
Recipients the right only to purchase shares of Common Stock at the same price
as will be paid by members of the general public in the Eligible Public
Shareholders and Community Offerings, but without undertaking any independent
investigation of state or federal law or the position of the Internal Revenue
Service with respect to this issue, we are of the opinion that:
(1) the Subscription Rights will have no ascertainable market value; and
(2) the price at which the Subscription Rights are excercisable will not
be more or less than the pro forma market value of the shares upon
issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Company's value alone. Accordingly, no assurance can
be given that persons who subscribe to shares of Common Stock in the offering
will thereafter be able to buy or sell such shares at the same price paid in the
Subscription Offering.
Very Truly Yours,
FinPro, Inc.
/s/ Kenneth G. Emerson
Kenneth G. Emerson
Director
<PAGE>
CONFORMED EXHIBIT 24.1
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Samuel C. Harding, Jr., as true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities to sign
any or all amendments to the Application for Conversion by Fredericksburg
Savings and Loan Association, F.A. and the Form S-1 Registration Statement by
Virginia Capital Bancshares, Inc. and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Office of Thrift
Supervision of the Department of the Treasury (the "OTS") or the U.S. Securities
and Exchange Commission, respectively, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as they
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of Part 563b of the OTS Rules and Regulations
and the Securities Act of 1933, as amended, and any rules and regulations
promulgated thereunder, the foregoing Power of Attorney prepared in conjunction
with the Application for Conversion and the Registration Statement has been duly
signed by the following persons in the capacities and on the dates indicated.
NAME DATE
---- ----
/s/ Samuel C. Harding, Jr. September 11, 1998
- ---------------------------------
Samuel C. Harding, Jr.
President and Director
(principal executive officer)
Virginia Capital Bancshares, Inc.
President and Director
(principal executive officer)
Fredericksburg Savings and Loan
Association, F.A.
/s/ Peggy J. Newman September 11, 1998
- ---------------------------------
Peggy J. Newman
Executive Vice President, Treasurer, Secretary
and Director (principal accounting and financial
officer) Virginia Capital Bancshares, Inc.
Executive Vice President, Treasurer, Secretary
and Director (principal accounting and financial
officer) Fredericksburg Savings and Loan
Association, F.A.
<PAGE>
/s/ H. Smith McKann September 11, 1998
- --------------------------------
H. Smith McKann
Chairman of the Board
Virginia Capital Bancshares, Inc.
Chairman of the Board
Fredericksburg Savings and Loan
Association, F.A.
/s/ Ronald G. Beck September 11, 1998
- --------------------------------
Ronald G. Beck
Vice Chairman of the Board
Virginia Capital Bancshares, Inc.
Vice Chairman of the Board
Fredericksburg Savings and Loan
Association, F.A.
/s/ William M. Anderson, Jr. September 11, 1998
- --------------------------------
William M. Anderson, Jr.
Director
Virginia Capital Bancshares, Inc.
Director
Fredericksburg Savings and Loan
Association, F.A.
/s/ O'Conor Ashby September 11, 1998
- ---------------------------------
O'Conor Ashby
Director
Virginia Capital Bancshares, Inc.
Director
Fredericksburg Savings and Loan
Association, F.A.
/s/ Ernest N. Donahoe, Jr. September 11, 1998
- ---------------------------------
Ernest N. Donahoe, Jr.
Director
Virginia Capital Bancshares, Inc.
Director
Fredericksburg Savings and Loan
Association, F.A.
/s/ DuVal Q. Hicks, Jr. September 11, 1998
- ---------------------------------
DuVal Q. Hicks, Jr.
Director
Virginia Capital Bancshares, Inc.
Director
Fredericksburg Savings and Loan
Association, F.A.
<PAGE>
/s/ Charles S. Rowe September 11, 1998
- ---------------------------------
Charles S. Rowe
Director
Virginia Capital Bancshares, Inc.
Director
Fredericksburg Savings and Loan Association, F.A.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Fredericksburg Savings and Loan Association, F.A. at and
for the year ended December 31, 1997 and for the six months ended June 30, 1998
and is published in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-1-1997 JAN-1-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 653 783
<INT-BEARING-DEPOSITS> 10,634 8,248
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 31,151 30,928
<INVESTMENTS-CARRYING> 1,291 1,190
<INVESTMENTS-MARKET> 1,335 1,226
<LOANS> 418,510 421,625
<ALLOWANCE> 5,478 5,639
<TOTAL-ASSETS> 471,920 472,280
<DEPOSITS> 377,114 373,719
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 6,733 7,061
<LONG-TERM> 8,000 8,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 80,073 83,500
<TOTAL-LIABILITIES-AND-EQUITY> 471,920 472,280
<INTEREST-LOAN> 32,516 16,004
<INTEREST-INVEST> 2,929 1,388
<INTEREST-OTHER> 1,734 1,276
<INTEREST-TOTAL> 37,179 18,668
<INTEREST-DEPOSIT> 18,816 9,375
<INTEREST-EXPENSE> 19,418 9,620
<INTEREST-INCOME-NET> 16,027 7,772
<LOAN-LOSSES> 375 369
<SECURITIES-GAINS> 67 52
<EXPENSE-OTHER> 7,009 3,244
<INCOME-PRETAX> 10,377 5,535
<INCOME-PRE-EXTRAORDINARY> 10,377 5,535
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,425 3,320
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.74 7.60
<LOANS-NON> 3,676 2,904
<LOANS-PAST> 0 321
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 9,800 8,500
<ALLOWANCE-OPEN> 5,543 5,478
<CHARGE-OFFS> (440) (108)
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 5,478 5,639
<ALLOWANCE-DOMESTIC> 543 610
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 4,935 5,029
</TABLE>
<PAGE>
EXHIBIT 99.2
DRAFT
GIFT INSTRUMENT
CHARITABLE GIFT TO
FREDERICKSBURG SAVINGS CHARITABLE FOUNDATION
Virginia Capital Bancshares, Inc., Fredericksburg, Virginia (the
"Company"), desires to make a gift of its common stock, par value $.01 per share
to Fredericksburg Savings Charitable Foundation (the "Foundation"), a nonprofit
corporation organized under the laws of the State of Delaware. The purpose of
the donation is to establish a bond between Virginia Capital Bancshares, Inc.
and the community in which it and its affiliates operate to enable the community
to share in the potential growth and success of the Company and its affiliates
over the long term. To that end, Virginia Capital Bancshares, Inc. now gives,
transfers, and delivers to the Foundation __________ shares of its common stock,
par value $.01 per share, or total consideration of $______, subject to the
following conditions:
1. The Foundation shall use the donation solely for charitable purposes,
including community development, in the communities in which the Company and its
affiliates operate in accordance with the provisions of the Foundation's
Certificate of Incorporation; and
2. Consistent with the Company's intent to form a long-term bond between
the Company and the community, the amount of Common Stock that may be sold by
the Foundation in any one year shall not exceed 5% of the market value of the
assets held by the Foundation, except that this restriction shall not prohibit
the board of directors of the Foundation from selling a greater amount of Common
Stock in any one year if the board of directors of the Foundation determines
that the failure to sell a greater amount of the Common Stock held by the
Foundation would: (a) result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; or (b) otherwise
jeopardize the Foundation's tax-exempt status.
3. The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be considered by the
Company to be voted in the same ratio as all other shares of Common Stock of the
Company which are voted on each and every proposal considered by stockholders of
the Company, provided, however, that if this Condition No. 3 is waived by the
Office of Thrift Supervision pursuant to Office of Thrift Supervision Order No.
______, dated _____________, 1998 (a copy of which is attached hereto), then
this Condition No. 3 shall become void and of no effect.
Dated: ___________, 1998 VIRGINIA CAPITAL BANCSHARES, INC.
By:________________________________
