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As filed with the Securities and Exchange Commission on April __, 2000
Registration No. 033-___________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Salem Community Bankshares, Inc.
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(Exact Name of Registrant as Specified in its Charter)
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Virginia 6711 54-1054018
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(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code) Identification No.)
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Clark Owen, Jr. Copy to:
President and CEO Hugh B. Wellons
Salem Comm. Bankshares, Inc. Flippin, Densmore, et al.
220 East Main Street. 1800 First Union Tower
Salem, Virginia 24153 Roanoke, Virginia 24011
Tel. (540) 387-0223 Tel. (540) 570-3057
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(Name and Address of Agent for Service)
Approximate date of commencement of the proposed sale of the securities to the
public: As soon a practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ X ]
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CALCULATION OF REGISTRATION FEES
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Title of Amount Proposed Maximum Proposed Maximum Amount of
Securities to To Be Offering Price Aggregate Registration
Be Registered Registered(1) Per Unit (2) Offering Price Fee
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Common Stock, 1,590,482 $ 11.69 $18,592,735 $4,910
($5.00 par value) Shares
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______________________
(1) Includes 64,790 shares unissued and subject to the 1992 Employee Stock
Option Plan.
(2) Estimated solely for the purpose of calculating the Registration Fee
pursuant to Rule 457 on the basis of 11.69 per share, the book value as of
12/3/99 for the stock on a pro forma basis, since no material trading market
exists for this stock.
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 this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
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Cross Reference Sheet Pursuant to Item 501 of Regulation S-K
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A. Information About the Transaction
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1. Forepart of Registration Front Cover Page of Registration Statement;
Statement and Outside Front Cross Reference Sheet; Outside Front Cover
Cover Page of Prospectus Page of Prospectus
2. Inside Front and Outside Back Where You Can Find More Information;
Cover Pages of Prospectus Information Incorporated by Reference;
Table of Contents
3. Risk Factors, Ratio of Earnings Risk Factors; Selected Consolidated
to Fixed Charges and Other Financial and Other Information;
Information Consolidated Financial Statements; Proposed Reorganization into a
Bank Holding Company; Additional Information
About Salem Bank & Trust
4. Terms of the Transaction Summary - Questions and Answers About
the Holding Company Formation; Proposed
Reorganization into a Bank Holding Company;
Additional Information About
Salem Community Bankshares
5. Pro Forma Financial Information Not Applicable.
6. Material Contracts With the Summary - Questions and Answers About
Company Being Acquired the Holding Company Formation; Proposed
Reorganization into A Bank Holding Company
7. Additional Information Required Not Applicable
for Reoffering by Persons and
Parties Deemed to be
Underwriters
8. Interests of Named Experts and Legal Matters
Counsel
9. Disclosure of Commission's Not Applicable
Position on Indemnification for
Securities Act Liabilities
B. Information About the Registrant
10. Information with Respect to S-3 Not Applicable
Registrants
11. Incorporation of Certain Not Applicable
Information by Reference
12. Information with Respect to S-2 Not Applicable
or S-3 Registrants
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13. Incorporation of Certain Where You Can Find More Information
Information by Reference
14. Information with Respect to Where You Can Find More Information;
Registrants Other than S-2 or Additional Information About Salem Bank
S-3 Registrants & Trust; Additional Information About
Salem Community Bankshares
C. Information About the Companies
Being Acquired
15. Information with Respect to S-3 Not Applicable
Companies
16. Information with Respect to S-2 Not Applicable
and S-3 Companies
17. Information with Respect to Not Applicable
Companies Other than S-2 or S-3
Companies
D. Voting and Management Information
18. Information if Proxies, Consents Proposed Reorganization into a Bank
or Authorizations Are to Be Holding Company; Additional Information
Solicited About Salem Bank & Trust
19. Information if Proxies, Consents Not Applicable
or Authorizations Are Not to Be
Solicited or in an Exchange Offer
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Salem Bank & Trust, N.A.
Dear Shareholders:
You are cordially invited to attend the annual meeting of shareholders of
Salem Bank & Trust, N.A. to be held at 10:00 a.m. on May 31, 2000, at Salem
Civic Center, located at 1001 Roanoke Boulevard, Salem, Virginia.
At this meeting, you will be asked to vote on a bank holding company
formation for Salem Bank & Trust. If you approve this proposal at the meeting,
Salem Community Bankshares, Inc. will become the holding company for our bank.
Each existing share of the bank's common stock will be converted into an equal
interest in the new holding company in a reorganization transaction. The bank
holding company formation will not change your equity or voting interest in our
operations relative to other stockholders. In addition, you will be asked to
vote on a proposal to postpone the meeting, if we believe that is necessary to
obtain approval of enough shares to complete the reorganization. Finally, you
will be asked to elect 9 directors of the bank.
The establishment of the bank holding company is also subject to approval
by governmental regulatory authorities. If approved, the holding company will
not affect the daily operations of Salem Bank & Trust, and we will continue to
provide your bank services in the same offices and with the same directors,
officers and employees.
The financial services industry is changing rapidly in Virginia and
throughout our nation. Historical distinctions between different types of
financial institutions and other financial service providers are eroding
rapidly, and banks like ours are subject to more aggressive competition. We
believe that the greater flexibility and investment opportunities provided by a
holding company will help us to continue to fulfill our customer's needs in this
rapidly changing environment.
The board of directors has considered and unanimously approved the
formation of Salem Community Bankshares as a holding company for Salem Bank &
Trust as being in the best interest of the bank and its shareholders. The bank's
board of directors recommends that shareholders vote FOR the plan, approving the
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establishment of the holding company.
The accompanying proxy statement and related proxy materials provide
detailed information concerning the proposed transaction to establish a holding
company. We encourage you to review these materials, and especially the "Risk
Factors" section beginning on page 8, before completing the enclosed proxy card.
Salem Community Bankshare's stock has not been approved or disapproved by
the Securities and Exchange Commission, any State Securities Commission, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency, the
Federal Reserve Board or any State Banking Commission, nor has any of these
institutions passed upon the accuracy or adequacy of this proxy
statement/prospectus. Any representation to the contrary is a criminal offense.
The new holding company's securities are not savings accounts or deposits
and are neither insured nor guaranteed by Salem Bank & Trust, the U.S.
Government, the Federal Deposit Insurance Corporation or any other governmental
agency. The securities are subject to investment risk and may lose value.
The separate votes of more than two-thirds of the bank's outstanding common
stock is required to approve the reorganization. Not returning a proxy card, not
voting in person at the annual meeting or abstaining from voting will have the
same effect as voting against the reorganization.
We believe it is important that your shares be represented at the annual
meeting regardless of the number you own. Even if you plan to be present at the
annual meeting, we urge you to complete, sign, date and return your proxy card
promptly in the envelope provided.
Very truly yours,
Clark Owen, Jr.
President and CEO
This proxy statement/prospectus is being mailed to stockholders on or about
___________, 2000. The date of this proxy statement/prospectus is ___________,
2000.
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SALEM BANK & TRUST, N.A.
220 E. Main Street
Salem, Virginia 24153
(540) 387-0223 (Telephone)
NOTICE OF ANNUAL MEETING
TO BE HELD ON MAY 31, 2000
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Salem
Bank & Trust, N.A. will be held at Salem Civic Center, located at 1001 Roanoke
Boulevard, Salem, Virginia, on May 31, 2000 at 10:00 a.m., for the following
purposes:
(1) To consider a proposal to approve the reorganization of Salem Bank &
Trust into a bank holding company form of ownership by approving a
plan and agreement of share exchange, through which
- The bank will become a subsidiary of a newly formed bank holding
company called Salem Community Bankshares, Inc.; and
- Each outstanding share of Salem Bank & Trust common stock will be
converted into one share of common stock of the holding company;
and
(2) To consider a proposal to allow the Chairman of the meeting to adjourn
the meeting to a later date and resolicit shareholders if he believes
that there are insufficient votes to approve the reorganization.
(3) To elect nine (9) directors for the ensuing year or until their
replacements are qualified and approved.
(4) To transact any other business that properly comes before the annual
meeting or any adjournment of the meeting.
If you held shares of the bank's common stock at the close of business on
, 2000, you are entitled to notice of the annual meeting and to vote on
all matters that properly come before the meeting, including the reorganization.
A stockholder may exercise statutory dissenter's rights. If you desire to
do this by attempting to seek the payment of "fair value" for your shares, you
must follow strictly the procedures outlined in Chapter 9, Article 15 of the
Virginia Stock Corporation Act. A copy of these statutory provisions is attached
as Appendix C to this proxy statement. If you wish to object and do not follow
the statutory procedures carefully, your right to seek the payment of "fair
value" for your shares may be invalidated.
The separate votes of more than two-thirds of Salem Bank & Trust's issued
and outstanding common stock, is required to approve the reorganization.
Consequently, the required vote of Salem Bank & Trust's common stockholders is
based on the total number of shares of Salem Bank & Trust's common stock issued
and outstanding, and not on the number of shares which are actually voted. Not
returning a proxy card, not voting in person at the annual meeting or abstaining
from voting will have the same effect as voting against the reorganization.
Therefore, it is important that your shares be represented at the annual
meeting regardless of the number you own. Even if you plan to be present at the
annual meeting, we urge you to complete, sign, date and return your proxy card
promptly in the envelope provided. If you attend this meeting you may vote in
person or by your proxy. Any proxy given may be revoked by you in writing or in
person at any time prior to the time it is exercised as described in the
accompanying proxy statement/prospectus.
By Order of the Board of Directors
_________________
Corinna Witt
Administrative Assistant
Salem, Virginia
______________, 2000
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TABLE OF CONTENTS
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PAGE
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SUMMARY - QUESTIONS AND ANSWERS ABOUT THE HOLDING COMPANY FORMATION.................... 4
RISK FACTORS........................................................................... 8
FORWARD LOOKING STATEMENTS............................................................. 9
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION.................................. 9
THE ANNUAL MEETING..................................................................... 10
PROPOSED REORGANIZATION INTO A BANK HOLDING COMPANY.................................... 12
ADDITIONAL INFORMATION ABOUT SALEM BANK & TRUST........................................ 21
ADDITIONAL INFORMATION ABOUT SALEM COMMUNITY BANKSHARES................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................ 27
STATISTICAL FINANCIAL DATA .......................................................... 33
SUPERVISION AND REGULATION............................................................. 45
FEDERAL HOME LOAN BANK SYSTEM.......................................................... 48
WHERE YOU CAN FIND MORE INFORMATION.................................................... 49
INFORMATION INCORPORATED BY REFERENCE.................................................. 49
CONSOLIDATED FINANCIAL STATEMENTS...................................................... 50
POSTPONEMENT AND ADJOURNMENT OF STOCKHOLDER MEETING.................................... 50
ELECTION OF DIRECTORS.................................................................. 50
NOMINEES FOR ELECTION.................................................................. 50
BENEFICIAL OWNERSHIP OF COMMON STOCK................................................... 51
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES...................................... 51
NOMINATION OTHER THAN BY OR ON BEHALF OF DIRECTORS..................................... 52
SUMMARY COMPENSATION TABLE............................................................. 53
STOCK OPTION GRANTS.................................................................... 53
STOCK OPTIONS EXERCISED AND YEAR-END OPTION VALUES..................................... 53
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES......................... 53
EMPLOYMENT AGREEMENTS.................................................................. 53
RETIREMENT PLANS....................................................................... 54
EMPLOYEE STOCK OPTION PLAN............................................................. 54
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS......................................... 54
INDEPENDENT PUBLIC ACCOUNTANTS......................................................... 54
ANNUAL REPORTS......................................................................... 54
OTHER MATTERS.......................................................................... 55
LEGAL MATTERS.......................................................................... 55
SHAREHOLDER PROPOSALS.................................................................. 55
Appendix A -- Plan and Agreement of Share Exchange.....................................
Appendix B - Salem Community Bankshare's Articles of Incorporation and By-laws
and Salem Bank & Trust's Articles of Incorporation and By-laws........................
Appendix C - Dissenters' Rights: Chapter 9, Article 15 of the Virginia Stock
Corporation Act.......................................................................
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SUMMARY
QUESTIONS AND ANSWERS ABOUT THE HOLDING COMPANY FORMATION
The following questions and answers were written to help you understand the
reorganization proposal. The remainder of the proxy statement and attached
exhibits contain more detailed information. Before you vote, you should give
careful consideration to all of the information contained in or incorporated by
reference into this document.
The Annual Meeting
When and where is the Annual Meeting?
An annual meeting of stockholders will be held at Salem Civic Center,
located at 1001 Roanoke Boulevard, Salem, Virginia on May 31, 2000 at 10:00 a.m.
What will we vote on at the Annual Meeting?
You will be asked to vote on the proposed reorganization by which Salem
Community Bankshares, Inc. will become the holding company for Salem Bank &
Trust. In addition, you will be asked to vote on a proposal that allows the
Meeting chairman to postpone the meeting if he believes we do not have enough
votes to approve the reorganization. You also will vote on the election of
directors, as we do every annual meeting. Finally, you will vote on any other
business as may properly come before the meeting or any adjournment of the
meeting.
Who is Eligible to Vote?
If you held Salem Bank & Trust common stock at the close of business on
April 21, 2000 you are entitled to vote at the Meeting. You may cast one vote
for each share of common stock you held then on each matter properly presented
at the Meeting, except you may cumulate your shares for one or more candidates
in voting on directors.
How do I vote?
Please read the entire proxy statement and consider the matters carefully. Then
fill out the enclosed proxy form and mail it to the bank in the enclosed return
envelope. That proxy will instruct the persons named on the form how to vote
your shares at the meeting. You also may attend the meeting in person and vote.
If you wish to change your vote, you may do so by attending the meeting and
notifying the registrar before the meeting begins, or submitting a proxy bearing
a later date. The board of directors recommends that you vote FOR the directors
nominated, the reorganization, and the proposal to allow postponement of the
meeting.
What vote is required on each matter considered?
Under the bank's articles of association and bylaws, any shareholder
approval must involve at least a quorum of all shares held, which is a majority
of shares outstanding. If we have a quorum:
. Two-thirds of the outstanding shares of our common stock must approve the
reorganization;
. A majority of the votes cast, must approve the proposal that would allow
postponement of the Meeting; and
. The board sets the numbers of directors, and that number of nominees
receiving the most votes are elected.
What percentage of outstanding shares are controlled by management?
On April 21, 2000, the bank's directors and executive officers, and their
affiliates, held __% of the bank's outstanding common stock. This represented
__% of the affirmative votes needed to approve the reorganization. We expect
that all of these shares will be voted in favor of all the proposals submitted
to shareholders.
THE REORGANIZATION
What is being proposed?
We are proposing that the bank be reorganized into a holding company structure,
with each shareholder of the bank receiving the same interest in the holding
company that he or she now has in the bank, and the bank becoming a wholly-owned
subsidiary of the holding company.
Where will the new company be located?
The holding company will be located at the same location that the bank now is
located, 220 East Main Street, Salem, Virginia 24153. The telephone number of
the holding company and the bank will be (540) 387-0223, and our website will be
at www.salembank.com.
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Who are the parties to the reorganization, and what is the structure?
Two parties will engage in the reorganization:
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Salem Bank & Trust; and Salem Community Bankshares, Inc., a wholly owned
subsidiary of Salem Bank & Trust formed to serve as the bank holding company
after the reorganization.
In the reorganization, the bank will become the wholly owned subsidiary of
the holding company through a share exchange in which all of the capital stock
of the bank, namely your shares of bank common stock, will be acquired by the
holding company in exchange for an equal number of shares of holding company
common stock. For more information, please see the section of this proxy
statement/prospectus captioned "Proposed Reorganization into a Bank Holding
Company -- Description of the Proposed Reorganization" on page ___.
Will the reorganization change my ownership interest?
Immediately after the reorganization takes place, and assuming there are no
dissenters: (1) the holding company will have outstanding the same number of
shares of common stock that the bank had issued and outstanding immediately
prior to the reorganization; and (2) you will hold the same number of shares of
holding company common stock that you held in the bank immediately prior to the
reorganization.
Will the reorganization change my rights as a shareholder?
Your rights as a shareholder of the bank are governed generally by the
National Bank Act, a federal statute, and the Articles of Association and Bylaws
of the bank. Following the reorganization, your rights as a shareholder of the
holding company will be governed by Virginia corporate law and the articles of
incorporation and bylaws of the holding company. This change in applicable law,
articles of incorporation and bylaws, will cause some changes in your
stockholder rights. The following list highlights principal changes in your
rights as a result of the reorganization:
. The holding company is authorized to issue up to 10,000,000 shares of
common stock, while the bank is currently authorized to issue only
2,000,000 shares of common stock.
. The holding company is authorized to issue up to 10,000,000 shares of
preferred stock, and the board of directors may set the terms of any
preferred sock issued by the holding company, including using it to prevent
a takeover that the board does not favor. The bank may not issue preferred
stock.
. Holding company directors will serve staggered three year terms instead of
the one year terms currently served by the directors of the bank. Holding
company directors can only be removed by the shareholders for cause before
their term expires. Bank directors may be removed by shareholders
regardless of cause.
. Holding company Articles of Incorporation increase the number of shares
that must be voted to approve the removal of directors, approve certain
fundamental corporate transactions, adopt corporate bylaws different from
those approved by the Board or change certain provisions of the Articles of
Incorporation, unless the Board first approves those actions.
. Holding Company directors and officers will be entitled to greater
indemnification and protected from liability in shareholder and derivative
actions to a greater extent than the bank's directors.
. Holding Company shareholders will not have the authority to call special
shareholders meetings. Bank shareholders owning at least 10% of its stock
may call a special meeting.
. Holding Company shareholders will not have cumulative voting rights in
electing directors. Bank shareholders have such rights.
. If a merger or other extraordinary corporate transaction is not approved by
a majority of the board, it will require approval of holders of 80% of the
outstanding holding company common stock, but if it is approved by the
board, it will require only a majority vote. A similar transaction now
requires the approval of holders of two-thirds of outstanding bank common
stock.
. Two Virginia statutes - the Affiliated Transactions Statute and the Control
Share Acquisitions Statute will make it very difficult for someone to
acquire effective control of the holding company without first obtaining
board, and possibly shareholder, approval. It is not clear whether these
statutes presently apply to the bank.
For more information, please see "Proposed Reorganization into a Bank
Holding Company -- Differences in Stockholder Rights as a Result of the
Reorganization" on page ____.
We intend to list the holding company's stock on the NASDAQ Over the
Counter Bulletin
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Board under the same trading symbol now used for the bank, "SBVA."
Will the reorganization affect my federal income taxes?
You should not incur U.S. Federal income taxes as a result of exchanging
your bank stock for holding company stock. Cash you receive instead of
fractional shares or in connection with the exercise of dissenter's rights may
be taxable. For more information about the tax consequences of the
reorganization, please see the section of this proxy statement/prospectus
captioned "Proposed Reorganization into a Bank Holding Company -- Tax
Consequences of the Reorganization" on page ____.
Will the reorganization have anti-takeover effects?
Holding company Articles of Incorporation and the Virginia Stock
Corporation Act contain provisions that enhance the ability of the holding
company to deal with attempts to acquire control of the company. They may also
facilitate the company's efforts to acquire additional financial institutions.
While management has no plans at present to engage in any acquisition or
affiliation, it is open to opportunities that may develop. These provisions,
together with the ability of the holding company Board to issue preferred stock
and determine its preferences and other terms, also may have an anti-takeover
effect and discourage takeover efforts which have not been approved by the Board
of Directors. These provisions are discussed on the previous page under "Will
the reorganization change my rights as a shareholder?" and in more detail under
"Certain Effects of the Reorganization - Comparison of the Rights of
Shareholders".
Why are you forming a bank holding company?
The holding company structure will increase our opportunities to diversify
our products and services and meet future opportunities to engage in the
following, if we choose to do so:
. Allowing us to provide certain services outside the bank, which is
restricted from offering certain products;
. Engaging in insurance sales and securities activities to a greater degree,
especially if we decide to take advantage of recent federal legislation
that eliminates many restrictions in these areas;
. Provides greater flexibility in acquiring other institutions and allowing
them to retain their own identity;
. Provides greater flexibility in defending against an unfriendly takeover
attempt;
. Provides greater freedom in repurchasing our own stock; and
. May reduce our state tax liability.
We have no specific plans to buy another institution or increase our securities
activity, but we do intend to increase our insurance activities. The flexibility
of a holding company will allow us to react more quickly to market forces. State
tax savings will depend on our ability to move capital into the holding company,
which, at the state level, is taxed on income, while the bank is taxed on
capital.
How will our government supervision and regulation change?
After the reorganization, (1) the Federal Bank Holding Company Act of 1956,
as amended, will apply to the holding company, and the Board of Governors of the
Federal Reserve System will regulate its operations as a bank holding company,
(2) the bank will continue to be regulated by the Office of the Comptroller of
the Currency; and (3) the deposits of the bank will continue to be insured by
the FDIC to the full extent provided by law. For more information, please see
the section of this proxy statement/prospectus captioned "Supervision and
Regulation" on page ____.
Will the management of the holding company be the same as the bank's?
The holding company's board of directors consists of the same persons who
are presently the directors of the bank, with the addition of Carl E. Tarpley,
Jr., Executive Vice President of the bank and the holding company, to the
holding company board. Your approval of the reorganization will confirm those
persons as the directors of the holding company without further action to serve
for the terms described.
Does the bank's board of directors recommend the reorganization?
After careful consideration, the bank directors have determined that the
reorganization is advisable and in the best interests of the bank and its
stockholders. Accordingly, the board unanimously
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approved the reorganization. The bank board of directors recommends that you
vote FOR approval of the reorganization.
What rights will I have if I do not vote for the reorganization?
If you do not vote in favor of the reorganization, and it is approved,
and you do nothing else, your bank stock will automatically be converted into
holding company common stock. However, if you do not vote in favor of the
reorganization, you may have dissenters' rights. Chapter 9, Article 15 of the
Virginia Stock Corporation Act will govern the rights of dissenters. Although
Salem Bank & Trust is a national bank, in order for the share exchange
reorganization to be approved by the OCC, it was necessary for the bylaws of the
Bank to be amended to provide for Virginia law to apply in certain respects. The
Board of Directors did this on June 17, 1999. If the reorganization takes place,
you will be entitled to receive payment of the value of your shares from the
bank if you (1) do not vote in favor of the reorganization, and (2) deliver in
writing to Salem Bank & Trust prior to the vote on the reorganization notice of
your intent to demand payment for your shares. For more information, including a
description of other steps necessary to perfect dissenter's rights, please see
the section of this proxy statement/prospectus captioned "Proposed
Reorganization into a Bank Holding Company -- Rights of Dissenting Stockholders"
on page ___.
What other conditions must be satisfied before the reorganization can occur?
The bank will not be permitted to complete the reorganization until it
satisfies the following conditions:
. stockholder approval by at least two-thirds of all outstanding shares;
. regulatory approvals, which have been applied for;
. rulings or opinions concerning the tax consequences of the reorganization;
and
. compliance with certain state securities laws.
For more information, please see the section of this proxy
statement/prospectus captioned "Proposed Reorganization into a Bank Holding
Company - Conditions That Must be Satisfied Before the Reorganization Can Occur"
on page ___.
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RISK FACTORS
Salem Bank & Trust stockholders should consider, among other matters, the
following factors in voting for the reorganization. If completed, the
reorganization will result in holders of bank common stock receiving
corresponding shares of holding company common stock.
Applicable laws and Federal banking law restricts the bank's ability to
regulations restrict pay dividends on its capital stock. The bank may not
both the ability of pay dividends if upon payment it would become
Salem Bank & Trust to undercapitalized under the laws and regulations
pay dividends to the enforced by the OCC. The bank also may be prevented
Holding Company, and from paying dividends if the OCC determines that the
the ability of the bank is operating in an unsafe or unsound condition
Holding Company to pay or engaging in an unsafe or unsound practice.
dividends to you.
Even if stockholders approve the proposed
reorganization into a bank holding company structure,
these restrictions on the bank's ability to pay
dividends will continue. Consequently, because the
holding company's principal source of income will
consist initially of dividends, if any, from the
bank, the restrictions on the bank's ability to pay
dividends could restrict the holding company's
ability to pay dividends. Moreover, the holding
company will be restricted in its ability to pay
dividends by constraints generally imposed on
Virginia corporations, and may be further restricted
by minimum capital requirements imposed by the Board
of Governors of the Federal Reserve System. See
"Regulatory Matters -- Holding Company Regulation."
The Federal Reserve Board has issued a policy
statement that provides that insured banks and bank
holding companies should generally pay dividends only
out of current operating earnings.
The bank's directors and As of the April 21, 2000 record date, the directors
executive officers own and executive officers of Salem Bank & Trust
a large amount of its beneficially own approximately ____% of our
stock and have outstanding common stock. As a result of this
significant control of percentage ownership, our directors and executive
its management and officers as a group can exercise significant control
affairs, which they over our management and affairs, including the
could exercise in a way election of directors and the determination of all
you believe is not in other matters requiring stockholder approval. This
your best interest. control is enhanced by the reorganization. Acting as
a group, they will retain the power to block business
combinations in accordance with the charter documents
of both the bank and the holding company.
Accordingly, this concentration of ownership may have
the effect of delaying or preventing a change of
control of our company that you may favor.
Provisions of the In addition, provisions of the charter documents of
Holding Company's the holding company, as well as Virginia corporate
charter and applicable law, could make it more difficult for a third party
law may prevent a to acquire us after the reorganization, even if doing
change in control. so would provide our stockholders with a "premium" to
prevailing market prices or otherwise be beneficial
to our stockholders. These provisions in the charter
documents include:
. a staggered board of directors;
. the power of the board to fix the terms of
preferred stock which the holding company
board can issue without stockholder approval;
. the limited ability to remove directors prior
to the end of their term except for cause and
then only if at least two-thirds of each
class of voting stock approves;
. a provision which prohibits stockholders from
calling special meetings of the holding
company's stockholders;
. advance notice procedures for stockholder
proposals;
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. super-majority (80%) shareholder approval
required for change of control transactions
involving a person who owns 5% or more of
holding company common stock unless the
transaction is approved by a majority of
certain unaffiliated directors or unless
certain conditions regarding the
consideration being offered to holding
company shareholders in the transaction are
met;
. the power of the directors, even if less than
a quorum, to fill vacancies on the board;
. the requirement for a super-majority (80%) of
shareholders to approve a change to certain
provisions of the holding company's Articles
of Incorporation or adopt different Bylaws
from those approved by the board of
directors;
. the power of a quorum of the board to change
the Bylaws; and
. the prior approval of the Federal Reserve
Board and the Virginia Bureau of Financial
Institutions must be obtained prior to the
occurrence of a change in control.
Our small market area Our primary market area is Salem, Roanoke City, and
places us at greater Roanoke County, Virginia. This part of the Roanoke
risk of a regional Valley market consists of approximately 60 square
economic problem, such miles and 200,000 people. Practically, our six
as a flood or the branches serve only a portion of this market.
closing of a large Accordingly, a regional disaster, like a flood or a
local employer, having tornado, or a regional economic problem like the
a large effect on our closure of a large local employer could hurt our
performance. performance. Roanoke has a diverse economic base, but
some large employers in our area, such as Roanoke
College or the Norfolk-Southern Corporation, have a
large number of employees and impact many local
businesses. The bank does not lend to any of the
largest companies in this region, but closure of one
of these large employers would hurt many local
businesses and could result in less business, more
defaults, and tougher competition for financial
services. This could make us less profitable or even
result in net losses.
FORWARD LOOKING STATEMENTS
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this proxy
statement/prospectus in connection with our solicitation of proxies or the
offering of the holding company common stock being made. You should not rely on
any other information or representation as having been authorized by Salem Bank
& Trust or Salem Community Bankshares. This proxy statement/prospectus does not
constitute (1) an offer to sell, or a solicitation of an offer to purchase, any
of holding company common stock offered by this proxy statement/prospectus, or
(2) the solicitation of a proxy, in any jurisdiction in which it is unlawful to
make that kind of an offer or solicitation. Neither the delivery of this proxy
statement/prospectus nor any distribution of holding company common stock
offered by this proxy statement/prospectus will, under any circumstances, create
an implication that there has been no change in the affairs of the bank or the
holding company or the information in this document or the documents or reports
incorporated by reference into this document since the date of this proxy
statement/prospectus.
. Some of the statements contained in this prospectus discuss future
expectations or state other "forward-looking" information. Those statements
could be affected by known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions. We are
obligated under federal and state securities laws to update forward-looking
information in future filings only to ensure that they are not misleading
regarding any material changes in our situation.
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SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
The following table shows selected consolidated financial data for each of
the years in the five-year period ended December 31, 1999. This consolidated
financial data is derived from, should be read together with, and is qualified
by reference to, the more detailed information contained in Salem Bank & Trust's
Annual Reports on Form 10-KSB for each of the years in the five-year period
ended December 31, 1999, as each may be amended, incorporated by reference into
this proxy statement/prospectus.
Selected Historical Financial Information
of Salem Bank & Trust N. A.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except ratios, share and per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total interest income.......................... $ 13,505 $ 11,894 $ 10,699 $ 9,850 $ 9,335
Total interest expense......................... 6,504 5,689 5,032 4,746 4,552
Net interest income............................ 7,001 6,205 5,667 5,104 4,783
Provision for loan losses...................... 315 358 391 193 119
Total noninterest income....................... 1,137 1,125 1,013 877 752
Total noninterest expense...................... 4,584 4,404 4,364 3,963 3,962
Income tax expense............................. 1,020 777 539 498 366
Net income..................................... 2,219 1,791 1,386 1,327 1,088
Per Share Data (1):
Net income..................................... $ 1.46 $ 1.19 $ .92 $ .89 $ .76
Net income-assuming dilution................... 1.44 1.16 .90 .87 .74
Cash dividends................................. .40 .35 .30 .26 .22
Stock dividends................................ 4.0% 4.0% 4.0% 3.0% 5.0%
Book value..................................... $ 11.69 $ 11.17 $ 10.70 $ 10.35 $ 9.85
Weighted average shares outstanding............ 1,520,290 1,510,463 1,500,783 1,491,246 1,429,736
Weighted average shares outstanding -
assuming dilution............................ 1,541,896 1,545,705 1,538,885 1,532,434 1,462,261
Balance Sheet Data:
Federal funds sold and securities purchased
under resale agreements...................... $ -- $ 10,180 $ 6,445 $ 975 $ 3,460
Securities available-for-sale.................. 9,376 2,920 5,903 9,909 10,243
Securities held-to-maturity.................... 41,456 38,777 16,242 14,995 16,774
Loans, net..................................... 115,593 98,404 97,320 86,405 73,577
Total assets................................... 180,276 162,583 136,373 123,513 120,248
Total deposits................................. 156,864 145,359 120,433 109,127 105,919
Total stockholders' equity..................... 17,837 16,292 14,905 13,771 12,640
Selected Ratios:
Return on average assets....................... 1.28 1.22 1.06 1.08 .93
Return on average equity....................... 12.77 11.32 9.51 9.93 9.23
Dividend payout ratio.......................... 28.03 29.26 32.25 29.62 30.61
Average equity to average assets............... 10.01 10.74 11.20 10.88 10.05
Allowance for loan losses to loans,
net of unearned income....................... 1.20 1.29 1.22 1.33 1.55
</TABLE>
____________________
(1) All prior-period weighted average shares outstanding, net income per share
and cash dividends per share data has been restated to reflect the Bank's
stock dividends. In addition, all prior-period net income per share and
weighted average shares outstanding data has been restated to conform with
the provisions of Statement of Financial Accounting Standards No. 128,
Earnings per Share.
10
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THE ANNUAL MEETING
Matters To Be Voted on at The Annual Meeting
At the Annual Meeting, you will be asked to vote on
. The reorganization of the bank into a holding company structure,
including adoption of the Plan and Agreement of Share Exchange, dated
as of June 17, 1999, among the bank and the holding company. We
organized the Salem Community Bankshares, Inc. as a new Virginia
corporation to become the holding company for the bank. Through the
share exchange between the bank and the holding company, each
outstanding share of common stock of the bank will be converted into
an equivalent share of common stock of holding company.
. A proposal to allow the Chairman of the Annual Meeting to postpone the
meeting if necessary to allow for more time to solicit additional
shares in favor of the reorganization.
. The election of nine (9) directors to the board of directors of the
bank.
. Any other business as may properly come before the annual meeting or
any adjournment of the annual meeting. Except for procedural matters
related to the conduct of the annual meeting, management is not aware
of any other matters which could come before the annual meeting.
Who is Eligible To Vote
If you held bank common stock at the close of business on April 21, 2000
you are entitled to vote at the annual meeting. On April 21, 2000, there were
1,526,067 shares of bank common stock outstanding. On that day, there were ____
holders of record of common stock. Each share of common stock is entitled to
one vote on each matter properly presented at the annual meeting.
Quorum, Required Vote
At least a majority of the total number of shares of common stock entitled
to vote must attend the annual meeting, in person or by proxy, to constitute a
quorum for matters to be voted upon by the common stockholders. We will count
shares that abstain and broker non-votes as present for purposes of determining
the presence of a quorum. If we have not obtained sufficient votes for a
quorum, the annual meeting may be adjourned or postponed to permit us to further
solicit proxies.
We will count abstentions in tabulations of the votes cast to determine
whether a proposal has been approved. Broker non-votes will not be counted to
determine the number of votes cast for any proposal. You may vote FOR the
reorganization, AGAINST the reorganization, or ABSTAIN by checking the
appropriate box.
More than two-thirds of the bank's outstanding common stock must approve
the reorganization for it to be passed. Consequently, the required vote of the
bank's common stockholders is based on the total number of shares of the bank's
common stock and not on the number of shares which are actually voted. Not
returning a proxy card, not voting in person at the annual meeting or abstaining
from voting will have the same effect as voting against the plan and agreement
of share exchange.
Revocability of Proxies
The proxies solicited pursuant to this proxy statement/prospectus, if
properly signed and returned to the bank, will be voted in accordance with the
instructions contained in the proxies, unless revoked prior to their use.
Executed proxies with no instructions indicated on the proxy card will be voted
for the reorganization. If you properly
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<PAGE>
submit a proxy card, you may revoke it at any time before it is exercised by (1)
filing a written notice of revocation with Gill Roseberry, Senior Vice President
and Cashier, Salem Bank & Trust, 220 E. Main Street, Salem, Virginia 24153, (2)
submitting a duly executed proxy card bearing a later date or (3) appearing at
the annual meeting and giving the Administrative Assistant notice of your
intention to vote in person.
Proxies solicited pursuant to this proxy statement will be returned to the
proxy solicitors and will be tabulated by inspectors of election designated by
the board of directors of the bank who are employees of the bank. If any proxies
or the tabulation is questioned, three judges, who are not executive officers or
directors, will review the matter and make a final determination. After the
final adjournment of the annual meeting, the proxies will be returned to the
board of directors of the bank for safekeeping. Proxies solicited pursuant to
this proxy statement may be used only at the annual meeting and any adjournment
of the meeting and will not be used for any other meetings.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
the bank may solicit proxies for the annual meeting from stockholders personally
or by telephone or telegram without receiving additional compensation for these
activities. The bank will bear the cost of soliciting proxies. The bank also
will make arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse those
parties for their expenses in doing so.
PROPOSED REORGANIZATION
INTO A BANK HOLDING COMPANY
The reorganization will be accomplished pursuant to the Plan and Agreement
of Share Exchange dated as of June 17, 1999. We have attached a copy of the Plan
and Agreement to this proxy statement as Appendix A and incorporate the plan by
reference into this proxy statement/prospectus. We urge you to read the entire
Plan and Agreement.
Parties to the Reorganization
. Salem Bank & Trust, N.A. - - Salem Bank & Trust, N.A. a publicly owned
full service commercial bank governed by the National Bank Act,
provides a wide range of financial services for retail and commercial
customers. Its principal executive offices are located at 220 E. Main
Street, Salem, Virginia 24153, and its telephone number is (540) 387-
0223. The bank operates under the regulations of the OCC and the
bank's deposits are insured by the FDIC to the full extent provided by
law.
. Salem Community Bankshares, Inc. -- Salem Community Bankshares, Inc.
is a corporation formed under the laws of the Commonwealth of Virginia
on May 28, 1999, to serve as a bank holding company after the
reorganization. The holding company has no prior operating history.
Its principal executive offices are located at the bank's address, and
it has the same telephone number as the bank.
Description of Proposed Reorganization
If our stockholders approve the reorganization and all of the other
conditions set forth in the Plan and Agreement of Share Exchange - primarily
regulatory approvals - are satisfied, on the effective date of the
reorganization, other than dissenting shares, each share of the bank's common
stock that is outstanding immediately prior to the reorganization will
automatically by operation of law become one share of holding company common
stock.
After the reorganization, the former holders of the bank's outstanding
common stock who do not exercise dissenters' rights will hold all of the
outstanding shares of holding company common stock, and the holding company will
own all of the bank's outstanding capital stock.
After the reorganization, the bank will continue its existing business and
operations as a wholly owned subsidiary of the holding company and the
consolidated (1) capitalization, (2) assets, (3) liabilities, (4) income and (5)
financial statements of the holding company immediately following the
reorganization will be substantially the same as
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<PAGE>
those of the bank immediately prior to the reorganization. The articles of
incorporation and the bylaws of the bank will continue in effect, and will not
be affected in any material manner by the reorganization. The bank will continue
to use the name "Salem Bank & Trust, N.A."
The boards of directors of the bank and holding company believe that the
reorganization is in the best interests of the bank's stockholders for the
reasons described below in the subsection captioned "Reasons for the
Reorganization." The boards of directors of the bank and holding company have
approved the Plan and Agreement of Share Exchange. If the bank's stockholders
approve the Plan and Agreement of Share Exchange and the other conditions
described below are satisfied, the reorganization will become effective at the
time specified in a Certificate of Share Exchange to be issued by the Virginia
State Corporation Commission.
Reasons for the Reorganization
. The banking industry and the broader financial services industry are
experiencing change at a rapid pace. Historical distinctions between
various types of financial institutions are eroding rapidly, and banks
are competing for business with companies that do not offer
traditional banking services.
. Traditional restrictions on branch banking have given way to multi-
state banking. Thus, banks are subject to aggressive competition from
other financial institutions, local, regional and national, as well as
non-financial institutions offering an array of financial products and
services.
. Current laws limit banks' ability to supplement traditional financial
services and products and to diversify into other related ventures in
order to respond to these competitive demands. The laws and
regulations applicable to bank holding companies, however, allow
holding companies somewhat greater flexibility in expanding their
markets and in increasing the variety of services they and their
subsidiaries provide their customers. Under the federal Bank Holding
Company Act, in addition to banks, the holding company may own
companies whose activities are closely related to banking. The
proposed new corporate structure will enhance the Bank's ability to
compete under the laws and conditions prevailing today and to respond
effectively in the future to changing market conditions, while
permitting the continuation of those services presently provided by
the Bank to its customers.
. The new holding company structure also may be used to affiliate with
other banks and with companies already established in financially
oriented activities. While the corporation contemplates no specific
acquisitions at this time, the holding company structure increases the
attractiveness of these affiliations by enabling other entities under
the appropriate circumstances to affiliate with the bank and to
maintain their own identities.
. A bank holding company may repurchase its own stock, without the
approval of any regulatory agency, within certain limitations, as long
as the company remains a "well-capitalized institution," as defined by
regulation, after the repurchase. The bank may repurchase its stock
only after approval by the OCC. By having the power to repurchase
stock, a bank holding company can be an additional source of liquidity
for a shareholder who may desire to sell his shares.
. The holding company also may provide more defenses against an unwanted
attempt by another party to acquire or gain control of the bank. We
are not aware of anyone who currently plans to acquire the bank. See
"Regulation and Supervision."
. The holding company may provide additional funding sources for the
bank, as well as better access to diverse money and capital markets.
For instance, the holding company, unlike the bank, will be permitted
to raise capital by issuing "capital securities." Any capital raised
by the holding company could then be invested as capital in the bank.
In general, we believe that operating as a bank holding company will
serve the interests of the banking public and the stockholders of the
bank by improving the capability and scope for service in a highly
competitive environment.
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<PAGE>
. Salem Bank & Trust pays a state franchise tax based on its capital.
The holding company will pay income tax but not a capital-based
franchise tax. The restructuring will reduce the bank's capital for
purposes of the franchise tax and we believe that the reduction in
franchise taxes that the bank pays will exceed the income taxes paid
by the holding company.
Recommendation of Salem Bank & Trusts Board of Directors
After careful consideration, the bank's board of directors has determined
that the reorganization is advisable and in the best interests of the bank and
its stockholders and has approved the Plan and Agreement of Share Exchange and
the transactions contemplated by the Plan and Agreement of Share Exchange. We
recommend that you vote FOR approval of the Plan and Agreement of Share
Exchange.
Treatment of Stock Certificates
After the reorganization, the former bank's shareholders who do not
exercise dissenters' rights will be entitled to exchange their bank stock
certificates for new certificates representing the same number of shares of
holding company common stock. Until so exchanged, bank stock certificates will,
for all purposes, represent the same number of holding company shares and the
holders of bank certificates who do not exercise dissenters' rights will have
all of the rights of holding company shareholders.
After the reorganization takes place, instructions concerning the exchange
of stock certificates will be sent to all holders of record as of the effective
date of the reorganization. The holding company intends to act as its own stock
transfer agent.
Conditions That Must Be Satisfied Before The Reorganization Can Occur
The following conditions must be satisfied before the reorganization can
occur:
. an effective registration statement under the Securities Act of 1933
for holding company common stock;
. compliance with all applicable state securities laws relating to the
issuance of holding company common stock;
. approval of at least two-thirds of the issued and outstanding shares
of the bank's outstanding common stock;
. approval of the Board of Governors of the Federal Reserve System for
Salem Community Bankshares to become a bank holding company;
. approval of the OCC for Bankshares to acquire control of Salem Bank &
Trust;
. all other required regulatory approvals, or waiver or exemption and
satisfaction of all other legal requirements necessary to complete the
reorganization and compliance with all statutory waiting periods;
. no imposition of any condition or requirement by any regulatory
authority that would materially and adversely affect the operations or
business prospects of the holding company or the bank following the
effective date which would make the completion of the reorganization
inadvisable;
. an opinion of counsel to the bank regarding the U.S. income tax
consequences of the reorganization;
. approval of holding company common stock for quotation on the Bulletin
Board of the National Association of Securities Dealers Automated
Quotation System.
Differences in Stockholder Rights as a Result of the Reorganization
If the reorganization takes place, the bank's stockholders will become
stockholders of Salem Community Bankshares, a Virginia corporation. Accordingly,
their rights will be governed by the Virginia Stock Corporation Act and the
articles of incorporation and bylaws of the holding company. The rights of
holders of holding company stock will no longer be governed by the National Bank
Act. This change of governing law, as well as from distinctions between the
articles of incorporation and bylaws of the bank and the holding company, will
produce some differences in your stockholder rights. The following discussion
summarizes the material differences in stockholder rights that will
14
<PAGE>
arise as a result of the reorganization. The articles of incorporation and
bylaws of the holding company and of the bank are attached to this proxy
statement/prospectus at Appendix B. We urge all stockholders to read these
documents.
Payment of Dividends. The bank's ability to pay dividends on its common
stock is restricted by applicable banking laws. The holding company will not be
restricted on its ability to pay dividends by those same laws, but restrictions
generally imposed on Virginia corporations will be imposed on the holding
company. Under Virginia corporate law, dividends may be paid out only if after
making the distribution the corporation can pay its debts and its assets exceed
its liabilities. The holding company's ability to pay dividends also may be
restricted by minimum capital requirements imposed by the Board of Governors of
the Federal Reserve System. Furthermore, the Board of Governors has issued a
policy statement that provides that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings. You
should note, though, that after the reorganization, the holding company's
principal source of income initially will consist of dividends, if any, from
Salem Bank & Trust, and the existing restrictions on the bank's ability to pay
dividends will continue in effect.
Authorized Capital. Salem Bank & Trust's Articles of Incorporation
authorize the issuance of up to 2,000,000 shares of common stock, par value
$5.00 per share, of which 1,526,067 shares were issued and outstanding as of
December 31, 1999. The bank is not authorized to issue shares of preferred
stock. The holding company's Articles will authorize the issuance of up to
10,000,000 shares of common stock, of which no shares were issued and
outstanding as of the date of these proxy materials. The holding company also
will be authorized to issue up to 10,000,000 shares of preferred stock on terms
set by the company's board, which could favor holders of preferred stock over
holders of common stock in the payment of dividend, and could also be used to
prevent a takeover attempt.
Shareholder Vote Required for Certain Actions. Salem Bank & Trust's
Articles of Incorporation provide that an amendment of its Articles may be
approved by shareholders owning a majority of the stock in the Bank, consistent
with applicable laws. In addition, the board of directors or shareholders owning
at least 10% of the bank's common stock may call a meeting of the bank's
shareholders. Other fundamental matters, such as mergers, dissolution, sale of
substantially all the assets, etc. must be approved by two-thirds of the shares
outstanding. The bank's Bylaws may be amended at any regular meeting of the
board of directors by a majority vote of the directors in office.
The holding company's Articles decrease the shareholder vote required to
approve mergers, business combinations and certain other fundamental
transactions to a majority of the shares entitled to vote at a meeting under two
circumstances:
. for mergers and other similar transactions not involving a person who
owns 5% or more of holding company shares, if the majority of holding
company directors approve the transaction;
. for mergers and certain other transactions involving a person who owns
5% or more of holding company shares, if the majority of the directors
and a majority of directors who were in office before the large
shareholder obtained the 5% interest and who are not affiliated with
the large shareholder approve the transaction and certain other
conditions relating to the consideration which holding company
shareholders are to receive in the transaction are met.
In these cases, if the conditions are not met to reduce the required
shareholder vote, the holding company's Articles increase the required
shareholder vote to 80% of each class of voting stock outstanding.
The effect of these provisions is to make shareholder approval of certain
transactions less difficult to obtain if favored by the board of directors. A
lower required shareholder vote will benefit the holding company by reducing the
cost of soliciting the shareholder vote. If, however, the Board does not approve
a merger or similar transaction, these provisions will make approval of the
transaction subject to the 80% affirmative shareholder vote, which may be more
difficult to obtain.
The holding company's Articles provide that an amendment of the Articles
may be approved by a majority of votes cast by each voting group entitled to
vote at a meeting, unless the Board of Directors require a greater vote.
However, an amendment to Article 3 of the holding company's Articles of
Incorporation must be approved by the vote
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<PAGE>
of 80% or more of each class of voting stock. Article 3 sets the minimum and
maximum size of the Board and divides the Board of Directors into three classes;
permits directors to be removed only for cause and on the vote of at least two-
thirds of holding company shareholders entitled to vote; and permits the
shareholders to change the Bylaws upon an 80% vote of all holding company
shareholders entitled to vote.
Size and Classification of Board of Directors. The bank's Articles provide
for a board of directors consisting of not less than 5 nor more than 25
individuals, with the exact number to be fixed by a majority of the full Bank
Board. The Bank Board, however, may not increase the number of directors by more
than two (if there are 15 or fewer directors last elected by shareholders) or by
more than 4 (if there are more than 16 directors last elected by shareholders)
between shareholders' meetings. The bank board of directors set the number at
nine (9) directors more than ten (10) years ago and has held to that number ever
since. The National Bank Act requires that each director own Bank common stock
having a par value of not less than $1,000, or stock in like amount of the
bank's holding company. Directors are elected at each annual meeting of
shareholders.
The holding company's Articles similarly provide for a board of directors
of between 5 and 25 individuals. The holding company's Bylaws presently do not
provide otherwise. The holding company Articles provide that directors are
divided into three classes as nearly equal as possible, to be elected to
consecutive three-year terms, with the first class' term expiring in 2000.
Directors of a class whose term expires, or their replacements, will be elected
at the next annual meeting of shareholders.
Vacancies and Removal of Directors. The bank's Bylaws provide that
vacancies on the Board of Directors may be filled by a majority vote of the
remaining directors. The National Bank Act provides that any director appointed
following a vacancy shall hold office until the next election of directors.
Neither the National Bank Act nor the Bank Articles or Bylaws provide for the
removal of directors.
The holding company's Articles provide that the directors then in office,
whether or not a quorum, may fill a vacancy by majority vote. Holding company
directors may be removed only for cause and with the affirmative vote of at
least two-thirds of the outstanding shares entitled to vote.
Director Liability and Indemnification. The bank's Articles provide that
the bank may indemnify a director, officer or employee made a party to a
proceeding because of being a director, officer or employee of the bank for
reasonable expenses, unless the director or officer was grossly negligent, or
engaged in willful misconduct or criminal acts.
The holding company's Articles provide that each director and officer shall
be indemnified against liabilities, penalties and claims because of serving as a
holding company director or officer, serving as an officer, director, employee,
agent of another entity at holding company request, except as to matters for
which he is finally adjudged liable due to willful misconduct or knowing
violation of criminal law. The holding company's Articles also eliminate
liability to the holding company and its shareholders of each director and
officer for monetary damages to the full extent permitted by Virginia law,
except for liability for willful misconduct or a knowing violation of criminal
or securities laws.
Special Meetings of Shareholders. The bank's Bylaws provide that special
meetings of the shareholders may be called by the board of directors or by three
or more shareholders owning, in the aggregate, at least 10% of the outstanding
stock of the bank. Holding company Bylaws provide that special meetings of the
shareholders may be called by the board of directors, the Chairman of the Board
or the President.
Director Nomination and Shareholder Proposals. It is the practice of the
bank for the board to consider candidates for board election. The entire board
then determines which candidates should be recommended to the shareholders for
approval at the annual meeting. Replacement directors are appointed by the board
until the annual meeting. The bank's Articles require that any director
nomination, other than those made on behalf of existing management, must be
stated in writing and filed with the President of the bank and with the OCC not
less than 14 days nor more than 50 days prior to the date of the shareholder
meeting. The notice must contain certain information relating to the shareholder
nominee for director. Nominations not made in accordance with the requirements
are not considered.
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Holding company Bylaws provide that no person (other than initial
directors) who will be age 75 or older on the date set for election shall be
eligible to be a director. To place a matter before a shareholders meeting,
shareholders must give written notice to the President not less than 60 or more
than 90 days before the meeting unless less than 70 days notice or public
disclosure of the meeting is given, in which case the shareholder must notify
the President by the tenth day following the date of the meeting notice or
disclosure. The shareholder's notice to the President must contain certain
specified information about the shareholder's proposal.
Rule 14a-8 of the regulations promulgated by the SEC under the Exchange
Act, however, provides that shareholders who own at least 1% or $1,000 of market
value of voting securities of a registrant, which will include the holding
company, may make a proposal for a vote at a shareholders' meeting if the
proposal is received on a timely basis and may not otherwise be omitted by the
registrant, all as described in more detail in that rule.
Shareholder Voting Rights in General. You do not have preemptive rights as
a Salem Bank & Trust shareholder but you do have cumulative voting rights in the
election of directors. As a holding company shareholder, you will have neither
preemptive rights or cumulative voting rights. See "Description of Holding
Company Capital Stock".
State Anti-takeover Statutes. The National Bank Act does not provide any
specific anti-takeover statutes to the national banking associations, like Salem
Bank & Trust. Virginia corporate law restricts transactions between a
corporation and its affiliates and potential acquirers. Virginia corporate law
applies to the holding company. The summary below is necessarily general and is
not intended to be a complete description of all the features and consequences
of those provisions.
Affiliated Transactions. Virginia corporate law treats "Affiliated
Transactions" differently from other similar transactions. Affiliated
Transactions include certain mergers, share exchanges, material dispositions of
corporate assets not in the ordinary course of business, and similar
transactions which have the effect of increasing by more than 5% the voting
strength of a shareholder who already owns at least 10% of voting stock.
The provisions governing Affiliated Transactions generally require that,
for three years following the date upon which any shareholder acquires at least
a 10% voting interest, any Affiliated Transaction must be approved by the
affirmative vote of two-thirds of the outstanding voting shares, other than the
shares of the large shareholder, and by a majority (but not less than two) of
the corporation's board of directors who (i) were members before the date on
which the shareholder acquired his 10% interest or (ii) were recommended for
election by a majority of such directors. These are called disinterested
directors. After the three year period, these provisions require approval of
the Affiliated Transaction by the affirmative vote of the holders of two-thirds
of the outstanding shares of the corporation, other than those of the large
shareholder, but not by the disinterested directors.
The principal exceptions to these special shareholder voting requirements
for Affiliated Transactions occurring after the three year period has expired
and require either that the transaction be approved by a majority of the
corporation's disinterested directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that shareholders must receive the higher of the highest per share price
for their shares as was paid by the large shareholder attempting to engage in an
Affiliated Transaction for his or its shares, or the fair market value of the
shares.
These provisions were designed to deter certain takeovers of Virginia
corporations. There are no Salem Bank & Trust shareholders who would be
restricted by the Affiliated Transactions laws as holding company shareholders.
. Control Share Acquisitions. The Virginia Control Share Acquisitions
statute also is designed to afford shareholders of a Virginia public
company protection against certain types of non-negotiated
acquisitions in which a party seeks to gain voting control. The
statute generally applies to acquisitions of shares of a corporation
which would result in ownership of at least 20% of the corporation's
voting shares. These "control shares" will not be entitled to voting
rights unless the holders of a majority of the other shares vote to
accord the "Control Shares" with voting rights. Under certain
circumstances, the statute grants dissenters' rights to shareholders
who vote against granting voting rights to the "Control Shares". A
corporation may also provide for redemption of control shares with no
voting rights. Among the
17
<PAGE>
acquisitions specifically excluded from the statute are acquisitions
which are a part of certain negotiated transactions to which the
corporation is a party.
. Dissenters' Rights. For a description of the respective rights for
dissenting shareholders of the bank, see The Reorganization -
Appraisal Rights for Dissenting Shareholders."
Tax Consequences of the Reorganization
Before the reorganization may take place Salem Bank & Trust must receive an
opinion of counsel that the reorganization will qualify as a tax-free exchange
within the meaning of Section 351 of the Internal Revenue Code of 1986, as
amended. As a tax-free exchange, the reorganization will have the following
federal income tax consequences:
(1) No gain, loss or income will be recognized by the holding company upon
the receipt of bank common stock solely in exchange for holding company common
stock;
(2) No gain or loss will be recognized by the shareholders of bank common
stock upon the transfer of their common stock to the holding company solely in
exchange for holding company common stock;
(3) The aggregate basis of holding company common stock received by Salem
Bank & Trust shareholders in the share exchange will be the same as the
aggregate basis of bank common stock exchanged for it;
(4) The holding period of holding company common stock to be received by
bank shareholders will include the period during which bank common stock
surrendered in exchange for it was held, provided bank common stock was held as
a capital asset on the date of the exchange; and
(5) Bank shareholders who exercise their dissenter's rights generally will
recognize gain or loss equal to the difference between the amount of money
received and their adjusted basis in their bank common stock held.
Each Salem Bank & Trust stockholder should consult its tax counsel as to
the specific federal and state tax consequences of the reorganization, if any,
to that stockholder. Gain or loss for United States income tax purposes may be
recognized in the case of any Salem Bank & Trust stockholder who receives
payment in cash for the value of shares as a result of the exercise of rights as
a dissenting stockholder.
Regulatory Approvals
For the reorganization to occur, the holding company and the bank must
receive approvals from the OCC, Federal Reserve and Virginia State Corporation
Commission, Bureau of Financial Institutions. In this section, we refer to
these approvals as the required regulatory approvals. The holding company has
applied to the OCC to acquire the shares of Salem Bank & Trust in the
reorganization. In reviewing these applications, the OCC will consider, among
other things, the financial and managerial resources of the bank, the effect of
the reorganization on depositors, creditors and stockholders of the bank, and
the public interest.
The holding company also filed a notice with the Federal Reserve to become
a bank holding company under the Bank Holding Company Act of 1956 and an
application with the Bureau of Financial Institutions of the Virginia State
Corporation Commission to become a financial institution holding company under
Virginia law.
Neither the holding company nor Salem Bank & Trust is aware of any other
governmental approvals or actions that are required for the reorganization to
take place that are not described above. If any other approval or action is
required, Salem Bank & Trust and the holding company presently contemplate that
they would seek the approval or take the required action.
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<PAGE>
Rights of Dissenting Stockholders
The following summarizes the Virginia law of dissenter's rights. Chapter
9, Article 15 of the Virginia Stock Corporation Act governs dissenter's rights
and is reproduced in Exhibit B. It applies to the share exchange because the
Bylaws of Salem Bank & Trust were amended to apply the law of Virginia corporate
governance to the Bank as a condition to obtaining OCC approval for the Bank to
engage in a share exchange transaction in order to adopt a holding company
structure. You should read Appendix B thoroughly.
A Salem Bank & Trust shareholder will have the right to receive in cash the
fair value of his or her Salem Bank & Trust shares immediately prior to the
completion of the share exchange if the shareholder properly exercises
dissenter's rights. A shareholder who desires to exercise dissenter's rights
must satisfy all of the following conditions.
(1) Deliver a written notice of intent to demand payment for the
shareholder's Salem Bank & Trust shares to the bank before the vote on
the share exchange. Merely voting against, abstaining or failing to
vote on the share exchange will not relieve you of giving this notice.
(2) Do not vote for approval of the share exchange. Voting for approval
or delivering a proxy for the shareholders' meeting (unless the proxy
specifies a vote against or abstaining from voting on approval of the
share exchange) will nullify a notice of intent to demand cash
payment. If a shareholder has shares registered in his or her name,
some of which are beneficially owned by another person, the
shareholder may assert dissenter's rights as to less than all of the
shares registered in his or her name, only if the shareholder (i)
dissents with respect to all shares registered in the shareholder's
name which are beneficially owned by any one person; and (ii) notifies
the Bank in writing of the name and address of each person. The
rights of a partial dissenter are determined as if the shares as to
which the shareholder dissents and the shareholder's other shares are
registered in the names of different people. The beneficial owner of
shares registered in another name may assert dissenter's rights if:
(i) the beneficial owner gives the written consent of the shareholder
of record to Salem Bank & Trust to the dissent not later than the time
the beneficial asserts dissenter's rights; and (ii) the beneficial
owner dissents with respect to all shares beneficially owned or over
which he or she has the power to vote.
(3) If the share exchange is completed, Salem Bank & Trust would be
required, within 10 days after completion, to deliver a notice to all
shareholders who properly exercised dissenter's rights. This notice
will give specified information to the shareholder in order to
complete the process of demanding cash payment for his or her shares.
A shareholder who is sent a dissenter's notice must send a payment
demand to the Bank and take certain other actions within the time
period provided in the notice. Failure to do so on time will cause
loss of dissenter's rights.
Generally, within 30 days after receipt of a payment demand from a
dissenting shareholder, the bank is required to pay the dissenting shareholder
the amount the Bank estimates to be the fair value of the dissenter's shares,
plus accrued interest. The bank may choose to withhold payment, however, to
dissenters who were not the beneficial owners of the dissenting shares at the
earlier of the first publication by the news media or the first announcement to
shareholders generally of the share exchange terms. In this case, the bank will
estimate the fair value of the after acquired shares based on then current
market trades, plus accrued interest; and will offer to pay that amount to each
dissenter who agrees to accept it in full satisfaction of the demand. The bank
will explain to the dissenter how it computed the fair value of the after
acquired shares and how it calculated interest.
Within 30 days after the bank makes the payment to dissenters or offers
payment for after acquired shares, a dissenter may notify the Bank in writing of
the dissenter's own estimate of the fair value of his or her shares and the
amount of interest due and demand payment of that amount (less what the Bank has
already paid) or reject the Bank's offer to pay and demand payment of the
estimate. If any demand remains unsettled, within 60 days after receiving
payment demand from the dissenter, the bank will either ask the court to
determine the fair value of the dissenting shares and the interest owed and make
all dissenters whose demands remain unsettled parties to the lawsuit or pay the
amount demanded.
19
<PAGE>
Termination of the Plan and Agreement of Share Exchange
Termination. The Plan and Agreement of Share Exchange may be terminated by
the unilateral action of either of the board of directors of the bank or holding
company prior to the approval by the shareholders of the bank, or by the mutual
consent of both boards of directors of the bank and the holding company after
stockholder approval. The following are some of the reasons why either or both
parties might terminate the Share Exchange:
. The number of shares of Salem Bank & Trust common that voted against
approval of the reorganization or that have sought dissenter's rights
is great enough that completion of the reorganization is unlikely or
inadvisable;
. Any action, suit, proceeding, or claim is commenced or threatened or
any claim is made that could make completion of the reorganization
inadvisable;
. It is likely that a regulatory approval will not be obtained, or if
obtained, has or will contain or impose a condition or requirement
that would materially and adversely affect the operations or business
prospects of the holding company or Salem Bank & Trust following the
effective date so as to render inadvisable the completion of the
reorganization; or
. Any other reason exists that makes completion of the share exchange
inadvisable in the sole and exclusive judgment of the respective board
of directors.
Each party's decision to terminate the Plan and Agreement of Share Exchange will
be made in the sole discretion of its own board of directors and for any or no
reason as the board may determine. Upon termination, the Plan and Agreement of
Share Exchange will be deemed void and of no further effect. There will be no
liability under or on account of the termination on the part of the parties, or
the directors, officers, employees, agents or stockholders of any of them,
except that the bank will pay the fees and expenses incurred by the parties in
connection with the transactions contemplated in the reorganization.
Market Price of Salem Bank & Trust's Common Stock and Dividends
Salem Bank and Trust, National Association has only one class of common
stock at a par value of $5 per share. On May 12, 1994, the Bank's common stock
was approved for listing on the OTC Bulletin Board and began trading on the
Bulletin Board under the symbol "SMVA" on June 30, 1994. During 1996, the
Bulletin Board symbol was changed to "SBVA" under which the Bank's common stock
is currently trading. McKinnon & Company, Inc., Monroe Securities, Inc., Scott &
Stringfellow, Davenport and Co., LLC, Hill, Thompson, Magid & Co., Ryan Beck &
Co. and Baird, Patrick & Co., Inc. were the principal market makers in the
Bank's common stock at December 31, 1999.
As of December 31, 1999, there were 639 stockholders of record holding
1,526,067 shares of the authorized 2,000,000 shares. On April __, 2000 (the most
recent practicable date prior to printing proxy statement/prospectus), there
were 642 holders of record of bank's common stock, and the bank's common stock
on that date traded at a high price of $_________ and a low price of $_______
per share. On April 27, 1999 (the date prior to the announcement of the
proposed reorganization), the high and low sales prices per share of Salem Bank
& Trust's common stock were $16 1/2 and $16 1/8. The high and low bid prices
of the Bank's common stock during 1999, 1998, and 1997 were as follows:
<TABLE>
<CAPTION>
Quarter Ended High and Low Sales Prices Cash Dividends Paid
High Low
<S> <C> <C> <C>
1997
March 31 $16.00 $14.00 --
June 30 16.00 14.75 --
September 30 19.38 15.00 --
December 31 19.38 14.75 $0.33
1998
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
March 31 $20.25 $19.50 --
June 30 20.75 19.50 --
September 30 19.75 14.50 --
December 30 19.00 16.00 $0.35
1999
March 31 $18.00 $16.00 --
June 30 17.00 15.82 --
September 30 17.75 16.25 --
December 31 18.75 14.00 $0.40
2000
Through March 31 $15.00 $13.13 --
</TABLE>
No attempt has been made by the Bank to verify the accuracy of the above
common stock market prices. The Bank expects to continue to pay dividends in
the future based on its income.
The holding company intends to follow the bank's policy of declaring and
paying a cash dividend annually. The declaration and payment of future dividends
by the holding company on its common stock will depend upon its earnings and
financial condition and upon other factors that are not presently determinable.
After the reorganization takes place, the holding company initially will obtain
the funds needed for payment of its dividends and expenses from the bank,
chiefly in the form of dividends. Salem Bank & Trust's ability to pay dividends
may be restricted by federal banking law and the regulations of the OCC. For
more information, please see the section of this proxy statement/prospectus
captioned "Proposed Reorganization into a Bank Holding Company -- Differences in
Stockholder Rights -- Payment of Dividends."
Management
The initial directors of the holding company are the current directors of
Salem Bank & Trust, except for Carl E. Tarpley, Jr., who is a director of the
holding company but not of Salem Bank & Trust. Holding company directors have
been divided into three classes as follows:
. Class A: Gladys O'Brien, Truman Dorton, Carlos Hart
. Class B: Morris Elam, H. Morgan Griffith, Dr. Walter Hunt
. Class C: Clark Owen, Jr., Carl E. Tarpley, Jr., Dr. Eugene Bane, and
Rose Hagen.
The Class A directors have an initial one year term and, if renominated,
will be subject to shareholder reelection at the 2001 holding company annual
shareholder meeting. Similarly, the Class B directors, if renominated, will be
subject to shareholder reelection at the 2002 holding company annual shareholder
meeting. The Class C directors, if renominated, will be subject to shareholder
reelection at the 2003 holding company annual shareholder meeting.
Approval of the reorganization by the bank's shareholders will be deemed to be a
confirmation by holding company stockholders of those persons as holding company
directors without further action and without changes in classes or terms.
Several officers of Salem Bank & Trust will hold similar positions with the
holding company. The names of these officers and their titles are shown below.
After the reorganization takes place, these officers will continue to be
officers of the holding company.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
Clark Owen, Jr. President and Chief Executive Officer
Carl E. Tarpley, Jr. Executive Vice President and Treasurer
Gill R. Roseberry Secretary
</TABLE>
21
<PAGE>
ADDITIONAL INFORMATION ABOUT SALEM BANK & TRUST
Salem Bank & Trust is a nationally chartered commercial bank, headquartered
in Salem, Virginia. Its deposits are insured by the FDIC. The bank has
operated as a full service commercial bank since 1978, offering a broad range of
banking products.
Historically, Salem Bank & Trust's banking operations have focused on the
City of Salem, Roanoke City, and Roanoke County, Virginia. The bank has
experienced growth, with total assets increasing from $104 million at December
31, 1993 to $180.3 million at December 31, 1999, and total deposits increasing
from $93.4 million at December 31, 1993 to $156.9 million at December 31, 1999.
The bank's net income during that period increased from $1.0 million for the
year ended December 31, 1993 to $2.2 million for the year ended December 31,
1999. Since the beginning of 1993 through the date of this proxy
statement/prospectus, the bank has declared $2.8 million of cash dividends to
stockholders, and total stockholders' equity has increased from $9 million at
December 31, 1993 to $17.8 million at December 31, 1999.
The bank's interest earning assets are comprised primarily of loans and
investment and mortgage-related securities. At December 31, 1999, loans, net,
were $115.6 million and investment securities held to maturity were $41.5
million. This compares to net loans of $98.4 million and investment securities
held to maturity of $38.8 million at December 31, 1998. The bank's loan
portfolio consists primarily of consumer, small business, and real estate,
including the following types of loans as of the dates indicated:
<TABLE>
<CAPTION>
Summary of Loans by Category ($ 000's)
------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Commercial $ 9,058 $ 12,301 $ 7,489
Consumer (principally installment) 22,183 19,236 20,412
Real estate - mortgage 71,914 55,372 58,368
Real estate - construction 14,881 13,727 13,325
-------- -------- -------
Total Loans 118,036 100,636 99,594
Less unearned income (1,039) (948) (1,074)
-------- -------- -------
Total loans, less unearned income $116,997 $ 99,688 $98,520
======== ======== =======
</TABLE>
At December 31, 1999, nonaccrual loans totaled $810, and the bank's total
allowance for loan losses was $1,404 or 1.20% of loans net of unearned income
and 173.3% of nonaccrual assets at that date.
Deposits in Salem Bank & Trust are insured to the maximum extent provided
by law by the FDIC, and the bank is a member of the Federal Home Loan Bank
System. The FDIC and OCC examine and regulate the bank's operations. As a
member of the Federal Reserve System, the bank also is subject to regulations of
the Federal Reserve Board that are applicable to member banks. If the
reorganization is approved and completed, the holding company will be regulated
by the Federal Reserve Board.
Salem Bank & Trust's executive offices are located at 220 East Main Street,
Salem, Virginia 24153; its telephone number is (540) 387-0223; and its home page
on the Internet World Wide Web is at: www.salembank.com.
-----------------
Market Area and Competition
Salem Bank & Trust's primary service area is the City of Salem, Roanoke
City, and Roanoke County, Virginia. Located in the Valley of Virginia in
western Virginia, this market is diversified but has not grown in recent years
as fast as the northern and eastern portions of the state. Salem Bank & Trust
competes mainly with other commercial banks and thrifts in attracting and
retaining savings deposits and in making consumer, real estate and commercial
loans.
22
<PAGE>
There are 13 other banks operating in the Roanoke Valley. Salem Bank &
Trust competes for loans with other banks, most of which are larger and have
available resources greater than those of Salem Bank & Trust. In addition,
Salem Bank & Trust competes with (1) credit unions, (2) small loan companies,
and (3) savings institutions. Recently, three banks opened branch offices in
Salem Bank & Trust's primary market area, further intensifying competition.
Salem Bank & Trust may not be able to continue to increase its deposit base or
originate loans in the manner or on the terms on which it has done so in the
past.
Management believes that Salem Bank & Trust has been able to compete
effectively for deposits and loans by:
. its knowledge of its primary service area
. emphasizing its local ownership and personal connections with
businesses and consumers in its primary service area,
. offering a variety of transaction account products and loans with
competitive features,
. pricing its products at competitive interest rates,
. offering convenient branch locations, and
. emphasizing the quality and personal nature of its service.
Salem Bank & Trust's ability to originate loans depends primarily on the
rates and fees charged and the service it provides to its borrowers in making
prompt determinations as to whether it will fund particular loan requests.
Branches and Offices
As of April 21, 2000, Salem Bank & Trust owned 1 branch and 1 other
location for its operations center, and leased 5 locations for its main office
and branches. The bank recently opened a branch at 3804 Brandon Road, in
Roanoke City, primarily serving the residents at Brandon Oaks.
Salem Bank & Trust's properties are well maintained and are suitable for
the bank's business as presently conducted. All of the bank's properties are
listed below.
Properties Owned:
Operations Center 110 E. Main Street, Salem, VA 24153
West Main Office 1251 W. Main Street, Salem, VA 24153
Properties Leased:
Main Office 220 E. Main Street, Salem, VA 24153
South Salem Office 1406 Colorado Street, Salem, VA 24153
Oak Grove Office 2103 Electric Road, Roanoke, VA 24018
Hollins Office 7337 Williamson Road, Roanoke, VA 24019
Brandon Oaks Office 3804 Brandon Avenue, Roanoke, VA 24018
Principal Shareholders of Salem Bank & Trust
For information in connection with the beneficial ownership of the capital
stock of Salem Bank & Trust please refer to the "Beneficial Ownership of
Securities" section of this proxy statement/prospectus.
ADDITIONAL INFORMATION ABOUT SALEM COMMUNITY BANKSHARES
23
<PAGE>
Salem Community Bankshares was incorporated on May 24, 1999 in Virginia to
serve as a bank holding company in the reorganization. The holding company has
no prior operating history. Its principal office is located at 220 East Main
Street, Salem, Virginia 24153, and its telephone number is (540) 387-0223.
The holding company is authorized to issue 10,000,000 shares of common
stock, no par value, and 10,000,000 shares of preferred stock. The bank
currently owns 10 shares of holding company common stock, which will constitute
all of the issued and outstanding capital stock of the holding company
immediately prior to the reorganization. On the effective date of the
reorganization, all of the holding company stock held by the bank will be
canceled.
On the effective date of the reorganization, the outstanding shares of the
bank common stock will be acquired from bank stockholders through a statutory
share exchange. The bank shares will be converted into the equivalent number of
shares of holding company common stock, and the holding company will own all of
the outstanding capital stock of the bank.
Description of Holding Company Capital Stock
The following summary of the terms of holding company capital stock is not
complete and is subject to the applicable provisions of Virginia law and holding
company articles of incorporation and bylaws which are attached to this proxy
statement/prospectus at Appendix B.
Salem Community Bankshares Common Stock. The holders of holding company
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Each share of holding company
common stock has the same relative rights as, and is identical in all respects
to, each other share of holding company common stock. Holding company board of
directors can issue preferred stock with voting, conversion and other rights
which could adversely affect the voting power, without stockholder approval, of
the common stockholders. See "Holding Company Preferred Stock" below.
If the holding company is liquidated or dissolved or distributes all of its
assets, after the preferential rights of holding company preferred stock, if
any, are satisfied, holding company common stock holders will share ratably in
the assets of the holding company legally available for distribution.
Holding company common stock:
. is not redeemable;
. is not convertible for other shares of holding company capital stock;
. is not subject to a sinking fund;
. does not have any preemptive rights to subscribe for other shares
issued by the holding company; and
. does not have cumulative voting rights for election of directors.
Holding company common stock holders are entitled to receive dividends on
an equal per share basis when, as, and if declared by the board of directors out
of funds legally available. Holding company common stock shares to be issued as
part of the reorganization when issued will be duly authorized, validly issued,
fully paid and nonassessable. Holding company intends to act as its own transfer
agent, registrar and dividend disbursement agent for its common stock.
Holding Company Preferred Stock. The holding company articles of
incorporation authorize its board of directors to provide, when it deems
necessary, for the issuance of preferred stock in one or more series. The
holding company board of directors may establish by resolution the terms of any
newly created series of preferred stock. Terms that may be established include:
(1) the designation of the series;
(2) the dividend rate of the series, including
24
<PAGE>
. the conditions and dates on which the dividends will be payable,
. the preference or relation which the dividends will bear to the
dividends payable on any other class or classes of capital stock
of the holding company; and
. whether the dividends will be cumulative or non-cumulative;
(3) whether the shares of the series will be redeemable by the holding
company, and if so, on what terms and conditions;
(4) the terms and amount of any sinking fund provided for the purchase or
redemption of the shares of the series;
(5) whether the shares of the series will be convertible and if so, the
terms of conversion;
(6) the extent, if any, to which the holders of the shares will be
entitled to vote;
(7) the restrictions and conditions, if any, upon the issue or re-issue of
any additional preferred stock ranking evenly with or senior to the
shares as to dividends or upon dissolution; and
(8) the rights of the holders of shares upon dissolution, or distribution
of the assets of the holding company, which may be different in the
case of a voluntary dissolution.
Holding company common stock holders may be adversely affected by future
issuances of holding company preferred stock, since preferred stock issued in
the future may be designated with special rights or preferences superior to
those of holding company common stock as to dividends, liquidation rights and
voting rights. For example, the holding company board of directors could
designate a new class of preferred stock with a separate class right to approve
a merger or sale of substantially all the assets of the holding company or other
matters. Consequently, the issuance of preferred stock may have the effect of
delaying or preventing a change in control of the holding company. See "Risk
Factors -- Provisions of the holding company charter and applicable law may
prevent a change in control."
Restrictions on Acquisition of the Holding Company
Several provisions of holding company articles of incorporation and bylaws
may discourage unilateral tender offers or other attempts to take over and
acquire the business of the company. The following summarizes those provisions
of holding company articles of incorporation and bylaws which might have a
potential "anti-takeover" effect. You should refer in each case to the holding
company articles of incorporation and bylaws which are attached to this proxy
statement/prospectus at Appendix B.
. Classified Board of Directors. The holding company board of directors
is divided into three classes of approximately equal numbers of
directors, with the term of office of one class expiring each year.
This provides a greater likelihood of continuity, knowledge and
experience on the holding company board of directors because at any
one time, one third of the board of directors would be in its second
year of service and one third of the board of directors would be in
its third year of service. In addition, any person who may attempt to
take over the holding company would have to deal with the current
board of directors because even if that person acquires a majority of
the outstanding voting shares of the holding company, that person
would be unable to change the majority of the board of directors at
any one special meeting.
. Removal of Directors. Directors may be involuntarily removed from
office before their term expires only for cause and only if at least
two-thirds of each class of holding company voting stock vote in favor
of removal at a meeting of shareholders. This provision may make it
difficult for any person who may attempt to take over the holding
company to remove elected directors before the end of their term.
. Vacancies on the Board of Directors. Any vacancy occurring in the
board of directors, including an increase in the number of authorized
directors, may be filled only by the affirmative vote of a majority of
25
<PAGE>
the directors then in office, though less than a quorum of the board
of directors. A director elected to fill a vacancy will serve until
the next shareholders' meeting at which directors are elected. This
provision may make it difficult for any person who may attempt to take
over the holding company to elect new directors even if that person
successfully removes existing directors.
. Size of the Board. The number of holding company directors cannot
exceed 25, unless the Bylaws provide otherwise. Any person who may
attempt to take over the holding company will not be able to increase
the size of the Board in order to elect that person's nominees
without a change in the holding company's Articles of Incorporation.
. Power of the Board to Issue Preferred Stock. The Board of Directors
may authorize the holding company to issue preferred stock in one or
more series. The Board may also establish the terms of any series of
preferred stock holding company issues. By issuing one or more series
of preferred stock with certain special rights or preferences - for
example, the right to approve a merger or sale of all or substantially
all of the assets of the holding company - it would be more difficult
for a potential acquirer to obtain necessary shareholder approval to
acquire the holding company.
. Special Shareholders Meetings. A special holding company shareholders
meeting may only be called by the Chairman of the Board of Directors,
the President of the holding company or by the Board of Directors.
Because certain actions may only be taken at a special shareholders
meeting (for example, removal of a director) and because regular
shareholders meetings occur generally annually, it would be more
difficult for a potential acquirer to obtain shareholder approval of
changes necessary to facilitate an acquisition.
. Restrictions on Business at Shareholder Meetings. Generally, business
at the holding company shareholders meetings is restricted to the
purpose of the meeting described in the notice (if it is a special
shareholders' meeting), business that the Board of Directors wishes to
be taken up at the meeting (regardless of whether it is a special or
regular meeting) or which is brought before the meeting pursuant to a
timely written notice to the President by one or more shareholders. A
notice is timely if it is received at the holding company executive
offices between 60 and 90 days prior to the meeting, unless less than
70 days notice or public disclosure of the meeting is given, in which
case the written notice by the shareholder(s) desiring to make a
proposal must be received within 10 days after the meeting notice or
disclosure. The required contents of the notice by the shareholder(s)
are contained in the holding company bylaws and must be strictly
complied with in order for a shareholder proposal or nomination to be
considered. These restrictions, while helpful in assuring orderly and
informed shareholders meetings, have the effect of making it more
difficult for someone attempting to acquire control of the holding
company to bring matters before any shareholders meeting, including
amendments to the holding company articles of incorporation.
. Amendment of Articles and Bylaws. Generally, Virginia corporation law
requires amendments to corporate articles of incorporation to be
approved by more than two-thirds of all votes entitled to be voted by
each shareholder voting group. Virginia law permits a corporation's
articles of incorporation to increase or, within limits, to decrease,
these shareholder voting requirements. The holding company articles of
incorporation increase the percentage to at least 80% of each class of
voting stock outstanding required to change the following provisions
of holding company articles:
(1) change the minimum and maximum number of directors
(2) change the staggered terms of the board
(3) change the requirement that the interim board vacancies be filled
by the directors
(4) change the requirements for removal of a director before the end
of his or her term
(5) change the requirements for amending holding company bylaws
26
<PAGE>
(6) change provisions of holding company articles which determine the
required shareholder vote on business combinations such as
mergers and the sale of all or substantially all of holding
company assets.
The holding company articles of incorporation also provide that the
company's bylaws may be amended by the vote of a majority of a quorum of
directors. If there is a shareholder who controls at least 5% of holding company
voting stock, the director majority must include a majority of directors not
affiliated with that shareholder and who were members of the board before the
shareholder reached the 5% level. The shareholders may change the bylaws only if
at least 80% of each class of voting shares approve.
These provisions have the effect of making it difficult to change the
holding company articles and bylaws without the approval of the board of
directors, particularly provisions of the holding company articles of
incorporation which relate to board composition and increased shareholder
approval requirements for mergers and similar transactions not approved by the
board. The effect of these provisions may be to make it more difficult for a
person who desires to acquire control of the holding company to do so without
the cooperation of the incumbent board.
For restrictions on acquisitions of the holding company imposed by law or
regulation, please see the section of this proxy statement/prospectus captioned
"Supervision and Regulation -- Acquisition of the Holding Company," below.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Shares and Per Share Data and Ratios)
The following is a discussion of the factors which significantly affected
the financial condition and results of operations of Salem Bank and Trust,
National Association and subsidiary (the Bank) at December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997. This discussion should be
read in conjunction with the consolidated financial statements, statistical
disclosures and other financial information presented herein.
1999 COMPARED TO 1998
Balance Sheet
Total assets of the Bank at December 31, 1999 exceeded total assets at
December 31, 1998 by $17,693 or 10.9 percent. The majority of this increase was
the result of growth in net loans. Net loans outstanding at December 31, 1999
compared to December 31, 1998 showed an increase of $17,189, or 17.5 percent, an
increase which was a result of overall increased loan demand in the Bank's
lending territory.
Total securities at December 31, 1999 increased by $9,135, or 21.9 percent
compared to December 31, 1998. This increase was due primarily to purchases of
both available-for-sale and held-to-maturity securities totaling $14,106 offset
by maturities, calls and paydowns of $4,742. Securities growth was funded in the
current year, despite significant loan growth, from a liquidation of the Bank's
federal funds sold position and steady deposit growth. Included in available-
for-sale securities at December 31, 1999 are floating rate and step-up rate U.S.
Government agency securities with amortized costs of $1,761 and fair values of
$1,740. Included in held-to-maturity securities at December 31, 1999 is a
floating rate U.S. Government agency security with an amortized cost of $250 and
a fair value of $251. Refer to note 3 of the notes to consolidated financial
statements for additional information concerning the Bank's investment
securities.
Total deposits increased by $11,505, or 7.9 percent, due mostly to
increases in total time deposits. Total time deposits were up from $84,549 to
$93,922, an 11.1 percent increase. Deposit balances increased due to more
attractive depository rates being made available to customers in 1999 than in
1998.
The Bank received an advance from the Federal Home Loan Bank of Atlanta
during the year which totaled $4,100 at December 31, 1999. This advance was
necessary due to Year 2000 cash vault requirements and strong fourth quarter
loan growth.
Allowance for Loan Losses
At December 31, 1999, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement 114, totaled $1,032
compared to $1,070 at December 31, 1998. Of these amounts, $711 at December 31,
1999 related to loans with no valuation allowance compared to $660 at December
31, 1998, and $321 and $410 at December 31, 1999 and 1998, respectively, related
to loans with a corresponding valuation allowance of $67 and $77, respectively.
For the year ended December 31, 1999, the average recorded investment in
impaired loans was approximately $1,092 compared to $998 for the year ended
December 31, 1998, and the total interest income recognized on impaired loans
was $85 in 1999 versus $96 in 1998, of which $65 and $76 was recognized on a
cash basis in 1999 and 1998, respectively.
The provision for loan losses was $315 for the year ended December 31, 1999
compared to $358 for the year ended December 31, 1998, a decrease of $43. This
decrease resulted from improved loan portfolio quality as reflected by decreased
charge-off activity in the current year. Actual net charge-offs were $195 for
the year ended December 31, 1999 versus $274 in net charge-offs for the year
ended December 31, 1998. Management understands that its efforts to
28
<PAGE>
improve earnings through increased loan volume requires an adequate allowance
for loan losses. Therefore, an ongoing evaluation of the allowance for loan
losses, as it relates to the growth and quality of the portfolio, is being made
to ensure that the allowance for loan losses is at a sufficient level to absorb
estimated losses in the Bank's portfolio. As of December 31, 1999 and 1998, the
ratio of the allowance for loan losses to loans, net of unearned income, was
1.20 percent and 1.29 percent, respectively. Management believes the allowance
for loan losses of $1,404 at December 31, 1999 is adequate. While management
uses available information to recognize loan losses, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. The agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available at the time of their examination.
Foreclosed properties decreased to $216 at December 31, 1999 from $559 at
December 31, 1998. This decrease resulted from a lesser volume of properties
being brought to foreclosure in the current year. Foreclosed properties consist
primarily of single-family property, some of which were under contract to be
sold as of December 31, 1999.
See note 5 to the Bank's consolidated financial statements for summaries of
the changes in the Bank's allowance for loan losses, nonperforming assets and
impaired loans. Also, see comments in note 14 to the Bank's consolidated
financial statements.
Capital Resources
Stockholders' equity increased by $1,545, or 9.5 percent, to $17,837 as of
December 31, 1999 compared to stockholders' equity of $16,292 at December 31,
1998. The increase was primarily due to improved earnings, the majority of which
were retained. Stockholders' equity at December 31, 1999 has been reduced by
$210, compared to $46 at December 31, 1998, representing the net unrealized
losses on available-for-sale securities, net of income taxes, at year end. The
net unrealized losses on available-for-sale securities, net of income taxes,
which is recorded as accumulated other comprehensive income as a separate
component of stockholders' equity, will continue to be subject to change in
future periods due to fluctuations in market value, sales, purchases, maturities
and calls of securities classified as available-for-sale.
The Bank was in compliance with minimum Tier 1 and total capital ratios of
4 percent and 8 percent, respectively, at December 31, 1999. Also, the Bank's
leverage ratio at December 31, 1999 was in excess of the 4 percent minimum
requirement. See note 11 of the notes to the consolidated financial statements
for additional information concerning the Bank's capital requirements.
There are no material commitments for capital expenditures as of December
31, 1999. In addition, there are no expected material changes in the mix or
relative cost of capital resources.
Net Interest Income
The principal source of earnings for the Bank is net interest income. Net
interest income is the net amount of interest earned on the Bank's interest-
bearing assets less the amount of interest paid on the Bank's deposits and other
interest-bearing liabilities. Net interest income before the provision for loan
losses was $7,001 for the year ended December 31, 1999 compared with $6,205 for
the year ended December 31, 1998, an increase of $796 or 12.8 percent. Most of
this increase was due to increased securities and loan portfolios which grew
more rapidly during the period than interest-bearing deposits. Total interest
income increased from $11,894 in 1998 to $13,505 in 1999, an increase of $1,611
or 13.5 percent due primarily to the aforementioned larger securities and loan
portfolios. Interest expense increased from $5,689 in 1998 to $6,504 in 1999, an
increase of $815 or 14.3 percent, due to steady growth in deposits.
Noninterest Income
Noninterest income consists of earnings generated primarily from service
charges on deposit accounts and other service charges, commissions and fees. The
Bank's total noninterest income increased from $1,125 in 1998 to $1,137 in 1999,
an increase of 1.1 percent, due primarily to increases in service charges on
deposit accounts and offset by
29
<PAGE>
decreases in other service charges, commissions and fees. Service charges on
deposit accounts increased 19.3 percent over 1998 due to increases in returned
check, stop payment and overdraft charges which resulted from an overall
increase in the volume of deposit accounts. Other service charges, commissions
and fees decreased 12.6 percent compared to the year ended December 31, 1998 due
primarily to decreases in commissions on mortgage loans sold to outside
investors. The current year volume of mortgage loans sold was considerably less
than in the prior year.
Noninterest Expense
The Bank's total noninterest expense for the year ended December 31, 1999
increased $180, or 4.1 percent, compared to the year ended December 31, 1998,
due primarily to increases in salaries and employee benefits and other expenses.
The 4.0 percent increase in salary and employee benefits expense in 1999 was due
primarily to routine merit adjustments, promotions and other normal compensation
related items. Furniture, fixtures and equipment expense increased 5.2 percent
due primarily to an increase in repairs and maintenance expenses, offset by a
decrease in depreciation expense. Write-downs and losses, net, on foreclosed
properties decreased to $24 in 1999 from $47 in 1998. Other expenses in 1999
increased 12.0 percent over 1998 due to increases in telephone expense, charge-
offs of overdrafts and cash items, and other miscellaneous items.
Income Taxes
Reported income tax expense increased $243 to $1,020 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. The Bank's
effective tax rate was 31.5 percent in 1999 compared to 30.3 percent in 1998.
The increase in the effective tax rate resulted from a lower level of tax-exempt
securities being held in the current year relative to the prior year. See note 9
of the notes to consolidated financial statements for additional information
concerning the Bank's income taxes.
Net Income
Net income for the year ended December 31, 1999 was $2,219 compared to
$1,791 for the year ended December 31, 1998. This was an increase of $428, or
23.9 percent, due primarily to the increase in net interest income and offset by
increases in total noninterest expense and income tax expense. The Bank achieved
a 1.28 percent return on average assets during 1999, compared to a 1.22 percent
return for 1998. This increase resulted from net income growth outpacing average
asset growth. In addition, the Bank achieved a return on average equity of 12.77
percent in 1999 versus 11.32 percent in 1998. This increase resulted from higher
levels of net income and was only partially offset by an increased dividend
payment in the current year.
Liquidity
Liquidity is the ability to generate adequate cash flow to meet financial
commitments and to fund customers' demands for funds, either in terms of loan
requests or deposit withdrawals. Liquidity may be provided by both assets and
liabilities. Asset liquidity is derived from sources such as sales, calls and
maturities of securities, principal and interest payments on loans, and cash and
due from banks. Liability liquidity is provided by the core deposit growth from
the Bank's stable customer base. Liquidity may also be provided by the issuance
of the Bank's common stock. Management believes the liquidity of the Bank
remains adequate, as sufficient assets are maintained on a short-term basis to
meet the liquidity demands anticipated. Secondary sources of funds are also
available should the need arise. Management is not aware of any trends,
commitments or events that will result in or that are reasonably likely to
result in a material increase or decrease in liquidity.
Net cash provided by operating activities of $4,569 in 1999 increased
$3,073 from 1998 and was primarily attributable to the increase in net income
and the change in the mortgage loans held for sale category which fluctuates
based upon loan demand and the timing of loan sales in the secondary market. Net
cash flows from financing activities in 1999 decreased $9,281 from 1998 due
primarily to significant decreases in cash flows from demand and savings
deposits. Cash flows from operating and financing activities were used primarily
to fund the net increase in loans of $17,189 and the net increase in securities
of $9,135 in 1999.
Year 2000
30
<PAGE>
The Bank was cognizant of the risks posed by the Year 2000 issue.
Subsequent to December 31, 1999, the Bank is not aware of any information that
indicates a significant vendor or service provider may be unable to sell goods
or provide services to the Bank because of Year 2000 issues. Further, the Bank
has not received any notifications from borrowers or regulatory agencies to
which it is subject, nor is the Bank aware of any information which indicates
that (1) a borrower has experienced significant issues which may impact their
ability to service their loan or which may impact their borrowing agreement
terms or covenants or (2) significant regulatory action is being or may be taken
against the Bank, as a result of Year 2000 issues.
The Bank has not experienced any significant disruptions to financial or
operating activities caused by failure to computerized systems resulting from
Year 2000 issues. Management does not expect Year 2000 issues to have a material
adverse effect on the Bank's operations or financial results in 2000. To date,
the Bank has expensed approximately $25,000 on the Year 2000 issue. Future
expenses related to the Year 2000 issue are not expected to be significant.
1998 COMPARED TO 1997
Balance Sheet
Total assets of the Bank at December 31, 1998 exceeded total assets at
December 31, 1997 by $26,210 or 19.2 percent. Net loans outstanding at December
31, 1998 compared to December 31, 1997 showed an increase of $1,084 or 1.1
percent. The increase was a result of improved commercial loan demand. Federal
funds sold and securities purchased under resale agreements at December 31, 1998
increased by $3,735 or 58.0 percent compared to December 31, 1997, due primarily
to increases in total deposits which were only partially utilized to fund
increases in net loans and securities.
Total securities at December 31, 1998 increased by $19,552 or 88.3 percent
compared to December 31, 1997, due primarily to purchases of securities of
$36,564, offset by maturities and calls of securities of $17,028. Included in
available-for-sale securities at December 31, 1998 are floating rate and step-up
rate securities with coupon rates of 5 percent or below with amortized cost of
$1,503 and fair value of $1,434. No floating rate or step-up rate securities
with coupon rates of 5 percent or below are included in held-to-maturity
securities at December 31, 1998. Refer to note 3 of the notes to consolidated
financial statements for additional information concerning the Bank's investment
securities.
Total deposits increased by $24,926 or 20.7 percent, due mostly to
increases in interest-bearing demand deposits and total time deposits. Total
interest-bearing demand deposits were up from $23,474 to $33,915, a 44.5 percent
increase and total time deposits were up from $74,912 to $84,549, a 12.9 percent
increase.
Allowance for Loan Losses
At December 31, 1998, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement 114, totaled $1,070
compared to $861 at December 31, 1997. Of these amounts, $660 at December 31,
1998 related to loans with no valuation allowance compared to $735 at December
31, 1997, and $410 and $126 at December 31, 1998 and 1997, respectively, related
to loans with a corresponding valuation allowance of $77 and $40, respectively.
For the year ended December 31, 1998, the average recorded investment in
impaired loans was approximately $998 compared to $923 for the year ended
December 31, 1997, and the total interest income recognized on impaired loans
was $96 in 1998 versus $78 in 1997, of which $76 and $39 was recognized on a
cash basis in 1998 and 1997, respectively.
The provision for loan losses was $358 for the year ended December 31, 1998
compared to $391 for the year ended December 31, 1997, a decrease of $33. This
decrease resulted from improved loan portfolio quality in the current year.
Actual net charge-offs were $274 for the year ended December 31, 1998 versus
$356 in net charge-offs for the year ended December 31, 1997. An ongoing
evaluation of the allowance for loan losses, as it relates to the growth and
31
<PAGE>
quality of the portfolio, is being made to ensure that the allowance for loan
losses is at a sufficient level to absorb estimated losses in the Bank's
portfolio. As of December 31, 1998 and 1997, the ratio of the allowance for
loan losses to loans, net of unearned income, was 1.29 percent and 1.22 percent,
respectively. While management uses available information to recognize loan
losses, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. The agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available at the time of
their examination.
Foreclosed properties increased to $559 at December 31, 1998 from $306 at
December 31, 1997. These properties consist primarily of single-family
property, some of which were under contract to be sold as of December 31, 1998.
See note 5 to the Bank's consolidated financial statements for summaries of
the changes in the Bank's allowance for loan losses, nonperforming assets and
impaired loans. Also, see comments in note 14 to the Bank's consolidated
financial statements.
Capital Resources
Stockholders' equity increased by $1,387 or 9.3 percent to $16,292 as of
December 31, 1998 compared to stockholders' equity of $14,905 at December 31,
1997. The increase was primarily due to improved earnings, the majority of
which were retained. Stockholders' equity at December 31, 1998 has been reduced
by $46 compared to $54 at December 31, 1997 representing the net unrealized
losses on available-for-sale securities, net of income taxes, at year end. The
net unrealized losses on available-for-sale securities, net of income taxes,
which is recorded as accumulated other comprehensive income as a separate
component of stockholders' equity, will continue to be subject to change in
future periods due to fluctuations in market value, sales, purchases, maturities
and calls of securities classified as available-for-sale.
The Bank was in compliance with minimum Tier 1 and total capital ratios of
4 percent and 8 percent, respectively, at December 31, 1998. Also, the Bank's
leverage ratio at December 31, 1998 was in excess of the 4 percent minimum
requirement. See note 11 of the notes to the consolidated financial statements
for additional information concerning the Bank's capital requirements.
There are no material commitments for capital expenditures as of December
31, 1998. In addition, there are no expected material changes in the mix or
relative cost of capital resources.
Net Interest Income
The principal source of earnings for the Bank is net interest income. Net
interest income is the net amount of interest earned on the Bank's interest-
bearing assets, less the amount of interest paid on the Bank's deposits and
other interest-bearing liabilities. Net interest income before the provision
for loan losses was $6,205 for the year ended December 31, 1998, compared with
$5,667 for the year ended December 31, 1997, an increase of $538 or 9.5 percent.
Most of this increase was due primarily to federal funds sold and held-to-
maturity securities volume increasing more rapidly during the period than the
volume of interest-bearing deposits. Total interest income increased from
$10,699 in 1997 to $11,894 in 1998, an increase of $1,195 or 11.2 percent due
primarily to higher federal funds sold and securities volume. Interest expense
increased from $5,032 in 1997 to $5,689 in 1998, an increase of $657 or 13.1
percent, due to the increased volume in interest-bearing demand and time
deposits.
Noninterest Income
Noninterest income consists of earnings generated primarily from service
charges on deposit accounts and other service charges, commissions and fees.
The Bank's total noninterest income increased from $1,013 in 1997 to $1,125 in
1998, an increase of 11.1 percent due primarily to increases in other service
charges, commissions and fees offset by a decrease in service charges on deposit
accounts. Service charges on deposit accounts decreased 18.0 percent over 1997
due to decreases in charges earned on commercial deposit accounts. Other service
charges, commissions and fees
32
<PAGE>
increased 34.7 percent compared to the year ended December 31, 1997 due
primarily to increases in commissions on mortgage loans sold.
Noninterest Expense
The Bank's total noninterest expense for the year ended December 31, 1998
increased $40, or .9 percent compared to the year ended December 31, 1997. The
10.2 percent increase in salary and employee benefits expense in 1998 was due
primarily to additions to the Bank's staff, routine merit adjustments,
promotions and other normal compensation related items. Furniture, fixtures and
equipment expense decreased 8.4 percent due primarily to the Bank's installation
of a new computer system in 1997 which increased prior year costs under
maintenance contracts. Computer services decreased $174 or 91.1 percent in 1998
due to the Bank's installation of a new computer system in the prior year, which
eliminated the costs associated with outsourcing the data processing function.
Write-downs and losses, net, on foreclosed properties increased to $47 in 1998
from $7 in 1997. Other expenses in 1998 decreased 4.7 percent over 1997 due to a
decrease in armored car service which was partially offset by increases in
telephone expense, advertising expense and capital stock taxes.
Income Taxes
Reported income tax expense increased $238 to $777 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The Bank's
effective tax rate was 30.3 percent in 1998 compared to 28.0 percent in 1997.
The increase in the effective tax rate was due primarily to a decrease in the
level of tax-exempt interest income. See note 9 of the notes to consolidated
financial statements for additional information concerning the Bank's income
taxes.
Net Income
Net income for the year ended December 31, 1998 was $1,791 compared to
$1,386 for the year ended December 31, 1997. This was an increase of $405 or
29.2 percent, due primarily to increases in net interest income and total
noninterest income and a decrease in the provision for loan losses, offset by
increases in total noninterest expense and income tax expense. The Bank
achieved a 1.22 percent return on average assets during 1998, compared to a 1.06
percent return for the same period in 1997.
Liquidity
Net cash provided by operating activities of $1,496 in 1998 decreased
$1,282 from 1997 and was primarily attributable to the increase in the mortgage
loans held for sale category which fluctuates based upon loan demand and the
timing of loan sales in the secondary market. Net cash flows from financing
activities in 1998 increased $13,532 from 1997 due primarily to increases in
demand and savings deposits. Cash flows from financing activities were used
primarily to fund the net increase in securities of $19,552, the net increase in
loans of $2,369 and the net increase in federal funds sold of $3,735 in 1998.
General
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Bank are monetary in nature. As a
result, interest rates have a more significant impact on the Bank's performance
than the general level of inflation. Over short periods of time, interest rates
may not necessarily move in the same direction or in the same magnitude as
inflation.
33
<PAGE>
Derivatives
The Bank does not use derivatives or other off-balance sheet transactions
such as futures contracts, forward obligations, interest rate swaps, or options:
Future Accounting Considerations
Statement 133
- - -------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative. Statement 133 was issued to
address concerns over the lack of uniformity in accounting and reporting for
derivative instruments and hedging activities.
Statement 133, as amended by Statement 137, Deferral of the Effective Date
of FASB Statement No. 133, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, although earlier application is permitted.
Retroactive application of Statement 133 to financial statements of prior
periods is not permitted.
Future adoption of Statement 133 is not expected to have any effect on the
consolidated financial position, results of operations or liquidity of the Bank.
The Bank currently does not hold derivative instruments as defined by Statement
133.
STATISTICAL FINANCIAL DATA
--------------------------
The following information presents statistical information describing
portions of the bank's business. The numbers in the tables below are in
thousands, except ratios, share and per share information.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
-------------------------------------------------------------- ---------
RATES AND INTEREST DIFFERENTIAL
- - -------------------------------
The table on the following page illustrates balances of total interest-
earning assets and total interest- bearing liabilities for the periods
indicated, showing the average distribution of assets, liabilities,
stockholders' equity and the related income, expense and corresponding average
yields earned and rates incurred. The average balances used in this table and
other statistical data were calculated using daily average balances.
It should be noted that income and yields are not reported on a tax-
equivalent basis. Nonaccrual loans are included in average balances for yield
computations. The interest rate spread is the average yield earned on interest-
earning assets less the average rate incurred on interest-bearing
liabilities. Net interest margin is net interest income expressed as a
percentage of average interest-earning assets.
34
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------
Average Average
Interest Rate Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average
Balance Expense Paid Balance Expense Paid Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,387 $ - - $ 4,722 $ - - $ 4,775
Interest-bearing deposits with banks 58 3 5.17% 40 2 5.00% 38
Taxable securities 42,612 2,859 6.71% 20,775 1,337 6.44% 14,877
Non-taxable securities 4,864 266 5.47% 6,039 345 5.71% 6,832
- - ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 47,476 3,125 6.58% 26,814 1,682 6.27% 21,709
Federal funds sold and securities
purchased under resale agreements 11,073 538 4.86% 13,558 722 5.33% 6,986
Total loans (net of unearned) 106,431 9,839 9.24% 99,281 9,488 9.56% 93,943
Allowance for loan losses (1,337) - - (1,242) - - (1,192)
- - ----------------------------------------------------------------------------------------------------------------------------------
Loans, net 105,094 - - 98,039 - - 92,751
Bank premises and equipment 2,069 - - 2,178 - - 1,999
Accrued interest receivable 1,264 - - 943 - - 850
Foreclosed properties 248 - - 338 - - 299
Other assets 830 - - 620 - - 763
- - ----------------------------------------------------------------------------------------------------------------------------------
Total assets $173,499 $147,252 $130,170
-------- -------- --------
Total Interest-earning Assets $165,038 $ 13,505 8.18% $139,693 $ 11,894 8.51% $122,676
------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits 19,772 - - 17,736 - - 16,565
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing demand deposits 35,545 1,190 3.35% 29,526 995 3.37% 23,231
Savings deposits 5,944 145 2.44% 5,524 134 2.43% 5,083
Certificates of deposit $100,000 &
over 15,205 885 5.82% 11,807 719 6.09% 9,785
Other time deposits 78,263 4,276 5.46% 65,695 3,841 5.85% 59,937
- - ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 134,957 6,496 4.81% 112,552 5,689 5.05% 98,036
Federal funds purchased and
securities
sold under repurchase agreements 178 8 4.49% - - - 73
Accrued interest payable 993 - - 839 - - 727
Other liabilities 228 - - 305 - - 188
Total liabilities $156,128 $131,432 $115,589
Stockholders' equity 17,371 15,820 14,581
Total Liabilities/Stockholders'
Equity $173,499 $147,252 $130,170
-------- -------- --------
Total Interest-bearing Liabilities $135,135 $ 6,504 4.81% $112,552 $ 5,689 5.05% $ 98,109
------------------------------------------------------------------------------------------
Interest rate spread 3.37% 3.46%
-------- --------
Interest Income/Interest-earning
Assets 8.18% 8.51%
Interest-Expense/Interest-earning
Assets 3.94% 4.07%
-------- --------
Net Interest Income/Net Yield on
Interest-earning Assets $ 7,001 4.24% $ 6,205 4.44%
----------------------- --------------------
<CAPTION>
1997
------------------
Average
Interest Rates
Income/ Earned/
Expense Paid
<S> <C> <C>
Assets
Cash and due from banks $ - -
Interest-bearing deposits with banks 4 10.53%
Taxable securities 880 5.92%
Non-taxable securities 401 5.87%
- - -----------------------------------------------------------------
Total investment securities 1,281 5.90%
Federal funds sold and securities
purchased under resale agreements 387 5.54%
Total loans (net of unearned) 9,027 9.61%
Allowance for loan losses - -
- - -----------------------------------------------------------------
Loans, net - -
Bank premises and equipment - -
Accrued interest receivable - -
Foreclosed properties - -
Other assets - -
- - -----------------------------------------------------------------
Total assets
Total Interest-earning Assets $ 10,699 8.72%
- - -----------------------------------------------------------------
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits - -
- - -----------------------------------------------------------------
Interest-bearing demand deposits 745 3.21%
Savings deposits 124 2.44%
Certificates of deposit $100,000 &
over 603 6.16%
Other time deposits 3,556 5.93%
- - -----------------------------------------------------------------
Total interest-bearing deposits 5,028 5.13%
Federal funds purchased and
securities
sold under repurchase agreements 4 5.48%
Accrued interest payable - -
Other liabilities - -
Total liabilities
Stockholders' equity
Total Liabilities/Stockholders'
Equity
Total Interest-bearing Liabilities $ 5,032 5.13%
--------------------------
Interest rate spread 3.59%
-----
Interest Income/Interest-earning
Assets 8.72%
Interest-Expense/Interest-earning
Assets 4.10%
--------
Net Interest Income/Net Yield on
Interest-earning Assets
</TABLE>
35
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
The following table describes the impact on the Bank's interest income and
interest expense resulting from changes in average balances and average rates
for the periods indicated. The changes in interest due to both volume and rate
have been allocated to volume and rate changes equally.
<TABLE>
<CAPTION>
Years Ended December 31,
1999/1998 1998/1997
---------------------------------- ---------------------------------------
Increase (decrease) Total Increase (decrease) Total
due to change in: or net due to change in: or net
--------------------- -------------------------
Average Average increase Average Average increase
balance rate (decrease) balance rate (decrease)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with banks $ 1 - 1 $ - (2) (2)
Taxable securities 1,435 87 1,522 364 93 457
Non-taxable securities (66) (13) (79) (46) (10) (56)
Federal funds sold and securities purchased
under resale agreements (127) (57) (184) 357 (22) 335
Total loans (net of unearned) 672 (321) 351 510 (49) 461
- - -----------------------------------------------------------------------------------------------------------------------------
Income on interest-earning assets 1,915 (304) 1,611 1,185 10 1,195
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits 202 (7) 195 208 42 250
Savings deposits 10 1 11 11 (1) 10
Certificates of deposit of $100,000 & over 202 (36) 166 124 (8) 116
Other time deposits 711 (276) 435 336 (51) 285
Federal funds purchased and securities
sold under repurchase agreements 8 - 8 (2) (2) (4)
--------------------------------------------------------------------------------
Expense of interest-bearing liabilities 1,133 (318) 815 677 (20) 657
- - -----------------------------------------------------------------------------------------------------------------------------
Net change in net interest income 782 14 796 508 30 538
--------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
II. INVESTMENT PORTFOLIO
--------------------
The amortized costs and fair values of available-for-sale securities as of
December 31, 1999 and 1998 were as follows:
December 31, 1999
-----------------------------
Amortized Fair
Costs Values
-----------------------------
U. S. Government agencies
and corporations (1) $ 8,752 8,434
Other securities 942 942
------- ------
Totals $ 9,694 9,376
======= ======
December 31, 1998
-----------------------------
Amortized Fair
Costs Values
-----------------------------
U. S. Government agencies
and corporation (1) $ 2,163 2,093
Other securities 827 827
------- ------
Totals $ 2,990 2,920
======= ======
The amortized costs of held-to-maturity securities as of December 31, 1999
and 1998 were as follows:
December 31,
-----------------------------
1999 1998
-----------------------------
U. S. Government agencies
and corporations (1) $37,249 33,014
State and political subdivisions 4,207 5,763
------- ------
Totals $41,456 38,777
======= ======
(1) Mortgage-backed securities are included in the totals for U.S.
Government agencies and corporations.
Other than U.S. Government securities, the Bank has no securities with any
issuer that exceeds 10% of its stockholders' equity.
The following tables set forth the maturity distribution and weighted
average yields of the investment portfolio at December 31, 1999. The weighted
average yields are calculated on the basis of amortized costs of the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount. Yields on tax-exempt investments have been
computed on a tax equivalent basis assuming a federal tax rate of 34 percent.
37
<PAGE>
AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
December 31, 1999
----------------------------
Weighted
Amortized Fair Average
Costs Values Yields
--------- ------ --------
<S> <C> <C> <C>
U.S. Government agencies
and corporations (1):
One year or less $ 614 613 5.11%
After five to ten years 1,003 985 5.58%
After ten years 7,135 6,836 7.40%
------ ----- ----
8,752 8,434 7.03%
Other securities:
No maturity 942 942 6.78%
------ ----- ----
Total available-for-sale securities $9,694 9,376 7.01%
====== ===== ====
</TABLE>
HELD-TO-MATURITY
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Weighted
Amortized Fair Average
Costs Values Yields
--------- ------ --------
<S> <C> <C> <C>
U.S. Government agencies and corporations (1):
One year or less $ 500 508 8.25%
After one to five years 2,472 2,428 6.38%
After five to ten years 9,997 9,329 6.55%
After ten years 24,280 22,014 6.83%
------- ------ ----
37,249 34,279 6.74%
State and political subdivisions:
One year or less 420 434 6.17%
After one to five years 2,408 2,414 4.83%
After five to ten years 1,379 1,428 6.03%
------- ------ ----
4,207 4,276 5.36%
Total held-to-maturity securities $41,456 38,555 6.60%
======= ====== ====
Total securities $51,150 47,931 6.68%
======= ====== ====
</TABLE>
(1) Mortgage-backed securities are included in the totals for U. S. Government
agencies and corporations.
38
<PAGE>
III. LOAN PORTFOLIO
--------------
A summary of loans outstanding is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Commercial $ 9,058 12,301
Consumer, principally installment 22,183 19,236
Real estate - mortgage 71,914 55,372
Real estate - construction 14,881 13,727
-------- --------
Total loans 118,036 100,636
Less unearned income (1,039) (948)
-------- --------
Total loans, less unearned income $116,997 99,688
======== ========
</TABLE>
The following table presents the maturities of loans for the Bank.
Maturities of loans are not readily available by loan category.
Aggregate maturities of loan balances which are due:
December 31, 1999
-----------------
Within one year $ 44,449
Over one year through five years 43,972
Over five years 29,615
--------
Total loans $118,036
========
Loans with aggregate maturities of more than one year with a predetermined
interest rate totaled $67,146, and an additional $6,441 were priced with
adjustable interest rates.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments
to extend credit and standby letters of credit. This information is incorporated
by reference in this report from note 13 of the attached 1999 Annual Report to
Stockholders at page F-21.
The Bank also has certain concentrations of credit risk. This information
is incorporated by reference in this report from note 14 of the attached 1999
Annual Report to Stockholders at page F-22.
39
<PAGE>
The following table presents information concerning nonperforming assets.
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Nonaccrual loans $ 810 859
Foreclosed properties 216 559
------ -----
Total nonperforming assets $1,026 1,418
====== =====
Accruing loans contractually past due
90 days or more $ 97 293
====== =====
</TABLE>
There were no committments to lend additional funds to customers whose
loans were classified as nonperforming at December 31, 1999.
The following table shows the proforma interest that would have been earned
on nonaccrual loans if they had been current in accordance with their original
terms and the recorded interest that was included in income on these loans:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Proforma interest-nonaccrual loans $ 80 74 60
===== ==== ====
Recorded interest-nonaccrual loans $ 65 76 46
===== ==== ====
</TABLE>
Loans are generally placed in nonaccrual status when the collection of
principal or interest is 90 days or more past due, unless the obligation is both
well secured and in the process of collection.
At December 31, 1999 and 1998, the recorded investment in loans which have
been identified as impaired loans totaled $1,032 and $1,070, respectively. Of
these amounts, $711 and $660 related to loans with no valuation allowance, and
$321 and $410 related to loans with a corresponding valuation allowance of $67
and $77, respectively.
For the years ended December 31, 1999, 1998 and 1997, the average recorded
investment in impaired loans was approximately $1,092, $998 and $923 and the
total interest income recognized on impaired loans was $85, $96 and $78 of which
$65, $76 and $46, respectively, was recognized on a cash basis.
40
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Average loans outstanding $106,431 99,281 93,943
-------- ------ ------
Balance at beginning of year 1,284 1,200 1,165
Additions charged to operations 315 358 391
Charge-offs:
Commercial loans (25) (177) (277)
Consumer loans, principally
installment (234) (191) (159)
Real estate loans (17) (22) (39)
Recoveries:
Commercial loans 41 60 15
Consumer loans, principally
installment 38 56 104
Real estate loans 2 - -
-------- ------ ------
Net charge-offs (195) (274) (356)
-------- ------ ------
Balance at year end $ 1,404 1,284 1,200
-------- ------ ------
Ratio of net charge-offs
during the year to average loans
outstanding during the year 0.18% 0.28% 0.38%
-------- ------ ------
</TABLE>
41
<PAGE>
A breakdown of the allowance for loan losses in dollars and loans in each
category to total loans in percentages is provided in the following table.
However, the Bank's management does not believe that the allowance for loan
losses can be fragmented by category with a degree of precision. Because all of
these factors are subject to change, the breakdown is not necessarily indicative
of future loan losses in the indicated categories.
The following is an allocation of the allowance for loan losses:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------- ------------------------------
Percent of Percent of Percent of
loans in loans in loans in
each category each category each category
Allowance to total Allowance to total Allowance to total
Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 69 7.67% 92 12.22% 46 7.52%
Consumer Loans 170 18.79% 145 19.11% 125 20.50%
Real Estate 666 73.54% 520 68.67% 438 71.98%
Unallocated 499 - 527 - 591 -
------ ------ ----- ------ ----- --------
$1,404 100.00% 1,284 100.00% 1,200 100.00%
====== ====== ===== ====== ===== ========
</TABLE>
42
<PAGE>
V. DEPOSITS
--------
The following table details the average amount of, and the average rate
paid on, the primary deposit categories for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998
-----------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Interest-bearing demand
deposits $ 35,545 3.35% 29,526 3.37%
Savings deposits 5,944 2.44% 5,524 2.43%
Time deposits:
Certificates of deposit
$100,000 and over 15,205 5.82% 11,807 6.09%
Other time deposits 78,263 5.46% 65,695 5.85%
-------- ---- ------- ----
Total interest-bearing deposits 134,957 4.81% 112,552 5.05%
Noninterest bearing deposits 19,772 17,736
-------- -------
Total deposits $154,729 130,288
======== =======
</TABLE>
The following is a summary of the maturity distribution of certificates of
deposit and other time deposits of $100,000 or more as of December 31, 1999:
<TABLE>
<CAPTION>
Maturity
- - ------------------
<S> <C>
3 months $ 2,479
3 months to 6 months 2,384
6 months to 12 months 4,175
Over 12 months 8,835
--------
Total $ 17,873
========
</TABLE>
43
<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
The table below sets forth, as of December 31, 1999, the distribution of
repricing opportunities of the Bank's interest-earning assets and interest-
bearing liabilities, the interest rate sensitivity gap (i.e., interest rate
sensitive assets less interest rate sensitive liabilities), and the cumulative
interest rate sensitivity gap ratio (i.e., interest rate sensitivity gap divided
by total interest-earning assets). The table sets forth the time periods during
which interest-earning assets and interest-bearing liabilities will mature or
may reprice in accordance with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in
the following table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear on the table.
The Bank has a formal asset/liability management program provided through a
correspondent bank relationship. The primary goal of the program is to provide
management with information related to the rate sensitivity of certain assets
and liabilities and the effect of changing rates on profitability and capital
accounts. While this planning process is designed to protect the Bank over the
long-term, it does not provide near-term protection from "interest rate shocks,"
as interest rate sensitive assets and liabilities, by their nature, move up or
down in tandem in response to changes in the overall rate environment.
Therefore, the Bank's profitability in the near-term may temporarily be
affected, either positively by a falling interest rate scenario, or negatively
by a period of rising rates.
An interest rate sensitivity 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.
During a period of rising interest rates, a negative gap would generally tend to
affect adversely net interest income while a positive gap would generally tend
to result in an increase in net interest income. During a period of declining
interest rates, a negative gap would generally tend to result in increased net
interest income, while a positive gap would generally tend to affect adversely
net interest income. The Bank's future earnings may be adversely affected by a
sharp upturn in interest rates as the Bank is liability sensitive for the next
year. In a falling rate environment earnings would benefit to a certain degree
from this position, because assets at higher rate levels would reprice downward
at a slower rate than interest sensitive liabilities. After the ten year period
the Bank's cumulative interest-sensitivity position reflects an asset sensitive
position.
44
<PAGE>
INTEREST RATE SENSITIVITY
The following table illustrates the interest rate sensitivity position of
the Bank as of December 31, 1999 (focusing only on repricing schedule and not
fixed versus variable rates). This table presents a position that existed at
one particular day, changes continually, and is not necessarily indicative of
the Bank's position at any other time.
<TABLE>
<CAPTION>
Maturing/Repricing In .
----------------------------------------------------
Under 3 4 to 12 1 to 5 6 to 10 Over 10
Months Months Years Years Years Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive Assets:
- - --------------------------
Securities (1) 499 1,034 5,136 12,124 31,415 50,208
Loans (2) 6,447 8,900 45,565 29,886 26,428 117,226
--------- ------- ------- ------- ------- -------
Total Interest-sensitive assets $ 6,946 9,934 50,701 42,010 57,843 167,434
--------- ------- ------- ------- ------- -------
Cumulative Interest-sensitive assets $ 6,946 16,880 67,581 109,591 167,434 167,434
--------- ------- ------- ------- ------- -------
Interest-sensitive Liabilities:
- - -------------------------------
NOW, money market & savings $ 42,814 - - - - 42,814
Time deposits $100,000 & Over 2,478 11,273 4,122 - - 17,873
Other time deposits 15,987 23,799 35,948 315 - 76,049
Federal Funds purchased and securities
sold under repurchase agreements 145 - - - - 145
Federal Home Loan Bank advance 4,100 - - - - 4,100
--------- ------- ------- ------- ------- -------
Total Interest-sensitive liabilities $ 65,524 35,072 40,070 315 - 140,981
--------- ------- ------- ------- ------- -------
Cumulative interest-sensitive liabilities $ 65,524 100,596 140,666 140,981 140,981 140,981
--------- ------- ------- ------- ------- -------
Period gap ($58,578) (25,138) 10,631 41,695 57,843 26,453
--------- ------- ------- ------- ------- -------
Cumulative gap ($58,578) (83,716) (73,085) (31,390) 26,453 26,453
--------- ------- ------- ------- ------- -------
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities 10.60% 16.78% 48.04% 77.73% 118.76% 118.76%
--------- ------- ------- ------- ------- -------
</TABLE>
(1) Excluding Federal Reserve Bank and Federal Home Loan Bank stock.
(2) Excluding nonaccrual loans.
45
<PAGE>
SUPERVISION AND REGULATION
General
Salem Bank & Trust is a national bank, and its deposit accounts are insured
up to applicable limits by the FDIC. The bank is subject to extensive
regulation by the OCC as its chartering agency. The reorganization will not
change this. The discussion that follows of the regulations that currently apply
to the bank will apply to the same extent to the bank after the reorganization.
The bank must file reports with the OCC concerning its activities and
financial condition, and it must obtain regulatory approval prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions and opening or acquiring branch offices. The OCC
conducts periodic examinations to assess the bank's compliance with regulatory
requirements as well as its safety and soundness as a financial institution. As
insurer, the FDIC may also conduct examinations of and require reporting by the
bank. This regulation and supervision is intended primarily for the protection
of the deposit insurance funds and depositors, not shareholders. The regulatory
authorities have extensive discretion in the exercise of their supervisory and
enforcement activities, including the setting of policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. The FDIC is authorized to prohibit Salem Bank & Trust
from engaging in any activity that the FDIC determines will pose a threat to the
insurance fund. The FDIC also may initiate enforcement actions.
Salem Community Bankshares, as a bank holding company, also will be
required to file reports with, and otherwise comply with, the rules and
regulations of the Federal Reserve and Virginia Bureau of Financial Institutions
and with the rules and regulations of the Securities and Exchange Commission
under the federal securities laws. Compliance with these additional regulations
will impose additional costs on the holding company not currently borne by Salem
Bank & Trust.
Any change in the laws governing the bank or the holding company, whether
by a bank regulatory agency or through legislation, could have a material
adverse impact on Salem Bank & Trust and Salem Community Bankshares and their
operations and stockholders.
The following is a summary of the laws and regulations that apply to the
bank and the holding company. This summary is not complete. The operations of
the bank and holding company may be affected by legislative and regulatory
changes as well as by changes in the policies of various regulatory authorities.
Salem Community Bankshares
Following the completion of the reorganization, holding company will be
subject to examination, regulation and periodic reporting under the Bank Holding
Company Act of 1956, as amended, as administered by the Board of Governors of
the Federal Reserve System.
As a bank holding company, Salem Community Bankshares will be required to
file with the Federal Reserve annual and semi-annual reports and information
regarding its business operations and those of the bank. The holding company
also must provide the Virginia Financial Institutions with information regarding
itself and the bank. The holding company (as a bank holding company) and Salem
Bank & Trust (as a member of the Federal Reserve System) will be examined by the
Federal Reserve, and the holding company will be examined by the Virginia Bureau
of Financial Institutions.
A bank holding company is required by the Federal Bank Holding Company Act
to obtain approval from the Federal Reserve prior to acquiring control of any
bank that it does not already own or engaging in any business
46
<PAGE>
other than banking or managing, controlling or furnishing services to banks and
other subsidiaries authorized by the statute. Similarly, approval of the
Virginia Bureau of Financial Institutions Bureau is required for certain
acquisitions of other banks and bank holding companies. The Federal Reserve
would approve a bank holding company owning shares in a company involved in
activities the Federal Reserve has determined to be closely related to banking
or to managing or controlling banks.
Some of the principal activities that the Federal Reserve Board has already
determined to be closely related to banking are:
. making or servicing loans;
. performing certain data processing services;
. providing discount and full service brokerage services;
. acting as fiduciary, investment or financial advisor;
. leasing personal or real property;
. making investments in corporations or projects designed primarily to
promote community welfare; and
. acquiring a savings and loan association.
The holding company would be compelled by the Federal Reserve to invest
additional capital in the event the bank experiences either significant loan
losses or rapid growth of loans or deposits. The Federal Reserve requires a
bank holding company to act as a source of financial strength and to take
measures to preserve and protect its bank subsidiaries.
As a bank holding company, the holding company will operate under the
capital adequacy guidelines established by the Federal Reserve. Under the
Federal Reserve's current risk-based capital guidelines for bank holding
companies, the minimum required ratio for total capital to risk weighted assets
the holding company will be required to maintain is 8%, with at least 4%
consisting of Tier 1 capital. Tier 1 capital consists of common and qualifying
preferred stock and minority interests in equity accounts of consolidated
subsidiaries, less goodwill and other intangible assets. These risk-based
capital guidelines establish minimum standards and bank holding companies
generally are expected to operate well above the minimum standards. The amount
of capital a bank holding company is required to hold can adversely affect its
profitability and its ability to expand.
The holding company will be required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the holding
company's consolidated net worth. The Federal Reserve Board may disapprove any
purchase or redemption under certain circumstances. Such notice and approval is
not required for a bank holding company that, as we believe the holding company
will be, would be treated as "well capitalized" under applicable regulations of
the Federal Reserve Board, that has received a composite "1" or "2" rating at
its most recent bank holding company inspection by the Federal Reserve Board,
and that is not the subject of any unresolved supervisory issues.
Notwithstanding the foregoing, any redemption of holding company preferred stock
will require the prior approval of the Federal Reserve Board.
The Federal Reserve Board is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the Bank Holding
Company Act, or the regulations, orders, conditions or agreements of or with the
Federal Reserve Board.
The status of the holding company as a registered bank holding company
under the Bank Holding Company Act does not exempt it from certain federal and
state laws and regulations applicable to corporations generally, including
certain provisions of the federal securities laws.
47
<PAGE>
Salem Bank & Trust
Salem Bank & Trust is examined and regulated by the OCC and is a member of
the Federal Reserve System. The OCC regulates and monitors all significant
aspects of the Bank's operations. The OCC, as the primary regulator, has
enforcement authority over the bank. The OCC requires quarterly reports on the
bank's financial condition and conducts periodic examinations of the bank. The
cost of complying with these regulations and reporting requirements can be
significant. In addition, some of these regulations impact shareholders
directly. For example, Salem Bank & Trust may pay dividends only out of its
undivided profits after deducting expense, including losses and bad debts. In
addition, the bank may not pay dividends at all until its surplus equals its
stated capital. The only exception is if the bank has transferred to surplus no
less than 10% of its net profits for the preceding two consecutive half year
periods (for annual dividends) or of the preceding half year period (for
quarterly or half year dividends).
The bank's loan operations, particularly for consumer and residential real
estate loans, are also subject to numerous legal requirements as are its deposit
activities. In addition to regulatory compliance costs, these laws may create
the risk of liability to the bank for noncompliance.
Salem Bank & Trust's deposits will be insured by the FDIC for a maximum of
$100,000 per depositor. For this protection, the bank will pay a semi-annual
statutory assessment and will have to comply with the rules and regulations of
the FDIC. These assessments can go up or down, affecting the bank's costs,
depending on the solvency of the banking industry as a whole. In addition, the
FDIC has authority to initiate enforcement actions against banks, like Salem
Bank & Trust, whose deposits are insured. The FDIC may also terminate or
suspend a bank's deposit insurance if the institution is or is thought to be
engaging in unsafe or unsound practices and under other circumstances.
In case of member banks like Salem Bank & Trust, the Federal Reserve has
the authority to prevent the continuance or development of unsound and unsafe
banking practices and to approve conversions, mergers and consolidations.
Under the Federal Reserve's current risk-based capital guidelines for
member banks, Salem Bank & Trust is required to maintain a minimum ratio of
total capital to risk weighted assets of 8%, with at least 4% consisting of Tier
1 capital. In addition, the Federal Reserve requires its member banks to
maintain a minimum ratio of Tier 1 capital to total assets. This capital
measure is generally referred to as the leverage capital ratio. The minimum
required leverage capital ratio is 4% if the Federal Reserve determines that the
institution is not anticipating or experiencing significant growth and has well-
diversified risks, including no undue interest rate exposure, excellent asset
quality, high liquidity and good earnings and, in general, is considered a
strong banking organization and rated Composite 1 under the Uniform Financial
Institutions Rating Systems. Salem Bank & Trust currently satisfies these
criteria. If the bank does not satisfy any of these criteria in the future, it
may be required to maintain a ratio of total capital to risk-based assets of 10%
and a ratio of Tier 1 capital to risk-based assets of at least 6%. The bank
would then be required to maintain a 5% leverage capital ratio. This would mean
that the bank would have to hold more capital, and its ability to expand would
be impaired and its profitability diminished.
Banking profitability depends on interest rate differentials. The
difference between the interest rates paid by Salem Bank & Trust on its deposits
and other borrowings and the interest rate received on loans extended to its
customers and on securities held in its portfolio comprises the major portion of
the bank's earnings.
The earnings and growth of Salem Bank & Trust are affected not only by
general economic conditions, both domestic and foreign, but also by the monetary
and fiscal policies of the United States and its agencies, particularly the
Federal Reserve. The Federal Reserve implements national monetary policy by its
open market operations in United States government securities, adjustments in
the amount of reserves that banks and other financial institutions are required
to maintain and adjustments to the discount rates applicable to borrowings by
banks from the Federal Reserve The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged and paid on deposits.
48
<PAGE>
Salem Bank & Trust has restrictions on its investment and lending
authorities. Loans are subject to limitations on amount based upon the bank's
capital. Additional limitations are imposed on the aggregate amount of loans
that a national bank may make to any one borrower, including relating entities.
These restrictions can affect the ability of the bank to make larger loans.
The requirements of the Community Reinvestment Act affect Salem Bank &
Trust. The CRA imposes on financial institutions an affirmative obligation to
help meet the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. Each financial institution's efforts in helping meet
community credit needs currently is evaluated as part of the examination process
pursuant to a new regulation recently adopted by the banking regulatory
agencies. Under the new regulation, a financial institution's efforts in helping
meet its community's credit needs are evaluated according to a three-pronged
test (lending, investment and service). The grade received by a bank is
considered in evaluating mergers, acquisitions and applications to open a branch
or facility. Salem Bank & Trust was last examined for CRA compliance on
February 6, 1997 and received a "satisfactory" rating. To the best knowledge of
the bank, it continues to meet its obligations under the CRA.
Acquisition of the Holding Company
Federal Restrictions. Under the federal Change in Bank Control Act, a
notice must be submitted to the Federal Reserve Board if any person or entity,
or group acting in concert, seeks to acquire 10% or more of holding company
common stock. The Federal Reserve Board takes into consideration certain
factors, including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by the holding company and Salem
Bank & Trust, and the competitive effects of the acquisition.
Under the Bank Holding Company Act, any company would be required to obtain
prior approval from the Federal Reserve Board before it could acquire "control"
of the holding company within the meaning of the Bank Holding Company Act.
Control generally is defined for these purposes to mean the ownership, control
or power to vote 25% or more of any class of voting securities of the holding
company, the ability to control in any manner the election of a majority of
holding company directors, or to otherwise have the power to exercise a
controlling influence over the management or policies of the holding company.
Virginia Restrictions. Virginia law prohibits any person or entity from
acquiring control (generally defined as at least 25% of the voting shares) of a
Virginia financial institution holding company without the approval of the
Virginia State Corporation Commission's Bureau of Financial Institutions. The
same restriction applies to an existing Virginia financial institution holding
company acquiring more than 5% of the voting shares of any other Virginia
financial institution holding company. In deciding whether to approve such
acquisitions the Bureau generally must consider whether the acquisition would be
detrimental to the safety and soundness of either party, the suitability of the
applicant and its officers and directors, the interests of depositors,
creditors, shareholders and others, and the general public interest. These
restrictions will apply to the holding company.
FEDERAL HOME LOAN BANK SYSTEM
Salem Bank & Trust is a member of the Federal Home Loan Bank System. The
Federal Home Loan Bank System provides a central credit facility available to
member institutions. The bank, as a member of the Federal Home Loan Bank of
Atlanta, is required to acquire and hold shares of capital stock in that Federal
Home Loan Bank in an amount equal to the greater of 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, 5% of its
Federal Home Loan Bank advances outstanding, or one per cent of thirty per cent
of total assets. At December 31, 1999, the bank owned $487,000 of Federal Home
Loan Bank common stock.
Advances from and securities sold under agreements to repurchase with the
Federal Home Loan Bank of Atlanta are secured by a member's shares of stock in
the Federal Home Loan Bank of Atlanta, certain types of
49
<PAGE>
mortgages and other assets. Interest rates charged for advances vary depending
upon maturity and cost of funds to the Federal Home Loan Bank of Atlanta. As of
December 31, 1999, Salem Bank & Trust had $4.1 million in outstanding advances
from the Federal Home Loan Bank of Atlanta.
WHERE YOU CAN FIND MORE INFORMATION
Salem Bank & Trust is subject to the information reporting requirements of
the Securities Exchange Act of 1934, and in accordance with that law files
reports, proxy statements and other information with the OCC. Reports, proxy
statements and other information filed by the bank are available from the
Disclosure Officer, Communications Division, Office of the Comptroller of the
Currency, 250 E Street, SW, Washington, DC 20219.
The holding company will not be subject to the information requirements of
the Securities Exchange Act of 1934 until after the reorganization takes place.
After the reorganization takes place, holding company common stock will be
listed for trading on the NASD Over the Counter Bulletin Board. The holding
company will be subject to the information requirements of the Securities
Exchange Act of 1934, and the holding company will file reports, proxy
statements and other information with the Securities and Exchange Commission. At
that time, the common stock of the bank will be withdrawn from listing and
registration under the Securities Exchange Act of 1934.
Salem Community Bankshares has filed a registration statement on Form S-4
relating to the reorganization with the SEC. This proxy statement/prospectus
does not contain all of the information included in the registration statement.
We have omitted parts of the registration statement in accordance with the rules
and regulations of the SEC. For the further information, we refer you to the
registration statement on Form S-4, including its exhibits. Statements contained
in this proxy statement/prospectus about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that any agreement or document be filed as an exhibit to the
registration statement, please see the filed copy of the agreement or document
for a complete description of these matters. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of each document.
After the reorganization, the holding company will file annual, quarterly
and special reports, proxy statements and other information with the SEC. You
may read and copy materials filed with the SEC, including the registration
statement, at the following SEC public reference rooms:
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The holding company SEC filings will also be available to the
public on the SEC's Web Site at http:/www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
Any statement contained in a document incorporated by reference into this
proxy statement/prospectus will be deemed to be modified or superseded for all
purposes to the extent that a statement contained in this proxy
statement/prospectus or in any other subsequently filed document which is also
incorporated by reference modifies or replaces such statement. Any statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute a part of this proxy statement/prospectus.
If you call or write to us, we will send to you without charge a copy of
any or all of the documents described above, other than exhibits to those
documents that are not incorporated by reference into such documents.
50
<PAGE>
To request documents, call or write to Gill Roseberry, Secretary, Salem
Community Bankshares, Inc., P.O. Box 979, Salem, Virginia 24153, telephone
number (540) 387-0223.
51
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
A copy of Salem Bank & Trust's Annual Report to Stockholders accompanies
this proxy statement/ prospectus. It contains consolidated financial statements
as of December 31, 1999 and 1998 for the years ended December 31, 1999, 1998 and
1997 prepared in accordance with generally accepted accounting principles.
POSTPONEMENT AND ADJOURNMENT OF STOCKHOLDER MEETING
You are asked to approve, if necessary, allowing the Chairman of the
meeting, who probably will be Dr. Walter Hunt, Chairman of the Board, to adjourn
the annual meeting and reschedule it for a later date. This would be done if
necessary to solicit further votes in favor of the reorganization and any other
matters to be voted upon at the meeting. If you do not vote in favor of this
proposal, your proxy may not be used by management to vote in favor of an
adjournment pursuant to its discretionary authority.
ELECTION OF DIRECTORS
The Articles of Association of the Bank provide that the number of
directors shall be not less than five (5) nor more than twenty-five (25). The
Board of Directors has set the present number of directors at nine (9).
The persons named below, all of whom are members of the present Board of
Directors, will be nominated for election to serve. No director or nominee is
related by blood, marriage, or adoption to any other director in any other
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
With respect to the election of directors, shareholders have cumulative
voting rights. Each shareholder has the right to vote the number of shares owned
by him for as many persons as there are directors to be elected or to cumulate
such shares for one candidate or distribute them among as many candidates as he
wishes. The Board of Directors solicits and the proxies may be instructed to use
discretionary authority to use cumulative voting in the voting of the proxies
should it be necessary to elect as many of the director nominees as possible.
It is the intention of the persons named in the proxy to vote for the
election of the following nominees unless the proxy directs otherwise. The
following, if elected, shall serve for one year and until their successors are
elected and have qualified.
NOMINEES FOR ELECTION
The Directors of the Bank serve one-year terms. The following table lists
the directors' names, ages, principal occupations and the number of shares of
common stock beneficially owned by them as of April __, 2000.
<TABLE>
<CAPTION>
Shares
Principal Beneficially
Occupation Owned (1)
For Last Director of the --------------------
Name (Age) Five Years Bank Since Number Percent
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eugene M. Bane, Jr. (60) Doctor of Optometry 1981 32,821 2.25
Truman R. Dorton (60) Dorton & Gooch, CPAs 1991 12,683 (2)
Morris A. Elam (75) Retired Owner 1983 17,408 1.19
Morris Elam Electric Co.
H. Morgan Griffith (42) Attorney-at-Law 1994 659 (2)
Representative to Virginia
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
House of Delegates
Rose M. Hagen (41) CPA and Staff 1989 1,721 (2)
Financial Analyst
Allstate Insurance
Carlos B. Hart (72) President 1981 33,928 2.33
Hart Motor Co., Inc.
Walter A. Hunt (70) Retired Superintendent 1981 36,156 2.48
City of Salem Schools
Gladys C. O'Brien (63) Vice President 1983 33,187 2.28
O'Brien Meats
Clark Owen, Jr. (57) President and 1977 18,163 (3)
Chief Executive Officer
Salem Bank & Trust, N.A.
</TABLE>
_________________
(1) Includes shares which may be deemed beneficially owned due to certain
family or business relationships. The listing of such shares is not to be
construed as an admission that a director is the "beneficial owner" of such
shares.
(2) Less than one percent.
(3) Included in the shares listed are shares held in a 401(k) pool with about
seven other employees. Mr. Owen's portion of this pool amounts to
approximately 4,400. Mr. Owen may direct the account to sell the shares,
but Mr. Owen has no say in how the shares are voted.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table indicates those persons owning five percent or more of the
Bank's outstanding shares, together with all shares owned by directors and
executive officers of the Bank as a group, as of April 21, 2000.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT BENEFICIALLY OWNED PERCENT OF CLASS (1)
- - ---------------- ------------------------- --------------------
<S> <C> <C>
Warren L. Baker 84,534 5.80
Roanoke, Virginia
Sondra Hagen (2) 76,518 5.25
Salem, Virginia
CEDE and Company 545,119 37.38 (3)
New York, New York
All directors and executive officers
as a group (16 persons) 197,654 13.55
</TABLE>
- - --------------
(1) Includes shares which may be deemed beneficially owned due to family or
business relationships, joint ownership, voting power or investment power.
(2) Bank and holding company director Rose Hagen is the spouse of Ms. Sondra
Hagen's son.
(3) CEDE and Company shares are believed to be held for the benefit of several
shareholders.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of Salem Bank and Trust, National Association, meets
once monthly on the third Thursday unless that day happens to be a holiday in
which case the meeting is usually held on the previous Thursday. There were
twelve (12) regular meetings during the calendar year 1999. The average
attendance of the
53
<PAGE>
meetings was 90%. No Director attended less than 75% of the meetings, except Mr.
Elam, who attended 67% of the meetings.
Directors receive a monthly fee of $400 and the Chairman receives a monthly
fee of $525.
There are eight standing committees made up of various members of the Board
of Directors. They are as follows: Executive Committee; Compliance Committee;
Loan Committee; Audit Committee; Planning Committee; Investment Committee;
Marketing Committee; and Personnel and Benefits Committee.
The Audit Committee consisting of Chairman, Carlos B. Hart, and Truman R.
-------------------
Dorton met eight (8) times in 1999. The committee's primary responsibility is
to review the findings of the Bank's internal auditor, external auditor and
regulatory agency.
The Personnel and Benefits Committee, which reviews personnel and
------------------------------------
compensation matters, consisting of Chairwoman, Rose M. Hagen, H. Morgan
Griffith, Morris A. Elam, Dr. Walter A. Hunt and Clark Owen, Jr., did not meet
during 1999.
Staff members other than directors attend and participate in some of these
committee meetings.
NOMINATION OTHER THAN BY OR ON BEHALF OF DIRECTORS
The Bank does not have a nominating committee and other nominations may be
made as described below. The Bank's By-laws provide that nominations other than
by or on behalf of the existing management of the Bank shall be made in writing
and shall be delivered or mailed to the President of the Bank not less than 14
days or more than 50 days prior to the meeting, provided however, that if less
than 21 days notice of the meeting is given to shareholders, such proposal or
nomination shall be mailed or delivered to the President of the Bank not later
than the close of business on the seventh day following the day on which the
notice of the meeting was mailed. Proposals and nominations not made in
accordance herewith may in his discretion be disregarded by the Chairman of the
meeting, and upon his instructions, the vote tellers may disregard all votes
cast for each such proposal or nominee. The Board of Directors is not aware of
any other proposals or nominations.
A COPY OF THE BANK'S ANNUAL REPORT ON FORM 10-KSB, INCLUDING THE FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999, REQUIRED TO BE FILED
WITH THE OFFICE OF THE COMPTROLLER OF THE CURRENCY IN WASHINGTON, D.C. AND
RELATED SCHEDULES THERETO SHALL BE PROVIDED BY THE BANK WITHOUT CHARGE TO EACH
SHAREHOLDER UPON HIS WRITTEN REQUEST TO GILL R. ROSEBERRY, SENIOR VICE PRESIDENT
AND CASHIER, 110 EAST MAIN STREET, SALEM, VIRGINIA, 24153.
The Board of Directors does not know of any matters to be presented at the
Annual Meeting of Shareholders other than as set forth above. However, if any
other matters come before the meeting, proxies received pursuant to this
solicitation will be voted thereon in accordance with the recommendations of the
Board of Directors.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information concerning
compensation paid to the Bank's Chief Executive Officer during 1999. The Bank
had no other officer whose total annual salary and bonus exceeded $100,000 for
the year ended December 31, 1999.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
- - --------------------------- ---- --------- ------ ----------------
<S> <C> <C> <C> <C>
Clark Owen, Jr. President 1999 $103,369 $6,120 $5,378
and Chief Executive Officer 1998 99,350 5,961 5,338
1997 96,230 4,812 4,205
</TABLE>
(1) Annual contribution to 401(k) plan in 1999, 1998, and 1997 and premiums for
life insurance.
STOCK OPTION GRANTS
There were no stock options granted to Mr. Owen during the year ended
December 31, 1999.
STOCK OPTIONS EXERCISED AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the shares
acquired on exercise of options for the Bank's common stock and the value
realized (based on the difference between the exercise price of the exercised
options and the closing bid price of the common stock on the exercise date,
which was $17.75 per share) during the year ended December 31, 1999, and the
number of shares underlying unexercised options and the value of such options
(based on the difference between the exercise price of the outstanding options
and the closing bid price of the common stock on December 31, 1999, which was
$16.00 per share) as of December 31, 1999 available to Mr. Owen. Stock option
data has been adjusted to reflect the effects of the Bank's stock dividends.
AGGREGATED OPTION EXERCISES IN 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31 - 1999(#) December 31 - 1999($)
-------------------------- ----------------------------
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - ---- --------------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Clark Owen, Jr. 394 $3,940 409 1,230 $3,272 $9,840
</TABLE>
EMPLOYMENT AGREEMENTS
The Bank's President and Executive Vice President have each entered into an
employment agreement with the Bank which provides that upon a change in control
of the Bank, the employment agreement shall automatically renew for a period of
three years. If within 36 months after a change in control, the Bank terminates
the executive's employment, the executive will (1) be entitled to receive for
the greater of the remainder of the term or 24 months all prerequisites provided
immediately prior to termination and payment of all insurance premiums necessary
to continue the executive's life, health and accident insurance; (2) be entitled
to receive for the greater of the remainder of the term, or 12 months, the
annual compensation to which the executive was entitled immediately prior to
termination; and (3) become vested in all employee benefit plans as of the date
when final compensation is paid to the executive. An agreement has also been put
in place for other members of management at the Bank which provides that upon a
change in control of the Bank, the severance agreement shall continue in effect
for a period of three years. Upon termination of the employee's employment
following a change in control for reasons other than
55
<PAGE>
death, retirement, disability, by the Bank for cause, or by the employee for
other than good reason, the employee shall receive certain severance pay and
medical benefits.
RETIREMENT PLANS
Effective January 1, 1996, the Bank adopted a 401(k) defined contribution
plan. To become eligible for the plan, an employee must complete six months of
service and be at least 20 1/2 years of age. The plan allows participants to
contribute through salary reduction up to 20 percent of their annual
compensation on a pretax basis. Contributions by the Bank are paid into a trust
semimonthly at the rate of 3 percent of eligible compensation. The Bank modified
this plan on July 1, 1997 to increase the Bank's contribution to a rate of 5
percent of eligible compensation. The annual expense under the plan was $104,118
for the year ended December 31, 1999 and $95,951 for the year ended December 31,
1998.
EMPLOYEE STOCK OPTION PLAN
In 1992, the Board of Directors and the stockholders approved an Employee
Stock Option Plan (the "Plan") to give directors, officers and employees
(collectively referred to as employees) an opportunity to acquire shares of the
common stock of the Bank to provide an incentive for employees to continue to
promote the best interest of the Bank and enhance its long-term performance, and
to provide an incentive for employees to join or remain with the Bank. Under the
Plan, options may be granted at not less than fair market value on the date of
grant. Stock options granted under the plan are exercisable in July of each year
in ratable installments over the option period, which expires in 2002. Any
options not exercised as permitted are forfeited. In the event of a change in
control, merger, consolidation, dissolution or liquidation of the Bank,
employees holding unexercised stock options will be given 30 days to exercise
any unexercised stock options, without regard to installment exercise
limitations.
At December 31, 1999, there were 64,790 additional shares available for grant
under the Plan.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Certain directors and officers of the Bank and their families or associates
were customers of and had transactions with the Bank during 1999, and expect to
continue to do so. All loans and commitments to loan by the Bank to directors
and officers and their immediate family members or associates have been and will
continue to be made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP, Certified Public Accountants, have performed the Bank's
independent audit for the past several years and did so in 1999. The Board of
Directors selects the audit firm to perform the independent audit, but the
selection has not yet been made for 2000. A representative of KPMG LLP will be
present at the Annual Meeting.
ANNUAL REPORT
A copy of Salem Bank & Trust's Annual Report to Stockholders for the year
ended December 31, 1999 accompanies this proxy statement/prospectus. The Annual
Report is not part of the proxy solicitation materials.
If we receive a written request, we will furnish to any stockholder,
without charge, a copy of Salem Bank & Trust's annual report on form 10-KSB for
the year ended December 31, 1999, and the list of exhibits to that report that
are required to be filed with the OCC under the Securities Exchange Act of 1934.
A written request should be sent to Gill R. Roseberry, Senior Vice President and
Cashier, Salem Bank & Trust, 220 E. Main
56
<PAGE>
Street, Salem, Virginia 24153, telephone number (540) 387-9301. The Form 10-KSB
is not part of the proxy solicitation materials.
OTHER MATTERS
As of the date of this proxy statement/prospectus, management is not aware
of any business to come before the annual meeting other than the matters that
are described in this proxy statement/prospectus. However, if any other matters
properly come before the annual meeting, we intend that the proxies solicited by
this proxy statement/prospectus will be voted on those other matters in
accordance with the judgment of the persons voting the proxies.
The annual meeting will be presided over by Dr. Walter A. Hunt, the
Chairman. He will conduct the proceedings in accordance with Salem Bank &
Trust's Bylaws and past practice.
LEGAL MATTERS
The validity of the holding company stock to be issued in the
reorganization of certain federal tax matters will be passed upon by Flippin,
Densmore, Morse & Jessee, a Professional Corporation, 1800 First Union Tower,
Drawer 1200, Roanoke, Virginia 24006.
SHAREHOLDER PROPOSALS
Shareholders are hereby notified that any proposals which they desire to
have printed in the Bank's 2000 Annual Proxy material must be submitted to the
Secretary of the Bank by certified mail, return receipt requested, no later than
December 1, 2000.
THE ACCOMPANYING PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND COST
OF SAME IS BORNE BY THE BANK. IT MAY BE REVOKED IN WRITING DIRECTED TO THE
SECRETARY OF THE BOARD AT ANY TIME PRIOR TO ITS EXERCISE.
By Order of the Board of Directors
Corinna Witt, Administrative Assistant
April 30, 2000
57
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Salem Bank and Trust, National Association:
We have audited the accompanying consolidated balance sheets of Salem Bank and
Trust, National Association and subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income and comprehensive income, changes
in stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salem Bank and
Trust, National Association and subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Roanoke, Virginia
February 25, 2000
F-1
<PAGE>
[Page intentionally left blank]
F-2
<PAGE>
SALEM BANK AND TRUST, NATIONAL ASSOCIATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(In Thousands, Except Shares and Per Share Data)
<TABLE>
<CAPTION>
Assets 1999 1998
---- ----
<S> <C> <C>
Cash and due from banks (notes 2 and 16) $ 8,959 5,925
Federal funds sold and securities purchased under resale agreements (note 16) -- 10,180
Securities (notes 3 and 16):
Available-for-sale, at fair value 9,376 2,920
Held-to-maturity, at amortized cost (fair value $38,555 in 1999 and $38,938
in 1998) 41,456 38,777
Mortgage loans held for sale (notes 13, 14 and 16) 346 1,902
Loans, less unearned income (notes 4, 5 and 14) 116,997 99,688
Less allowance for loan losses (note 5)
(1,404) (1,284)
--------- ---------
Loans, net (note 16) 115,593 98,404
--------- ---------
Bank premises and equipment, net (note 6) 2,147 2,111
Accrued interest receivable 1,369 1,138
Foreclosed properties (note 5) 216 559
Other assets (note 9) 814 667
--------- ---------
Total assets $ 180,276 162,583
========= =========
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits 20,128 21,562
Interest-bearing demand deposits 36,735 33,915
Savings deposits 6,079 5,333
Time deposits (note 7) 93,922 84,549
--------- ---------
Total deposits (notes 7 and 16) 156,864 145,359
Federal funds purchased and securities sold under resale agreements (note 16) 145 --
Federal Home Loan Bank advance (notes 3 and 16) 4,100 --
Accrued interest payable 941 775
Other liabilities (note 15) 389 157
--------- ---------
Total liabilities 162,439 146,291
--------- ---------
Stockholders' equity (notes 10 and 11):
Common stock, par value $5.00 per share. Authorized 2,000,000 shares;
issued and outstanding 1,526,067 shares in 1999 and 1,458,204 shares in 1998 7,630 7,291
Surplus 8,447 7,769
Undivided profits 1,970 1,278
Accumulated other comprehensive loss (210) (46)
Total stockholders' equity 17,837 16,292
------- ------
Commitments and contingent liabilities (notes 8, 10, 13 and 15)
Total liabilities and stockholders' equity $ 180,276 162,583
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SALEM BANK AND TRUST, NATIONAL ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,839 9,488 9,027
Interest on federal funds sold and securities purchased under
Resale agreements 538 722 387
Interest on deposits with banks 3 2 4
Interest on securities - taxable 2,859 1,337 880
Interest on securities - nontaxable 266 345 401
------ ------ ------
Total interest income 13,505 11,894 10,699
------ ------ ------
Interest expense:
Interest on certificates of deposit of $100 or more 885 719 603
Interest on other deposits 5,611 4,970 4,425
Interest on federal funds purchased and securities sold under
Repurchase agreements 8 -- 4
------ ------ ------
Total interest expense 6,504 5,689 5,032
------ ------ ------
Net interest income 7,001 6,205 5,667
Provision for loan losses (note 5) 315 358 391
------ ------ ------
Net interest income after provision for loan
losses 6,686 5,847 5,276
Noninterest income:
Service charges on deposit accounts 483 405 494
Other service charges, commissions and fees 521 596 434
Other income 125 129 106
Realized securities gains (losses), net 8 (5) (21)
------ ------ ------
Total noninterest income 1,137 1,125 1,013
------ ------ ------
Noninterest expense:
Salaries and employee benefits (note 8) 2,611 2,510 2,277
Occupancy expense of bank premises 324 308 294
Furniture, fixtures and equipment 445 423 462
Computer services 5 17 191
Stationery, printing and supplies 117 111 131
FDIC assessment 17 15 13
Repossession and collection 16 58 29
Write-downs and losses, net, on foreclosed properties 24 47 7
Other expenses 1,025 915 960
------ ------ ------
Total noninterest expense 4,584 4,404 4,364
------ ------ ------
Income before income tax expense 3,239 2,568 1,925
Income tax expense (note 9) 1,020 777 539
------ ------ ------
Net income 2,219 1,791 1,386
Other comprehensive income (loss), net of income tax expense (benefit):
Net unrealized gains (losses) on available-for-sale securities
(notes 1, 3 and 17) (164) 8 65
------ ------ ------
Comprehensive income $ 2,055 1,799 1,451
====== ====== ======
Net income per share (note 1):
Net income per share $ 1.46 1.19 .92
====== ====== ======
Net income per share - assuming dilution $ 1.44 1.16 .90
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
s
SALEM BANK AND TRUST, NATIONAL ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Shares and Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Undivided Comprehensive
Stock Surplus Profits Income Total
--------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 6,655 6,027 1,208 (119) 13,771
Net income -- -- 1,386 -- 1,386
Cash dividend at $.30 per share -- -- (442) -- (442)
4% stock dividend (53,264 shares) 266 626 (892) -- --
Stock dividend fractional shares payment -- -- (5) -- (5)
Stock options exercised (8,625 shares) 43 33 -- -- 76
Income tax benefit from stock options
exercised -- 54 -- -- 54
Transfer per regulatory requirement -- 139 (139) -- --
Change in net unrealized losses on
available-for-sale securities, net
of income tax expense of $33 -- -- -- 65 65
--------- --------- --------- ------------- ----------
Balances at December 31, 1997 6,964 6,879 1,116 (54) 14,905
Net income -- -- 1,791 -- 1,791
Cash dividend at $.35 per share -- -- (519) -- (519)
4% stock dividend (55,789 shares) 279 669 (948) -- --
Stock dividend fractional shares payment -- -- (5) -- (5)
Stock options exercised (9,573 shares) 48 39 -- -- 87
Income tax benefit from stock options
exercised -- 25 -- -- 25
Transfer per regulatory requirement -- 157 (157) -- --
Change in net unrealized losses on
available-for-sale securities, net
of income tax expense of $5 -- -- -- 8 8
--------- --------- --------- ------------- ----------
Balances at December 31, 1998 7,291 7,769 1,278 (46) 16,292
Net income -- -- 2,219 -- 2,219
Cash dividend at $.40 per share -- -- (617) -- (617)
4% stock dividend (58,386 shares) 292 613 (905) -- --
Stock dividend fractional shares payment -- -- (5) -- (5)
Stock options exercised (9,477 shares) 47 38 -- -- 85
Income tax benefit from stock options
exercised -- 27 -- -- 27
Change in net unrealized losses on
available-for-sale securities, net
of income tax benefit of $84 -- -- -- (164) (164)
--------- --------- --------- ------------- ----------
Balances at December 31, 1999 $ 7,630 8,447 1,970 (210) 17,837
========= ========= ========= ============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SALEM BANK AND TRUST, NATIONAL ASSOCIATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities (note 12):
Net income $ 2,219 1,791 1,386
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 315 358 391
Deferred income taxes (47) (55) (35)
Depreciation and amortization of bank premises and equipment 269 314 311
(Gain) loss on disposal of equipment (1) -- 15
Amortization of premiums and accretion of discounts, net (11) (5) (3)
Write-downs and losses on foreclosed properties, net 24 47 7
Loss on calls of available-for-sale securities, net -- 5 --
(Gain) loss on calls of held-to-maturity securities, net (8) -- 18
Loss on sales of held-to-maturity securities -- -- 3
Income tax benefit from stock options exercised 27 25 54
(Increase) decrease in:
Mortgage loans held for sale 1,556 (580) 253
Accrued interest receivable (231) (237) 53
Other assets (16) (134) 166
Increase (decrease) in:
Accrued interest payable 166 71 131
Other liabilities 304 (104) 134
------- ------- -------
Net cash provided by operating activities 4,566 1,496 2,778
------- ------- -------
Cash flows from investing activities (note 12):
Net (increase) decrease in federal funds sold and securities purchased
under resale agreements 10,180 (3,735) (5,470)
Proceeds from maturities and calls of available-for-sale securities 402 3,065 4,136
Proceeds from maturities and calls of held-to-maturity securities 4,340 13,960 4,548
Proceeds from sales of held-to-maturity securities -- -- 794
Purchases of available-for-sale securities (7,106) (74) (32)
Purchases of held-to-maturity securities (7,000) (36,490) (6,607)
Purchases of loan participations (1,742) (152) (445)
Collections of loan participations 203 369 1,649
Net increase in loans made to customers (16,267) (2,369) (12,876)
Recoveries on loans previously charged off 81 116 119
Proceeds from sales of foreclosed properties 540 304 262
Capital expenditures on foreclosed properties -- (10) --
Purchases of bank premises and equipment (304) (144) (610)
------- ------- -------
Net cash used in investing activities (16,673) (25,160) (14,532)
------- ------- -------
Cash flows from financing activities (note 12):
Net increase in time deposits 9,373 9,637 9,003
Net increase in demand and savings deposits 2,132 15,289 2,303
Net increase in federal funds purchased and securities sold under
resale agreements 145 -- --
Net increase in Federal Home Loan Bank advances 4,100 -- --
Principal payments on capital lease obligations (72) (70) (48)
Proceeds from exercise of stock options 85 87 76
Cash dividends paid (622) (524) (447)
------- ------- -------
Net cash provided by financing activities 15,141 24,419 10,887
------- ------- -------
Net increase (decrease) in cash and due from banks 3,034 755 (867)
Cash and due from banks at beginning of year 5,925 5,170 6,037
------- ------- -------
Cash and due from banks at end of year $ 8,959 5,925 5,170
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Salem Bank and Trust, National
Association and its wholly-owned subsidiary, S.B.& T. Service Corp.,
conform to generally accepted accounting principles and general practices
within the banking industry.
The following is a summary of the more significant accounting policies:
(a) Consolidation
The consolidated financial statements include the accounts of Salem
Bank and Trust, National Association and its wholly-owned subsidiary
(the Bank). All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include the amounts classified on the consolidated balance sheets as
cash and due from banks.
(c) Securities
Securities available for sale are reported at fair value, with
unrealized gains and losses excluded from net income and reported, net
of income taxes, in a separate component of stockholders' equity.
Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts on a basis which
approximates the level yield method. The Bank does not engage in
securities trading. Gains and losses on securities are accounted for
on the completed transaction basis by the specific identification
method.
A decline in the fair value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary is
charged to income resulting in the establishment of a new cost basis
for the security.
(d) Loans
Loans are stated at the amount of funds disbursed plus the applicable
amount, if any, of the unearned income and other charges less payments
received. Interest on installment loans, including impaired
installment loans that have not been placed in nonaccrual status, is
credited to income based upon the level yield method or the sum-of-the
-months'-digits method, which does not differ materially from the
level yield method. Interest on all other loans, including impaired
loans that have not been placed in nonaccrual status, is accrued based
on the balances outstanding times the applicable interest rates. Loans
are generally placed in nonaccrual status when the collection of
principal or interest is 90 days or more past due, unless the
obligation is both well-secured and in the process of collection. The
interest on nonaccrual loans is accounted for on the cash basis until
qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Impaired loans are presented in the financial statements at the
present value of expected future cash flows or at the fair value of
the loan's collateral if the loan is deemed "collateral dependent." A
valuation allowance is required to the extent that the measure of the
impaired loans is less than the recorded investment. Large groups of
small-balance homogeneous loans
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such as residential real estate mortgage, consumer installment, home equity
and bank card loans are collectively evaluated for impairment.
Loan origination and commitment fees and certain related costs are
deferred, and the net amount amortized as an adjustment of yield over the
contractual life of the related loan.
Mortgage loans held for sale are carried at the lower of cost or market
value determined on an aggregate basis.
(e) Allowance for Loan Losses
The allowance for loan losses is a valuation allowance consisting of
the cumulative effect of the provision for loan losses, plus any
amounts recovered on loans previously charged off, minus loans charged
off. The provision for loan losses charged to operating expenses is
the amount necessary in management's judgment to maintain the
allowance for loan losses at a level it believes sufficient to cover
losses in the collection of its loans.
(f) Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Equipment under capital leases is
stated at the present value of minimum lease payments at the inception
of the lease. Depreciation is computed by the straight-line method
based on estimated useful lives of eighteen to thirty-nine years for
buildings and five to seven years for furniture, fixtures and
equipment. Leasehold improvements are amortized on a straight-line
basis over the terms of the leases. Equipment held under capital
leases is amortized straight-line over the estimated useful lives of
the assets since the leases transfer ownership or contain a bargain
purchase option. Expenditures for maintenance and repairs are charged
to expense as incurred and improvements are capitalized.
(g) Foreclosed Properties
Foreclosed properties, acquired through foreclosure or deed in lieu of
foreclosure, are carried at the lower of the recorded investment in
the property or its fair value less estimated selling costs. When the
property is acquired, any excess of the loan balance over the fair
value less estimated selling costs of the property is charged to the
allowance for loan losses. Subsequent write-downs, if any, are charged
to expense. Gains and losses on the sale of foreclosed properties are
recorded in income in the year of the sale.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(i) Net Income Per Share
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Net income per share -
assuming dilution reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Bank.
The following is a reconciliation of the numerators and denominators
of the net income per share and net income per share- assuming
dilution computations for the periods indicated:
<TABLE>
<CAPTION>
Net Income Shares Per Share
Year Ended December 31, 1999 (Numerator) (Denominator) Amount
- - ---------------------------- ------------- --------------- -----------------
<S> <C> <C> <C>
Net income per share 2,219 1,520,290 $ 1.46
=================
Effect of dilutive stock options -- 21,606
------------- --------------
Net income per share - assuming dilution $ 2,219 1,541,896 $ 1.44
============= ============== =================
Net Income Shares Per Share
Year Ended December 31, 1998 (Numerator) (Denominator) Amount
- - ---------------------------- ------------- --------------- -----------------
Net income per share $ 1,791 1,510,463 $ 1.19
=================
Effect of dilutive stock options -- 35,242
------------ --------------
Net income per share - assuming dilution $ 1,791 1,545,705 $ 1.16
============ ============== ==================
Net Income Shares Per Share
Year Ended December 31, 1997 (Numerator) (Denominator) Amount
- - ---------------------------- ------------- --------------- -----------------
Net income per share $ 1,386 1,500,783 $ .92
=================
Effect of dilutive stock options -- 38,102
------------ ---------------
Net income per share - assuming dilution $ 1,386 1,538,885 $ .90
============ =============== =================
</TABLE>
Stock options that could potentially dilute net income per share in
the future that were not included in the computation of net income per
share - assuming dilution because to do so would have been
antidilutive for the periods presented totaled 20,758, 8,505 and 5,538
in 1999, 1998 and 1997, respectively.
(j) Stock Dividends
All prior-period weighted average shares outstanding, net income per
share, cash dividends per share and stock option data has been
adjusted to reflect the effects of the Bank's stock dividends.
(k) Stock Option Plan
Prior to January 1, 1996, the Bank accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Bank adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, Statement 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and future years as if the
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair-value-based method defined in Statement 123 had been applied. The
Bank has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of Statement
123.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Bank reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(m) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires the Bank to disclose
estimated fair values of its financial instruments. The following
methods and assumptions were used to estimate the fair value of each
class of financial instrument for which it is practicable to estimate
that value:
. Cash and Due from Banks, Federal Funds Sold and Securities
Purchased under Resale Agreements, Federal Funds Purchased and
Securities Sold Under Resale Agreements, Federal Home Loan Bank
Advances
The carrying amounts are a reasonable estimate of fair value
because of the short maturity of these instruments.
. Securities
The fair value of securities, except certain state and municipal
securities, is determined by quoted market price. The fair value of
certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.
. Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
mortgage loans held for sale, commercial, real estate -commercial,
real estate - construction, real estate -mortgage, credit card and
other consumer loans. Each loan category is further segmented into
fixed and adjustable rate interest terms.
The fair value of loans is estimated by discounting the future cash
flows using the current interest rates at which similar loans would
be made to borrowers for the same remaining maturities. Fair value
is further adjusted for credit risk based on estimates for cash
flows not expected to be collected. Assumptions regarding credit
risk are judgmentally determined using available external
appraisals and specific borrower information.
. Deposits
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of demand and savings deposits is the amount payable
on demand. The fair value of fixed maturity time deposits and
certificates of deposit is estimated using the rates currently
offered for deposits with similar remaining maturities.
. Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit, standby
letters of credit and financial guarantees written are the deferred
fees arising from these unrecognized financial instruments. These
deferred fees are not deemed significant at December 31, 1999 and
1998, and as such, the related fair values have not been estimated.
(n) Comprehensive Income
On January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130
establishes standards for reporting and presentation of comprehensive
income and its components in a full set of general purpose financial
statements. Statement 130 was issued to address concerns over the
practice of reporting elements of comprehensive income directly in
equity.
The Bank is required to classify items of "other comprehensive income"
(such as net unrealized gains (losses) on available-for-sale
securities) by their nature in a financial statement and present the
accumulated balance of other comprehensive income separately from
undivided profits and surplus in the equity section of the balance
sheet. Per share amounts of comprehensive income are not required to
be disclosed.
In accordance with the provisions of Statement 130, the Bank has
included Consolidated Statements of Income and Comprehensive Income in
the accompanying consolidated financial statements. Comprehensive
income consists of net income and net unrealized gains (losses) on
available-for-sale securities. Also, accumulated other comprehensive
income is included as a separate disclosure within the Consolidated
Statements of Changes in Stockholders' Equity in the accompanying
consolidated financial statements. Comprehensive income for the year
ended December 31, 1997 is presented for comparative purposes. The
adoption of Statement 130 did not have any effect on the Bank's
consolidated financial position, results of operations or liquidity.
(o) Use of Estimates
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the dates of the consolidated balance
sheets and the reported amounts of revenues and expenses for the years
presented. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of foreclosed properties acquired in
connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and
the valuation of foreclosed properties, management obtains independent
appraisals for significant properties.
Management believes the allowance for loan losses and the valuation of
foreclosed properties are adequate. While management uses available
information to recognize losses on loans and foreclosed properties,
future additions to the allowance for loan losses and write-downs to
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreclosed properties may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's
allowance for loan losses and its valuation of foreclosed properties.
Such agencies may require the Bank to recognize additions to the
allowance for loan losses and additional write-downs to foreclosed
properties based on their judgments about information available to
them at the time of their examinations.
(p) Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to place them on a basis comparable with the 1999
consolidated financial statements.
(2) Cash Restrictions
To comply with Federal Reserve regulations, the Bank is required to
maintain certain average reserve balances. The daily average reserve
requirements were $958 and $886 for the weeks including December 31, 1999
and 1998, respectively.
(3) Securities
The amortized costs, gross unrealized holding gains, gross unrealized
holding losses and fair values for available-for-sale and held-to-maturity
securities by major security type are as follows:
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Available-for-sale Costs Gains Losses Values
- - ------------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. Government agencies and corporations $ 7,492 -- (299) 7,193
Mortgage-backed securities 1,260 -- (19) 1,241
Other securities 942 -- -- 942
------------- ------------- ------------ -----------
Totals $ 9,694 -- (318) 9,376
============= ============= ============ ===========
Hold-to-Maturity
- - ----------------
U.S. Government agencies and corporations $ 36,962 8 (2,980) 33,990
Mortgage-backed securities 287 3 -- 290
Obligations of state and political subdivisions 4,207 74 (6) 4,275
------------- ------------- ------------- -------------
Totals $ 41,456 85 (2,986) 38,555
============= ============= ============= =============
<CAPTION>
December 31, 1998
-----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Available-for-sale Costs Gains Losses Values
- - ------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <S> <C>
U.S. Government agencies and corporations $ 500 -- (7) 493
Mortgage-backed securities 1,663 -- (63) 1,600
Other securities 827 -- -- 827
------------- ------------- ------------- -------------
Totals $ 2,990 -- (70) 2,920
============= ============= ============= =============
Held-to-maturity
- - ----------------
U.S. Government agencies and corporations $ 31,992 54 (92) 31,954
Mortgage-backed securities 1,022 10 -- 1,032
Obligations of state and political subdivisions 5,763 190 (1) 5,952
------------- ------------- ------------- -------------
Totals $ 38,777 254 (93) 38,938
============= ============= ============= =============
</TABLE>
The amortized costs and fair values of securities at December 31, 1999, 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>
December 31, 1999
------------------------------------------------------------
Available-for-Sale Held-to-Maturity
----------------------------- -----------------------------
Amortized Fair Amortized Fair
Costs Values Costs Values
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ 614 613 920 942
Due after one year through five years -- -- 4,880 4,842
Due after five years through ten years 1,003 985 11,376 10,757
Due after ten years 7,135 6,836 24,280 22,014
No maturity 942 942 -- --
------------- ------------- ------------- --------------
Totals $ 9,694 9,376 41,456 38,555
============= ============= ============= ==============
</TABLE>
For the year ended December 31, 1997, the Bank sold held-to-maturity
securities with an aggregate amortized cost of $797 and realized an
aggregate loss of $3 on the sales. There were no sales of securities during
the years ended December 31, 1999 and 1998.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, the Bank is required to maintain certain minimum investments in
the common stock of those entities. Required levels of investment are based
upon the Bank's capital and a percentage of qualifying assets. In addition,
the Bank is eligible to borrow from the FHLB with borrowings collateralized
by qualifying assets, primarily residential mortgage loans, and the Bank's
capital stock investment in the FHLB. At December 31, 1999, the Bank's
available borrowing limit was approximately $20,900. The Bank had $4,100 in
FHLB advances outstanding at December 31, 1999. The advances, due in full
in December 2000, bear interest at a variable rate of 4.55 percent at
December 31, 1999.
Securities with amortized costs of $24,214 and $15,507 at December 31, 1999
and 1998, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
(4) Loans
A summary of loans outstanding is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Commercial $ 9,058 12,301
Consumer, principally installment 22,183 19,236
Real estate - mortgage 71,914 55,372
Real estate - construction 14,881 13,727
--------------- ------------
Total loans 118,036 100,636
Less unearned income (1,039) (948)
--------------- ------------
Total loans, less unearned income $ 116,997 99,688
=============== ============
</TABLE>
In the normal course of business, the Bank has made loans to directors and
officers. At December 31, 1999, direct loans to directors and officers
totaled $237 compared to $396 at December 31, 1998. In addition, indirect
loans (i.e., loans to companies in which directors and officers have an
interest, immediate family members, or any other associates of such
directors and officers) totaled $618 and $227 at December 31, 1999 and
1998, respectively.
A summary of the activity during the year ended December 31, 1999 relating
to direct and indirect loans to officers and directors is as follows:
<TABLE>
<S> <C>
Aggregate balance, beginning of year $ 623
Additions 554
Collections (322)
-------------
Aggregate balance, end of year $ 855
=============
</TABLE>
(5) Nonperforming Assets, Impaired Loans and Allowance for Loan Losses
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Nonaccrual basis $ 810 859
Foreclosed properties 216 559
-------------- -------------
Total nonperforming assets $ 1,026 1,418
============== =============
</TABLE>
There were no commitments to lend additional funds to customers whose loans
were classified as nonperforming at December 31, 1999 and 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the pro forma interest that would have been
earned on nonaccrual loans if they had been current in accordance with
their original terms and the recorded interest that was earned and included
in income on these loans:
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Pro forma interest on nonaccrual loans $ 80 74 60
======== ======== ========
Recorded interest on nonaccrual loans $ 65 76 46
======== ======== ========
At December 31, 1999 and 1998, the recorded investment in loans which have
been identified as impaired loans totaled $1,032 and $1,070, respectively.
Of these amounts, $711 and $660 related to loans with no valuation
allowance, and $321 and $410 related to loans with a corresponding
valuation allowance of $67 and $77, respectively.
For the years ended December 31, 1999, 1998 and 1997, the average recorded
investment in impaired loans was approximately $1,092, $998 and $923, and
the total interest income recognized on impaired loans was $85, $96 and
$78, of which $65, $76 and $46, respectively, was recognized on a cash
basis.
A summary of the changes in the allowance for loan losses follows:
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Balances, beginning of year $ 1,284 1,200 1,165
Provision for loan losses 315 358 391
Loans charged off (276) (390) (475)
Loan recoveries 81 116 119
-------- -------- --------
Balances, end of year $ 1,404 1,284 1,200
======== ======== ========
(6) Bank Premises and Equipment
A summary of bank premises and equipment stated at cost, less accumulated
depreciation and amortization, follows:
December 31,
------------------
1999 1998
-------- --------
Bank premises $ 1,657 1,643
Furniture, fixtures and equipment 2,572 2,323
Leasehold improvements 349 307
-------- --------
4,578 4,273
Less accumulated depreciation and amortization (2,431) (2,162)
-------- --------
Bank premises and equipment, net $ 2,147 2,111
======== ========
(7) Time and Other Deposits
Included in time deposits are certificates of deposit and other time
deposits of $100 or more in the aggregate amounts of $17,873 and $17,063 at
December 31, 1999 and 1998, respectively.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
Years Ending December 31,
2000 $ 53,539
2001 22,285
2002 11,531
2003 5,563
2004 538
Thereafter 466
--------
$ 93,922
========
Included in total deposits are funds deposited by local municipalities
totaling $15,992 and $13,751 at December 31, 1999 and 1998, respectively.
(8) Employee Retirement Plans
Effective January 1, 1996, the Bank adopted a 401(k) defined contribution
plan. To become eligible for the plan, an employee must complete six months
of service and be at least 21 years of age. The plan allows participants to
contribute through salary reduction up to 20 percent of their annual
compensation on a pretax basis. Contributions by the Bank are paid into a
trust semimonthly at the rate of 5 percent (3 percent prior to July 1997)
of eligible compensation. The annual expense under the plan was $104, $96
and $80 for the years ended December 31, 1999, 1998 and 1997, respectively.
(9) Income Taxes
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income $ 1,020 777 539
Stockholders' equity for:
Net unrealized gains (losses) on available-for-sale
securities recognized for financial reporting purposes (84) 5 33
Compensation cost recognized for income
tax purposes related to stock options exercised (27) (25) (54)
-------- -------- --------
Total income taxes $ 909 757 518
======== ======== ========
</TABLE>
Income tax expense attributable to income before income tax expense is as
follows:
Years Ended December 31,
------------------------
1999 1998 1997
------ ------ ------
Current $1,067 832 574
Deferred (47) (55) (35)
------ ------ ------
Total income tax expense $1,020 777 539
====== ====== ======
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differed from "expected" amounts, computed by applying
the U.S. Federal income tax rate of 34 percent to income before income tax
expense, as a result of the following:
Years Ended December 31,
-------------------------
1999 1998 1997
------ ------ ------
"Expected" income tax expense $1,101 873 655
Increase (reduction) in income tax expense
resulting from:
Tax-exempt interest income (89) (116) (136)
Nondeductible interest expense 13 16 18
Other, net (5) 4 2
------ ------ ------
Reported income tax expense $1,020 777 539
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 409 355
Net unrealized losses on available-for-sale securities 108 24
Other 17 16
-------- --------
Total gross deferred tax assets 534 395
Less valuation allowance -- --
-------- --------
Net deferred tax assets 534 395
-------- --------
Deferred tax liabilities:
Bank premises and equipment, principally due to
differences in depreciation and amortization (45) (30)
Loans, due to net unearned fees (21) (11)
Securities, due to differences in discount accretion (8) (21)
Prepaid expenses, due to deduction for tax purposes (11) (15)
-------- --------
Total gross deferred tax liabilities (85) (77)
-------- --------
Net deferred tax asset, included in other assets $ 449 318
======== ========
</TABLE>
The Bank has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1999 and 1998, since
realization of the gross deferred tax assets can be supported by the
amounts of taxes paid during the carryback period available under current
tax laws.
(10) Employee Stock Option Plan
The Bank sponsors an Employee Stock Option Plan (the Plan) to give
directors, officers and employees (collectively referred to as employees)
an opportunity to acquire shares of the common stock of the Bank to provide
an incentive for employees to continue to promote the best interests of the
Bank and enhance its long-term performance, and to provide an incentive for
employees to join or remain with the Bank. Under the Plan, stock options
may be granted at not less than fair market value on the date of grant.
Stock options granted under the plan are exercisable in July of each year
in ratable installments over the option period which expires in 2002. Any
options not exercised as permitted are forfeited. A change of control,
merger, consolidation, dissolution or liquidation of the
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank will result in employees holding stock options being given thirty days
to exercise their unexercised stock options without regard to installment
exercise limitations. Stock option data has been adjusted to reflect the
Bank's stock dividends. Proceeds from the exercise of stock options are
credited to common stock for the amount of par value and any excess is
credited to surplus.
At December 31, 1999, there were 64,790 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 1999, 1998 and 1997 was $3.35, $4.16 and $3.87,
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1999 - expected cash
dividend yield 2.2 percent, risk-free interest rate of 6.0 percent,
expected volatility of 32 percent and an expected life in ratable
installments over the option period which expires in July 2002; 1998 -
expected cash dividend yield 2.2 percent, risk-free interest rate of 6.0
percent, expected volatility of 32 percent and an expected life in ratable
installments over the option period which expires in July 2002; 1997 -
expected cash dividend yield 2.2 percent, risk-free interest rate of 6.3,
expected volatility of 30 percent and an expected life in ratable
installments over the option period which expires in July 2002.
The Bank applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had compensation cost for the Bank's Plan been
determined consistent with Statement 123, the Bank's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 2,219 1,791 1,386
========= ========= =========
Pro forma $ 2,177 1,763 1,365
========= ========= =========
Net income per share:
As reported $ 1.46 1.19 .92
========= ========= =========
Pro forma $ 1.43 1.17 .91
========= ========= =========
Net income per share - assuming dilution:
As reported $ 1.44 1.16 .90
========= ========= =========
Pro forma $ 1.41 1.14 .89
========= ========= =========
</TABLE>
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
option period which expires in July 2002, and compensation cost for options
granted prior to January 1, 1995 is not considered.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
-------------- --------------
<S> <C> <C>
Balance at December 31, 1996 110,216 9.69
Granted 14,623 16.66
Exercised (9,702) 8.76
Forfeited (9,700) 11.92
Expired (8,946) 11.29
--------------
Balance at December 31, 1997 (number and weighted average
exercise price of options exercisable - 19,264 at $10.47) 96,491 10.47
Granted 15,142 18.95
Exercised (10,394) 9.02
Forfeited (14,477) 13.38
Expired (8,790) 13.52
--------------
Balance at December 31, 1998 (number and weighted average
exercise price of options exercisable - 19,450 at $11.46) 77,972 11.46
Granted 16,640 17.65
Exercised (9,856) 8.98
Forfeited (5,029) 15.27
Expired (10,162) 14.48
--------------
Balance at December 31, 1999 (number and weighted average
exercise price of options exercisable - 23,158 at $12.58) 69,565 12.57
==============
</TABLE>
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $8.00 to $20.25 and
2.5 years, respectively.
(11) Dividend Restrictions and Capital Requirements
Under applicable federal laws, the Comptroller of the Currency restricts,
without prior approval, the total dividend payments of the Bank in any
calendar year to the net profits of that year, as defined, combined with
retained net profits for the two preceding years. At December 31, 1999, the
Bank had retained net profits of approximately $854 which were free of such
restrictions.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's consolidated 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 assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average assets (as defined). Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, the most recent notifications from the appropriate
regulatory authorities categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since those notifications that management
believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
To Be 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 December 31, 1999:
Total Capital
(to Risk Weighted Assets) $ 19,451 16.53% 9,416 8% 11,770 10%
Tier 1 Capital
(to Risk Weighted Assets) 18,047 15.33% 4,708 4% 7,062 6%
Tier 1 Capital
(to Average Assets) 18,047 10.16% 7,105 4% 8,881 5%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 17,622 16.69% 8,445 8% 10,557 10%
Tier 1 Capital
(to Risk Weighted Assets) 16,338 15.48% 4,223 4% 6,334 6%
Tier 1 Capital
(to Average Assets) 16,338 10.53% 6,204 4% 7,755 5%
</TABLE>
(12) Supplemental Cash Flow Information
The Bank paid $6,338, $5,618 and $4,901 for interest and $738, $895 and
$363 for income taxes, net of refunds received, for the years ended
December 31, 1999, 1998 and 1997, respectively. Noncash investing
activities included $221, $594 and $247 of loans transferred to
foreclosed properties and $276, $390 and $475 of loans charged against
the allowance for loan losses in 1999, 1998 and 1997, respectively.
Noncash investing activities also included $(248), $13 and $98 of changes
in net unrealized losses included in available-for-sale securities, $84,
$(5) and $(33) of changes in deferred tax assets included in other
assets, and $(164), $8 and $65 of changes in net unrealized losses on
available-for-sale securities, net of income taxes, included in
stockholders' equity in 1999, 1998 and 1997, respectively. In addition,
noncash investing and financing activities included $203 of capital lease
obligations incurred in 1997 when the Bank entered into leases for
certain computer hardware equipment.
(13) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
The contract amounts of those instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The Bank generally requires collateral or other security to support the
following financial instruments with credit risk:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
----------------- -----------
Contract Amounts
------------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 16,048 10,449
============ ===========
Standby letters of credit $ 1,992 1,597
============ ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments to extend credit consist of construction loans ($8,376 at
December 31, 1999) which have a fixed rate but a duration of generally less
than one year. The remainder ($7,672 at December 31, 1999) represents
generally variable rate lines of credit that renew annually. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include marketable securities, accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. The credit
risk involved in issuing standby letters of credit is generally less than
that involved in extending loans to customers because the Bank generally
holds deposits equal to the commitment.
The Bank originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In
1999, the Bank originated $15,076 of mortgage loans and sold $16,632 to
investors, compared to $22,282 originated and $21,702 sold in 1998. Every
contract with each investor contains certain recourse language. In general,
the Bank may be required to repurchase a previously sold mortgage loan if
there is major noncompliance with defined loan origination or documentation
standards, including fraud, negligence or material misstatement in the loan
documents. Repurchase may also be required if necessary governmental loan
guarantees are cancelled or never issued, or if an investor is forced to
buy back a loan after it has been resold as a part of a loan pool. In
addition, the Bank may have an obligation to repurchase a loan if the
mortgagor has defaulted early in the loan term. This potential default
period is for a period of twelve months after sale of a loan to the
investor. Sold loans with potential recourse totaled approximately $16,632
at December 31, 1999 and $21,702 at December 31, 1998.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Concentrations of Credit Risk
The Bank's primary business activity is centered primarily in the City of
Salem, but extends throughout the Roanoke Valley. Accordingly, operating
results are closely correlated with the economic trends within this service
area. The City of Salem has a diverse economy, including a variety of
manufacturing and service industries. The ultimate collectibility of the
loan portfolios and the recovery of the carrying amounts of foreclosed
properties are susceptible to changes in the market conditions of this
area.
The Bank has established operating policies relating to the credit process
and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property with loan
amounts established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval is primarily a
function of the evaluation of the creditworthiness of the individual
borrower or project based on available financial information and
collateral. The commercial loan portfolio is diversified with no
significant concentrations of credit. The consumer loan portfolio contains
loans to individuals for household, family and other personal expenditures.
At December 31, 1999 and 1998, the real estate loan portfolio contains
approximately $15,000 and $14,000, respectively, of loans for construction
and land development, approximately $37,000 and $30,000, respectively, of
loans collateralized by 1-4 family residential properties and approximately
$35,000 and $25,000, respectively, of loans collateralized by nonfarm,
nonresidential properties.
(15) Commitments
During 1997, the Bank, as lessee, entered into capital leases for certain
computer hardware equipment that expire in three years. At December 31,
1999, the gross amount of equipment and related accumulated amortization
recorded under capital leases were $203 and $101, respectively.
Amortization of assets held under capital leases is included with
depreciation expense. The Bank, as lessee, is also obligated under various
noncancellable operating leases for its premises. Future minimum lease
payments, by year and in the aggregate, under operating leases that have
initial or remaining lease terms in excess of one year and the present
value of future minimum capital lease payments as of December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Years Ending December 31, Leases Leases
----------------- -----------------
<S> <C> <C>
2000 $ 14 168
2001 -- 137
2002 -- 124
2003 -- 101
2004 -- 95
Thereafter -- 261
------------ -----------
Total minimum lease payments 14 $ 886
===========
Less amounts representing interest (at rates ranging
from 5.42% to 5.99%) (1)
-----------
Present value of future minimum capital
lease payments, included in other liabilities $ 13
===========
</TABLE>
The operating leases generally provide for contingent rentals based on any
increase in real estate taxes or other governmental assessments. Rent
expense was approximately $152, $148 and $143 for the years ended December
31, 1999, 1998 and 1997, respectively.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank, as lessor, leases certain of its bank premises under various
noncancellable operating leases. The future minimum payments that will be
received by the Bank, by year and in the aggregate, under the
noncancellable terms of the leases are as follows:
Years Ending December 31,
2000 $ 25
2001 5
2002 5
2003 5
2004 5
Thereafter --
------
$ 45
======
The leases are all renewable for varying lengths of time and generally
provide for increases in lease payments based on the consumer price index.
Rental income was approximately $54, $52 and $54 for the years ended
December 31, 1999, 1998 and 1997, respectively.
(16) Fair Value of Financial Instruments
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,959 8,959 5,925 5,925
Federal funds sold and
securities purchased
under resale agreements -- -- 10,180 10,180
Securities 50,832 47,931 41,697 41,858
Mortgage loans held for sale 346 346 1,902 1,902
Loans, net 115,593 118,597 98,404 100,140
---------- --------- --------- ----------
Total financial assets $ 175,730 175,833 158,108 160,005
========== ========= ========= ==========
Financial
liabilities:
Deposits $ 156,864 156,614 145,359 146,667
Federal funds purchased and
securities sold under resale
agreements 145 145 -- --
Federal Home Loan Bank advances 4,100 4,100 -- --
---------- --------- --------- ----------
Total financial liabilities $ 161,109 160,859 145,359 146,667
========== ========= ========= ==========
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Bank's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these
estimates.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are not
considered financial assets include deferred tax assets and bank premises
and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
(17) Other Comprehensive Income
Other comprehensive income, net of income tax expense and reclassification
adjustments between net income and other comprehensive income relating to
available-for-sale securities, are reported in the consolidated statements
of income and comprehensive income. The information that follows discloses
the reclassification adjustments and the income tax expense related to
available-for-sale securities that are included in other comprehensive
income, net of income tax expense, for the years ended December 31, 1999
and 1998:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) during the year $ (240) 8
Plus reclassification adjustments for (gains) losses included
in net income (8) (5)
Income tax (expense) benefit 84 5
----------- ----------
Other comprehensive income (loss), net of
income tax expense (benefit) $ (164) 8
=========== ==========
</TABLE>
F-24
<PAGE>
APPENDIX A
PLAN AND AGREEMENT OF SHARE EXCHANGE
THIS PLAN AND AGREEMENT OF SHARE EXCHANGE is made and entered into as
of June 17, 1999, by and among Salem Community Bankshares, Inc., a proposed bank
holding company organized under the laws of Virginia, with its principal office
in Salem, Virginia (the "Holding Company"), and Salem Bank & Trust, N.A., a
banking corporation organized under the laws of the United States of America,
with its main office in Salem, Virginia (the "Bank").
WITNESSETH:
Whereas, Holding Company is a Virginia corporation formed for the
purpose of engaging in a share exchange transaction with Bank by which Holding
Company will, on the effective date of the share exchange, own 100% of the
outstanding shares of the common stock ($5.00 par value) of Bank ("Bank Common
Stock") by virtue of an exchange of shares of the common stock (no par value) of
Holding Company ("Holding Company Common Stock") for all of the issued and
outstanding shares of Bank Common Stock excluding only the "Excluded Shares" as
hereinafter defined.
Whereas, the respective Boards of Directors of Holding Company and
Bank consider the Share Exchange to be in the best interest of each corporation.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, Holding Company and Bank agree as follows:
1. The Share Exchange. At the Effective Date (as hereinafter
defined), the Bank shall become a wholly owned subsidiary bank of Holding
Company by virtue of a share exchange in which all of the capital stock of Bank
as represented by all of the issued and outstanding shares of Bank Common Stock
(excluding only the Excluded Shares) shall be the only class or series of Bank
stock outstanding as of the Effective Date and shall be acquired from the
holders thereof through a statutory share exchange in which each outstanding
share of Bank Common Stock shall be converted into the right to receive the
consideration specified in Section 2 (the "Share Exchange").
2. Share Exchange Rights. Upon, and by reason of, the Share Exchange
becoming effective pursuant to the issuance of a Certificate of Share Exchange
by the Virginia State Corporation Commission (the "Effective Date"):
(a) Each of the issued and outstanding share of Bank Common
Stock or fraction thereof (excluding shares held by Bank or Holding Company, in
each case other than in a fiduciary capacity or as a result of debts previously
contracted, and excluding shares held by stockholders who perfect their
dissenters rights, if any (the "Excluded Shares") shall be automatically
converted into the right to receive the equivalent number of shares of Holding
Company Common Stock. Outstanding certificates representing shares of Bank
Common Stock will thereafter represent the right to receive an equal number of
shares of Holding Company Common Stock (the "Exchange Rights"). As soon as
practicable thereafter, the Holding Company will issue new stock certificates
representing the shares of Holding Company Common Stock received in the Share
Exchange. Each holder of Bank Common Stock, upon the surrender of his stock
certificates for the Bank Common Stock to the Holding Company duly endorsed for
transfer, will be entitled to receive in exchange therefor a certificate or
certificates representing an equivalent number of shares of Holding Company
Common Stock.
(b) On the Effective Date, holders of Bank Common Stock shall
cease to be, and shall have no rights as, stockholders of the Bank other than
the Exchange Rights and there shall be no transfer on the stock transfer book of
Bank of the shares of Bank Common Stock which were outstanding immediately prior
to the Effective Date.
(c) Any holder of Bank Common Stock who perfects his dissenters'
rights of appraisal in accordance with and as contemplated by the applicable
provisions of Article 15 of the Virginia Stock Corporation Act (Va. Code (S)
13.1-729, et seq.) shall be entitled to receive the value of such shares in cash
as determined
<PAGE>
pursuant to such provision of law; provided, however, that no such payment shall
be made to any dissenting stockholder unless and until such dissenting
stockholder has complied with the applicable provisions of Article 15 of the
Virginia Stock Corporation Act (Va. Code (S) 13.1-729, et seq.) and duly
surrendered the certificate or certificates representing the shares for which
payment is being made. In the event that a dissenting shareholder of Bank having
dissenters' rights as a matter of law fails to perfect or effectively withdraws
or loses his right to appraisal and of payment or his share, after the Effective
Date, Holding Company will issue and deliver the consideration to which such
holder was entitled (without interest) on surrender by such holder of the
certificates) representing shares of Bank Common Stock held by him.
(d) As promptly as practicable after the Effective Date, Holding
Company shall send or cause to be sent to each former stockholder of Bank of
record immediately prior to the Effective Date transmittal materials for use in
exercising his Exchange Rights. Any dividends paid on any shares of Holding
Company Common Stock that such stockholder shall be entitled to receive prior to
the delivery to Holding Company of such stockholder's certificates representing
all of such stockholder's shares of Bank Common Stock will be delivered to such
stockholder only upon delivery to Holding Company of the certificates
representing all of such shares (or indemnity satisfactory to Holding Company in
its judgment, if any of such certificates are lost, stolen or destroyed). No
interest will be paid on any such dividends which the holder of such shares
shall be entitled to receive upon such delivery. After the Effective Date, to
the extent permitted by law, former stockholders of record of Bank Common Stock
shall be entitled to vote at any meeting of holders of Holding Company Common
Stock, the number of whole shares of Holding Company Common Stock to which they
have Exchange Rights, regardless of whether such holders have exchanged their
certificates representing Bank Common Stock for certificates representing
Holding Common Stock in accordance with the provisions of this Agreement.
(e) Each of the shares of Bank Common Stock held by Bank or by
Holding Company, in each case other than in a fiduciary capacity or as a result
of debts previously contracted, shall be cancelled and retired at the Effective
Date and no consideration shall be issued in exchange therefor.
3. Capital of the Bank. The capital, surplus and undivided profits
of the Bank at the Effective Date will be equal to the capital structure of the
Bank immediately prior to the Effective Date.
4. Board of Directors; Officers. (a) At the Effective Date, the
boards of directors of the Bank and the Holding Company shall continue to serve
as the directors of the Bank and the Holding Company, respectively, except as
otherwise determined in the discretion of the Boards prior to the Effective
Date, until the expiration of their term or until such time as their successors
have been elected and qualified.
(b) At the Effective Date, the respective officers of the Bank
and the Holding Company shall continue to serve in their then current positions
until such time as their successors have been elected or appointed.
5. Conditions to the Merger. Consummation of the Share Exchange is
conditioned upon (i) the approval of this Agreement by the affirmative vote of
the shareholders owning more than two-thirds of the outstanding shares of the
common stock of the Bank at a meeting to be held on the call of the Bank's board
of directors, (ii) the receipt of the required regulatory approvals, (iii) the
effectiveness of the registration of the shares of Holding Company Common Stock
to be issued in the Share Exchange and compliance with all Blue Sky law
requirements so that such shares may be lawfully issued, and (iv) the receipt of
an opinion of counsel as to the tax-free nature of the transaction. Upon the
satisfaction of the foregoing conditions, the Share Exchange shall become
effective at the time specified in a Certificate of Share Exchange to be issued
by the Virginia State Corporation Commission.
6. Termination. This Agreement may be terminated by the unilateral
action of either of the boards of directors of the Bank or the Holding Company
prior to the approval of the Agreement by the shareholders of Bank or by the
mutual consent of the respective boards of directors of the Bank and the Holding
Company after any shareholder group has taken the requisite affirmative action.
Upon termination for any reason, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of the Bank or the Holding Company or any of
their directors, officers, employees, agents or shareholders.
<PAGE>
WITNESS, the following signatures and seals for the parties, each
hereunto set by its President and attested by its Cashier or Secretary, pursuant
to duly authorized resolutions of its Board of Directors.
Salem Community Bankshares, Inc.
By ________________________________
Salem Bank & Trust, N.A.
By ________________________________
<PAGE>
APPENDIX B
RESTATED
ARTICLES OF INCORPORATION
OF
Salem Community Bankshares, Inc.
1. The name of the Corporation is Salem Community Bankshares, Inc.
2. (a) The aggregate number of shares which the Corporation is authorized
to issue is as follows:
Class Number of Shares
----- ----------------
Common 10,000,000
Preferred 10,000,000
(b) The Board of Directors of the Corporation (the "Board of
Directors") may, by amending these Articles of Incorporation (the "Articles") by
filing Articles of Amendment with the Virginia State Corporation Commission, fix
in whole or in part the preferences, limitations and rights, within the limits
set by law, of (i) any class of shares, before the issuance of any shares of
that class, or (ii) one or more series within a class, before the issuance of
any shares within that series.
(c) The preferred stock (including any shares of preferred stock
restored to the status of authorized but unissued preferred stock undesignated
as to series pursuant to this Article 2(c)) may be divided into one or more
series and issued from time to time with such preferences, privileges,
limitations, and relative rights as shall be fixed and determined by the Board
of Directors. Without limiting the generality of the foregoing, the Board of
Directors is expressly authorized to the fullest extent permitted from time to
time by law to fix:
(i) the distinctive serial designations and the division of
shares of preferred stock into one or more series and the number of shares of a
particular series, which may be increased or decreased (but not below the number
of shares thereof then outstanding);
(ii) the rate or amount (or the method of determining the rate
or amount) and times at which, the form in which, and the preferences and
conditions under which, dividends shall be payable on shares of a particular
series, the status of such dividends as cumulative, partially cumulative, or
noncumulative, the date or dates from which dividends, if cumulative, shall
accumulate, and the status of such series as participating or nonparticipating
with shares of other classes or series;
<PAGE>
(iii) the price or prices at which, the consideration for which,
the period or periods within which and the terms and conditions, if any, upon
which the shares of a particular series may be redeemed, in whole or in part, at
the option of the Corporation or otherwise;
(iv) the amount or amounts and rights and preferences, if any,
to which the Holders (as defined in Article 3 below) of shares of a particular
series are entitled or shall have upon any involuntary or voluntary liquidation,
dissolution or winding up of the Corporation;
(v) the rights and preferences over or otherwise in relation
to any other class or series (including other series of preferred stock), as to
the right to receive dividends and/or the right to receive payments out of the
net assets of the Corporation upon any involuntary or voluntary liquidation,
dissolution or winding up of the Corporation;
(vi) the right, if any, of the Holders of a particular series,
the Corporation or another person to convert or cause conversion of shares of
such series into shares of other classes or series or into other securities,
cash, indebtedness or other property, or to exchange or cause exchange of such
shares for shares of other classes or series or other securities, cash,
indebtedness or other property, and the terms and conditions, if any, including
the price or prices or the rate or rates of conversion and exchange, and the
terms and conditions or adjustments, if any, at which such conversion or
exchange may be made or caused;
(vii) the obligation, if any, of the Corporation to redeem,
purchase or otherwise acquire, in whole or in part, shares of a particular
series for a sinking fund or otherwise, the terms and conditions thereof, if
any, including the price or prices and the nature of the consideration payable
for such shares so redeemed, purchased or otherwise acquired;
(viii) the voting rights, if any, including special, conditional
or limited voting rights, of the shares of a particular series in addition to
those required by law, including the number of votes per share and any
requirement for the approval by the Holders of shares of all series of preferred
stock, or of the shares of one or more series thereof, or of both, in an amount
greater than a majority, up to such amount as is in accordance with applicable
law or these Articles, as a condition to specified corporate action or
amendments to the Articles; and
(ix) any other preferences, limitations and relative rights
which may be so determined by resolution or resolutions of the Board of
Directors.
Shares of preferred stock shall rank prior or superior to the common
stock in respect of the right to receive dividends and/or the right to receive
payments out of the net assets of the Corporation upon any
<PAGE>
involuntary or voluntary liquidation, dissolution or winding up of the
Corporation. All shares of preferred stock redeemed, purchased or otherwise
acquired by the Corporation (including shares surrendered for conversion or
exchange) shall be cancelled and thereupon restored to the status of authorized
but unissued shares of preferred stock undesignated as to series.
(d) The Holders of common stock, to the exclusion of any other class
of stock of the Corporation, have sole and full power to vote for the election
of directors and for all other purposes without limitation except only (i) as
otherwise expressly provided in the serial designation of any series of
preferred stock, (ii) as otherwise expressly provided in these Articles and
(iii) as otherwise expressly provided by the then existing laws of the
Commonwealth of Virginia. The Holders of common stock will have one vote for
each share of common stock held by them. The outstanding shares of common stock,
upon dissolution, liquidation or winding up of the Corporation, entitle their
Holders to share, pro rata, based on the number of shares owned, in the
Corporation's assets remaining after payment or provisions for payment of all
debts and liabilities of the Corporation, and after provisions for the
outstanding shares of any class of stock or other security having senior
liquidation rights to the common stock.
(e) No Holder of shares of stock of any class of the Corporation will
have any preemptive or preferential right of subscription to any shares of any
class of stock of the Corporation, whether now or hereafter authorized, or to
any obligations of the Corporation convertible into stock of the Corporation,
issued or sold, nor any right of subscription to any thereof.
3. (a) Subject to the rights of Holders of any series of preferred stock
to elect directors under specified circumstances:
(i) The number of directors of the Corporation, not less than
five nor more than twenty-five, shall be set by the Bylaws; provided that, in
the absence of a provision in the Bylaws fixing the number of directors, the
number of directors shall be fifteen. The directors shall be divided into three
classes as nearly equal in number as possible, with the term of office of
directors of the first class to expire at the first annual meeting of the
shareholders after their election, that of the second class to expire at the
second annual meeting after their election, and that of the third class to
expire at the third annual meeting after their election. At each annual meeting
after such classification, the number of directors equal to the number of the
class whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting of shareholders and until their
<PAGE>
respective successors are elected and shall qualify. In the event of any
increase or decrease in the number of directors fixed by the Bylaws, all classes
of directors shall be increased or decreased as equally as may be possible.
(ii) Newly-created directorships resulting from an 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 shall be filled by the affirmative vote of a majority of
the directors then in office, whether or not a quorum. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director. A director may be removed from office only for cause and
only by the affirmative vote of the Holders of not less than two-thirds of each
class of the voting stock of the Corporation then outstanding at a meeting
called for that purpose.
(b) The power to adopt, alter, amend or repeal Bylaws is vested in
the Board of Directors, which may take such action by the vote of a majority of
the directors present and voting at a meeting at which a quorum is present,
provided that if, as of the date such action shall occur, there is an Interested
Shareholder, such majority must include a majority of the Continuing Directors.
The Bylaws may contain any provision respecting the affairs, business,
governance or other matters relating to the Corporation not inconsistent with
the express provisions of these Articles. Shareholders, by the affirmative vote
of the Holders of not less than 80 percent of each class of the voting stock of
the Corporation then outstanding, may (i) adopt new Bylaws, or (ii) alter, amend
or repeal Bylaws adopted by either the shareholders or the Board, and (iii)
prescribe that any Bylaw made by them shall not be altered, amended or repealed
by the Board (provided that if the shareholders do not so prescribe, any Bylaw
made by them may be altered, amended or repealed by the Board).
(c) The affirmative vote of the Holders of not less than 80 percent
of each class of the voting stock of the Corporation then outstanding shall be
required to amend or repeal this Article 3 or adopt any provision of the
Articles or Bylaws inconsistent with this Article 3.
(d) For purposes of this Article 3:
(i) "Person" means any individual, firm, corporation or other
entity.
(ii) "Interested Shareholder" means (A) any Person (other than
the Corporation, a Subsidiary, or any profit-sharing, employee stock ownership
or employee benefit plan of the Corporation or a Subsidiary, or any trustee of
or fiduciary with respect to any such plan acting in such capacity) that is the
direct or indirect beneficial owner (as defined in Rules 13d-3 and 13d-5 under
the Securities Exchange Act of 1934 ("`34
<PAGE>
Act") the date these Articles first became effective) of five percent or more of
the outstanding capital stock of the Corporation entitled to vote for the
election of directors, and (B) any Affiliate or Associate of any such Person.
(iii) "Affiliate" and "Associate" shall have the respective
meanings given those terms in Rule 12b-2 of the General Rules and Regulations
under the `34 Act as in effect on the date these Articles first became
effective.
(iv) "Subsidiary" means any business entity, 50 percent or more
of which is directly or indirectly owned by the Corporation.
(v) "Continuing Director" means any member of the Board of
Directors who is neither an Interested Shareholder nor affiliated with an
Interested Shareholder and who was a member of the Board of Directors
immediately prior to the time that the Interested Shareholder became an
Interested Shareholder.
(vi) "Holders" means the holders of all classes and series of
the capital stock of the Corporation, except as otherwise specifically provided
herein.
4. To the full extent that the laws of the Commonwealth of Virginia, as
they now or may hereafter exist, permit the limitation or elimination of the
liability of directors or officers, no director or officer of the Corporation
shall be liable to the Corporation or its shareholders for any monetary damages.
5. (a) The Corporation shall indemnify a director or officer of the
Corporation who is or was a party to any proceeding, including a proceeding by
or in the right of the Corporation, by reason of the fact that he is or was such
a director or officer or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other profit or non-profit
enterprise against all liabilities and expenses incurred in the proceeding,
except such liabilities and expenses as are incurred because of his willful
misconduct or knowing violation of the criminal law. Unless a determination has
been made that indemnification is not permissible, the Corporation shall make
advances and reimbursement for expenses incurred by a director or officer in a
proceeding upon receipt of an undertaking from him to repay the same if it is
ultimately determined that he is not entitled to indemnification. Such
undertaking shall be an unlimited unsecured general obligation of the director
or officer and shall be accepted without reference to his ability to make
repayment. The Board of Directors is hereby empowered to contract in advance to
indemnify and advance the expenses of any director or officer. The termination
of any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent shall not, by itself, create a presumption
- - ---- ----------
that the director or officer did not meet the standard of conduct entitling him
to indemnity hereunder.
<PAGE>
(b) The Board of Directors is hereby empowered to cause the
Corporation to indemnify and make advances and reimbursement for expenses (or
contract in advance for the same) incurred by any person not specified in
paragraph (a) of this Article 5 who was or is a party to any proceeding, by
reason of the fact that he is or was an employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other profit or non-profit enterprise, to the same
extent as if such person were specified as one to whom indemnification is
granted in paragraph (a) of this Article.
(c) The Corporation may purchase and maintain insurance to indemnify
it against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against or incurred by such person in
any such capacity or arising from his status as such, whether or not the
Corporation would have power to indemnify him against such liability under the
provisions of this Article.
(d) Except as hereinafter provided, all determinations as to the
permissibility of indemnification and advances and reimbursement for expenses
(including contracts with respect thereto) shall be made by a majority vote of a
quorum consisting of directors not at the time parties to the proceeding. In the
event such a quorum cannot be obtained to make any determination as to the
permissibility of indemnification and advances and reimbursement for expenses
with respect to any claim for indemnification (including contracts with respect
thereto), or in the event there has been a change in the composition of a
majority of the Board of Directors after the date of the alleged act with
respect to which indemnification is claimed, such determination shall be made by
special legal counsel agreed upon by the Board of Directors and the proposed
indemnitee. If the Board of Directors and the proposed indemnitee are unable to
agree upon such special legal counsel, the Board of Directors and the proposed
indemnitee each shall select a nominee, and the nominees shall select such
special legal counsel.
(e) The provisions of this Article shall be applicable to all
actions, claims, suits or proceedings commenced after the adoption hereof,
whether arising from any action taken or failure to act before or after such
adoption. No amendment, modification or repeal of this Article shall diminish
the rights provided hereby or diminish the right to indemnification with respect
to any claim, issue or matter in any then pending or subsequent
<PAGE>
proceeding that is based in any material respect on any alleged action or
failure to act prior to such amendment, modification or repeal.
(f) Except to the extent inconsistent with this Article, terms used
herein shall have the same meanings assigned them in the Indemnification Article
of the Virginia Stock Corporation Act, as now in effect or hereafter amended or
replaced. Without limitation, it is expressly understood that reference herein
to directors, officers, employees or agents shall include former directors,
officers, employees and agents and their respective heirs, executors and
administrators.
6. (a) Except for any Business Combination, any plan of merger, share
exchange, a transaction involving the sale of all or substantially all of the
assets of the Corporation other than in the regular course of business and the
adoption of any plan of dissolution or liquidation shall be approved by the
affirmative vote of a majority of the Holders of all the shares cast on such
transaction by each voting group entitled to vote on the transaction at a
meeting at which a quorum of the voting group is present provided that the
transaction has been approved and recommended by at least a majority of the
Board of Directors. If such a transaction (excluding a Business Combination) is
not so approved and recommended, then the transaction shall be approved by the
affirmative vote of the Holders of not less than 80% of each class of the voting
stock of the Corporation then outstanding.
(b) Any Business Combination shall require the affirmative vote of a
majority of the Holders of all the shares cast on such transaction by each
voting group entitled to vote on the transaction at a meeting at which a quorum
of the voting group is present if the conditions of either of paragraphs (i) or
(ii) are met:
(i) The Business Combination has been approved by a vote of a
majority of the Board of Directors, including a majority of all the Continuing
Directors; or
(ii) All of the following conditions have been satisfied:
(A) The Holders shall receive the aggregate amount of (x)
cash and (y) fair market value (as of the date of the consummation of the
Business Combination) of consideration other than cash, at least equal to the
highest per share price (including any brokerage commissions, transfer taxes and
soliciting dealers' assessing fees) paid by the Interested Shareholder for any
shares of such class or series of stock acquired by the Interested Shareholder.
However, if the highest preferential amount per share of a series of preferred
stock to which the Holders thereof would be entitled in the event of any
voluntary or-involuntary liquidation, dissolution or winding up of the affairs
of the Corporation (regardless of whether the Business Combination constitutes
such an event) is
<PAGE>
greater than such aggregate amount, Holders of such series of preferred stock
shall receive at least the highest preferential amount per share applicable to
such series of preferred stock; and
(B) The consideration to be received by Holders of any
class or series of outstanding common or preferred stock shall be in cash or in
the same form as the Interested Shareholder has previously paid for shares of
such class or series of stock. If the Interested Shareholder has paid for shares
of any class or series of stock with varying forms of consideration, the form of
consideration given for such class or series of stock in the Business
Combination shall be either cash or the form used to acquire the largest number
of shares of such class or series of stock previously acquired by the Interested
Shareholder; and
(C) A proxy statement satisfying the requirements of the
'34 Act and the rules and regulations thereunder (or any subsequent provisions
replacing the '34 Act and such rules and regulations) shall be mailed to the
shareholders of the Corporation at least 45 days prior to the holding of any
meeting of shareholders of the Corporation to vote upon the Business Combination
(whether or not such proxy or information statement is required pursuant to the
'34 Act or any subsequent provisions) and shall contain in the forepart thereof
in a prominent place any recommendations as to the advisability (or
inadvisability) of the Business Combination which the Continuing Directors may
choose to state and, if deemed advisable by a majority of the Continuing
Directors, an opinion of a reputable investment banking firm as to the fairness
(or lack of fairness) of the terms of such Business Combination from the point
of view of the Holders of any class or series of voting stock of the Corporation
other than the Interested Shareholder (such investment banking firm to be
selected by a majority of the Continuing Directors, to be furnished with all
information it reasonably requests and to be paid by the Corporation a
reasonable fee for its services upon receipt by the Corporation of such
opinion).
(b) If the provisions of paragraph (a) of this Article 6 have not
been satisfied, any Business Combination shall require the affirmative vote of
the Holders of at least 80 percent of each class of the voting stock of the
Corporation then outstanding. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified by law or in any agreement of the Corporation with
any national securities exchange or otherwise.
(c) For the purposes of this Article 6:
(i) "Business Combination" means any of the following:
(A) Any merger or consolidation of the Corporation or any
Subsidiary with or into (x) any Interested Shareholder, or (y) any other
Corporation which, after such merger or consolidation, would be an Interested
Shareholder; or
<PAGE>
(B) Any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related transactions) to or
with any Interested Shareholder of any assets of the Corporation or any
Subsidiary when such assets have an aggregate fair market value of $500,000 or
more; or
(C) The issuance or transfer to any Interested Shareholder by
the Corporation or any Subsidiary (in one transaction or a series of related
transactions) of any equity securities of the Corporation or any Subsidiary
where any such equity securities have an aggregate fair market value of $500,000
or more; or
(D) Any reclassification of securities (including any preferred
stock split) or recapitalization of the Corporation or any merger or
consolidation of the Corporation with any of its Subsidiaries or any similar
transaction (whether or not with or into or otherwise involving an Interested
Shareholder) which has the effect of directly or indirectly increasing the
percentage 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 Shareholder; or
(E) Any agreement, contract, or other arrangement providing for
any of the transactions described in this definition of a "Business
Combination;" or
(F) The Corporation or any of its Subsidiaries entering into a
partnership agreement with any Interested Shareholder.
(ii) The terms "Person," "Interested Shareholder," "Affiliate,"
"Associate," "Subsidiary," "Continuing Director" and "Holders," as used in this
Article 6, shall have the meanings and be as defined in Article 3 of these
Articles.
(d) A majority of the Continuing Directors shall have the power to
make all determinations with respect to this Article 6, including, without
limitation, determining which transactions are Business Combinations, the
Persons who are Interested Shareholders, the time at which an Interested
Shareholder became an Interested Shareholder, the fair market value of any
assets, securities or other property, and whether a Person is an Affiliate or
Associate of another, and any such determinations of such Continuing Directors
shall be conclusive and binding.
(e) Nothing contained in this Article 6 shall be construed to relieve
any Interested Shareholder from any fiduciary obligation imposed by law.
<PAGE>
(f) Notwithstanding any other provisions of these Articles or of the
Bylaws of the Corporation (and in addition to any other vote that may be
required by law or the Bylaws of the Corporation), the affirmative vote of the
Holders of not less than 80 percent of each class of the voting stock of the
Corporation then outstanding shall be required in order to amend or repeal this
Article 6 or adopt any provision inconsistent herewith.
7. Unless a greater vote is required by law, by these Articles, or by
resolution of the Board as a condition to its submission of a proposed amendment
to these Articles for shareholder approval, any amendment to these Articles
which must be adopted by shareholders shall be so adopted upon being approved by
a majority of all the votes cast on the amendment by each voting group entitled
to vote on the transaction at a meeting at which a quorum of the voting group
exists.
8. The Corporation's initial registered office shall be located in the
City of Roanoke at 1800 First Union Tower, 10 South Jefferson Street, Roanoke,
Virginia 24011. The Corporation's initial registered agent shall be Douglas W.
Densmore, whose address is the same as the Corporation's registered office and
who is a resident of Virginia and a member of the Virginia State Bar.
BYLAWS
OF
Salem Community Bankshares, Inc.
SALEM, VIRGINIA
Adopted July 17, 1999
<PAGE>
ARTICLE I. SHAREHOLDERS
SECTION 1.1. Annual Meeting. The annual meeting of the shareholders to
--------------
elect directors and for the transaction of such other business as may properly
come before the meeting shall be held on the fourth Tuesday of April of each
year or, if such date falls on a legal holiday, the next business day.
SECTION 1.2. Special Meetings. Special meetings of shareholders may be
----------------
called by the Chairman of the Board of Directors, the President or by a majority
of the Board of Directors. Business transacted at all special meetings shall be
confined to the purpose(s) stated in the notice.
SECTION 1.3. Place of Meeting. The Board of Directors (the "Board") may
----------------
designate any place inside or outside Virginia for any annual or special meeting
of the shareholders. If no designation is made, the meeting will be at the
principal office of the Corporation.
SECTION 1.4. Notice of Meeting. Except as otherwise required by the
-----------------
Virginia Stock Corporation Act, as now in effect or hereafter from time to time
amended (the "Act"), written notice stating the time and location of the
meeting, and, in case of a special meeting, the purpose(s) of the meeting, shall
be delivered not less than ten nor more than sixty days before the meeting date,
either personally or by mail, to each shareholder of record entitled to vote at
such meeting. If mailed, the notice will be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
shareholder at his address as it appears on the stock transfer books of the
Corporation.
SECTION 1.5. Closing of Transfer Books or Fixing of Record Date. For the
--------------------------------------------------
purpose of determining shareholders entitled to notice of or vote at any
shareholders' meeting, or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to determine shareholders for any other
proper purpose, the Board may close the stock transfer books for a stated period
not to exceed seventy days. If the stock transfer books are closed to determine
shareholders entitled to notice of or vote at a shareholders' meeting, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board may fix in advance a date
as the record date for a determination of shareholders, such date to be not more
than seventy days, and in case of a shareholders' meeting, not less than ten
days, prior to the date on which the particular action requiring a determination
of shareholders is to be taken. If the stock transfer books are not closed and
no record date is fixed for the determination of shareholders entitled to notice
of or vote at a shareholders' meeting, or shareholders entitled to receive
payment of a dividend, the day before the notice of the meeting is mailed or the
date on which the resolution of the Board declaring such dividend is adopted, as
the case may be, shall be the record date for the determination of shareholders.
Any determination of shareholders entitled to vote at a shareholders' meeting
made as provided in this Section shall apply to any adjournment thereof, unless
the Board fixes a new record date, which it shall do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 1.6. Presiding Officer and the Secretary. The President, or, in
-----------------------------------
his absence, an officer designated by the Board, shall preside at all
shareholder meetings, and the Secretary shall serve as secretary. Otherwise, a
chairman or secretary shall be elected by a majority vote of the shareholders
present to act in the absence of those officers.
SECTION 1.7. Voting Lists. The Secretary or other person having charge of
------------
the stock transfer books of the Corporation shall make, at least ten days before
each shareholders' meeting, a complete list of the shareholders entitled to vote
at such meeting, or any adjournment thereof, with the address of and the number
of shares held by each, which list, for a period of ten days prior to such
meeting, shall be kept on file at the registered office of the Corporation and
shall be subject to inspection by any shareholder at any time during usual
business hours, subject to any limitations on such right provided by the Act or
other provisions of law. Such list shall also be produced and kept open at the
time and place of the meeting for inspection by any shareholder during the whole
time of the meeting for the purposes thereof. The original stock transfer book
is prima facie evidence as to the shareholders who are entitled to examine such
----- -----
list or transfer books or to vote at any shareholders' meeting.
SECTION 1.8. Quorum. Unless otherwise provided in the Corporation's
------
Articles of Incorporation (the "Articles"), a majority of the outstanding shares
of the Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a shareholders' meeting. If less than a quorum is present
at a meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. At such adjourned
<PAGE>
meeting at which a quorum is present or represented, any business may be
transacted which might have been transacted at the original meeting. If a quorum
exists, action on a matter by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing the
action, unless the vote of a greater number is required by the Act or the
Articles, and except that in the election of directors those receiving the
greatest number of votes cast by the shares entitled to vote shall be deemed
elected, even though not receiving a majority.
SECTION 1.9. Proxies. At all meetings of shareholders, a shareholder may vote
-------
by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the Secretary before or at the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
SECTION 1.10 Action by Shareholders Without a Meeting. Any action required to
----------------------------------------
be taken at a meeting of the shareholders of the Corporation, or any action
which may be taken at a meeting of the shareholders, may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the shareholders entitled to vote with respect to the subject
matter thereof.
SECTION 1.11 Shareholder Proposals. No business shall be transacted at any
---------------------
meeting of shareholders, except such business as shall be (a) specified in the
notice of meeting given as provided in Section 1.4 of this Article I; (b)
otherwise brought before the meeting by or at the direction of the Board; or (c)
otherwise brought before the meeting by a shareholder of record of the
Corporation entitled to vote at the meeting in compliance with the procedure set
forth in this Section 1.11. For business to be brought before a meeting by a
shareholder pursuant to (c) above, the shareholder must have given timely notice
in writing to the President of the Corporation. To be timely, a shareholder's
notice shall be delivered to, or mailed and received at, the principal executive
offices of the Corporation not less than sixty days nor more than ninety days
prior to the meeting; provided, however, in the event that less than seventy
days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting or such public disclosure was made.
Notice shall be deemed to have been given more than seventy days in advance of
an annual meeting of shareholders if the annual meeting is called on the date
indicated by Section 1.1 of this Article I without regard to when public
disclosure thereof is made. Notice of actions to be brought before a meeting
pursuant to (c) above shall set forth, as to each matter the shareholder
proposes to bring before the meeting: a brief description of the business
desired to be brought before the meeting and the reasons for bringing such
business before the meeting; and as to the shareholder giving the notice, (i)
the name and address, as they appear on the Corporation's books, of such
shareholder, (ii) the classes and number of shares of the Corporation which are
owned of record and beneficially by such shareholder, and (iii) any material
interest of such shareholder in such business other than his interest as a
shareholder of the Corporation. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted on a shareholder proposal or nomination
except in accordance with the provisions set forth in this Section 1.11. The
requirements of this Section are in addition to any other requirements
established by law and do not impair the effect of the requirements of Section
1.2 of these Bylaws relating to business permitted to be transacted at special
shareholders' meetings. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that any business was not properly brought
before the meeting in accordance with the provisions prescribed by these Bylaws
and, if he should so determine, he shall so declare to the meeting and any such
business not so properly brought before the meeting shall not be transacted.
ARTICLE II. BOARD OF DIRECTORS
SECTION 2.1. General Powers. The business and affairs of the Corporation
--------------
shall be managed and administered by the Board of Directors. Except as limited
by the Act, all corporate powers shall be vested in and exercised by the Board.
SECTION 2.2. Number, Tenure and Qualifications. The number of directors of
---------------------------------
the Corporation shall be at least five and no more than twenty-five. The number
of directors may be increased or decreased from time to time by amendment of
these Bylaws within the variable range established by the Articles. At each
annual meeting of shareholders, the number of directors equal to the number of
the class whose term expires at the time of such meeting shall be elected to
hold office until the third succeeding annual meeting and until their successors
shall have been elected and qualify.
<PAGE>
SECTION 2.3. Regular Meetings. A meeting of the Board shall be held
----------------
immediately after each annual meeting of shareholders without notice other than
that given by these Bylaws, at which meeting there shall be elected at least a
Chairman of the Board, or a President, a Secretary and a Treasurer, who shall
hold such offices until the first meeting of the Board following the next annual
meeting of shareholders and until their successors shall be elected and qualify
or until their earlier resignation or removal. Regular meetings of the Board
shall be held as provided by resolution of the Board.
SECTION 2.4. Special Meetings. Special meetings of the Board may be called
----------------
by or at the request of the Chairman, the President or by a majority of the
Board. The person or persons calling a special meeting of the Board may fix any
place inside or outside Virginia as the place for holding that special meeting.
SECTION 2.5. Action by Directors Without a Meeting; Telephonic Attendance.
------------------------------------------------------------
Any action of the Board, or of any committee of the Board, 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, or by all of the members of the committee, as
the case may be. Directors may participate in meetings of the Board and
committees of the Board by, and such meetings may be conducted through, the use
of any means of communication by which all directors participating may
simultaneously hear each other during the meeting. Directors so participating
are deemed to be present in person at the meeting and will be counted in
determining whether a quorum is present.
SECTION 2.6. Notice. Notice of any special meeting (which notice need not
------
state the purpose of or business to be conducted at the meeting) shall be given
by written notice delivered personally or mailed to each director at his
business address, or by telephone, facsimile or telegram. If notice is by
personal delivery, facsimile or telephone, the delivery, facsimile transmission
or telephone call shall be at least two days prior to the special meeting. If
notice is given by mail or telegram, such notice shall be deposited in the
United States mail, postage prepaid, addressed to each director at his business
address or delivered to the telegraph company, as the case may be, at least five
days prior to the special meeting.
SECTION 2.7. Quorum. Except as may otherwise be provided in the Articles
------
or in these Bylaws, a majority of the full Board or of the full membership of
any committee thereof shall constitute a quorum for the transaction of business
at any meeting of the Board or such committee, as the case may be. If less than
such majority is present at a meeting, a majority of directors present may
adjourn the meeting from time to time without further notice.
SECTION 2.8. Committees. By resolution, the Board shall designate from
----------
among Board members an Executive Committee, which shall include the President
and the Chairman of the Board, which shall exercise all of the authority of the
Board except as limited by law, the Articles or the Board itself. The Board may
designate from among its members other committees for such purposes and with
such powers as the Board may determine. All committees shall keep regular
minutes of their meetings and shall report their actions to the Board at its
next regular meeting.
SECTION 2.9. 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
or any committee thereof, unless the Articles or these Bylaws require the vote
of a greater number of directors.
SECTION 2.10. Vacancies. Any vacancy occurring on the Board, including a
---------
vacancy resulting from an increase in the number of directors, may be filled by
the affirmative vote of a majority of the remaining directors, though less than
a quorum of the Board. If a vacancy is filled by the shareholders, a vacant
office held by a director elected by a voting group of shareholders shall be
filled by a vote of only the holders of that voting group.
SECTION 2.11. Compensation. Payment to the directors for the expense, if
-----------
any, of attendance at meetings of the Board, and of a fixed sum for attendance
at meetings of the Board or a stated salary as director may be authorized by
Board resolution. Members of special or standing committees may be authorized by
Board resolution to receive like compensation for attending meetings.
SECTION 2.12. Retirement. Except for Members of the Board serving as such
----------
on July 17, 1999, no person shall stand for election or re-election to the Board
who has reached the age of 75 years prior to the date of the
<PAGE>
regular annual meeting of the shareholders at which an election of directors is
held, and no person who has reached the age of 75 years may be elected to fill a
vacancy on or as an addition to the Board.
SECTION 2.13. Honorary Directors. The Board shall not appoint any Honorary
------------------
Director, Honorary Chairman, Honorary President, or Honorary Officer.
ARTICLE III. OFFICERS
SECTION 3.1. Generally. The officers of the Corporation shall include a
---------
President, a Secretary and a Treasurer. Except as provided in these Bylaws, all
such officers shall be elected by the Board of Directors. Any one or more
offices may be held by the same person.
SECTION 3.2. President. The Board shall appoint a President of the
---------
Corporation to serve at the pleasure of the Board. The President shall supervise
the carrying out of the policies adopted or approved by the Board and shall be
the Chief Executive Officer of the Corporation. The President shall have general
executive powers, as well as the specific powers conferred by these Bylaws. The
President shall also have and may exercise such further powers and duties as
from time to time may be conferred upon or assigned to him by the Board.
SECTION 3.3. Secretary. The Board shall appoint a Secretary to serve at
---------
the pleasure of the Board. The Secretary shall: (a) keep the minutes of the
shareholders', Board and committee meetings in one or more books provided for
that purpose; (b) see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; (c) be custodian of the
corporate records and the Corporation's seal and see that the Corporation's seal
is affixed to all documents for which it is required; (d) sign with the
President or other designated officer stock certificates of the Corporation
issued as authorized by resolution of the Board; (e) have general charge of the
stock transfer books and shareholder list of the Corporation; and (f) in general
perform all duties incident to the office of Secretary and such other duties as
may from time to time be assigned to him by the President or the Board.
SECTION 3.4. Treasurer. The Board shall appoint a Treasurer, and if
---------
required by the Board, the Treasurer shall give a bond for the faithful
discharge of his duties in such sum and with such surety or sureties as the
Board shall determine. He shall: (a) have charge and custody of and be
responsible for all funds and securities of the Corporation; (b) receive and
give receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected by the Board;
and (c) in general perform all of the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the
President or the Board.
SECTION 3.5. Other Officers. The Board may appoint one or more Vice
--------------
Presidents (including Senior Vice Presidents, Assistant Vice Presidents and the
like), one or more Assistant Secretaries, one or more Assistant Treasurers and
such other officers and assistant officers as it deems appropriate to
transacting the business of the Corporation. Such officers shall exercise such
powers and perform such duties as pertain to their offices or are assigned to
them by the President, any other superior officer or the Board. The Board may by
resolution authorize any duly appointed officer to appoint one or more officers
or assistant officers.
SECTION 3.6. Removal. Any officer or agent may be removed by the Board at
-------
any time, with or without cause, whenever the Board in its sole discretion shall
consider that the best interests of the Corporation will be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. Any officer or agent appointed by another officer may be
removed at any time, with or without cause, by the Board or by such appointing
officer whenever the Board or such appointing officer, in its or his sole
discretion, shall consider that the best interests of the Corporation shall be
served thereby.
SECTION 3.7. Vacancies. The Board may fill any vacancy occurring in the
---------
offices of the Corporation at any regular meeting of the Board or at a special
meeting of the Board called for that purpose. An officer elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
SECTION 3.8. Salaries. The salaries of the officers shall be fixed from
--------
time to time by the Board. The President, or any other officer duly authorized
by the Board or the President, may fix the salaries of the employees who are not
officers, subject to the approval of the Board.
<PAGE>
ARTICLE IV. STOCK CERTIFICATES AND THEIR TRANSFER
SECTION 4.1. Certificates for Shares. The Board will determine the form of
-----------------------
certificates representing shares of the Corporation. Such certificates shall
bear the signature (or a facsimile thereof if such certificates are
countersigned by an appropriate party in accordance with the Act) of the
President or a Vice President and the Secretary or an Assistant Secretary and
shall bear the corporate seal or a facsimile thereof. All stock certificates
shall be consecutively numbered or otherwise identified. The name and address of
the person to whom the shares represented thereby are issued, and the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation. All certificates surrendered to the Corporation for transfer shall
be canceled, and no new certificates will be issued until the former certificate
for a like number of shares has been surrendered and canceled, except that a
replacement for a lost, destroyed or mutilated certificate may be issued upon
such terms and indemnity to the Corporation as the Board prescribes. No stock
certificate will be issued, and no dividend payment will be made, for fractional
shares of common stock.
SECTION 4.2. Transfer of Shares. Transfer of shares shall be made only on
------------------
the stock transfer books of the Corporation by the holder of record or by his
legal representative, who must furnish evidence of authority satisfactory to the
Corporation, and on surrender for cancellation of the certificate for such
shares. The Corporation may treat the holder of record of any share or shares of
stock as the holder in fact thereof and accordingly is not bound to recognize
any equitable or other claim to or interest in such shares on the part of any
other person, whether or not it shall have notice thereof, except as expressly
provided by the laws of the Commonwealth of Virginia.
ARTICLE V. CONTRACTS, LOANS,
CHECKS AND DEPOSITS
The President shall have by virtue of his office "full signing authority"
and shall have the power to sign, countersign, attest, affix the corporate seal,
to acknowledge, endorse, guarantee signatures upon and deliver checks, drafts,
agreements, contracts, indentures, mortgages, deeds, conveyances, transfers,
certificates, declarations, receipts, discharges, releases, satisfactions,
settlements, petitions, schedules, accounts, affidavits, bonds, undertakings,
proxies and other documents, securities, chases in action and instruments of
every kind and description on behalf of the Corporation in its corporate or any
fiduciary capacity. The President shall be authorized to grant in writing to
individual officers and employees signing authority on behalf of the Corporation
in its corporate or any fiduciary capacity, limited as he in his discretion
deems necessary.
ARTICLE VI. BOOKS AND RECORDS
The Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations, the accounts and books of the
Corporation (except such as may by statute be specifically opened to
inspection), or any of them, shall be opened to the inspection of the
shareholders, and the shareholders' rights in this respect are and shall be
restricted and limited accordingly.
ARTICLE VII. SEAL
The Board may authorize the use of a corporate seal, but failure to use the
seal shall not affect the validity of any instrument. The use of a facsimile of
a seal, or the affixing of a scroll by way of a seal, or the execution of a
document containing words importing a sealed document shall be of the same force
as if actually sealed by physically affixing an impression of a seal.
ARTICLE VIII. WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or director of
the Corporation under the provisions of these Bylaws, the Articles or the Act, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Attendance at or participation in any
shareholders' meeting by a shareholder, or at any Board or Board committee
meeting by a director, waives any required notice unless objection is timely
made as provided by the Act.
<PAGE>
(SEAL) __________________________________
Secretary
<PAGE>
APPENDIX C
VIRGINIA CODE
Section 13.1.
Corporations.
Chapter 9.
Virginia Stock Corporation Act.
Article 15.
Dissenters' Rights.
(S) 13.1-729. Definitions.
In this article:
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate action
under (S) 13.1-730 and who exercises that right when and in the manner required
by (S)(S) 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action until
the date of payment, at the average rate currently paid by the corporation on
its principal bank loans or, if none, at a rate that is fair and equitable under
all the circumstances.
"Record shareholder" means the person in whose name shares are registered in the
records of a corporation or the beneficial owner of shares to the extent of the
rights granted by a nominee certificate on file with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of shares
held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
History
(S) 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of, any of the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party (i) if
shareholder approval is required for the merger by (S) 13.1-718 or the articles
of incorporation and the shareholder is entitled to vote on the merger or (ii)
if the corporation is a subsidiary that is merged with its parent under (S)
13.1-719;
2. Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired, if the shareholder is entitled
to vote on the plan;
<PAGE>
3. Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation if the shareholder was entitled to vote on the sale
or exchange or if the sale or exchange was in furtherance of a dissolution on
which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the extent the
articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder or
the corporation.
C. Notwithstanding any other provision of this article, with respect to a plan
of merger or share exchange or a sale or exchange of property there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) or (ii) held by at least 2,000
record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares provide
otherwise;
2. In the case of a plan of merger or share exchange, the holders of the class
or series are required under the plan of merger or share exchange to accept for
such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests and cash in
lieu of fractional shares (i) of the surviving or acquiring corporation or
limited liability company or (ii) of any other corporation or limited liability
company which, at the record date fixed to determine the shareholders entitled
to receive notice of and to vote at the meeting at which the plan of merger or
share exchange is to be acted on, were either listed subject to notice of
issuance on a national securities exchange or held of record by at least 2,000
record shareholders or members; or
c. A combination of cash and shares or membership interests as set forth in
subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is not
approved by a majority of "disinterested directors" as such terms are defined in
(S) 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair value of
his shares shall terminate upon the occurrence of any one of the following
events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the corporate
action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
E. Notwithstanding any other provision of this article, no shareholder of a
corporation located in a county having a county manager form of government and
which is exempt from income taxation under (S) 501 (c) or (S) 528 of the
Internal Revenue Code and no part of whose income inures or may inure to the
benefit of any private share holder or individual shall be entitled to dissent
and obtain payment for his shares under this article.
(S) 13.1-731. Dissent by nominees and beneficial owners.
<PAGE>
A. A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
1. He submits to the corporation the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts dissenters'
rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
(S) 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights under (S) 13.1-730
is submitted to a vote at a shareholders' meeting, the meeting notice shall
state that shareholders are or may be entitled to assert dissenters' rights
under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under (S) 13.1-730 is taken
without a vote of shareholders, the corporation, during the ten-day period after
the effectuation of such corporate action, shall notify in writing all record
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in (S) 13.1-734.
(S) 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under (S) 13.1-730
is submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights (i) shall deliver to the corporation before the vote
is taken written notice of his intent to demand payment for his shares if the
proposed action is effectuated and (ii) shall not vote such shares in favor of
the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of this
section is not entitled to payment for his shares under this article.
(S) 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under (S) 13.1-730
is authorized at a shareholders' meeting, the corporation, during the ten-day
period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of (S) 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when certificates
for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of the shares
will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment demand, which
date may not be fewer than thirty nor more than sixty days after the date of
delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
<PAGE>
(S) 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in (S) 13.1-734 shall
demand payment, certify that he acquired beneficial ownership of the shares
before or after the date required to be set forth in the dissenters' notice
pursuant to subdivision 3 of subsection B of (S) 13.1-734, and, in the case of
certificated shares, deposit his certificates in accordance with the terms of
the notice.
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(S) 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
(S) 13.1-737. Payment.
A. Except as provided in (S) 13.1-738, within thirty days after receipt of a
payment demand made pursuant to (S) 13.1-735, the corporation shall pay the
dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending not
more than sixteen months before the effective date of the corporate action
creating dissenters' rights, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest available interim
financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the shares
and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under (S) 13.1-739;
and
4. A copy of this article.
(S) 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by (S) 13.1-737 from a
dissenter unless he was the beneficial owner of the shares on the date of the
first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under subsection A
of this section, after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall offer to pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The corporation shall send
<PAGE>
with its offer an explanation of how it estimated the fair value of the shares
and of how the interest was calculated, and a statement of the dissenter's right
to demand payment under (S) 13.1-739.
(S) 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under (S) 13.1-737), or reject the corporation's
offer under (S) 13.1-738 and demand payment of the fair value of his shares and
interest due, if the dissenter believes that the amount paid under (S) 13.1-737
or offered under (S) 13.1-738 is less than the fair value of his shares or that
the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
(S) 13.1-740. Court action.
A. If a demand for payment under (S) 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the city or county where
its principal office is located, or, if none in this Commonwealth, where its
registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of this
Commonwealth, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder who
claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment (i)
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation or (ii) for the fair
value, plus accrued interest, of his after-acquired shares for which the
corporation elected to withhold payment under (S) 13.1-738.
(S) 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under (S) 13.1-740 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters did not act in good faith in demanding payment under
(S) 13.1-739.
<PAGE>
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of
(S)(S) 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other party,
if the court finds that the party against whom the fees and expenses are
assessed did not act in good faith with respect to the rights provided by this
article.
C. If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, the court may award
to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of (S) 13.1-737 the court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters who are parties to the proceeding, in
amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
The Registrant's Articles of Incorporation implement the provisions of the
Virginia Stock Corporation Act (the "Virginia SCA"), which provide for the
indemnification of Registrant's directors and officers in a variety of
circumstances that may include indemnification for liabilities under the
Securities Act of 1933. Under sections 13.1-697 and 13.1-702 of the Virginia
SCA, a Virginia corporation generally is authorized to indemnify its directors
and officers in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation require
indemnification of directors and officers with respect to certain liabilities,
expenses and other amounts imposed upon them be reason of having been a director
or officer, except in the case of willful misconduct or a knowing violation of
criminal law. The Registrant also carries insurance on behalf of directors,
officers, employees or agents that may cover liabilities under the Securities
Act of 1933. In addition, the Virginia SCA and the Registrant's Articles of
Incorporation eliminate the liability of a director or officer of the Registrant
in a shareholder or derivative proceeding. This elimination of liability will
not apply in the event of willful misconduct or a knowing violation of the
criminal law or any federal or state securities law. Sections 13.1-692.1 and
13.1-696 to -704 of the Virginia SCA are hereby incorporated herein by
reference.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2 Plan and Agreement of Share Exchange (attached to the Prospectus as
Appendix A)
3(i) Articles of Incorporation of Salem Community Bankshares (included in
Appendix B, attached to the Prospectus)
3(ii) Bylaws of Salem Community Bankshares (included in Appendix B, attached to
the Prospectus)
5 Legal Opinion and consent of Flippin, Densmore, Morse & Jessee
8 Tax Matters Opinion of Flippin, Densmore, Morse & Jessee
10 Material Contracts*
11 Statement re Computation of Per Share Earnings*
13 Annual or Quarterly Reports, Form 10-Q*
21 Subsidiaries of the Registrant
23(a) Consent of KPMG LLP
23(b) Consent of Flippin, Densmore, Morse & Jessee included in Exhibit 5 above
27 Financial Data Schedule*
II-1
<PAGE>
99 Form of Proxy
* To be filed by amendment
(b) Financial Statement Schedules - Not Applicable
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as follows:
1 That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the
applicable form.
2 That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of
an amendment to the registration statement and will not be used until
such amendment is effective, and that, for the purposes of determining
any liability under the Securities Act of 1933, each such post-
effective amendment will be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time will be deemed to be the initial bona fide
offering thereof.
3 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.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of the
post-effective amendment all information concerning a transaction, and
the company being acquired involved
II-2
<PAGE>
therein, that was not the subject of and included in the registration
statement when it became effective.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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 ______________,
Commonwealth of Virginia, on ___________________, 2000.
SALEM COMMUNITY BANKSHARES, INC. (Registrant)
By: /s/ Clark Owen, Jr.
---------------------
Clark Owen, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on _________________________, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Clark Owen, Jr. President, Chief Executive Officer,
- - ------------------------- and Director (Principal Executive Officer)
Clark Owen, Jr.
/s/ Carl E. Tarpley, Jr. Executive Vice President and Treasurer, and Director
- - ------------------------- (Principal Financial and Accounting Officer)
Carl E. Tarpley, Jr.
/s/ Eugene M. Bane, Jr. Director
- - --------------------------
Eugene M. Bane, Jr.
/s/ Truman R. Dorton Director
- - --------------------------
Truman R. Dorton
</TABLE>
II-3
<PAGE>
/s/ Morris A. Elam Director
- - -------------------------
Morris A. Elam
/s/ H. Morgan Griffith Director
- - -------------------------
H. Morgan Griffith
/s/ Rose M. Hagen Director
- - -------------------------
Rose M. Hagen
/s/ Carlos B. Hart Director
- - --------------------------
Carlos B. Hart
/s/ Walter A. Hunt Chairman of the Board, and Director
- - --------------------------
Walter A. Hunt
/s/ Gladys C. O'Brien Director
- - --------------------------
Gladys C. O'Brien
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit
2 Plan and Agreement of Share Exchange (attached to the Prospectus as
Appendix A)
3(i) Articles of Incorporation of Salem Community Bankshares (included in
Appendix B, attached to the Prospectus)
3(ii) Bylaws of Salem Community Bankshares (included in Appendix B, attached to
the Prospectus)
5 Legal Opinion and consent of Flippin, Densmore, Morse & Jessee
8 Tax Matters Opinion of Flippin, Densmore, Morse & Jessee
10 Material Contracts*
11 Statement re Computation of Per Share Earnings*
13 Annual or Quarterly Reports, Form 10-Q*
21 Subsidiaries of the Registrant
23(a) Consent of KPMG LLP
23(b) Consent of Flippin, Densmore, Morse & Jessee (included in Exhibit 5
above)
27 Financial Data Schedule*
99 Form of Proxy
II-5
<PAGE>
Exhibit 5
LEGAL OPINION AND CONSENT OF FLIPPIN, DENSMORE, MORSE & JESSEE
<PAGE>
HUGH B. WELLONS
(540) 510-3057
[email protected]
April ___, 2000
Salem Community Bankshares, Inc.
220 East Main Street
Salem, Virginia 24153
Gentlemen:
We have participated in the preparation of the Registration Statement on
Form S-4 (the "Registration Statement") to be filed by Salem Community
Bankshares, Inc. (the "Company") with the Securities and Exchange Commission on
April ___, 2000 covering a maximum of 1,590,482 shares of common stock,
$5.00 par value, to be issued by the Company in connection with the
reorganization of Salem Bank and Trust, National Association (the "Bank") into a
one-bank holding company structure. As stated in the materials included in the
Registration Statement, the reorganization will be effected by a share exchange.
Under the terms of the Plan and Agreement of Reorganization, each share of
Common Stock of the Bank, will be converted into and exchanged for one share of
Common Stock of the Company, in a transaction intended to qualify as a "tax-
free" reorganization for federal income tax purposes. The Bank will continue as
a wholly-owned subsidiary of the Company.
For the purposes of this opinion, we have examined the Company's Articles
of Incorporation and Bylaws. We also have examined the Plan and Agreement of
Reorganization by and between the Bank and the Company.
Based on the foregoing, with regard to the legality of the issuance of the
stock being registered under the Registration Statement, it is our opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Virginia, with full power and authority to carry on the business in
which it is now and will be engaged.
2. All 1,590,482 shares of the Company's common stock, $5.00
par value, being registered under the Registration Statement will,
when issued, be legally issued, fully paid and nonassessable.
<PAGE>
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our name therein and under the caption "Legal Opinions" in the
prospectus contained therein.
Very truly yours,
Flippin, Densmone, Morse
& Jessee, P.C.
<PAGE>
Exhibit 8
TAX OPINION OF FLIPPIN, DENSMORE, MORSE & JESSEE
<PAGE>
[Flippin, Densmore, Morse & Jessee Letterhead][
April ___, 2000
Salem Community Bankshares, Inc. and
Salem Bank and Trust, National Association
220 East Main Street
Salem, Virginia 24153
Reorganization of Salem Bank and Trust, National Association
into a One-Bank Holding Company Structure
-----------------------------------------
Gentlemen:
You have requested our opinion as to certain federal income tax
consequences with respect to the consummation of the proposed share exchange
between Salem Bank and Trust, National Association, a national banking
corporation (the "Bank") and Salem Community Bankshares, Inc., a proposed bank-
holding company organized under the laws of Virginia (the "Holding Company"),
pursuant to the terms and conditions of the Plan and Agreement of Share
Exchange, dated as of June 17, 1999 (the "Agreement").
I. The Transaction
---------------
Pursuant to the Agreement and subject to various regulatory approvals, the Bank
will become a subsidiary of the Holding Company in accordance with the
provisions of Virginia law and the National Banking Act and regulations
promulgated thereunder with the effect provided therein (the
"Reorganization"). As a result of the Reorganization, the Bank will be a
wholly-owned subsidiary of the Holding Company and will conduct its business
in substantially the same manner as before the Reorganization.
At the effective date of the Reorganization, each outstanding share of
common stock of the Bank ("Bank Stock") will be exchanged for and converted into
one share of common stock of the Holding Company ("Holding Company Stock").
II. Examination
-----------
In connection with the preparation of this opinion, we have examined such
documents concerning the Reorganization as we have deemed necessary. We have
based our conclusions on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations promulgated pursuant thereto, each as amended from
time to time and existing on the date hereof, as well as existing judicial and
administrative interpretations thereof.
As to various questions of fact material to our opinion, we have relied
upon the representations made in the Agreement and in the Proxy Statement of the
Bank, dated as of April ___, 2000, furnished
<PAGE>
to the stockholders of the Bank in connection with the solicitation of proxies
to be used at the stockholders' meeting called to approve the Agreement, as well
as the representations recited in Section III below.
III. Additional Representations
--------------------------
In connection with the proposed Reorganization, the following additional
representations have been made:
A. The fair market value of Holding Company Stock to be received by the
Bank's stockholders will be approximately equal to the fair market value of Bank
Stock surrendered in exchange therefor.
B. To the best knowledge of the management of the Bank, there is no plan
or intention on the part of the Bank's stockholders to sell or otherwise dispose
of Holding Company Stock to be received by them in the Reorganization that will
reduce their holdings thereof to a number of shares having in the aggregate a
fair market value of less than 50 percent of the fair market value of all the
Bank Stock held by Bank stockholders on the effective date of the
Reorganization.
C. The Holding Company has no plan or intention to reacquire any Holding
Company stock issued in the reorganization.
D. There is no plan or intention to sell or otherwise dispose of any of
the assets of the Bank except for dispositions made in the ordinary course of
business or transfers described in Section 368(a)(2)(C) of the Code. The Bank
has no plan or intention to issue additional shares of its capital stock that
would result in the Holding Company ceasing to own 80 percent of the voting
power of all of the Bank voting stock and 80 percent of each class of any of the
Bank nonvoting stock, and the Holding Company has no plan to liquidate the Bank,
to merge the Bank into another corporation, or to sell or otherwise dispose of
any of the Bank Stock acquired in the Reorganization.
E. Each party to the Reorganization will pay its own expenses, if any,
incurred in connection with the Reorganization.
F. After consummation of the Reorganization, the Bank will conduct its
business operations in substantially the same manner as the Bank had done before
the Reorganization, but as a wholly-owned subsidiary of the Holding Company.
G. There is no intercorporate indebtedness existing between or among the
Holding Company and the Bank that was issued, acquired, or will be settled at a
discount. No debts or liabilities will be assumed in the Reorganization.
H. No dividends or other distributions will be made with respect to any
Bank Stock before the proposed Reorganization, except for regular, normal
distributions.
I. None of the shares of Holding Company Stock and no other property
received by a shareholder-employee in exchange for Bank Stock pursuant to the
Reorganization is compensation for services rendered. In addition, any
compensation paid to any shareholder-employee will be for services
<PAGE>
actually rendered and bargained for at arm's length, or commensurate with a
third party arm's length negotiation.
J. No two parties to the Reorganization are investment companies as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
K. The Bank is not under the jurisdiction of a court in a Title II or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
L. Any cash payments to the Bank stockholders who elect to dissent from
the Reorganization pursuant to Article 15 of the Virginia Stock Corporation Act
shall be paid by the Bank or funded from its assets and shall not be
attributable directly or indirectly to the Holding Company.
M. Upon the consummation of the Reorganization, the Bank will not have
outstanding any warrants, options, convertible securities or any other type of
right pursuant to which any person could acquire any Bank Stock.
IV. Opinion
-------
Based upon the foregoing, we are of the opinion that for federal income tax
purposes:
1. The Reorganization will constitute and qualify as a "reorganization"
within the meaning of the Section 368(a)(1)(C) of the Code;
2. No gain, loss or other income will be recognized by the Holding
Company (pursuant to Section 1032 of the Code) or the Bank as a result
of the Reorganization;
3. Shareholders of the Bank who receive solely Holding Company Stock in
exchange for their shares of Bank Stock will recognize no gain or loss
as a result of the Reorganization, as provided in Section 354(a)(1) of
the Code;
4. A dissenting Bank stockholder who receives solely cash in exchange for
his Bank Stock will be treated as receiving a distribution in
redemption of his Bank Stock, subject to the provisions and
limitations of Section 302(a) of the Code. Where, as a result of such
distribution, a Bank stockholder no longer holds any shares of Holding
Company Stock directly and, furthermore, is not deemed to own any such
shares pursuant to the constructive ownership rules under Section 318
of the Code, the distribution will be treated as a complete
termination of such stockholder's interest within the meaning of
Section 302(b)(3) of the Code and will be treated as a distribution in
full payment in exchange for the stockholder's shares pursuant to
Section 302(a) of the Code;
5. The tax basis of Holding Company Stock received by the stockholders of
the Bank who exchange their Bank Stock solely for Holding Company
stock will be the same as the tax basis of the Bank Stock surrendered
and exchanged therefor, as provided in Section 358(a)(1) of the Code;
and
<PAGE>
6. The holding period of the Holding Company Stock to be received by the
stockholders of the Bank will include the period during which the Bank
Stock surrendered in exchange therefor was held by such Bank
stockholders, provided such Bank Stock was held as a capital asset on
the date of the exchange.
This opinion is based upon the provisions of the Code, as interpreted by
regulations, administrative rulings and case law in effect on the date hereof.
This opinion is made in connection with the Reorganization and is solely for the
benefit of the Holding Company, the Bank and the Bank's stockholders. It may
not be relied upon in any other manner or by any other person.
Very truly yours,
Flippin, Densmore, Morse
& Jessee, P.C.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
SALEM BANK & TRUST, N.A., a Virginia Corporation (if approved by the
shareholders and all regulatory approvals received)
<PAGE>
Exhibit 23(a)
CONSENT OF KPMG LLP
The Board of Directors
Salem Bank and Trust, National Association
We consent to the inclusion herein of our report dated February 25, 2000,
relating to the consolidated balance sheets of Salem Bank and Trust, National
Association and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, which report is also included in the December
31, 1999 Annual Report on Form 10-KSB of Salem Bank and Trust, National
Association.
KPMG LLP
Roanoke, Virginia
April, ___, 2000
<PAGE>
EXHIBIT 23(b)
CONSENT OF
FLIPPIN, DENSMORE, MORSE & JESSEE
(Included in Exhibit 5 above)
<PAGE>
Exhibit 99
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
OF SALEM BANK AND TRUST, NATIONAL ASSOCIATION TO BE HELD APRIL 25, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints Eugene M. Bane,
Jr., Carlos B. Hart, and Rose M. Hagen as proxies, and each or any of them with
full power of substitution, and hereby authorizes them to represent and to vote,
as designated below, all the shares of Common Stock of SALEM BANK AND TRUST,
NATIONAL ASSOCIATION held of record by the undersigned on April __, 2000 at the
Annual Meeting of Shareholders to be held May __, 2000 or any adjournment
thereof.
1. To approve the reorganization of Salem Bank & Trust into a bank holding
company form of ownership by approving a plan and agreement of share
exchange.
FOR ____ AGAINST ____ ABSTAIN ____
2. To allow the Chairman of the meeting to adjourn the meeting to a later date
and resolicit shareholders if he believes that there are insufficient votes
to approve the reorganization.
FOR ____ AGAINST ____ ABSTAIN ____
3. Election of the directors in the accompanying proxy statement.
_____ FOR ALL NOMINEES listed below (except as marked to the contrary).
Dr. Eugene M. Bane, Jr. Carlos B. Hart H. Morgan Griffith
Truman R. Dorton Dr. Walter A. Hunt Rose M. Hagen
Morris A. Elam Gladys C. O'Brien Clark Owen, Jr.
_____ AGAINST ALL NOMINEES listed above.
You may withhold authority to vote for any nominee by striking through his or
her name.
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting, except as provided in
number 2 above relating to postponement of the meeting to solicit
shareholders to approve the reorganization.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, OR IF AUTHORITY IS NOT
WITHHELD, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL AND IN THE DISCRETION OF
THE PROXY AGENTS ON OTHER MATTERS.
Please sign exactly as your name appears below on this proxy. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
____________________________________ __________________________________
Signature Date Signature Date
<PAGE>
NUMBER OF SHARES _________________________
______________________________________________________________________________
PLEASE MARK, SIGN, DATE & RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE
_______________________________________________________________________________
