File Pursuant to Rule 424(b)(3)
File Number 333-70261
[Security letterhead]
MERGER PROPOSED - YOUR VOTE IS IMPORTANT
Dear Fellow Shareholders:
We cordially invite you to attend a special meeting of shareholders of
Security Bank Corporation to be held at Security's main office located at 8780
Centreville Road, Manassas, Virginia on Thursday, March 11, 1999 at 8:00 a.m.
The purpose of the meeting will be to consider and vote on the merger of
Security into F&M Bank-Northern Virginia, a subsidiary bank of F&M National
Corporation, a bank holding company headquartered in Winchester, Virginia.
In the merger, you will receive shares of F&M common stock with an
aggregate market value of $17.25 for each share of Security common stock you
own. In general, you will not recognize federal income tax gain or loss for the
F&M common stock you receive.
The market value of F&M common stock will be determined at the merger date
based on its average closing price over a ten day period. Accordingly, the
number of F&M shares you will receive in the merger cannot be determined now. As
an example, however, you would have received 0.597 shares of F&M common stock
for each common share of Security you own based on the $28.875 closing price of
F&M common stock on January 28, 1999. F&M's stock is listed on the New York
Stock Exchange. The most recent trade on the Nasdaq SmallCap Market of Security
common stock occurred on January 14, 1999 at $16.00 per share. These prices will
fluctuate between now and the merger.
The merger cannot be completed unless holders of more than two-thirds of
Security common stock approve it. If approved, we anticipate the merger will
occur on March 22, 1999.
This proxy statement/prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully. You can also obtain more information about F&M in documents it has
filed with the Securities and Exchange Commission and about Security in
documents it has filed with the Federal Reserve.
Your Board of Directors has unanimously approved the merger and believes
it is in the best interests of Security and you, our shareholders. Accordingly,
the Board unanimously recommends that you vote "FOR" the merger.
We hope you can attend the special meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. If you do not return your card or vote in
person, the effect will be a vote against approval of the merger. You can revoke
your proxy by writing to Security's Assistant Secretary any time before the
meeting or by attending the meeting and voting in person.
We look forward to seeing you at the meeting.
Sincerely yours,
Danny R. May
President and Chief Executive Officer
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the F&M common stock to be issued in the merger or
determined if this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
The date of this proxy statement/prospectus is February 2, 1999 and it is
first being mailed to shareholders on or about February 2, 1999.
<PAGE>
SECURITY BANK CORPORATION
Manassas, Virginia
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 11, 1999
-------------------------
A special meeting of shareholders of Security Bank Corporation will be
held on Thursday, March 11, 1999 at 8:00 a.m., at Security's main office located
at 8780 Centreville Road, Manassas, Virginia, for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
November 25, 1998, by and among Security, F&M National Corporation and F&M
Bank-Northern Virginia and a related plan of merger, providing for the merger of
Security with and into F&M Bank-Northern Virginia upon the terms and conditions
therein, including, among other things, that each issued and outstanding share
of Security common stock will be exchanged for shares of F&M common stock with
an aggregate market value equal to $17.25, with cash being paid instead of
issuing fractional shares. The merger agreement is enclosed as Appendix I to the
accompanying proxy statement/prospectus.
2. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the meeting.
The Board of Directors has fixed February 1, 1999, as the record date for
the special meeting. Only holders of record of Security common stock at the
close of business on that date are entitled to receive notice of and to vote at
the special meeting or any adjournments or postponements of the meeting.
By Order of the Board of Directors
Harry J. Parrish II
Secretary
February 2, 1999
Please mark, sign, date and return your proxy promptly, whether or not you
plan to attend the special meeting.
The Board of Directors of Security unanimously recommends that
shareholders vote for the merger agreement.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is Security merging with F&M?
A: Both the Security Board and the F&M Board believe the merger is in the best
interests of their respective companies and will provide significant benefits to
you, and their customers and employees. The boards' believe the merger will
permit the combined operations of Security and F&M Bank-Northern Virginia to be
better positioned to be a stronger competitor in the highly competitive northern
Virginia banking market. To review the background and reasons for the merger in
greater detail, see pages 13 through 17.
Q: What will I receive in the merger?
A: You will receive the number of shares of F&M common stock that have an
aggregate market value equal to $17.25 in exchange for each share of Security
common stock you hold. The market value of F&M common stock will be its average
closing price as reported on the New York Stock Exchange for each of the ten
consecutive trading days ending on the fifth business day before the date of the
merger.
Because the market price of F&M common stock fluctuates, the number of
shares you will receive in the merger cannot be determined at this time. As an
example, however, based on the $28.875 closing price of F&M common stock on
January 28, 1999, you would have received 0.597 shares of F&M common stock for
each common share of Security you own. The most recent trade on the Nasdaq
SmallCap Market of Security common stock occurred on January 14, 1999 at $16.00
per share.
Q: What are the tax consequences of the merger to me?
A: We expect that the exchange of shares by you generally will be tax-free to
you for federal income tax purposes. You will, however, have to pay taxes on
cash received for fractional shares. To review the tax consequences to you in
greater detail, see pages 28 and 29.
Your tax consequences will depend on your personal situation. You should consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
Q: Will I receive dividends after the merger?
A: For more than 56 consecutive years, F&M has paid dividends to its
shareholders. Security never paid a dividend on its common stock. F&M currently
pays a quarterly dividend of $0.195 per share. F&M expects that it will continue
to pay at least this amount in quarterly dividends. After the merger, the F&M
Board will use its discretion to decide whether and when to declare dividends
and in what amount.
Q: What am I being asked to vote upon?
A: You are being asked to approve the merger agreement. The merger agreement
provides for the acquisition by F&M of Security through Security's merger into
F&M Bank-Northern Virginia, a wholly-owned subsidiary bank of F&M, and for the
exchange of each of your shares of Security common stock for shares of F&M
common stock that have an aggregate market value of $17.25. F&M Bank-Northern
Virginia will be the surviving company of the merger. Approval of the merger
requires the affirmative vote of more than two-thirds of Security common stock.
The Security Board unanimously approved and adopted the merger agreement
and recommends voting for the approval of the merger agreement.
Q: What should I do now?
1
<PAGE>
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the merger. If you do not sign and
send in your proxy or you abstain or if you do not vote in person, it will have
the effect of a vote against the merger.
The special meeting will take place at 8:00 a.m. on Thursday, March 11,
1999. You may attend the meeting and vote your shares in person, rather than
voting by proxy. In addition, you may withdraw your proxy up to and including
the day of the meeting by following the directions on page 12 and either change
your vote or attend the meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares of Security common stock only if you
provide instructions on how to vote. You should instruct your broker how to vote
your shares following the directions your broker provides.
If you do not provide instructions to your broker, your shares will not be voted
and this will have the effect of voting against the merger.
Q: When is the merger expected to be completed?
A: We are working to complete the merger by March 22, 1999.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed we will send you written instructions for
exchanging your Security common stock certificates for F&M common stock
certificates.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
Dianne Kirkman
Assistant Secretary
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
Telephone: (703) 361-1986
2
<PAGE>
TABLE OF CONTENTS
Page
Questions and Answers About the Merger.......................................1
Summary......................................................................4
The Special Meeting.........................................................11
The Merger..................................................................12
Terms of the Merger...................................................12
Background of and Reasons for the Merger..............................13
Opinion of Financial Advisor..........................................17
Effective Date........................................................22
Surrender of Stock Certificates.......................................22
Representations and Warranties; Conditions to the Merger..............23
Regulatory Approvals..................................................23
Business Pending the Merger...........................................24
No Solicitation; Board Action.........................................24
Waiver, Amendment and Termination.....................................25
Resales of F&M Common Stock...........................................26
Accounting Treatment..................................................26
Interests of Certain Persons in the Merger............................26
The Option Agreement..................................................27
Material Federal Income Tax Consequences of the Merger................28
Absence of Appraisal Rights...........................................29
Certain Differences in Rights of Shareholders.........................29
Expenses of the Merger................................................30
Cautionary Statement Concerning Forward-Looking Statements............30
Market Prices and Dividends.................................................30
Security Bank Corporation...................................................32
General...............................................................32
History and Business..................................................32
Competition...........................................................32
Security Ownership of Management......................................33
Business of F&M ............................................................34
History and Business..................................................34
F&M's Acquisition Program.............................................35
Comparative Rights of Shareholders..........................................35
Description of F&M Capital Stock............................................39
Other Matters...............................................................40
Experts.....................................................................40
Legal Opinions..............................................................40
Where You Can Find More Information ........................................41
APPENDICES
I Agreement and Plan of Reorganization and Plan of Merger
II Stock Option Agreement
III Opinion of Scott & Stringfellow, Inc.
IV Security's 1997 Annual Report to Shareholders
V Security's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1998
3
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we refer you. See "Where You Can Find
More Information" on page 41.
Exchange Ratio to be Number of Shares of F&M Common Stock with Market Value of
$17.25 for each Security Share (page 12)
As a result of the merger, you will receive shares of F&M common stock that have
an aggregate market value equal to $17.25 for each share of Security common
stock you own. The market value of F&M common stock will be its average closing
price as reported on the New York Stock Exchange for each of the ten consecutive
trading days ending on the fifth business day before the date of the merger. The
number of shares of F&M common stock for which each outstanding share of
Security common stock will be exchanged will be established by dividing $17.25
by the F&M average closing price. This is the "exchange ratio."
Because the market price of F&M common stock fluctuates, the number of shares
you will receive in the merger cannot be determined at this time. As an example,
however, based on the $28.875 closing price of F&M common stock on January 28,
1999, you would have received 0.597 shares of F&M common stock for each common
share of Security you own. The most recent trade on the Nasdaq SmallCap Market
of Security common stock occurred on January 14, 1999 at $16.00 per share.
No Federal Income Tax on Shares Received in Merger (page 28)
We expect that you will not recognize any gain or loss for federal income tax
purposes as a result of the merger, except with respect to cash received instead
of any fractional share. F&M's attorneys will issue a legal opinion to this
effect, the form of which we have included as an exhibit to the registration
statement filed with the Securities and Exchange Commission for the shares to be
issued in the merger. Tax matters are complicated, and tax results may vary
among shareholders. We urge you to consult with your own tax advisor to
understand fully how the merger will affect you.
F&M Dividend Policy Following the Merger
F&M currently pays quarterly dividends of $0.195 per share of common stock. F&M
expects that it will continue to pay at least this amount in quarterly
dividends, but may change that policy based on business conditions, F&M's
financial condition and earnings and other factors.
F&M's next dividend is payable January 26, 1999 to shareholders of record on
December 24, 1998. F&M anticipates that its next quarterly dividend will be
payable on or about April 27, 1999, with a record date that will be on or about
March 26, 1999. Accordingly, if the merger takes place before the dividend
record date, which we expect, you will be entitled to receive that dividend.
However, no assurance can be given that the merger will take place before the
March dividend record date.
Security Board Recommends Shareholder Approval (page 12)
The Security Board unanimously approved the merger and the merger agreement. The
Board believes that the merger is fair to you and in your best interests. The
Security Board recommends that you vote "FOR" approval of the merger. The
Security Board believes that, as a result of the merger, Security shareholders
will have less financial risk and will experience greater stock value
appreciation than they would if Security remained independent.
4
<PAGE>
Exchange Ratio Fair to Shareholders, According to Investment Bank (page 17)
Scott & Stringfellow, Inc. has given an opinion to the Security Board that the
exchange ratio is fair from a financial point of view to Security shareholders.
A copy of the fairness opinion, setting forth the information reviewed,
assumptions made and matters considered, is attached to this proxy
statement/prospectus as Appendix III. We encourage you to read the opinion
carefully. If the merger is completed, Scott & Stringfellow will be paid
$100,000 in exchange for its advice and for providing its fairness opinion.
Meeting to be Held March 11, 1999 (page 11)
The special shareholders' meeting will be held on Thursday, March 11, 1999 at
8:00 a.m. at Security's main office located at 8780 Centreville Road, Manassas,
Virginia.
The Companies (pages 32 and 34)
F&M National Corporation
9 Court Square
Winchester, Virginia 22601
(540) 665-4200
F&M is a multi-bank holding company headquartered in Winchester, Virginia. F&M
has nine subsidiary banks that operate 120 banking offices in the Shenandoah
Valley of Virginia, central Virginia, the eastern panhandle of West Virginia and
the Washington D.C. metropolitan area. At September 30, 1998, F&M had total
assets of $2.8 billion, total deposits of $2.3 billion and total shareholders'
equity of $281.4 million. F&M common stock is listed on the New York Stock
Exchange under the symbol "FMN."
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
(703) 361-1986
Security is a community bank headquartered in Manassas, Virginia that operates
two banking offices in the Manassas area. At September 30, 1998, Security had
total assets of $60.4 million, total deposits of $51.4 million and total
shareholders' equity of $8.1 million. Security common stock trades on the Nasdaq
SmallCap Market under the symbol "SecurityM."
The Merger (page 12)
The merger agreement provides that Security will merge into a subsidiary bank of
F&M, F&M Bank-Northern Virginia, which will be the surviving corporation of the
merger. The merger agreement and the related plan of merger are attached to this
proxy statement/prospectus as Appendix I. We encourage you to read the merger
agreement, as it is the legal document that governs the merger.
Two-Thirds Security Shareholder Vote Required (page 11)
Approval of the merger requires the affirmative vote of more than two-thirds of
the outstanding shares of Security common stock. Your failure to vote will have
the effect of a vote against approval of the merger. Certain directors and
executive officers of Security own about 20.48% of the shares entitled to vote
at the meeting, and we expect them to vote their shares in favor of the merger.
Brokers who hold shares of Security common stock as nominees will not have
authority to vote such shares with respect to the merger unless shareholders
provide voting instructions.
The merger does not require the approval of F&M's shareholders.
Record Date Set at February 1, 1999; One Vote Per Share of Security Stock
(page 11)
You are entitled to vote at the special meeting if you owned shares of Security
common stock at the close of business on February 1, 1999. On February 1, 1999,
there were 978,420 shares of Security common stock outstanding.
5
<PAGE>
You will have one vote at the meeting for each share you owned on February 1,
1999.
Monetary Benefits to Management in the Merger (page 26)
When considering the recommendation of the Security Board, you should be aware
that some Security directors and officers have interests in the merger that
differ from the interests of other Security shareholders. Security directors and
officers hold stock options to acquire an aggregate of 77,100 shares of Security
common stock at exercise prices ranging from $8.00 to $13.12 per share. If not
exercised before the merger, the options will be converted into options to
acquire shares of F&M common stock.
In connection with the merger, Mr. Danny R. May, the President and Chief
Executive Officer of Security, will receive payments totaling $156,661 under his
existing employment agreement with Security. Mr. May's employment agreement
provides for such a severance allowance if there is a change of ownership or
control of Security and his job duties are substantially reduced. His agreement
also provides that F&M must continue for a two year period his medical and other
insurance coverage. Mr. May has accepted F&M's offer to join F&M Bank-Northern
Virginia as a senior vice president. He will not have an employment or severance
agreement with F&M.
Also, four directors of Security will become directors of F&M Bank-Northern
Virginia and will each earn a fee of $225 for each board meeting they attend;
the other Security directors will be offered positions on F&M-Northern
Virginia's advisory board and will be paid a quarterly fee of $100 for their
services.
The Security Board was aware of these and other interests and considered them
before approving and adopting the merger agreement.
Conditions that Must be Satisfied for the Merger to Occur (page 23)
The following conditions must be met for us to complete the merger:
o approval of the merger by Security shareholders;
o approval from the New York Stock Exchange for the listing of the F&M
common stock to be issued;
o the continuing effectiveness of F&M's registration statement filed with
the Securities and Exchange Commission;
o receipt by F&M of a letter from its accountants stating that the merger
qualifies for pooling of interests accounting treatment (however, this is
not a condition to the merger if F&M takes any action to prevent the
merger from so qualifying); and
o receipt of a legal opinion concerning the tax consequences of the merger.
We cannot complete the merger unless we obtain the approval of the Board of
Governors of the Federal Reserve System and the Virginia State Corporation
Commission. On January 12 and 13, 1999, applications were filed with the Federal
Reserve and the Virginia State Corporation Commission. While we cannot predict
whether or when we will obtain all required regulatory approvals, we see no
reason why the approvals will not be obtained in a timely manner.
Unless prohibited by law, either Security or F&M could elect to waive a
condition that has not been satisfied and complete the merger anyway.
Termination of the Merger Agreement (page 25)
We can agree to terminate the merger agreement at any time without completing
the merger. Either company may also terminate the merger agreement in the
following circumstances:
6
<PAGE>
o the merger is not completed on or before September 30, 1999; or
o if any event occurs which renders impossible, in a material way, the
satisfaction by one company of one or more of the conditions described above,
unless the other company waives such satisfaction.
Effective Date Expected to be March 22, 1999 (page 22)
The merger will become effective at the date and time stated on the certificate
of merger issued by the Virginia State Corporation Commission. We anticipate the
merger will take place on or about March 22, 1999.
Distribution of Stock Certificates (page 22)
After the merger, you will need to exchange your Security stock certificates for
certificates representing F&M common stock. F&M will have its exchange agent
mail to you instructions on how to exchange your shares. After turning in your
certificates to the exchange agent, you will be mailed certificates representing
shares of F&M common stock.
Option Agreement (page 27)
To induce F&M to agree to the merger, and to discourage other companies from
acquiring Security, F&M was granted an irrevocable option to purchase from
Security up to 191,300 shares of Security common stock at a price of $11.00 per
share.
F&M may exercise the option only if another party attempts to acquire control of
Security. As of the date of this proxy statement/prospectus, we do not believe
that has occurred. The stock option agreement is attached to this proxy
statement/prospectus as Appendix II.
F&M to Use Pooling of Interest Accounting Treatment (page 26)
We expect that the merger will be accounted for as a pooling of interests. This
will enhance future earnings of F&M by avoiding the creation of goodwill
relating to the merger and enable F&M to also avoid charges against future
earnings resulting from amortizing goodwill. This accounting method also means
that after the merger F&M will report financial results as if Security had
always been combined with F&M.
No Appraisal Rights (page 29)
Under Virginia law, you have no right to an appraisal of the fair value of your
shares in connection with the merger.
7
<PAGE>
Market Prices
This table provides the price per share of F&M common stock and Security
common stock based on the last reported sales prices per share of F&M common
stock on the NYSE and of Security common stock on the Nasdaq SmallCap Market on
November 9, 1998, the last business day before the public announcement of the
merger, and on January 28, 1999, the last practicable date before the mailing of
this proxy statement/prospectus:
Market Price Per Share
----------------------------------
F&M Security
Common Stock Common Stock
November 9, 1998..... $29.6875 $11.50
January 28, 1999..... $28.875 $16.00
If the merger had been effective on November 9, 1998, the exchange ratio
would have been 0.581 shares of F&M common stock per share of Security common
stock, using the closing price for F&M common stock on the NYSE on November 9,
1998 of $29.6875 as the average closing price. If the merger had been effective
on January 28, 1999, the exchange ratio would have been 0.597 shares of F&M
common stock per share of Security common stock, using the closing price of F&M
common stock on January 28, 1999 of $28.875 as the average closing price.
We urge you to obtain current market quotations for F&M common stock. We
expect that the market price of F&M common stock will fluctuate and likely
change before the exchange ratio is fixed and the merger is completed. As a
result, the number of shares of F&M common stock that you will receive in the
merger may increase or decrease prior to the date of the merger. However, the
aggregate value of F&M common stock received by you will still equal $17.25. See
"Market Prices and Dividends" on page 30 for more information.
Comparative Per Share Information
We have summarized below the per share information for our companies on a
historical, pro forma combined and equivalent basis. You should read this
information in conjunction with our historical financial statements and the
related notes contained in the annual and quarterly reports and other documents
that we have filed with the Securities and Exchange Commission (for F&M) and the
Federal Reserve (for Security). See "Where You Can Find More Information" on
page 41. The F&M pro forma information gives effect to the merger accounted for
as a pooling of interests, assuming that 0.597 shares of F&M common stock are
issued for each outstanding share of Security common stock. The assumed exchange
ratio is based on the closing price of F&M common stock of $28.875 as reported
on the NYSE on January 28, 1999 as the average closing price. Security
equivalent share amounts are calculated by multiplying the pro forma basic and
diluted earnings per share, historical per share dividend and historical book
value, by the assumed exchange ratio of 0.597 shares of F&M common stock so that
the per share amounts equate to the respective values for one share of Security
common stock.
You should not rely on the pro forma information as being indicative of
the historical results that we would have had if we had been combined or the
future results that we will experience after the merger, nor should you rely on
the nine-month information as being indicative of results expected for the
entire year.
8
<PAGE>
Year ended
Nine months ended December 31,
September 30, --------------------------
1998 1997 1996 1995
---- ---- ---- ----
Earnings Per Common Share
Basic:
Security historical.............. $ 0.27 $ 0.55 $ 0.84 $ 0.36
F&M historical................... 1.23 1.51 1.41 1.24
Pro forma combined............... 1.21 1.50 1.41 1.23
Security pro forma equivalent.... 0.72 0.89 0.84 0.74
Diluted:
Security historical.............. $ 0.26 $ 0.54 $ 0.83 $ 0.36
F&M historical................... 1.22 1.50 1.40 1.23
Pro forma combined............... 1.19 1.48 1.40 1.22
Security pro forma equivalent.... 0.71 0.89 0.84 0.73
Cash Dividends Declared Per Common
Share
Security historical.............. $ -- $ -- $ -- $ --
F&M historical................... 0.57 0.73 0.69 0.61
Pro forma combined............... 0.57 0.73 0.69 0.61
Security pro forma equivalent.... 0.34 0.44 0.41 0.36
`
September 30, December 31,
1998 1997
---- ----
Book Value Per Common Share
Security historical.............. $ 8.44 $ 8.14
F&M historical................... 12.85 12.10
Pro forma combined............... 12.88 12.14
Security pro forma equivalent.... 7.69 7.25
Selected Financial Data
We are providing the following information to help you analyze the
financial aspects of the merger. We derived this information from audited
financial statements for 1993 through 1997 and unaudited financial statements
for the nine months ended September 30, 1998. This information is only a
summary, and you should read it in conjunction with our historical financial
statements and the related notes contained in the annual and quarterly reports
and other documents that we have filed with the Securities and Exchange
Commission (for F&M) and the Federal Reserve (for Security). See "Where You Can
Find More Information" on page 41. You should not rely on the nine-month
information as being indicative of results expected for the entire year.
9
<PAGE>
F&M - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
----------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest
income............ $ 87,002 $ 82,543 $ 110,391 $ 102,703 $ 96,909 $ 91,391 $ 79,501
Net income........ 26,829 24,539 32,804 30,902 27,095 25,483 22,267
Diluted earnings
per share....... 1.22 1.11 1.50 1.40 1.23 1.15 1.05
Cash dividends
per share....... 0.57 0.54 0.73 0.69 0.61 0.54 0.58
Book value per
share............. 12.85 11.74 12.10 11.24 10.76 9.68 9.69
Total assets...... 2,759,056 2,599,689 2,677,935 2,458,431 2,346,358 2,149,817 2,054,951
Shareholders'
equity............ 281,365 253,272 264,851 246,052 236,066 207,931 200,463
</TABLE>
SECURITY - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Nine Months
Ended
September 30, Year Ended December 31,
----------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Net interest
income............ $ 1,901 $ 1,683 $ 2,293 $ 2,017 $ 1,743 $ 1,475 $ 1,423
Net income........ 256 378 526 641 202 136 219
Diluted earnings
per share....... 0.26 0.39 0.54 0.83 0.36 0.25 0.46
Cash dividends
per share...... -- -- -- -- -- -- --
Book value per
share............. 8.44 7.99 8.14 7.57 6.79 6.11 6.11
Total assets...... 60,436 54,898 56,358 49,771 44,278 40,125 38,636
Shareholders'
equity............ 8,116 7,657 7,800 7,251 3,765 3,385 3,166
Recent Developments
F&M. For the year ended December 31, 1998, net income for F&M was $36.5
million or $1.65 per share, assuming dilution, compared to $32.8 million, or
$1.50 per share, assuming dilution, for the same period in 1997. At December 31,
1998, F&M had total assets of $2.889 billion, an increase of 7.9% over the
$2.678 billion in total assets at December 31, 1997. Total loans at December 31,
1998 increased to $1.693 billion, up 2.69% from the $1.649 billion total loans
at December 31, 1997. Deposits at December 31, 1998, increased to $2.436
billion, up from $2.275 billion at December 31, 1997.
Security. For the year ended December 31, 1998, net income for Security
was $-20 thousand or $-0.02 per share, assuming dilution, compared to $526
thousand, or $0.54 per share, assuming dilution, for the same period in 1997. At
December 31, 1998, Security had total assets of $61.2 million, an increase of
8.5% over the $56.4 million in total assets at December 31, 1997. Total loans at
December 31, 1998 increased to $34.3 million, up 5.9% from the $32.4 million
total loans at December 31, 1997. Deposits at December 31, 1998, increased to
$52.4 million, up from $47.7 million at December 31, 1997.
10
<PAGE>
THE SPECIAL MEETING
Date, Place and Time
We are furnishing this proxy statement/prospectus and the enclosed form of
proxy to you in connection with the solicitation of proxies by the Board of
Directors of Security for use at a special meeting of shareholders of Security.
The special meeting will be held at Security's main office located at 8780
Centreville Road, Manassas, Virginia on Thursday, March 11, 1999 at 8:00 a.m.
Purpose of the Special Meeting
The purpose of the special meeting is to consider and vote upon the
Agreement and Plan of Reorganization, dated as of November 25, 1998, by and
among Security, F&M and F&M Bank-Northern-Virginia and a related plan of merger.
The merger agreement is attached to this proxy statement/prospectus as Appendix
I and is incorporated in this document by this reference.
Record Date
Only shareholders of record at the close of business on February 1, 1999,
the record date, are entitled to notice of and to vote at the special meeting or
any adjournment thereof. At the close of business on February 1, 1999, there
were 978,420 shares of Security common stock issued outstanding held by
approximately 645 shareholders of record.
Vote Required
Each share of Security common stock outstanding on February 1, 1999,
entitles the holder to cast one vote upon each matter properly submitted at the
special meeting. Approval of the merger requires the affirmative vote of the
holders of more than two-thirds of the shares of Security common stock
outstanding as of February 1, 1999, in person or by proxy.
Brokers who hold shares of Security common stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners of those shares. Any shares of Security common stock for
which a broker has submitted an executed proxy but for which the beneficial
owner of the shares has not given instructions on voting to such broker are
referred to as "broker non-votes." This is important because abstentions and
broker non-votes will be counted for purposes of establishing the presence of a
quorum at the meeting and also will be counted and will have the effect of a
vote against the proposal to approve the merger.
Because approval of the merger requires the affirmative vote of more than
two-thirds of the outstanding shares of Security common stock, abstentions and
broker non-votes will have the same effect as a vote against approval of the
merger agreement. Accordingly, the Security board urges you to complete, date
and sign the accompanying proxy and return it promptly in the enclosed envelope.
As of February 1, 1999, directors and executive officers of Security and
their affiliates, beneficially owned an aggregate of 200,378 shares of Security
common stock, or 20.48% of the shares of Security common stock outstanding on
such date, not counting shares that may be acquired pursuant to the exercise of
stock options. We currently expect that all directors and executive officers of
Security will vote their shares of Security common stock in favor of the merger.
11
<PAGE>
Voting and Revocation of Proxies
A form of proxy is enclosed with this proxy statement/prospectus. You are
requested to complete, date and sign the form of proxy and return it promptly to
Security in the enclosed envelope. If a proxy is properly executed and returned
in time for voting, it will be voted in accordance with the instructions
indicated on the proxy. If a proxy is signed and returned without indicating any
voting instructions, shares of Security common stock represented by the proxy
will be voted "FOR" the merger and in the discretion of the individuals named as
proxies as to any other matter that may come before the special meeting or any
adjournment or postponement thereof including, among other things, a motion to
adjourn or postpone the special meeting to another time and/or place, for the
purpose of soliciting additional proxies or otherwise. No proxy which is voted
against the merger will be voted in favor of any such adjournment or
postponement.
A proxy may be revoked at any time before it is voted. You may revoke a
proxy by giving written notice of revocation to Security, by executing and
delivering a substitute proxy to Security or by attending the special meeting
and voting in person. If you wish to revoke a proxy by written notice, please
mail the notice so that it is received on or before March 10, 1999, to Assistant
Secretary, Security Bank Corporation, 8780 Centreville
Road, Manassas, Virginia 20110.
Solicitation of Proxies
Security will bear the costs of this solicitation of proxies.
Solicitations may be made by mail, telephone, telegraph or personally by
directors, officers and employees at Security, none of whom will receive
additional compensation for performing such services. F&M will pay all of the
expenses of printing and mailing of this proxy statement/prospectus.
Recommendation
The board of directors of Security has unanimously approved the merger
agreement and the transactions contemplated thereby. The Security board believes
that the proposed transaction is fair to and in the best interests of Security
and its shareholders. The Security board unanimously recommends that you vote
"FOR" approval of the merger.
THE MERGER
The following is a summary description of the material aspects of the
merger. This description does not purport to be complete and is qualified in its
entirety by reference to the appendices hereto, including the merger agreement
and the plan of merger, which are attached as Appendix I to this proxy
statement/prospectus. We urge you to read the appendices in their entirety.
Terms of the Merger
The merger agreement provides that Security will merge into F&M
Bank-Northern Virginia. F&M Bank-Northern Virginia will be the surviving
corporation of the merger. At the date and time the merger is effected, each
outstanding share of Security common stock will be converted into the right to
receive shares of F&M common stock having an aggregate market value of $17.25
per share.
The market value of F&M common stock will be its average closing price as
reported on the NYSE for each of the ten consecutive trading days ending on the
fifth business day prior to the effective date of the merger. The number of
shares of F&M common stock that will be exchanged for each outstanding share of
Security common stock will then be established by dividing $17.25 by the average
closing price of F&M common stock. This will be the "exchange ratio." No
fractional shares of F&M common stock will be issued. Rather, cash, without
interest, will be paid instead of any fractional share interest based on the
average closing price of F&M common stock. The exchange ratio will be adjusted
to reflect any stock split, stock dividend, recapitalization or similar
transaction with respect to F&M common stock.
12
<PAGE>
There is no minimum number of shares of F&M common stock that must be
issued in connection with the merger. Security has no right to terminate the
merger or to obtain an adjustment of the consideration to be received solely as
a result of a decrease in the exchange ratio below a specified level. Similarly,
there is no maximum number of shares of F&M common stock which may be issued in
connection with the merger, and F&M has no right to terminate the merger or
obtain an adjustment in the consideration to be paid to you solely as a result
of an increase in the exchange ratio above a specified level. We can give no
assurance as to the average closing price of F&M common stock for the merger, or
the actual exchange ratio at which your shares are exchanged as of the effective
date, or as to the market or trading value of F&M common stock following the
effective date of the merger.
Background of and Reasons for the Merger
Background of the Merger. In late 1997 and early 1998, the board of
directors of Security began considering the strategic options available to
Security to build long-term shareholder value. Because Security's assets had not
increased at the rate anticipated by the board, Security had excess capital.
Furthermore, Security's earnings had not increased as anticipated either.
Accordingly, the board was concerned that Security would have difficulty
generating and sustaining a return on capital comparable to its peer group of
banks and sufficient to build long-term shareholder value. The board reviewed
several ways to utilize the excess capital and improve the return on capital,
including opening branches, investing in technological improvements and
repurchasing outstanding shares. The board also discussed the relative
advantages and disadvantages of affiliating with another banking institution
through an acquisition, a "merger of equals" or a sale to, or merger with, a
larger institution.
The board also realized that changes in the banking industry would make it
difficult for a bank of Security's size to compete, particularly in the highly
competitive northern Virginia banking market. These changes included the trend
towards consolidation, more focus on fee-based products, changing customer
preferences and the emergence of new technologies. The board also believed that
transforming Security to be competitive in this changing banking industry would
require significant costs and risk.
In mid-1998, Security was approached and had preliminary discussions with
a community bank about a possible merger that resulted in Security receiving a
merger offer. The board selected the investment banking firm of Scott &
Stringfellow to assist in analyzing the merger and conducting due diligence.
After extensive discussion, analysis of the merger and further study, the board
determined that a merger with this community bank was not in the best interests
of Security's shareholders.
This proposed transaction, however, further intensified the board's
concern about Security's future and its ability to build long-term shareholder
value. The board decided that this issue would be the major focus of Security's
strategic planning retreat to be held in late October 1998.
As background for the strategic planning retreat, and based on its
previous performance, the board asked Scott & Stringfellow to analyze the
strategic alternatives available to Security to build long-term shareholder
value. The board asked that this analysis include consideration of Security
remaining independent, merging with another bank and branching and/or engaging
13
<PAGE>
in non-traditional financial services. On September 10, 1998, representatives
from Scott & Stringfellow met with the board and reviewed the available options.
Scott & Stringfellow concluded that it was unlikely that Security would find a
suitable merger-of-equals partner that would help increase shareholder value
immediately, but Security had excellent prospects of merging with a larger
community bank or regional bank that would result in increased shareholder value
immediately and provide long-term value as well. In addition, Scott &
Stringfellow discouraged Security from acquiring a mortgage company, engaging in
non-traditional financial services or opening another branch until Security
could make its Sudley branch profitable. The board intended to discuss all of
these possibilities at its strategic planning retreat. However, the retreat did
not take place because of board meetings held in October 1998 with respect to
merger offers Security had received.
On September 22, 1998, a representative from another investment banking
firm met with the Security executive committee to provide its views on
Security's opportunities. At that meeting, the investment banker suggested that
Security consider a strategic merger with a specific out-of-state banking
organization. The committee expressed interest and following the meeting the
investment banking firm contacted the out-of-state bank. Subsequently,
representatives of the Security board met with representatives of the
out-of-state bank. Ultimately, this bank made a verbal offer at a price the
investment banker considered to be too low for consideration.
In early 1998, Mr. Danny R. May, President and Chief Executive Officer of
Security asked Mr. Charles E. Curtis, Vice Chairman and Chief Administrative
Officer of F&M, who Mr. May knew very well, what a regional organization like
F&M would pay to acquire a bank like Security. Mr. May made this inquiry for
planning purposes only and no further discussions ensued with F&M until ten
months later. In mid-October 1998, F&M expressed an interest in a merger with
Security, and as a result of discussions with Scott & Stringfellow, F&M extended
a written offer, by letter dated October 15, 1998, to affiliate with Security.
F&M offered to acquire 100% of the outstanding stock of Security at a fixed
price, payable in F&M common stock. Mr. May arranged a meeting at the office of
Security's Chairman, Mr. John O. Gregory, on October 16th. Messrs. May and
Gregory together with Mr. Danny G. Snow, Vice Chairman of the Security board,
met, reviewed the letter in detail and agreed that it should be presented at a
meeting of all of the directors for consideration. Mr. May talked with the
remaining board members by telephone that weekend and scheduled a meeting.
On October 23, 1998, a special board meeting was held to review the offers
from F&M and the out-of-state bank. The board consulted by telephone conference
call with a representative of the investment banking firm through which the
out-of-state bank had made a verbal offer. A representative of this firm
indicated that, in his opinion, he thought the out-of-state bank would be
willing to increase the value of its offer. The board then consulted by
telephone conference call with representatives of Scott & Stringfellow. In that
conference call, Scott & Stringfellow furnished the board with an in-depth
analysis of F&M and five other potential merger candidates, which included the
out-of-state bank.
At the conclusion of the conference calls, the board employed Scott &
Stringfellow to study both the F&M and out-of-state bank offers and evaluate
other potential alternatives available to Security, including having discussions
with or studying the possibility of merging with other banking organizations or
remaining independent.
On November 4, 1998, the board held another meeting to discuss Security's
options. Scott & Stringfellow presented to the board an analysis of the two
offers, one from F&M and one from the out-of-state bank, an analysis of Security
merged with several other banking organizations and an analysis of Security's
prospects if it remained independent. In addition, representatives from F&M made
a brief presentation to the board discussing F&M, its offer, and the advantages
14
<PAGE>
of an affiliation with F&M. Similar discussions had already been held with the
out-of-state bank. The board engaged in an extensive discussion comparing the
offers by F&M and the out-of-state bank, as well as other potential alternatives
available to Security. At this meeting, the board employed Scott & Stringfellow
as Security's exclusive investment banker to negotiate with both F&M and the
out-of-state bank.
On November 6, 1998, Scott & Stringfellow attended another meeting of the
board. Scott & Stringfellow again presented a thorough analysis of the offers by
F&M and the out-of-state bank, as well as a report on the financial performance
of each institution. Based upon discussions Scott & Stringfellow had with both
F&M and the out-of-state bank, Scott & Stringfellow presented the terms under
which both F&M and the out-of-state bank indicated each would acquire Security,
including the respective financial offers and the integration of Security into
the respective companies. At that time, F&M had indicated a willingness to pay a
fixed dollar amount of $17.00 per share in F&M common stock. The out-of-state
bank had revised the structure of its offer to a fixed dollar amount of $17.75
per share payable in common stock, but with certain contingencies.
Unlike the F&M offer, the out-of-state bank's offer contained a fixed
maximum and minimum number of shares that could be issued in the event its stock
falls below or rises above the price limits. Accordingly, the value of the
out-of-state bank's offer could fluctuate and be more or less than $17.75 to the
extent its stock price was outside the price limits leading up to the closing
date when the exchange ratio would be established.
Scott & Stringfellow discussed with the board the volatility of the stock
market over the preceding few months, reports from several stock market analysts
and economists expressing concern over the possible continued volatility in the
stock market and the direction of the United States economy in general, and the
board concluded that the out-of-state bank's offer involved a significantly high
level of market risk. Based on the information, the board was concerned with the
uncertainty over whether the actual value of the transaction would end up being
less than $17.75 per share, or even less than the F&M offer, when the exchange
ratio was subsequently established at the closing. In making this assessment,
the board also took into consideration the fact that the then current market
price of the out-of-state bank's stock had to fall only seven percent before it
dropped below the low end of the price limits and that several other announced
bank mergers had been recently terminated due to a decline in the stock market
generally and bank stocks specifically. In addition, the board discussed and
considered the compatibility of Security and F&M, including the similarity of
their community bank operations and products and customer orientations. The
board recognized that the bank resulting from the merger would have over 30
offices in northern Virginia to serve Security's existing customers, and would
possess the financial resources and economies of scale to compete effectively.
The board decided to continue negotiations with F&M due in large part to the
board's serious concern over the market risk associated with the out-of-state
bank's offer.
The board approved a motion to authorize Scott & Stringfellow to request
$17.50 in F&M common stock. Security further authorized Scott & Stringfellow to
negotiate an offer of no lower than $17.25 per share. The board understood that
F&M would pay for Security's stock with registered shares of F&M common stock.
On November 6, 1998, Scott & Stringfellow called Mr. May to report that
F&M had agreed to $17.25 per share payable in F&M common stock, subject to the
completion of a due diligence investigation. Mr. May notified Mr. Snow that
night, as Mr. Snow was leaving the country the next morning. The next day, Mr.
May notified all other directors by telephone that F&M had agreed to $17.25 per
share payable in F&M common stock.
On November 10, 1998, F&M completed its due diligence investigation of
Security. Also, on November 10, 1998, the board held another meeting that Scott
& Stringfellow and legal counsel for Security attended. Scott & Stringfellow and
15
<PAGE>
counsel presented the board with an agreement in principle prepared by F&M. The
board, legal counsel and Scott & Stringfellow carefully reviewed the agreement
and asked for certain changes. These changes were discussed with F&M and all
changes were made. Scott & Stringfellow then again reviewed the financial
considerations associated with the F&M offer and indicated that the offer was
fair from a financial point of view to Security's shareholders. The board then
unanimously approved the agreement and the related stock option agreement. The
press release was issued by F&M at approximately 5:00 p.m.
Immediately thereafter, Mr. May met with all Security officers and
announced the intent to merge with F&M. This meeting was followed by a meeting
with the full staff of Security and the proposed affiliation was again
announced. The staff was especially appreciative that they were assured they
would be offered positions at comparable salaries with F&M Bank-Northern
Virginia.
On November 12, 1998, Security held a regular board meeting. Mr. May
reported that the definitive merger agreement with F&M was being drafted by
F&M's counsel and would be reviewed by Security's counsel prior to being
submitted to the Security board for approval.
On November 24, 1998, the board held another special board meeting. The
board selected Messrs. Snow, Parrish, DeBell and Martin, based on seniority, to
serve on the board of F&M Bank-Northern Virginia. Legal counsel joined the
meeting and the board reviewed the merger agreement. The board unanimously
approved the document, subject to minor changes agreed to by Mr. Gregory and Mr.
May after consulting legal counsel. On November 25, 1998, F&M signed the merger
agreement. Due to the intervening Thanksgiving holiday and travel schedules of
Security board members, Mr. Gregory signed the merger agreement on Monday,
November 30, 1998.
Security's Reasons for the Merger. The Security board discussed both the
financial aspects of the proposed merger, including the benefits of the
transaction to Security's shareholders, as well as the potential effect of the
merger on Security's management, employees, customers and the community in which
Security is located, without assigning relative weights to the various
constituencies and factors considered. Relying on the opinion of Scott &
Stringfellow, and after consultation with management and legal counsel, the
Security board determined that the merger is fair from a financial point of view
to, and is in the best interests of, Security and its shareholders. In reaching
this determination, the board considered the following:
o The board was concerned with ways to improve Security's financial
performance and, prior to receiving the offer from F&M, had begun to study
options to utilize Security's excess capital in a manner that could be
expected to maintain or enhance shareholder returns. Possible uses for
the capital included, but were not limited to, opening branches,
investing in technological innovation, or affiliating with a bank of
similar size. Security asked Scott & Stringfellow to analyze the changes
in the industry, the industry's financial performance, the trend to
industry consolidation and the competitive environment of its market in
northern Virginia. Scott & Stringfellow issued a report and discussed
it with the board indicating that Security did not have the critical
mass to be competitive in the northern Virginia market and that the
recommended option would be to consider an affiliation.
o The compatibility of Security and F&M, including community bank
operating philosophies and similarity of products and customer
orientation.
o The terms of the merger agreement and the merger, including the exchange
ratio.
16
<PAGE>
o The current and prospective economic and competitive environment facing
the banking industry generally, and Security in particular, including the
continued pace of consolidation in the industry, the perceived importance
of operational scale in enhancing efficiency and profitability and
remaining competitive over the long term, and the benefits of
increased geographic diversification. In this regard, the board noted
that the combined bank resulting from the merger will have over 30
offices in northern Virginia and will possess the financial
resources and economies of scale necessary to compete more effectively
in the financial services industry in the future.
o The presentation of Scott & Stringfellow to the board on November
10, 1998, that as of such date, the exchange ratio was fair from a
financial point of view to the Security shareholders.
o The expectation that the merger will be tax-free for federal income
tax purposes to Security and its shareholders, except for cash paid
instead of fractional shares.
o The generally favorable impact that the merger could be expected to
have on the shareholders, customers, and employees of Security and
the communities it serves.
o The terms of the stock option agreement between F&M and Security,
including the risk that it might discourage third parties from
offering to acquire Security by increasing the cost of such an
acquisition, and recognizing that the execution of the stock option
agreement was a condition to F&M's willingness to agree to the
merger.
Additionally, in considering the opinion of Scott & Stringfellow, the
board was advised that in arriving at such opinion, Scott & Stringfellow relied
upon median estimates of F&M's and Security's 1998 and 1999 earnings per share
and earnings per share growth rates.
Based on its discussion and consideration of the factors discussed above,
the Security board voted unanimously to approve the merger as being in the best
interests of Security, its shareholders, employees and customers.
The Security board recommends that you vote "FOR" approval of the merger.
Opinion of Financial Advisor
Pursuant to an engagement letter dated as of November 5, 1998, Security
retained Scott & Stringfellow as its financial advisor in connection with
Security's consideration of a possible business combination with F&M. In
connection therewith, the Security board requested Scott & Stringfellow to
render its opinion as to the fairness, from a financial point of view, of the
consideration from F&M to the holders of Security common stock. At the November
10, 1998 meeting at which Security's board considered and approved the
agreement, Scott & Stringfellow delivered to Security's board both its oral and
written opinion that as of such date, the consideration to be received from F&M
was fair, from a financial point of view, to the holders of shares of Security
common stock. Scott & Stringfellow has reconfirmed its opinion dated the date of
this proxy statement/prospectus, to the effect that, as of the date thereof, the
consideration was fair to the holders of shares of Security common stock from a
financial point of view. Scott & Stringfellow is a regional investment banking
firm and was selected by Security based on the firm's reputation and experience
in investment banking, its extensive experience and knowledge of the Virginia
banking market, its recognized expertise in the valuation of commercial banking
17
<PAGE>
businesses and because of its familiarity with, and prior work for Security.
Scott & Stringfellow, through its investment banking business and specifically
through its Financial Institutions Group specializes in commercial banking
institutions and is continually engaged in the valuation of such businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings and other corporate transactions.
The full text of Scott & Stringfellow's opinion, dated the date of this
proxy statement/prospectus, which sets forth the assumptions made, procedures
followed, matters considered and limits on the review undertaken, is attached as
Appendix III to this proxy statement/prospectus. The description of the Scott &
Stringfellow opinion set forth herein is qualified in its entirety by reference
to Appendix III. The Scott & Stringfellow opinion is provided for the
information of Security shareholders because it was provided to the Security
board in connection with its consideration of the merger.
In developing its opinion, Scott & Stringfellow reviewed and analyzed:
o the merger agreement;
o this proxy statement/prospectus;
o Security's audited financial statements for the three years ended December
31, 1997;
o Security's unaudited financial statements for the nine months ended
September 30, 1998 and 1997, and other internal information relating to
Security prepared by Security's management;
o information regarding the trading market for Security common stock and
F&M common stock and the price ranges within which the respective
stocks have traded;
o the relationship of prices paid to relevant financial data such as net
worth, earnings, deposits and assets in certain bank and bank holding
company mergers and acquisitions in recent years;
o F&M's annual reports to shareholders and its audited financial
statements for the three years ended December 31, 1997;
o F&M's unaudited financial statements for the nine months ended
September 30, 1998 and 1997 and other internal information relating to
F&M prepared by F&M's management; and
o such other information as it deemed appropriate, the material portion
of which is described below.
Scott & Stringfellow also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuations and knowledge
of the commercial banking industry generally. Scott & Stringfellow also has
discussed with members of Security's and F&M's management past and current
business operations, the background of the merger, the reasons and basis for the
merger, results of regulatory examinations, and the business and future
prospects of Security and F&M individually and as a combined entity, as well as
other matters relevant to its inquiry. In these discussions, F&M did not discuss
with or provide to Scott & Stringfellow any forward-looking financial
information.
18
<PAGE>
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of Security and F&M as to the future financial
performance of Security and F&M, respectively. Scott & Stringfellow did not make
an independent evaluation or appraisal of the assets or liabilities of Security
and F&M nor was it furnished with any such appraisal.
In connection with rendering its opinion, Scott & Stringfellow performed a
variety of financial analyses. Scott & Stringfellow evaluated the financial
terms of the transaction using standard valuation methods, including comparable
acquisition analysis, pro forma merger analysis, present value analysis, ability
to pay analysis and comparable company analysis, among others. The following is
a summary of the material analyses presented by Scott & Stringfellow to the
Security board in connection with its fairness opinion dated as of such date.
Summary of Proposal. Scott & Stringfellow reviewed the terms of the
proposed transaction, including the $17.25 of consideration to be received from
F&M. Based on such consideration, Scott & Stringfellow calculated the premium
over the closing price of Security common stock on November 9, 1998, price to
book, price to tangible book, implied core deposit premium (defined as the
transaction value minus the tangible book value divided by core deposits) and
price to trailing twelve months' earnings multiple for Security. This analysis
yielded a premium over the closing price of Security common stock on November 9,
1998 of 50.0%, a price to book value multiple of 2.82x, a price to tangible book
value multiple of 2.86x, an implied core deposit premium of 26.40% and a price
to trailing twelve months' earnings multiple of 41.07x.
Comparable Acquisition Analysis. Scott & Stringfellow reviewed 12 merger
and acquisition transactions announced from January 1, 1997 to November 9, 1998
involving community commercial banking institutions in Virginia ("Comparable
Transactions"). Scott & Stringfellow compared the price to book value, price to
tangible book value, price to last twelve months' earnings, price to deposits,
price to assets, the implied core deposit premium, and the premium over the
seller's prior day closing price at the announcement date for such Comparable
Transactions to the proposed merger at announcement. In its analysis, Scott &
Stringfellow noted that Security had significantly more equity capital relative
to its assets than the acquired banks in the Comparable Transactions.
Accordingly, Scott & Stringfellow adjusted Security's equity such that its
equity-to-assets ratio equaled that of the aforementioned acquired banks. The
price to book, price to tangible book, and implied core deposit premium reflect
this adjustment.
F&M/ Comparable
Security Transactions
Deal Price/Book Value 2.82x 2.56x
Deal Price/Tangible Book 2.86x 2.59x
Deal Price/LTM Earnings 41.07x 22.82x
Deal Price/Deposits 33.93% 30.85%
Deal Price/Assets 28.85% 26.33%
Tangible Book Premium/Core 26.40% 21.83%
Deposits
Deal Price/Seller's Prior Day
Closing Price 50.00% 24.83%
19
<PAGE>
Pro Forma Merger Analysis. Scott & Stringfellow analyzed certain pro forma
effects of the merger based upon earnings forecasts of Security and F&M, as well
as estimated cost savings and revenue enhancements totaling $300,000 expected to
result from the merger. This analysis indicated that the transaction would be
dilutive to earnings per share of F&M in 1999 and accretive in each year
thereafter, once the projected cost savings and projected revenue enhancements
are realized, and that the merger would be modestly accretive to F&M's book
value and tangible book value per share. The actual results achieved by F&M may
vary from projected results.
1998 EPS Accretion (0.66%)
(Dilution)
1999 EPS Accretion (0.60%)
(Dilution)
Book Value Accretion 0.33%
Tangible Book Value 0.43%
Accretion
Present Value Analysis. Scott & Stringfellow performed an analysis to
determine a range of present values per share of Security common stock assuming
Security continued to operate as an independent community bank. This range was
determined by present valuing the estimated value of Security common stock at
the end of year 2003. Scott & Stringfellow used earnings estimates available
from Security's management for 1998. The net income projections were grown using
an earnings growth rate of 8% for years 1999 through 2003. The future value of
Security common stock at the end of year 2003 was determined by applying a range
of price-to-earnings multiples (15.0x to 17.0x) to year 2003 projected earnings.
These values were discounted to present value using discount rates of 11% to
13%, which Scott & Stringfellow viewed as the appropriate discount rate range
for a commercial bank with Security's risk characteristics. Based upon the above
assumptions, the value of Security common stock ranged from approximately $8.05
to $9.97 per share on a stand-alone basis.
Terminal Price/Earnings Multiple
-----------------------------------------------------------
Discount
Rate 15.0x 15.5x 16.0x 16.5x 17.0x
-------- ----- ----- ----- ----- -----
11.00% $8.80 $9.09 $9.38 $9.68 $9.97
11.50 8.60 8.89 9.18 9.46 9.75
12.00 8.41 8.69 8.97 9.25 9.53
12.50 8.23 8.50 8.78 9.05 9.32
13.00 8.05 8.31 8.58 8.85 9.12
20
<PAGE>
Ability to Pay Analysis. Scott & Stringfellow performed an analysis
comparing the merger to hypothetical acquisitions of Security by five banking
institutions other than F&M for consideration equivalent in value to the value
of the consideration proposed in the merger and reviewed certain publicly
available information with respect to such hypothetical acquirors. The analyses
used IBES median earnings estimates for the hypothetical acquirors and assumed
cost savings identical to those for F&M. Scott & Stringfellow analyzed the
effect of such transactions on the hypothetical acquirors' 1998 earnings. Scott
& Stringfellow calculated the earnings dilution effect to such hypothetical
acquirors, ranging between 0.21% and 4.68% dilution to 1998 earnings.
Bank A Bank B Bank C Bank D Bank E
-----------------------------------------------------
1998 EPS Accretion (0.21%) (0.36%) (0.57%) (2.04%) (4.68%)
(Dilution)
Analysis of Selected Comparable Companies. Scott & Stringfellow analyzed
the performance and financial condition of F&M relative to a group of commercial
banks consisting of FCNB Corp., F&M Bancorp, First Virginia Banks, Inc., Fulton
Financial Corporation, Keystone Financial, Inc., Mercantile Bankshares
Corporation, One Valley Bancorp, Inc., Sandy Spring Bancorp, Inc., Susquehanna
Bancshares, Inc., Union Bankshares Corporation, and United Bankshares, Inc. (the
"Bank Peer Group"). The financial ratios shown in the table below are as of
September 30, 1998; the market price multiples are based on market prices as of
November 9, 1998.
Bank Peer
F&M Group Average
--- -------------
Last 12 Months Net Interest Margin 4.70% 4.52%
Last 12 Months Efficiency Ratio 59.81 57.13
Last 12 Months Return on Avg. 1.30 1.31
Assets
Last 12 Months Return on Avg. 12.96 13.17
Equity
Tangible Equity / Assets 9.86 8.99
Equity / Assets 10.20 9.79
Risk Based Capital Ratio 16.83 15.14
Nonperforming Assets / Assets 1.15 0.45
Reserves / Nonperforming Assets 69.44 239.39
Market Price / Last 12 Months 19.55x 18.19x
Earnings
Market Price / 1998 Estimated 17.55x 16.40x
Earnings
Market Price / 1999 Estimated 15.92x 14.61x
Earnings
Market Price / Book Value 2.27x 2.25x
Current Dividend Yield 2.78% 2.75%
21
<PAGE>
Other Analyses. Scott & Stringfellow also reviewed, among other things,
selective investment research reports on, and earnings estimates for F&M and
analyzed available information regarding the ownership of F&M common stock. In
addition, Scott & Stringfellow prepared an overview of F&M's business, prepared
a summary of the historical financial performance of F&M, summarized F&M's
financial goals and objectives, and, based on publicly available information,
analyzed F&M's deposit market share and branch presence in the states in which
it operates.
In connection with its opinion dated as of the date of this proxy
statement, Scott & Stringfellow performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith.
The summary set forth above includes all the material factors considered
by Scott & Stringfellow in developing its opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefor, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed above, Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analysis and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. As a
whole, these various analyses contributed to Scott & Stringfellow's opinion that
the consideration is fair from a financial point of view to Security's
shareholders.
Pursuant to an engagement letter dated November 5, 1998 between Security
and Scott & Stringfellow, in exchange for its services, Security has agreed to
pay Scott & Stringfellow a transaction fee of $100,000, which is payable and
contingent upon the consummation of the merger. In the past, Scott &
Stringfellow has provided investment banking services to Security for which
services Scott & Stringfellow received customary fees. In the ordinary course of
its business, Scott & Stringfellow may actively trade the equity securities of
Security for its own account or the account of its customers, and, accordingly,
may at any time hold a long or short position in such securities.
Effective Date
If the merger is approved by the shareholders of Security, all required
governmental and other consents are obtained and the other conditions to the
merger are satisfied or waived, the merger will be consummated and made
effective on the date and at the time indicated on the certificate of merger
issued by the Virginia State Corporation Commission pursuant to the Virginia
Stock Corporation Act. See "The Merger - Representations and Warranties;
Conditions to the Merger" on page 23.
It is anticipated that the effective date of the merger will occur on or
about March 22, 1999.
Surrender of Stock Certificates
As soon as practicable after the merger, F&M will cause American Stock
Transfer & Trust Company, its exchange agent, to mail to you a letter of
transmittal and instructions for use to surrender the certificates representing
shares of Security common stock in exchange for certificates representing shares
of F&M common stock.
Security shareholders should not send in their certificates until they
receive such instructions.
22
<PAGE>
Promptly after surrender of one or more certificates for Security common
stock, together with a properly completed letter of transmittal, you will
receive a certificate or certificates representing the number of shares of F&M
common stock to which you are entitled and, where applicable, a check for the
amount payable in cash instead of issuing a fractional share. Lost, stolen,
mutilated or destroyed certificates will be treated in accordance with the
existing procedures of F&M.
After the merger, you will be entitled to vote the number of shares of F&M
common stock into which your Security common stock has been converted,
regardless of whether you have surrendered your Security certificates. The
merger agreement provides, however, that no dividend or distribution payable to
the holders of record of F&M common stock at or as of any time after the
effective date of the merger will be paid to the holder of any Security
certificate until such holder physically surrenders such certificate, promptly
after which time all such dividends or distributions will be paid, without
interest.
Representations and Warranties; Conditions to the Merger
The merger agreement contains representations and warranties by F&M and
Security, including representations and warranties with respect to their
individual organizations, authorizations to enter into the merger agreement,
capitalization, financial statements and pending and threatened litigation.
These representations and warranties, except as otherwise provided in the merger
agreement, will not survive the effective date of the merger.
The obligations of F&M and Security to consummate the merger are subject
to the following conditions, among others:
o approval and adoption of the merger agreement by the requisite shareholder
vote;
o receipt of all necessary regulatory approvals not conditioned or
restricted in a manner that, in the judgment of the boards of directors
of F&M or Security, materially adversely affects the economic or
business benefits of the merger so as to render inadvisable or unduly
burdensome consummation of the merger;
o the absence of certain actual or threatened proceedings before a
court or other governmental body relating to the merger;
o receipt of a fairness opinion from Scott & Stringfellow; and
o the receipt of an opinion of counsel as to certain federal income tax
consequences of the merger.
Also, under the terms of the merger agreement, F&M agreed that, following
the merger, it will indemnify those persons associated with Security who are
entitled to indemnification as of the effective date of the merger.
In addition, each company's obligation to effect the merger, unless
waived, is subject to:
o performance by the other company of its obligations under the merger
agreement;
o the accuracy, in all material respects, of the representations and
warranties of the other company contained in the merger agreement; and
23
<PAGE>
o the receipt of certain opinions and certificates from the other company.
Regulatory Approvals
As indicated above, the merger is conditioned on the prior approval of the
merger by the Board of Governors of the Federal Reserve System and the Virginia
State Corporation Commission. On January 12 and 13, 1999, applications were
filed with the Federal Reserve and the Virginia State Corporation Commission.
The applications were accepted but no approvals have been obtained. While we
cannot predict whether or when we will obtain all required regulatory approvals,
we see no reason why the approvals will not be obtained in a timely manner.
However, there can be no assurance that the necessary approvals will be
obtained, or that any approval will not be conditioned in a manner which makes
consummation of the merger, in the judgment of the board of directors of F&M or
Security, inadvisable or unduly burdensome.
Business Pending the Merger
Except with the prior consent of F&M, until the effective date of the
merger Security may not:
o conduct its operations except only in the ordinary and usual course,
consistent with past practice and to use its best efforts to maintain
its business organizations, employees and business relationships and
retain the services of its officers and key employees;
o take any action, engage in any transactions or enter into any
agreements which would adversely affect or delay in any material
respect the ability of F&M or Security to obtain the necessary
approvals, consents or waivers required to effect the merger or to
perform its covenants and agreements on a timely basis;
o issue any capital stock, except upon exercise of warrants or options
issued pursuant to existing employee benefits plans, programs or
arrangements or effect any stock split or otherwise change its
capitalization;
o enter into or amend any written employment or severance agreement or
similar arrangement with any of its directors, officers or employees,
or grant any salary or wage increase or increase any employee
compensation, except for normal individual increases to employees made
in the ordinary course of business consistent with past practice;
o enter into or amend, except as required by law, any employee benefit,
incentive or welfare arrangement, or any related trust agreement,
relating to any of its directors, officers or employees;
o incur any obligation or liability, make any pledge, or encumber any of
its assets, nor dispose of any of its assets in any other manner,
except in the ordinary course of business and for adequate value, or as
otherwise permitted in the merger agreement;
o change its lending, investment, asset/liability management or other
material banking policies in any material respect, except as may be
required by law;
o amend its articles of incorporation or bylaws;
24
<PAGE>
o declare or pay dividends on its capital stock; or
o purchase or redeem any of its capital stock.
Pending consummation of the merger, F&M has agreed that F&M and its
subsidiary banks will operate their respective businesses in the ordinary course
and use their best efforts to preserve their respective properties, business and
customer and employee relationships.
No Solicitation; Board Action
Security has agreed not to solicit or encourage inquiries or proposals
with respect to, furnish any information relating to, or participate in any
negotiations regarding any merger, consolidation, share exchange, joint venture,
business combination or similar transaction involving Security, or any purchase
of all or any material portion of the assets of Security (an "Acquisition
Transaction").
Notwithstanding the above-described non-solicitation provision, the
Security board may furnish information to, or enter into discussions or
negotiations with, any person or entity that makes an unsolicited, written bona
fide proposal regarding an Acquisition Transaction if, and only to the extent
that:
o the Security board concludes in good faith, after consultation with and
based upon the advice of outside counsel, that it is required to
furnish such information or enter into such discussions or negotiations
in order to comply with its fiduciary duties to shareholders under
applicable law;
o prior to taking such action, Security receives from such person or
entity an executed confidentiality agreement; and
o the Security board concludes in good faith that the proposal regarding
the Acquisition Transaction contains an offer of consideration that is
superior to the consideration set forth in the merger agreement.
Security has also agreed that it shall immediately notify F&M orally and
in writing of the receipt by it of any proposal or inquiry regarding an
Acquisition Transaction, the material terms and conditions of such proposal or
inquiry, and the identity of the person making any such proposal or inquiry.
Waiver, Amendment and Termination
At any time on or before the effective date of the merger, any term or
condition of the merger, except for the general conditions set forth in Section
5.1(a) - (d) of the merger agreement, may be waived by the party which is
entitled to the benefits thereof, without shareholder approval, to the extent
permitted under applicable law. The merger agreement may be amended at any time
before the merger by agreement of the parties whether before or after the
special meeting, except that the exchange ratio shall not be changed after
approval of the merger agreement by the Security shareholders. Any material
change in a material term of the merger agreement would require a resolicitation
of Security's shareholders. Such a material change would include, but not be
limited to, a change in the tax consequences to Security's shareholders.
25
<PAGE>
The merger agreement may be terminated by F&M or Security, whether before
or after the approval of the merger by the shareholders of Security:
o by mutual consent of Security and F&M;
o unilaterally by Security or F&M, if the merger has not occurred on or
before September 30, 1999, except that the party whose failure to
perform any obligation under the merger agreement is the cause of the
delay may not terminate the merger based upon the delay; or
o unilaterally by Security or F&M if the satisfaction in any material
respect of one or more conditions to the obligation of that party is
rendered impossible of satisfaction. In the event of termination, the
merger agreement shall become null and void, except that certain
provisions thereof relating to expenses and confidentiality of
information exchanged between the parties shall survive any such
termination.
26
<PAGE>
Resales of F&M Common Stock
All shares of F&M common stock received by you in connection with the
merger will be freely transferable, except that F&M common stock received by
persons who are deemed to be "affiliates" of Security for purposes of Rule 145
under the Securities Act of 1933. To the best knowledge of Security and F&M, the
only persons who may be deemed to be affiliates of Security subject to these
limitations are the directors and executive officers of Security.
Accounting Treatment
We anticipate that the merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, recorded assets and liabilities of F&M and Security are carried
forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Security for the entire fiscal year
in which the merger occurs, and the reported income of the separate corporations
for prior periods will be combined. No recognition of goodwill in the
combination is required of any party to the merger.
For the merger to qualify as a pooling of interests, it must satisfy a
number of conditions including that substantially all of the Security common
stock be exchanged for F&M common stock. If any of the conditions to pooling of
interests accounting is not satisfied, then the merger would not qualify for
pooling of interests accounting treatment, and a condition to the obligation of
F&M to consummate the merger would not be satisfied (unless, F&M took action
which prevented the merger from qualifying as a pooling of interests, in which
case it will not be a condition to the merger). Each of F&M and Security have
agreed that they will use their respective best efforts to ensure that the
merger will qualify for pooling of interests accounting treatment. In addition,
certain affiliates of F&M and Security have agreed that they will not sell any
F&M common stock or Security common stock within 30 days before the effective
date of the merger, nor sell any F&M common stock until such time as F&M has
published financial results covering at least 30 days of the combined operations
of F&M and Security after the merger.
Interests of Certain Persons in the Merger
Certain members of Security's management, as well as certain members of
the Security board of directors, have interests in the merger in addition to
their interests as shareholders of Security. These include, provisions in the
merger agreement relating to indemnification of directors and officers of
Security, the treatment of outstanding options with respect to Security common
stock and eligibility for certain F&M employee benefits. In each case, the
Security board was aware of these potential interests, and considered them,
among other matters, in approving the merger agreement and the transactions
contemplated thereby.
Indemnification. F&M has generally agreed to indemnify, for a period of
six years after the merger, the officers and directors of Security against
certain liabilities arising before the effective date of the merger. F&M also
has agreed to provide directors' and officers' liability insurance for the
present officers and directors of Security for a period of three years after the
merger.
Directors of F&M Bank-Northern Virginia. Four of the current directors of
Security will become directors of F&M Bank-Northern Virginia upon consummation
of the merger or as soon thereafter as practicable. Those directors will each
receive $225 for every board meeting they attend. Directors of Security who are
not appointed to the board of directors of F&M Bank-Northern Virginia will be
offered a position on F&M Bank-Northern Virginia's advisory board and will be
paid a quarterly fee of $100 for their services.
27
<PAGE>
Stock Options. Certain directors and officers of Security hold stock
options under Security's 1996 Director Stock Option Plan and Security's 1996
Employee Stock Option Plan to acquire an aggregate of 77,100 shares of Security
common stock at exercise prices ranging from $8.00 to $13.12 per share. These
options, if not exercised before the merger, will be converted into options to
acquire shares of F&M common stock, appropriately adjusted to reflect the
exchange ratio.
Employment Agreement. Mr. Danny R. May, the President and Chief Executive
Officer of Security, will receive payments totaling $156,661 under his existing
employment agreement upon the merger. Mr. May's employment agreement provides
for such a severance allowance if there is a change of ownership or control of
Security and his job duties are substantially reduced. His agreement also
provides that F&M must continue for a two year period his medical and other
insurance coverage. Mr. May has accepted F&M's offer to join F&M Bank-Northern
Virginia as a senior vice president. He will not have an employment or severance
agreement with F&M.
Employee and Benefit Plans. The merger agreement provides that all
officers and employees of Security will be offered positions with F&M
Bank-Northern Virginia at not less than the salaries they have with Security
prior to the merger. As soon as administratively practicable following the
merger, employees of Security will be entitled to participate in the F&M
pension, health and welfare benefit and similar plans on the same terms and
conditions as employees of F&M. Employees of Security will receive credit for
their years of service to Security for participation and vesting purposes only.
The Option Agreement
The option agreement was entered into as a condition to F&M's willingness
to enter into an agreement in principle with Security as to the terms of the
merger and to increase the probability of the merger. Exercise of the F&M option
may make the acquisition of a controlling interest in Security more expensive to
any prospective acquiror other than F&M, even if such an acquisition would be
beneficial to you. The existence of the F&M option is intended to make it less
likely that a prospective acquiror, other than F&M, will seek a business
combination with Security. The following is a brief summary of the option
agreement and is qualified in its entirety by reference to the option agreement,
a copy of which is attached to this proxy statement/prospectus as Appendix II
and incorporated by reference herein.
The option agreement permits the exercise by F&M of an option to acquire
up to 191,300 shares of Security common stock at a price of $11.00 per share,
subject to adjustment upon the occurrence of certain events described below. The
shares subject to the F&M option represent approximately 19.9% of the
outstanding shares of Security common stock as of the date of the option
agreement, November 10, 1998.
F&M may exercise its option, in whole or in part, at any time or from time
to time, upon or after the occurrence of a "Purchase Event." As used in the
option agreement, a "Purchase Event" means:
o Security shall have entered into an agreement with a person (other than
F&M or its affiliates) to: (i) acquire, merge or consolidate with, or
enter into any similar transaction with Security, (ii) purchase, lease
or otherwise acquire all or substantially all of the assets of
Security, or (iii) purchase or otherwise acquire (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing more than 10% of the voting power of Security;
28
<PAGE>
o any person shall have acquired beneficial ownership of more than 20% of
the outstanding shares of Security common stock; or
o a bona fide proposal is made by any person (other than F&M or its
affiliates) by public announcement or written communication that is or
becomes the subject of public disclosure to acquire, merge or
consolidate with, or enter into any similar transaction with Security,
and following such proposal the shareholders of Security vote not to
approve the merger agreement.
Security is required to notify F&M upon the occurrence of a transaction,
offer or event giving rise to a Purchase Event. In the event F&M wishes to
exercise the option, it must send Security written notice specifying (a) the
total number of shares it will purchase and (b) the place and date not earlier
than three business days nor later than 60 business days after the date on which
such notice is given for the closing of the purchase. If prior notification to,
or approval of, any federal or state regulatory agency is required, F&M will
promptly file the required notice or application for approval and the period of
time that otherwise would run pursuant to such notice period will run instead
from the date on which the last required notification period has expired or has
been terminated or such approvals have been obtained and any requisite waiting
period has passed.
F&M's option will expire and terminate, to the extent not previously
exercised, upon the earlier of:
o the effective date of the merger;
o the date on which the merger agreement is terminated, other than a
termination based upon a material breach by Security of any covenant
in the merger agreement or the failure of Security to obtain
shareholder approval of the transactions contemplated by the merger
agreement by the vote required by applicable law, in either case
following the occurrence of a Purchase Event; or
o twelve months after the merger agreement is terminated based upon a
material breach by Security of certain specified covenants or the
failure of Security to obtain shareholder approval of the transactions
contemplated by the merger agreement by the vote required under
applicable law, in either case following the occurrence of a Purchase
Event.
If Security's capitalization changes by reason of stock dividend, split-up
merger, recapitalization, combination, exchange of shares or the like, the
number of shares subject to the option and the purchase price per share thereof
will be adjusted so that the economic value of the option remains unaltered.
Material Federal Income Tax Consequences of the Merger
The following is a discussion of all material federal income tax
consequences of the merger under the Internal Revenue Code to Security
shareholders who receive F&M common stock solely in exchange for Security common
stock and cash instead of fractional shares. The discussion does not deal with
all aspects of federal taxation that may be relevant to particular Security
29
<PAGE>
shareholders. Certain tax consequences of the merger may vary depending upon the
particular circumstances of each Security shareholder and other factors.
You are urged to consult with your tax advisor to determine the particular
tax consequences of the merger to you.
This summary is based on current law and the advice of LeClair Ryan, legal
counsel to F&M. The advice in this summary is based on, among other things,
certain customary assumptions and representations relating to certain facts and
circumstances of, and the intentions of the parties to, the merger. Neither F&M
nor Security has requested a ruling from the Internal Revenue Service in
connection with the merger. To meet a condition to consummation of the merger,
F&M and Security will receive from LeClair Ryan, counsel to F&M, an opinion as
to certain federal income tax consequences of the merger. Such opinion is not
binding on the Internal Revenue Service.
In the opinion of counsel, the merger will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code, if consummated
in the manner set forth in the merger agreement. Accordingly, among other
things, in the opinion of such counsel:
o The merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
o No gain or loss will be recognized by F&M or Security as a result of the
merger;
o No gain or loss will be recognized by a Security shareholder to the
extent he or she receives F&M common stock solely in exchange for his
Security common stock pursuant to the merger;
o The tax basis of the F&M common stock received by each Security
shareholder will be the same as the tax basis of the Security common
stock surrendered in exchange therefor; and
o The holding period for each share of F&M common stock received by each
Security shareholder in exchange for Security common stock will include
the period for which such shareholder held the Security common stock
exchanged therefor, provided such Security common stock is a capital
asset in the hands of such holder at the effective date.
Any cash received by you instead of fractional shares could result in
taxable income to you. The receipt of such cash will generally be treated as a
sale or exchange of the stock resulting in capital gain or loss measured by the
difference between the cash received and an allocable portion of the basis of
the stock relinquished. The receipt of such cash may be treated as a dividend
and taxed as ordinary income in certain limited situations.
Absence of Appraisal Rights
Under Section 6.1-43 of the Virginia Banking Act, shareholders of Security
will not be entitled to dissent from the merger and obtain the judicially
determined fair value of their shares of Security.
Certain Differences in Rights of Shareholders
Both F&M and Security are corporations subject to the provisions of the
Virginia SCA. Your shareholder rights are presently governed by Security's
30
<PAGE>
articles of incorporation and bylaws. Upon consummation of the merger and your
becoming a shareholder of F&M, your shareholder rights will be governed by the
articles of incorporation and bylaws of F&M.
There are no material differences between the rights of a Security
shareholder under Security's articles of incorporation and bylaws, on the one
hand, and the rights of an F&M shareholder under the articles of incorporation
and bylaws of F&M, on the other hand, except as disclosed in the section
"Comparative Rights of Shareholders" on page 35.
Expenses of the Merger
In general, whether or not the merger is consummated, Security and F&M
will pay their own expenses incident to preparing, entering into and carrying
out the merger agreement, and preparing and filing the registration statement of
which this proxy statement/prospectus is a part. F&M will, however, pay the
expenses of printing and mailing this proxy statement/prospectus, and may make
payment under circumstances involving willful and material breaches of certain
provisions of the merger agreement.
If either party willfully and materially breaches the merger agreement,
that party must pay the costs associated with this transaction incurred by the
non-breaching party. If the merger agreement is terminated by Security because
it is not approved by Security shareholders, Security must pay 50% of F&M's
costs in this transaction, up to $50,000.
Cautionary Statement Concerning Forward-Looking Statements
This proxy statement/prospectus, including information included or
incorporated by reference herein, contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and businesses of each of F&M and Security. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
o competitive pressure in the banking industry increases significantly;
o changes in the interest rate environment reduce margins;
o general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality;
o changes occur in the regulatory environment;
o changes occur in business conditions and inflation; and
o changes occur in the securities markets.
MARKET PRICES AND DIVIDENDS
Market Prices
F&M common stock is listed and traded on the NYSE under the symbol "FMN."
Since June 24, 1996, Security common stock has traded on the Nasdaq SmallCap
Market under the symbol "SecurityM." Before that, Security common stock was
quoted on the OTC Bulletin Board.
31
<PAGE>
The following tables provide: (a) in the case of F&M, the high and low
closing sales prices for F&M common stock on the NYSE for the periods indicated,
and (b) in the case of Security, the high and low closing sales prices on the
Nasdaq SmallCap Market.
32
<PAGE>
F&M
Closing Sales Prices
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
High Low High Low High Low
1st Quarter (through
January 28)................ $29.94 $27.13 $36.25 $31.75 $22.88 $19.63
2nd Quarter................ -- -- 34.31 32.00 26.38 19.88
3rd Quarter................ -- -- 31.56 26.13 30.44 26.00
4th Quarter................ -- -- 31.69 25.06 36.25 28.56
The closing price of F&M common stock on the NYSE on November 9, 1998, the
last full trading day preceding the public announcement of the proposed merger,
was $29.6875 per share. The closing price of F&M common stock on the NYSE on
January 28, 1999, the latest practicable date before the date of this proxy
statement/prospectus was $28.875 per share.
Security
Closing Sales Prices
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
High Low High Low High Low
1st Quarter (through
January 28)................ $16.00 $15.75 $13.75 $12.50 $13.88 $9.75
2nd Quarter ............... -- -- 13.50 12.00 10.00 9.38
3rd Quarter................ -- -- 12.38 11.25 10.00 9.13
4th Quarter................ -- -- 16.00 10.50 10.00 9.00
As of December 31, 1998, there were 8,190 record holders of F&M common
stock. As of the record date, there were approximately 645 record holders of
Security common stock.
Dividends
The following table reflects the cash dividends declared per share during
each quarter on F&M common stock for the periods indicated. Security has not
declared any cash dividends.
The amounts shown for F&M have not been restated and adjusted to reflect
the acquisition on April 1, 1998 of Peoples Bank of Virginia and the acquisition
on June 1, 1998 of The Bank of Alexandria.
F&M
1998 1997
1st Quarter........................... $0.185 $0.180
2nd Quarter........................... 0.185 0.180
3rd Quarter........................... 0.195 0.185
4th Quarter........................... 0.195 0.185
F&M or F&M Bank-Winchester has paid regular cash dividends for
more than 56 consecutive years.
33
<PAGE>
F&M is a legal entity separate and distinct from its subsidiaries, and its
revenues depend primarily on the payment of dividends from its subsidiary banks.
F&M's subsidiary banks are subject to certain legal restrictions on the amount
of dividends they are permitted to pay to F&M. For example, a Virginia chartered
bank, of which there are seven within the F&M system, is prohibited from paying
a dividend that would impair its paid-in capital. In addition, the Virginia
State Corporation Commission may limit the payment by any Virginia chartered
bank if it determines that the limitation is in the public interest and is
necessary to ensure the bank's financial soundness.
Under current federal law, insured depository institutions, such as F&M's
bank subsidiaries, are prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the institution
would become "undercapitalized" (as such term is defined in federal law). Based
on F&M's subsidiary banks' current financial condition, F&M does not expect that
this provision will have any impact on its ability to obtain dividends from its
insured depository institution subsidiaries.
As a result of these legal restrictions, there can be no assurance that
dividends would be paid in the future by F&M's bank subsidiaries. The final
determination of the timing, amount and payment of dividends on F&M common stock
is at the discretion of F&M's board of directors and will depend upon the
earnings of F&M and its subsidiaries, principally its subsidiary banks, the
financial condition of F&M and other factors, including general economic
conditions and applicable governmental regulations and policies.
SECURITY BANK CORPORATION
General
Financial and other information relating to Security is included in
Security's 1997 Annual Report to Shareholders and its Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998, copies of which are attached as
Appendices IV and V. The audited financial statements of Security as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 are included in Security's 1997 Annual Report to Shareholders. See
"Where You Can Find More Information" on page 41.
History and Business
Security was organized in 1986. As of September 30, 1998, Security had
total assets of $60.4 million, total deposits of $51.4 million, and total
shareholder's equity of $8.1 million.
Security is a locally oriented community bank which seeks to serve the
needs of small and medium size businesses, professionals and consumers in the
City of Manassas and the surrounding area, which area constitutes Security's
primary service area. Security offers a wide range of commercial banking
services to businesses and professionals in its service area, as well as
comprehensive deposit and lending services for consumers. Security's deposits
are insured to the fullest extent provided by law by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation.
Security operates two branch locations in Manassas, Virginia. Each branch
has an automated teller machine, or ATM. At September 30, 1998, Security
employed 23 full-time and 6 part-time employees.
34
<PAGE>
Competition
In attracting deposits and making loans, Security encounters competition
from other institutions, including larger commercial banking organizations,
savings banks, credit unions, other financial institutions and non-bank
financial service companies serving Security's service area. Competitors include
major financial companies whose substantially greater resources may afford them
a marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. Because of the
deregulation of the financial service industry and the absence of interest rate
controls on deposits, Security anticipates that it will face continuing
competition from all of these institutions in the future. Additionally, as a
result of state and federal legislation regarding reduced restrictions on
interstate banking, Security has faced additional competition from institutions
outside Virginia which have taken advantage of such legislation to acquire or
establish banks or branches in Virginia. Additional changes in the financial
services industry, including rapid technology changes, may act as a catalyst for
further basic structural change within the financial services industry and may
result in additional competition.
Security Ownership of Management
The following table provides information as of December 31, 1998 regarding
the number of shares of Security common stock beneficially owned by (a) all
directors and executive officers of Security, (b) all directors and executive
officers of Security as a group, and (c) those persons or groups that own five
percent or more of the outstanding shares of Security common stock. For the
purposes of this table, beneficial ownership has been determined in accordance
with the provisions of Rule 13d-3 under the Securities Exchange Act of 1934
under which, in general, a person is deemed to be a beneficial owner of a
security if he has or shares the power to vote or direct the voting of the
security or the power to dispose or direct disposition of the security, or if he
has the right to acquire beneficial ownership of the security within 60 days.
Common Stock
Name Beneficially Owned Percent of Class
- ---- ------------------ ----------------
Director
John T. DeBell, Sr...... 11,832 (1) 1.20%
John O. Gregory......... 36,060 (2) 3.66
Michael C. Martin....... 9,417 (3) 0.96
Danny R. May............ 33,305 (4) 3.34
Harry J. Parrish II..... 14,580 (5) 1.48
Richard J. Ratcliffe.... 10,059 (6) 1.02
Danny G. Snow........... 133,486 (7) 13.56
Kenneth B. Swenson...... 11,639 (8) 1.18
All executive officers and
directors as a group
(10 persons).......... 270,128 25.77
Robert H. Digges
1700 N. Albemarle Street
McLean, Virginia 22101.. 54,934 (9) 5.73
Financial Institution
Partners,
L.P., and Hovde Capital,
Inc. 68,780 7.17
1629 Colonial Parkway
Inverness, Illinois 60067
35
<PAGE>
- ----------------
(1)Includes 2,206 shares held by Mr. DeBell in a self-directed IRA, 6,000
vested option shares, and 2,240 shares held by Bengtson, DeBell and Elkin
for which Mr. DeBell exercises voting and investment power. Does not
include 976 shares held by Mr. DeBell's spouse and 2,679 shares held by
Mr. DeBell's spouse in a self-directed IRA.
(2)Includes 22,089 shares held jointly by Mr. Gregory and his spouse, 3,805
shares held by Mr. Gregory in a self-directed IRA, and 6,000 vested option
shares. Does not include 3,600 shares held by Mr. Gregory's spouse.
(3)Includes 332 shares held as custodian for a minor child, 1,693 shares
held by Mr. Martin in a self-directed IRA, and 6,000 vested option shares.
(4)Includes 12,580 shares held in Mr. May's self-directed IRA and 20,000
vested option shares.
(5)Includes 2,160 shares held as custodian for a minor child, 6,000 vested
option shares, and 420 shares held by a minor child. Does not include
1,440 shares held by Mr. Parrish's spouse.
(6)Includes 3,000 shares held jointly by Mr. Ratcliffe and his spouse, 300
shares held jointly by Mr. Ratcliffe and Ann R. Harrover, 134 shares held
as custodian for a minor child, 625 shares held in Mr. Ratcliffe's
self-directed IRA, and 6,000 vested option shares.
(7)Includes 38,667 shares held in Mr. Snow's self-directed IRA, 6,000 vested
option shares, 2,500 shares held jointly by Mr. Snow and Lynne Snow,
20,835 shares held by Ice Components, Inc. for which Mr. Snow exercises
voting and investment power.
(8)Includes 4,225 shares held jointly by Mr. Swenson and his spouse and
6,000 vested option shares.
(9)All shares are held in Mr. Digges' Keogh account. Does not include 10,000
shares held by Mr. Digges' spouse.
BUSINESS OF F&M
History and Business
F&M was formed in 1969 to serve as the parent holding company of its then
sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired eighteen banks, which expanded its market area
and increased market share in Virginia and West Virginia. F&M has nine
subsidiary banks that operate 120 banking offices offering a full range of
banking services principally to individuals and small and middle-market
businesses in the Shenandoah Valley, central Virginia, Southside Virginia, the
eastern panhandle of West Virginia and the Washington, D.C. metropolitan area.
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of the subsidiary banks. F&M has consolidated the operations of the trust
departments of its subsidiary banks in Virginia in F&M Trust Company. F&M also
operates Big Apple Mortgage which engages in residential mortgage origination
and servicing in the Shenandoah Valley and the eastern panhandle of West
Virginia.
F&M has maintained its community orientation by allowing its subsidiary
banks latitude to tailor products and services to meet community and customer
needs. While F&M has preserved the autonomy of its subsidiary banks, it has
established system-wide policies governing, among other things, lending
practices, credit analysis and approval procedures, as well as guidelines for
deposit pricing and investment portfolio management. In addition, F&M has
established a centralized loan review team that regularly performs a detailed,
on-site review and analysis of each subsidiary bank's loan portfolio to ensure
the consistent application of credit policies and procedures system-wide. One or
more senior holding company officers serve on the board of directors of each
subsidiary bank to monitor operations and to serve as a liaison to F&M.
36
<PAGE>
F&M currently operates in seven market regions: the Shenandoah Valley and
Loudoun County; the eastern panhandle of West Virginia;
Charlottesville/Albemarle County and surrounding areas; Greenville County in
southside Virginia; suburban Richmond, primarily Henrico and Chesterfield
Counties; the northern Virginia area that includes the City of Alexandria, the
eastern portions of Fairfax and Prince William Counties; Warrenton and the
surrounding Fauquier County area; and Montgomery and Prince George's Counties in
Maryland.
At September 30, 1998, F&M had total consolidated assets of approximately
$2.8 billion, total consolidated deposits through its banking subsidiaries of
approximately $2.3 billion and consolidated shareholders' equity of
approximately $281.4 million.
F&M's Acquisition Program
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since 1988, F&M has acquired
approximately $1.4 billion in assets and approximately $1.2 billion in deposits
through fifteen bank acquisitions. Management believes there are additional
opportunities to acquire financial institutions or to acquire assets and
deposits that will allow F&M to enter new markets or increase market share in
existing markets. Management intends to pursue acquisition opportunities in
strategic markets where its managerial, operational and capital resources will
enhance the performance of acquired institutions and may, after the date of this
proxy statement/prospectus, enter into agreements to acquire one or more
financial institutions. There can be no assurance that F&M will be able to
successfully effect any additional acquisition activity, or that any such
acquisition activity will have a positive effect on the value of shares of F&M
common stock.
For additional information about F&M's business, see "Where You Can Find
More Information" on page 41.
COMPARATIVE RIGHTS OF SHAREHOLDERS
General
F&M and Security are corporations subject to the provisions of the
Virginia Stock Corporation Act (the "Virginia SCA"). Your rights as a
shareholder of Security are governed by Security's articles of incorporation and
bylaws and by the Virginia SCA. Upon consummation of the merger, you will become
a shareholder of F&M, and as such your shareholder rights will then be governed
by the articles of incorporation and bylaws of F&M and by the Virginia SCA.
The following is a summary of the material differences in the rights of
shareholders of Security and F&M. This summary is qualified in its entirety by
reference to the articles of incorporation and bylaws of F&M and Security and to
the Virginia SCA.
Authorized Capital
F&M. F&M is authorized to issue 30,000,000 shares of common stock, par
value $2.00 per share, of which 21,871,674 shares were issued and outstanding as
of December 31, 1998, and 5,000,000 shares of serial preferred stock, without
par value, of which no shares were issued and outstanding as of December 31,
1998. F&M's articles of incorporation authorize the F&M board, without
shareholder approval, to fix the preferences, limitations and relative rights of
37
<PAGE>
the preferred stock and to establish series of such preferred stock and
determine the variations between each series. If any shares of preferred stock
are issued, the rights of holders of F&M common stock would be subject to the
rights and preferences conferred to holders of such preferred stock. See
"Description of F&M Capital Stock" on page 39 for additional information.
Security. Security is authorized to issue 3,000,000 shares of Security
common stock, par value $5.00 per share, of which 978,420 shares were issued and
outstanding as of December 31, 1998. Security does not have an authorized class
of preferred stock.
Dividend Rights
F&M. The holders of F&M common stock are entitled to share ratably in
dividends when and as declared by the F&M board of directors out of legally
available funds. One of the principal sources of income to F&M is dividends from
its subsidiary banks. For a description of certain restrictions on the payment
of dividends by banks, see "Market Prices and Dividends" on page 30. F&M's
articles of incorporation permit the F&M board to issue preferred stock with
terms set by the F&M Board, which terms may include the right to receive
dividends ahead of the holders of F&M common stock. No shares of preferred stock
are presently outstanding.
Security. The holders of Security common stock also are entitled to share
ratably in dividends when and as declared by the Security board of directors out
of legally available funds. For a description of certain restrictions on the
payment of dividends by banks, see "Market Prices and Dividends" on page 30.
Voting Rights
The holders of both F&M and Security common stock have one vote for each
share held on any matter presented for consideration at a shareholder meeting.
Neither the holders of F&M nor Security common stock are entitled to cumulative
voting in the election of directors.
Directors and Classes of Directors
F&M. All of F&M's directors are elected each year. F&M's articles of
incorporation do not include a provision relating to the removal of directors.
Accordingly, the removal of F&M directors is governed by the Virginia SCA which
provides that shareholders may remove directors with or without cause if, in the
case of F&M, the number of votes cast to remove him constitutes a majority of
the outstanding shares of F&M common stock.
Security. All of Security's directors are elected each year. Pursuant to
Security's bylaws, Security's directors may be removed with or without cause by
a majority vote of the Security shareholders, or by a unanimous vote of the
remaining directors.
Anti-Takeover Provisions
Certain provisions of the Virginia SCA and the articles of incorporation
and bylaws of F&M may discourage an attempt to acquire control of F&M that a
majority of F&M's shareholders determined was in their best interests. These
provisions also may render the removal of one or all directors more difficult or
deter or delay corporate changes of control that the F&M board did not approve.
Authorized Preferred Stock. The articles of incorporation of F&M authorize
the issuance of preferred stock. The F&M board may, subject to applicable law
and the rules of the NYSE, authorize the issuance of preferred stock at such
times, for such purposes and for such consideration as it may deem advisable
38
<PAGE>
without further shareholder approval. The issuance of preferred stock under
certain circumstances may have the effect of discouraging an attempt by a third
party to acquire control of F&M by, for example, authorizing the issuance of a
series of preferred stock with rights and preferences designed to impede the
proposed transaction.
Supermajority Voting Provisions. The Virginia SCA provides that, unless a
corporation's articles of incorporation provide for a higher or lower vote,
certain significant corporate actions must be approved by the affirmative vote
of the holders of more than two-thirds of the votes entitled to be cast on the
matter. Corporate actions requiring a two-thirds vote include amendments to a
corporation's articles of incorporation, adoption of plans of merger or
exchange, sales of all or substantially all of a corporation's assets other than
in the ordinary course of business and adoption of plans of dissolution
("Fundamental Actions"). The Virginia SCA provides that a corporation's articles
may either increase the vote required to approve Fundamental Actions or may
decrease the required vote to not less than a majority of the votes entitled to
be cast.
The articles of incorporation of F&M provide that a Fundamental Action
shall be approved by a vote of a majority of all votes entitled to be cast on
such transactions by each voting group entitled to vote on the transaction,
provided that the transaction has been approved and recommended by at least
two-thirds of the directors in office at the time of such approval and
recommendation. If the transaction is not so approved and recommended, then the
transaction shall be approved by the vote of 80% or more of all votes entitled
to be cast on such transactions by each voting group entitled to vote on the
transaction.
The provisions of the articles of incorporation of F&M and the Virginia
SCA could tend to make the acquisition of F&M more difficult to accomplish
without the cooperation or favorable recommendation of the F&M board.
Shareholder Meetings. Shareholders of F&M may not request that a special
meeting of shareholders be called, while shareholders owning 25% or more of the
issued and outstanding shares of Security may call a special meeting of
shareholders.
Virginia Anti-Takeover Statutes. Virginia has two anti-takeover
statutes in force, the Affiliated Transaction Statute and the Control Share
Acquisitions Statute.
Affiliated Transactions. The Virginia SCA contains provisions governing
"affiliated transactions." These include various transactions such as mergers,
share exchanges, sales, leases, or other dispositions of material assets,
issuances of securities, dissolutions, and similar transactions with an
"interested shareholder." An interested shareholder is generally the beneficial
owner of more than 10% of any class of a corporation's outstanding voting
shares. During the three years following the date a shareholder becomes an
interested shareholder, any affiliated transaction with the interested
shareholder must be approved by both a majority of the "disinterested directors"
(those directors who were directors before the interested shareholder became an
interested shareholder or who were recommended for election by a majority of
disinterested directors) and by the affirmative vote of the holders of
two-thirds of the corporation's voting shares other than shares beneficially
owned by the interested shareholder. The foregoing requirements do not apply to
affiliated transactions if, among other things, a majority of the disinterested
directors approve the interested shareholder's acquisition of voting shares
making such a person an interested shareholder before such acquisition.
Beginning three years after the shareholder becomes an interested shareholder,
the corporation may engage in an affiliated transaction with the interested
shareholder if:
39
<PAGE>
o the transaction is approved by the holders of two-thirds of the
corporation's voting shares, other than shares beneficially owned by
the interested shareholder,
o the affiliated transaction has been approved by a majority of the
disinterested directors, or
o subject to certain additional requirements, in the affiliated
transaction the holders of each class or series of voting shares will
receive consideration meeting specified fair price and other
requirements designed to ensure that all shareholders receive fair and
equivalent consideration, regardless of when they tendered their
shares.
Control Share Acquisitions. Under the Virginia SCA's control share
acquisitions law, voting rights of shares of stock of a Virginia corporation
acquired by an acquiring person or other entity at ownership levels of 20%, 33
1/3%, and 50% of the outstanding shares may, under certain circumstances, be
denied. The voting rights may be denied:
o unless conferred by a special shareholder vote of a majority of the
outstanding shares entitled to vote for directors, other than shares
held by the acquiring person and officers and directors of the
corporation, or
o among other exceptions, such acquisition of shares is made pursuant to
a merger agreement with the corporation or the corporation's articles
of incorporation or by-laws permit the acquisition of such shares
before the acquiring person's acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws,
the statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than 50% of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value."
The provisions of the Affiliated Transactions Statute and the Control
Share Acquisition Statute are only applicable to public corporations that have
more than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute, but
F&M has not done so.
Director and Officer Exculpation
The Virginia SCA provides that in any proceeding brought by or in the
right of a corporation or brought by or on behalf of shareholders of the
corporation, the damages assessed against an officer or director arising out of
a single transaction, occurrence or course of conduct may not exceed the lesser
of (a) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
as a limitation on or elimination of the liability of the officer or director,
or (b) the greater of (1) $100,000 or (2) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
The articles of incorporation of F&M provide that to the full extent that
the Virginia SCA permits the limitation or elimination of the liability of
40
<PAGE>
directors or officers, a director or officer of F&M shall not be liable to F&M
or its shareholders for monetary damages in excess of one dollar. There is no
similar provision in the articles of incorporation of Security.
Indemnification
The articles of incorporation of F&M provide that to the full extent
permitted by the Virginia SCA and any other applicable law, F&M is required to
indemnify a director or officer of F&M who is or was a party to any proceeding
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, partnership, joint venture, trust,
employee benefit plan or other enterprise. The F&M board of directors is
empowered, by majority vote of a quorum of disinterested directors, to contract
in advance to indemnify any director or officer.
The articles of incorporation of Security do not include a provision with
respect to the indemnification of officers and directors. However, as permitted
by Security's bylaws, each director of Security has entered into an
indemnification agreement with Security whereby Security is required to
indemnify a director who is, or becomes a party, or is threatened to be made a
party to, any legal proceeding by reason of the fact the he is or was a director
of Security.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue 30,000,000 shares of common stock, par value
$2.00 per share, and 5,000,000 shares of serial preferred stock, without par
value, which may be issued in series with such powers, designations, and rights
as may be established from time to time by the Board of Directors. On December
31, 1998, F&M had issued and outstanding 21,871,674 shares of F&M common stock
held by 8,190 shareholders of record. All outstanding shares of F&M common stock
are fully paid and nonassessable. No shares of preferred stock have been issued.
Common Stock
Holders of shares of F&M common stock are entitled to receive dividends
when and as declared by the board of directors out of funds legally available
therefor. F&M's ability to pay dividends is dependent upon its earnings and
financial condition and certain legal requirements. Specifically, the Federal
Reserve has stated that bank holding companies should not pay dividends except
out of current earnings and unless the prospective rate of earnings retention by
the company appears consistent with its capital needs, asset quality and overall
financial condition. In addition, Virginia law precludes any distribution to
shareholders if, after giving it effect, (a) F&M would not be able to pay its
debts as they become due in the usual course of business; or (b) F&M's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed, if F&M were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. Upon the
liquidation, dissolution or winding up of F&M, whether voluntary or involuntary,
holders of F&M common stock are entitled to share ratably, after satisfaction in
full of all liabilities, in all remaining assets of F&M available for
distribution. The dividend and liquidation rights of F&M common stock are
subject to the rights of any preferred stock that may be issued and outstanding.
Holders of F&M common stock are entitled to one vote per share on all
matters submitted to shareholders. There are no cumulative voting rights in the
election of directors or preemptive rights to purchase additional shares of any
class of F&M's capital stock. Holders of F&M common stock have no conversion or
redemption rights. The shares of F&M common stock presently outstanding are, and
41
<PAGE>
those shares of F&M common stock to be issued in connection with the merger will
be when issued, fully paid and nonassessable.
F&M common stock is listed and traded on the NYSE.
Preferred Stock
The board of directors of F&M is empowered to authorize the issuance, in
one or more series, of shares of preferred stock at such times, for such
purposes and for such consideration as it may deem advisable without shareholder
approval. The F&M board is also authorized to fix the designations, voting,
conversion, preference and other relative rights, qualifications and limitations
of any such series of preferred stock.
The F&M board of directors, without shareholder approval, may authorize
the issuance of one or more series of preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of F&M
common stock and, under certain circumstances, discourage an attempt by others
to gain control of F&M.
The creation and issuance of any series of preferred stock, and the
relative rights, designations and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
F&M, then existing market conditions and other factors that, in the judgment of
the F&M board, might warrant the issuance of preferred stock.
OTHER MATTERS
The Security board does not intend to bring any matter before the special
meeting other than as specifically set forth in the notice of special meeting of
shareholders, nor does it know of any matter to be brought before the special
meeting by others. If, however, any other matters properly come before the
special meeting, it is the intention of each of the proxyholders to vote such
proxy in accordance with the decision of a majority of the Security board of
directors.
EXPERTS
The consolidated financial statements of F&M incorporated in this proxy
statement/prospectus by reference to F&M's Annual Report on Form 10-K for the
year ended December 31, 1997 have been so incorporated in reliance upon the
report of Yount, Hyde & Barbour, P.C., independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as experts
in auditing and accounting.
The financial statements of Security incorporated in this proxy
statement/prospectus by reference to Security's 1997 Annual Report to
Shareholders and included herein as Appendix IV have been so incorporated in
reliance upon the report of Yount, Hyde & Barbour, P.C., independent certified
public accountants, incorporated by reference herein, and upon the authority of
such firm as experts in auditing and accounting.
LEGAL OPINIONS
The validity of the shares of F&M common stock offered hereby is being
passed upon for F&M by LeClair Ryan, A Professional Corporation, Richmond,
Virginia. LeClair Ryan will deliver an opinion to F&M and Security concerning
certain federal income tax consequences of the merger. See "The Merger --
Material Federal Income Tax Consequences" on page 28.
Certain matters relating to the merger will be passed upon for Security by
Kaufman & Canoles, Norfolk, Virginia.
42
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
F&M and Security file reports, proxy statements and other information with
the Securities and Exchange Commission in the case of F&M and the Board of
Governors of the Federal Reserve System in the case of Security. You may read
and copy any reports, statements or other information that F&M files at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Information on F&M is also available
to the public through the Commission's website at "http://www.sec.gov." You may
read and copy reports, proxy statements and other information concerning
Security at the Federal Reserve, Division of Banking Supervision and Regulation,
20th Street and Constitution, Washington, D.C. 20551. The information may also
be obtained from the Federal Reserve by writing to the referenced address or by
calling (202) 452-3244. Reports, proxy statements and other information about
F&M and Security are also available to the public from commercial document
retrieval services and also should be available for inspection at the offices of
the New York Stock Exchange for F&M, and Nasdaq for Security.
F&M has filed a Registration Statement on Form S-4 to register with the
Commission the shares of F&M common stock to be issued to you in the merger.
This document is a part of the Registration Statement and constitutes a
prospectus of F&M and a proxy statement of Security for the special meeting. As
allowed by Commission rules, this document does not contain all the information
that shareholders can find in the Registration Statement or the exhibits to the
Registration Statement.
The Commission allows F&M and Security to "incorporate by reference"
information into this proxy statement/prospectus, which means that the companies
can disclose important information to you by referring you to another document
filed separately with the Commission and the Federal Reserve. The information
incorporated by reference is deemed to be a part of this proxy
statement/prospectus, except for any information superseded by information
contained directly in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that F&M and Security have previously filed with the Commission and the Federal
Reserve. These documents contain important business information about the
companies and their financial condition.
<TABLE>
<CAPTION>
F&M's Commission Filings (File No. 0-05929) Period
<S> <C>
Annual Report on Form 10-K...................... Year ended December 31, 1997
Quarterly Reports on Form 10-Q.................. Quarters ended September 30, 1998,
June 30, 1998, and March 31, 1998
Current Reports on Form 8-K..................... Dated November 9, 1998, June 1,
1998 and April 3, 1998 (two reports)
<CAPTION>
Security's Federal Reserve Filings Period
<S> <C>
Annual Report on Form 10-KSB.................... Year ended December 31, 1997
Quarterly Reports on Form 10-QSB................ Quarters ended September 30, 1998, June
30, 1998 and March 31, 1998
Current Report on Form 8-K...................... Dated November 24, 1998
1997 Annual Report to Shareholders.............. Year ended December 31, 1997
</TABLE>
43
<PAGE>
F&M and Security also incorporate by reference additional documents that
either may file with the Commission or the Federal Reserve between the date of
this document and the date of the special meeting. These include periodic
reports, such as annual reports, quarterly reports and current reports, as well
as proxy statements.
F&M has supplied all information contained or incorporated by reference in
this document relating to F&M and Security has supplied all such information
relating to Security.
Security may have sent you some of the documents incorporated by reference
by Security, but you can obtain any of them through Security or the Federal
Reserve. Documents incorporated by reference by F&M are available through the
Commission or the Commission's website stated above or from F&M without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this document. Shareholders of F&M or Security may obtain documents
incorporated by reference in this document by requesting them in writing or by
telephone from F&M or Security at the following addresses:
F&M NATIONAL CORPORATION
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
SECURITY BANK CORPORATION
8780 Centreville Road
Manassas, Virginia 20110
Telephone: (703) 361-1986
Attention: Assistant Secretary
If you would like to request documents from either F&M or Security, please
do so by March 3, 1999 in order to receive timely delivery of such documents
prior to the special meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting. F&M and
Security have not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
February 2, 1999. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to shareholders nor the issuance of F&M common stock in
the merger creates any implication to the contrary.
44
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
AND
PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 25, 1998, by and among F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), F&M BANK-NORTHERN VIRGINIA, a wholly-owned
Virginia banking subsidiary of F&M ("F&M Bank-Northern Virginia"), and SECURITY
BANK CORPORATION, a Virginia banking corporation ("Security").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and Security have
approved the affiliation of their companies through the merger of Security with
and into F&M Bank-Northern Virginia, pursuant to and subject to the terms and
conditions of this Agreement and the Plan of Merger in the form attached hereto
as Exhibit A (the "Plan of Merger"); and
WHEREAS, the parties desire to provide for certain conditions,
representations, warranties and agreements in connection with the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements set forth herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE 1
THE MERGER AND RELATED MATTERS
1.1 The Merger
Subject to the terms and conditions of this Agreement, at the Effective
Date as defined in Section 1.5 hereof, Security shall be merged with and into
F&M Bank-Northern Virginia pursuant to the Plan of Merger attached hereto as
Exhibit A and made a part hereof (the "Merger"). The separate corporate
existence of Security shall thereupon cease, and F&M Bank-Northern Virginia will
be the surviving corporation in the Merger and its name shall remain F&M
Bank-Northern Virginia (F&M Bank-Northern Virginia as existing on and after the
Effective Date is sometimes referred to as the "Continuing Bank"). From and
after the Effective Date, the Merger shall have the effect set forth in Section
13.1-721 of the Virginia Stock Corporation Act (the "VSCA").
1.2 Conversion of Security Stock
(a) At the Effective Date, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $5.00
per share, of Security ("Security Common Stock") issued and outstanding
immediately prior to the Effective Date shall cease to be outstanding and shall
be converted into and exchanged for shares of common stock, par value $2.00 per
share, of F&M ("F&M Common Stock"), whose aggregate market value equals $17.25,
plus cash for fractional shares, pursuant to the terms and conditions set forth
in the Plan of Merger (the "Exchange Ratio").
<PAGE>
(b) In the event F&M changes (or establishes a record date for changing)
the number of shares of F&M Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding F&M Common Stock and the
record date therefor shall be prior to the Effective Date, appropriate and
proportional adjustments will be made to the Exchange Ratio.
1.3 Board of Directors of the Continuing Bank; Officers and Employees
(a) At the Effective Date, the Board of Directors of the Continuing Bank
shall consist of all the current directors of F&M Bank-Northern Virginia and
four of the current directors of Security designated by Security and approved by
F&M. All current directors of Security who are not appointed to the Board of
Directors of the Continuing Bank will be offered a position on the Continuing
Bank's Advisory Board.
(b) The officers and employees of Security will be offered positions with
the Continuing Bank at salaries not less than the salaries such persons shall
have with Security immediately prior to the Effective Date.
1.4 Security Stock Options
From and after the Effective Date, all employee and director stock options
to purchase shares of Security Common Stock (each, a "Security Stock Option"),
that are then outstanding and unexercised, shall be converted into and become
options to purchase shares of F&M Common Stock, and F&M shall assume each such
Security Stock Option in accordance with the terms of the plan and agreement by
which it is evidenced; provided, however, that from and after the Effective Date
(i) each such Security Stock Option assumed by F&M may be exercised solely to
purchase shares of F&M Common Stock, (ii) the number of shares of F&M Common
Stock purchasable upon exercise of such Security Stock Option shall be equal to
the number of shares of Security Common Stock that were purchasable under such
Security Stock Option immediately prior to the Effective Date multiplied by the
Exchange Ratio and rounding down to the nearest whole share, with cash being
paid for any fractional share interest that otherwise would be purchasable, and
(iii) the per share exercise price under each such Security Stock Option shall
be adjusted by dividing the per share exercise price of each such Security Stock
Option by the Exchange Ratio, and rounding down to the nearest cent. The terms
of each Security Stock Option shall, in accordance with its terms, be subject to
further adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction with respect to F&M Common Stock
on or subsequent to the Effective Date.
1.5 Closing; The Effective Date
The Merger shall become effective on the date and at the time shown on the
Certificate of Merger issued by the Virginia State Corporation Commission
effecting the Merger (the "Effective Date"). Subject to the satisfaction or
waiver of the conditions set forth in Article V, the parties shall use their
reasonable best efforts to cause the Effective Date to occur on the first day of
the month following the month in which the conditions set forth in Article V
have been satisfied or waived in accordance with the terms of this Agreement or
on such other date as the parties may agree in writing. All documents required
by this Agreement to be delivered at or prior to the Effective Date will
exchanged by the parties at the closing of the Merger (the "Merger Closing"),
which shall be held on or before the Effective Date. At or after the Merger
Closing, F&M, F&M Bank-Northern Virginia and Security shall execute and deliver
to the Virginia State Corporation Commission Articles of Merger containing the
Plan of Merger.
<PAGE>
1.6 Definitions
Any term defined in this Agreement and the Plan of Merger shall have the
meaning ascribed to it for purposes of this Agreement. In addition:
(a) The term "Knowledge" means the knowledge, after due inquiry, of any
"Executive Officer" of such party, as such term is defined in Regulation O (12
C.F.R. 215).
(b) The term "Material Adverse Effect" means, with respect to a party, any
effect that (i) has or is reasonably likely to have a material and adverse
effect upon the financial position, results of operations or business of the
party and its subsidiaries, taken as a whole, or (ii) would materially impair
the party's ability to perform its obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the Merger;
provided that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, or (b) changes in
generally accepted accounting principles or regulatory requirements applicable
to financial institutions.
(c) The term "Previously Disclosed" shall mean information set forth in a
schedule (a "Disclosure Schedule", which shall be arranged in sections
corresponding to the sections of this Agreement) from one party to the other
party delivered and dated on the same date hereof, setting forth, among other
things, items the disclosure of which is necessary or appropriate in relation to
any or all of such party's representations and warranties. Any matter included,
whether aggregated or not, in the Security Financial Statements or the F&M
Financial Statements, as the case may be, shall be deemed to be Previously
Disclosed.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF Security
Security represents and warrants to F&M as follows:
2.1 Organization, Standing and Power of Security
Security is a Virginia chartered banking corporation duly organized,
validly existing and in good standing under the laws of Virginia. Security has
the corporate power and authority to carry on its business in Virginia as now
conducted and to own and operate its assets, properties and business; and
Security has the corporate power and authority to execute, deliver and perform
its obligations under this Agreement and the Stock Option Agreement dated
November 10, 1998, by and between Security and F&M (the "Option Agreement"), and
to consummate the transactions contemplated hereby and thereby (subject to
receipt of the approval of the shareholders of Security of this Agreement and
the Plan of Merger).
2.2 Authorized and Effective Agreements
(a) Subject to receipt of the approval of the shareholders of Security of
this Agreement and the Plan of Merger, this Agreement, the Plan of Merger and
the Option Agreement and the transactions contemplated hereby and thereby have
been authorized by all necessary corporate action on the part of Security on or
prior to the date hereof. Subject also to receipt of the approval of the
shareholders of Security of this Agreement and the Plan of Merger, this
Agreement, the Plan of Merger and the Option Agreement are valid and legally
binding obligations of Security, enforceable against Security in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws affecting the enforcement of rights of creditors or by general
principles of equity).
<PAGE>
(b) Neither the execution and delivery of this Agreement, the Plan of
Merger and the Option Agreement, nor the consummation of the transactions
contemplated herein or therein, nor compliance by Security with any of the
provisions hereof or thereof will: (i) conflict with or result in a breach of
any provision of the Articles of Incorporation or Bylaws of Security; (ii)
except as Previously Disclosed in its Disclosure Schedule, constitute or result
in the breach of any term, condition or provision of, or constitute a default
under, or give rise to any right of termination, cancellation or acceleration
with respect to, or result in the creation of any lien, charge or encumbrance
upon, any property or asset of Security pursuant to any (A) note, bond,
mortgage, indenture, or (B) material license, agreement or other instrument or
obligation; or (iii) subject to the receipt of all required regulatory and
shareholder approvals, violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Security.
2.3 Capital Structure
The authorized capital stock of Security consists of 3,000,000 shares of
common stock, par value $5.00 per share, of which 967,236 shares were issued and
outstanding as of November 20, 1998. All outstanding shares of Security Common
Stock have been duly authorized and validly issued, are fully paid and
nonassessable and have not been issued in violation of the preemptive rights of
any person. As of November 20, 1998, there are options held by employees and
directors of Security that represent rights to purchase a total of 77,100 shares
of Security Common Stock and there are outstanding warrants held by certain
individuals that represent rights to purchase a total of 12,241 shares of
Security Common Stock.
2.4 Rights
As of the date of this Agreement, there are not any shares of capital stock
of Security reserved for issuance, or any outstanding or authorized options,
warrants, rights, agreements, convertible or exchangeable securities, or other
commitments, contingent or otherwise, relating to its capital stock pursuant to
which Security is or may become obligated to issue shares of capital stock or
any securities convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of its capital stock (collectively, "Rights"), except
as contemplated by the Option Agreement and as Previously Disclosed in its
Disclosure Schedule (which shall include copies of the stock option plans and
individual stock option agreements pursuant to which employees and directors of
Security may exercise stock options and a list of those persons that hold
outstanding warrants to purchase Security Common Stock).
2.5 Financial Statements; Books and Records; Minute Books
The Security Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the financial position of Security as of the
dates indicated and the results of operations, changes in stockholders' equity
and statements of cash flows for the periods or as of the dates set forth
therein (subject, in the case of unaudited interim statements, to normal
recurring audit adjustments that are not material in amount or effect) in
conformity with generally accepted accounting principles applicable to financial
institutions applied on a consistent basis. The books and records of Security
fairly reflect in all material respects the transactions to which it is a party
or by which its properties are subject or bound. Such books and records have
been properly kept and maintained and are in compliance in all material respects
with all applicable legal and accounting requirements. The minute books of
Security contain accurate records of all corporate actions of its shareholders
and Board of Directors (including committees of its Board of Directors). The
Security Financial Statements shall mean (i) the statements of financial
condition of Security as of December 31, 1997 and 1996 and the related
statements of income, stockholders' equity and cash flows for each of the three
years ended December 31, 1997, 1996 and 1995 (including related notes and
schedules, if any) and (ii) the balance sheets of Security and related
statements of income, stockholders' equity and cash flows (including related
notes and schedules, if any) with respect to quarterly periods ended subsequent
to December 31, 1997.
<PAGE>
2.6 Absence of Material Changes and Events
Since September 30, 1998 and except as Previously Disclosed in its
Disclosure Schedule, there has not been any change in the financial condition or
results of operations of Security which, individually or in the aggregate, has
had or is reasonably likely to have a Material Adverse Effect. Notwithstanding
the foregoing, any adjustments after the date hereof to the allowance for loan
losses of Security made at the request of F&M in order to bring the allowance
for loan losses of Security into compliance with F&M's loan policies shall not
be deemed a material change or event.
2.7 Absence of Undisclosed Liabilities
Security has not incurred any liability (contingent or otherwise) that is
material to Security that, when combined with all similar liabilities, would be
material to Security, except as Previously Disclosed in its Disclosure Schedule
or as disclosed in the Security Financial Statements and except for liabilities
incurred in the ordinary course of business consistent with past practice since
the date of the most recent Security Financial Statements.
2.8 Legal Proceedings; Compliance with Laws
Except as Previously Disclosed in its Disclosure Schedule, there are no
actions, suits or proceedings instituted or pending or, to the Knowledge of
Security, threatened against Security or against any property, asset, interest
or right of Security, or against any officer, director or employee of Security
that would, if determined adversely to Security, have a Material Adverse Effect
on Security. To the Knowledge of Security, it has complied in all material
respects with all laws, ordinances, requirements, regulations or orders
applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders).
2.9 Tax Matters
Security has filed all federal, state and local tax returns and reports
("Tax Returns") required to be filed, and all such Tax Returns were correct and
complete in all material respects. All Taxes (as defined below) owed by Security
have been paid, are reflected as a liability in the Security Financial
Statements, or are being contested in good faith and have been Previously
Disclosed in its Disclosure Schedule. Except as Previously Disclosed, no tax
return or report of Security is under examination by any taxing authority or the
subject of any administrative or judicial proceeding, and no unpaid tax
deficiency has been asserted against Security by any taxing authority. As used
herein, "Taxes" mean all taxes, charges, fees, levies or other assessments,
including, without limitation, all income, gross receipts, sales, use, ad
valorem, goods and services, capital, transfer, franchise, profits, license,
withholding, payroll, employment, employer health, excise, estimated, severance,
stamp, occupation, property or other taxes, custom duties, fees, assessments or
chargers of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority.
<PAGE>
2.10 Property
Except as Previously Disclosed in its Disclosure Schedule or reserved
against in the Security Financial Statements, Security has good and marketable
title free and clear of all material liens, encumbrances, charges, defaults or
equitable interests to all of the properties and assets, real and personal,
reflected in the balance sheet included in the Security Financial Statements as
of September 30, 1998 or acquired after such date. To the Knowledge of Security,
all buildings, and all fixtures, equipment, and other property and assets that
are material to its business, held under leases or subleases, are held under
valid instruments enforceable in accordance with their respective terms, subject
to bankruptcy, insolvency, reorganization, moratorium and similar laws. To the
Knowledge of Security, the buildings, structures, and appurtenances owned,
leased, or occupied by it are in good operating condition and in a state of good
maintenance and repair and comply with applicable zoning and other municipal
laws and regulations, and there are no latent defects therein.
2.11 Employee Benefit Plans
(a) Security has Previously Disclosed in its Disclosure Schedule all
employee benefit plans and programs, including without limitation: (i) all
retirement, savings and other pension plans; (ii) all health, severance,
insurance, disability and other employee welfare plans; and (iii) all
employment, vacation and other similar plans, all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other employee benefit plans, programs or arrangements, and all employment
or compensation arrangements, in each case for the benefit of or relating to
current and former employees of Security (collectively, the "Security benefit
Plans").
(b) None of the Security Benefit Plans is a "multi-employer plan" as
defined in section 3(37) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
(c) Except as Previously Disclosed in its Disclosure Schedule, all Security
Benefit Plans are in compliance in all material respects with applicable laws
and regulations, and Security has administered the Security Benefit Plans in
accordance with applicable laws and regulations in all material respects.
(d) Each Security Benefit Plan that is intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") has
been determined by the Internal Revenue Service to be so qualified, as reflected
in a current favorable determination letter.
(e) Security has made available to F&M copies of all Security Benefit Plans
and, where applicable, summary plan descriptions, and annual reports required to
be filed within the last three years pursuant to ERISA or the Code with respect
to the Security Benefit Plans.
(f) To the Knowledge of Security, it has not engaged in any prohibited
transactions, as defined in Code section 4975 or ERISA section 406, with respect
to any Security Employee Benefit Plan that is a pension plan as defined in
Section 3(2) of ERISA.
(g) There are no actions, suits, investigations or claims pending,
threatened or anticipated (other than routine claims for benefits) with respect
to any Security Benefit Plans.
(h) No compensation or benefit that is or will be payable in connection
with the transactions contemplated by this Agreement will be characterized as an
"excess parachute payment" within the meaning of Code section 280G. Except as
Previously Disclosed in its Disclosure Schedule, no Security Benefit Plan
contains any provision which would give rise to any severance, termination or
other payments or liabilities as a result of the transactions contemplated by
this Agreement.
<PAGE>
(i) Security has not established and does not maintain a welfare plan, as
defined in ERISA section 3(1), that provides benefits to an employee at the
expense of Security after a termination of employment, except as required by the
Consolidated Omnibus Budget Reconciliation Act of 1985.
2.12 Insurance
Security currently maintains insurance in amounts reasonably necessary for
its operations and, to the Knowledge of Security, similar in scope and coverage
to that maintained by other entities similarly situated. Since January 1, 1998
and except as Previously Disclosed, Security has not received any notice of a
premium increase or cancellation or a failure to renew with respect to any
insurance policy or bond and, within the last three fiscal years, and Security
has not been refused any insurance coverage sought or applied for, and Security
has no reason to believe that existing insurance coverage cannot be renewed as
and when the same shall expire upon terms and conditions as favorable as those
presently in effect, other than possible increases in premiums or unavailability
of coverage that do not result from any extraordinary loss experience on the
part of Security.
2.13 Loans; Allowance for Loan Losses
(a) Except as Previously Disclosed in its Disclosure Schedule, to the
Knowledge of Security each loan reflected as an asset in the Security Financial
Statements (i) is evidenced by notes, agreements or evidences of indebtedness
which are true, genuine and what they purport to be, (ii) to the extent secured,
has been secured by valid liens and security interests which have been
perfected, (iii) is the legal, valid and binding obligation of the obligor and
any guarantor, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles, and
no defense, offset or counterclaim has been asserted with respect to any such
loan which if successful could have a Material Adverse Effect, and (iv) in all
material respects was made in accordance with Security's standard loan policies.
(b) Security has Previously Disclosed in its Disclosure Schedule the
aggregate amounts as of a recent date of all loans, losses, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of Security that have been classified by any bank examiner (whether
regulatory or internal) as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified" or words of similar import, and
Security shall promptly on a periodic basis inform F&M of any such
classification arrived at any time after the date hereof.
(c) The real property classified as other real estate owned ("OREO")
included in non-performing assets is carried net of reserve at the lower of cost
or market value based on independent appraisals.
(d) The allowance for loan losses reflected on the statements of financial
condition included in the Security Financial Statements, as of their respective
dates, is adequate in all material respects under the requirements of generally
accepted accounting principles and regulatory accounting principles to provide
for reasonably anticipated losses on outstanding loans; provided, however, the
parties acknowledge and agree that F&M may request Security to make certain
adjustments after the date hereof to its allowance for loan losses in order to
bring the allowance for loan losses of Security into compliance with F&M's loan
policies.
<PAGE>
2.14 Environmental Matters
(a) Except as Previously Disclosed in its Disclosure Schedule, Security is
in substantial compliance with all Environmental Laws (as defined below).
Security has not received any communication alleging that Security is not in
such compliance and there are no present circumstances that would prevent or
interfere with the continuation of such compliance.
(b) Security has not received notice of pending, and is not aware of any
threatened, legal, administrative, arbitral or other proceedings, asserting
Environmental Claims (as defined below) or other claims, causes of action or
governmental investigations of any nature, seeking to impose, or that could
result in the imposition of, any material liability arising under any
Environmental Laws upon (i) Security, (ii) any person or entity whose liability
for any Environmental Claim Security has or may have retained either
contractually or by operation of law, (iii) any real or personal property owned
or leased by Security, or any real or personal property which Security has been,
or is, judged to have managed or to have supervised or to have participated in
the management of, or (iv) any real or personal property in which Security holds
a security interest securing a loan recorded on the books of Security. Security
is not subject to any agreement, order, judgment, decree or memorandum by or
with any court, governmental authority, regulatory agency or third party
imposing any such liability.
(c) With respect to all real and personal property owned or leased by
Security, or all real and personal property which Security has been, or is,
judged to have managed or to have supervised or to have participated in the
management of, Security will promptly provide F&M with access to copies of any
environmental audits, analyses and surveys that have been prepared relating to
such properties (a list of which will be Previously Disclosed in its Disclosure
Schedule). Security is in compliance in all material respects with all
recommendations contained in any such environmental audits, analyses and
surveys.
(d) To the best of Security's Knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Laws against Security or against any person or
entity whose liability for any Environmental Claim Security has or may have
retained or assumed either contractually or by operation of law.
(e) For purposes of this Agreement, the following terms shall have the
following meanings:
(1) "Environmental Claim" means any written notice from any
governmental authority or third party alleging potential liability
(including, without limitation, potential liability for investigatory
costs, clean-up, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) arising out of, based
upon, or resulting from the presence, or release into the environment, of
any Materials of Environmental Concern.
(2) "Environmental Laws" means all applicable federal, state and
local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate
to pollution or protection of human health or the environment.
<PAGE>
(3) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products
and any other materials regulated under Environmental Laws.
2.15 Takeover Laws; No Dissenters Rights
Security has taken all action necessary to exempt this Agreement, the Stock
Option Agreement and the transactions contemplated hereby and thereby from the
requirements of any "control share," "fair price," "affiliate transaction" or
other anti-takeover laws and regulations of any state, including without
limitation Sections 13.1-725 through 13.1-728 of the VSCA (because a majority of
Security's disinterested directors approved such transactions for such purposes
prior to any "determination date" with respect to F&M) and Sections 13.1-728.1
through 13.1-728.9 of the VSCA. Holders of Security Common Stock do not have
dissenters' rights in connection with the Merger.
2.16 Brokers
Other than the financial advisory services performed for Security by Scott
& Stringfellow, Inc. (on terms disclosed to F&M), neither Security nor any of
its subsidiaries, nor any of their respective officers, directors or employees
has employed any broker, finder or financial advisor or incurred any liability
for any fees or commissions in connection with transactions contemplated by this
Agreement.
2.17 Securities Reports
Security has filed with the Board of Governors of the Federal Reserve
System (the "FRB") all required forms, reports and documents required under the
Securities Exchange Act or 1934, as amended (the "Exchange Act"). Security's
Annual Report on Form 10-KSB for the year ended December 31, 1997, and all other
reports, definitive proxy statements or documents filed or to be filed by it
subsequent to December 31, 1997 under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, in the form filed, or to be filed, with the FRB (i) complied or
will comply in all material respects as to form with the applicable requirements
under the Exchange Act and (ii) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.18 Statements True and Correct
When the Registration Statement on Form S-4 (the "Registration Statement")
to be filed by F&M with the SEC shall become effective, and at all times
subsequent thereto up to and including the Security shareholders' meeting called
to vote upon the Merger, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein furnished
by Security relating to Security, (i) shall comply in all material respects with
the applicable provisions of the federal and state securities laws, and (ii)
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they are made, not
misleading.
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF F&M
F&M represents and warrants to Security as follows:
3.1 Organization, Standing and Power
F&M is a corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia. F&M has the corporate power and
authority to carry on its business as now conducted and to own and operate its
assets, properties and business; and F&M has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. F&M is duly registered as a
bank holding company under the Bank Holding Company Act of 1956.
3.2 Organization, Standing and Power of F&M Subsidiaries
Each subsidiary of F&M (the "F&M Subsidiaries" and, collectively with F&M,
the "F&M Companies") is a duly organized corporation, validly existing and in
good standing in their respective states of incorporation. Each F&M Subsidiary
(i) has full corporate power and authority to carry on its business as now
conducted and (ii) is duly qualified to do business in the states where its
ownership or leasing of property or the conduct of its business requires such
qualification and where the failure to so qualify would have a material adverse
effect on F&M on a consolidated basis. The outstanding shares of capital stock
of each of the F&M Subsidiaries are validly issued and outstanding, fully paid
and nonassessable and all such shares are directly or indirectly owned by F&M
free and clear of all liens, claims and encumbrances or preemptive rights of any
person.
3.3 Authorized and Effective Agreement
(a) This Agreement and the Plan of Merger and the transactions
contemplated hereby and thereby have been authorized by all necessary corporate
action on the part of F&M. This Agreement and the Plan of Merger are valid and
legally binding obligations of F&M, enforceable against F&M in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws affecting the enforcement of rights of creditors or by general
principles of equity).
(b) Neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by F&M with any of the
provisions hereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of F&M or any F&M Subsidiary; (ii)
constitute or result in the breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon, any property or asset of F&M or any F&M
Subsidiary pursuant to any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation that would have a Material Adverse Effect on
F&M, or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to F&M or any F&M Subsidiary.
3.4 Capital Structure
<PAGE>
The authorized capital stock of F&M consists of: (i) 5,000,000 shares of
preferred stock, no par value per share, of which none are issued and
outstanding; and (ii) 30,000,000 shares of common stock, par value $2.00 per
share, of which 21,893,800 shares were issued and outstanding on September 30,
1998. All outstanding shares of F&M Common Stock have been duly issued and are
validly outstanding, fully paid and nonassessable and have not been issued in
violation of the preemptive rights of any person. The shares of F&M Common Stock
to be issued in exchange for shares of Security Common Stock upon consummation
of the Merger will have been duly authorized and, when issued in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable, will not be issued in violation of the preemptive rights of any
person, and will be duly registered under the applicable federal and state
securities laws.
3.5 Financial Statements; Books and Records; Minute Books
The F&M Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of F&M
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods or as of the
dates set forth therein (subject, in the case of unaudited interim statements,
to normal recurring audit adjustments that are not material in amount or effect)
in conformity with generally accepted accounting principles applicable to
financial institutions applied on a consistent basis. The books and records of
the F&M Companies fairly reflect in all material respects the transactions to
which each company is a party or by which its properties are subject or bound.
Such books and records have been properly kept and maintained and are in
compliance in all material respects with all applicable legal and accounting
requirements. The minute books of the F&M Companies contain accurate records of
all corporate actions of their respective shareholders and Boards of Directors
(including committees of its Board of Directors). The F&M Financial Statements
shall mean (i) the consolidated balance sheets of F&M as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years ended December 31, 1997, 1996 and
1995 (including related notes and schedules, if any) and (ii) the consolidated
balance sheets of F&M and related consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) with respect to quarterly periods ended subsequent to December 31, 1997.
3.6 Absence of Material Changes or Events
Since September 30, 1998, there has not been any change in the financial
condition or results of operations of F&M or the F&M Subsidiaries which,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect.
3.7 Absence of Undisclosed Liabilities
Neither F&M nor any F&M Subsidiary has any liability (contingent or
otherwise) that is material to F&M on a consolidated basis or that, when
combined with all similar liabilities, would be material to F&M on a
consolidated basis, except as disclosed in the F&M Financial Statements and
except for liabilities incurred in the ordinary course of business consistent
with past practice since the date of the most recent F&M Financial Statements.
3.8 Legal Proceedings; Compliance with Laws
<PAGE>
There are no actions, suits or proceedings instituted or pending or, to
the Knowledge of F&M, threatened against any of the F&M Companies or against any
property, asset, interest or right of any of the F&M Companies or against any
officer, director or employee of any of the F&M Companies that would, if
determined adversely to F&M or any F&M Subsidiary, have a Material Adverse
Effect on F&M on a consolidated basis. To the Knowledge of F&M, the F&M
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or orders).
3.9 Tax Matters
The F&M Companies have filed all Tax Returns required to be filed, and all
such Tax Returns were correct and complete in all material respects. All Taxes
owed by the F&M Companies have been paid, are reflected as a liability in the
F&M Financial Statements, or are being contested in good faith and have been
Previously Disclosed in its Disclosure Schedule. Except as Previously Disclosed,
no tax return or report of the F&M Companies is under examination by any taxing
authority or the subject of any administrative or judicial proceeding, and no
unpaid tax deficiency has been asserted against the F&M Companies by any taxing
authority.
3.10 Employee Benefit Plans
(a) All F&M employee benefit plans are in compliance with the applicable
terms of ERISA and the Code and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to F&M on a consolidated basis.
(b) No F&M employee benefit plan subject to ERISA that is a defined
benefit pension plan has any "unfunded current liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, and the present fair market value of
the assets of any such plan exceeds the plan's `benefit liabilities,' as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan was terminated in accordance with all
applicable legal requirements.
3.11 Insurance
Each of the F&M Companies currently maintains insurance in amounts
reasonably necessary for its operations and, to the Knowledge of F&M, similar in
scope and coverage to that maintained by other entities similarly situated.
Since January 1, 1998 and except as Previously Disclosed, none of the F&M
Companies has received any notice of a premium increase or cancellation or a
failure to renew with respect to any insurance policy or bond and, within the
last three fiscal years, none of the F&M Companies has been refused any
insurance coverage sought or applied for, and F&M has no reason to believe that
existing insurance coverage cannot be renewed as and when the same shall expire
upon terms and conditions as favorable as those presently in effect, other than
possible increases in premiums or unavailability of coverage that do not result
from any extraordinary loss experience on the part of the F&M Companies.
3.12 Allowance for Loan Losses
The allowance for loan losses reflected on the balance sheets included in
the F&M Financial Statements, as of their respective dates, is adequate in all
material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
<PAGE>
3.13 Environmental Matters
To the Knowledge of F&M, the F&M Companies are in substantial compliance
with all Environmental Laws. None of the F&M Companies has received any
communication alleging that F&M or any F&M Subsidiary is not in such compliance
and, to the Knowledge of F&M, there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
3.14 Securities Reports
F&M has filed with the SEC all required forms, reports and documents
required under the Exchange Act. F&M's Annual Report on Form 10-K for the year
ended December 31, 1997, and all other reports, definitive proxy statements or
documents filed or to be filed by it subsequent to December 31, 1997 under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed, or to
be filed, with the Securities and Exchange Commission (the "SEC") (i) complied
or will comply in all material respects as to form with the applicable
requirements under the Exchange Act and (ii) did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading.
3.15 Statements True and Correct
When the Registration Statement to be filed by F&M with the SEC shall
become effective, and at all times subsequent thereto up to and including the
Security shareholders' meeting called to consider and vote on the approval of
the Merger, such Registration Statement and all amendments or supplements
thereto, with respect to all information set forth therein furnished by F&M
relating to F&M (i) shall comply in all material respects with the applicable
provisions of the federal and state securities laws, and (ii) shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE 4
COVENANTS AND AGREEMENTS
4.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, F&M and Security
agree to use their reasonable best efforts in good faith to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary or
desirable, or advisable under applicable laws, so as to permit consummation of
the Merger as promptly as practicable and shall cooperate fully with the other
party hereto to that end.
4.2 Access to Information; Notice of Certain Matters; Confidentiality
(a) F&M and Security each will keep the other advised of all material
developments relevant to its business and to consummation of the transactions
contemplated herein. F&M and Security each may make or cause to be made such
further investigation of the operational, financial and legal condition of the
other as such party reasonably deems necessary or advisable in connection with
the Merger, provided, however, that such investigation shall not interfere
unnecessarily with normal operations. F&M and Security agree to furnish the
other and the other's advisors with such financial data and other information
with respect to its business and properties as such other party shall from time
to time reasonably request. No investigation pursuant to this Section 4.2 shall
affect or be deemed to modify any representation or warranty made by, or the
conditions to the obligations to consummate the Merger of, such party hereto.
<PAGE>
(b) F&M and Security shall give prompt notice to the other of any fact,
event or circumstance known to it that (i) is reasonably likely, individually or
taken together with all other facts, events and circumstances known to it, to
result in any Material Adverse Effect with respect to it or (ii) would cause or
constitute a material breach of any of its representations, warranties,
covenants or agreements contained herein.
(c) Each party shall, and shall cause each of its directors, officers,
attorneys and advisors, to maintain the confidentiality of all information
obtained in such investigation which is not otherwise publicly disclosed by the
other party, such undertaking with respect to confidentiality to survive any
termination of this Agreement. In the event of the termination of this
Agreement, each party shall return to the furnishing party or, at the request of
the furnishing party, destroy and certify the destruction of all confidential
information previously furnished in connection with the transactions
contemplated by this Agreement.
4.3 Registration Statement; Shareholder Approval
(a) F&M and Security agree to cooperate in the preparation of the
Registration Statement to be filed by F&M with the SEC in connection with the
issuance of F&M Common Stock in the Merger (including the proxy statement and
prospectus and other proxy solicitation materials of F&M and Security
constituting a part thereof (the "Proxy Statement") and all related documents).
F&M and Security agree to use all reasonable efforts to cause the Registration
Statement to be declared effective under the Securities Act of 1933, as amended
(the "Securities Act"), as promptly as reasonably practicable after filing
thereof. F&M shall also take any action required to be taken under state
securities or "Blue Sky" laws in connection with the issuance of F&M Common
Stock pursuant to the Merger.
(b) Security shall submit this Agreement and the Plan of Merger to its
shareholders at a special meeting to be held as promptly as practicable after
the Registration Statement is declared effective for the purpose of approving
the Merger. The Board of Directors of Security shall recommend such approval,
and Security shall take all reasonable lawful action to solicit such approval by
its shareholders; provided, however, that if the Board of Directors of Security
shall have reasonably determined in good faith (after consultation with its
counsel) that such recommendation is reasonably likely to constitute a breach of
its fiduciary duties to the shareholders of Security, then the Board of
Directors of Security shall not be obligated to recommend the approval of this
Agreement and Plan of Merger.
4.4 Operation of the Business of Security
Security agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by F&M, during the period from the
date hereof to the Effective Date:
(a) Security will conduct its operations only in the ordinary and usual
course of business consistent with past practice (subject, in any event, to the
provisions of paragraph (c) below) and will use its best efforts to keep
available the services of its officers and employees and maintain satisfactory
relationships with customers, suppliers, employees and others having business
relationships with them.
<PAGE>
(b) Security shall not take any action, engage in any transactions or enter
into any agreement which would adversely affect or delay in any material respect
the ability of F&M or Security to obtain any necessary approvals, consents or
waivers of any governmental authority or third party required for the
transactions contemplated hereby or to perform its covenants and agreements on a
timely basis under this Agreement.
(c) Security will not:
(1) Other than pursuant to stock options and stock warrants
Previously Disclosed in its Disclosure Schedule and currently outstanding
as of the date hereof: (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of
capital stock, any stock appreciation rights or any Rights; (ii) enter
into any agreement with respect to the foregoing; or (iii) permit any
additional shares of capital stock to become subject to new grants of
employee stock options, stock appreciation rights, or similar stock-based
employee rights;
(2) Enter into or amend any written employment agreement, severance
or similar agreements or arrangements with any of its directors, officers
or employees, or grant any salary or wage increase or increase any
employee benefit (including incentive or bonus payments), except for
normal individual increases in compensation to employees in the ordinary
course of business consistent with past practice;
(3) Enter into or amend (except as may be required by applicable
law) any pension, retirement, stock option, stock purchase, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance
or other employee benefit, incentive, welfare contract, plan or
arrangement, or any trust agreement related thereto, in respect of any
directors, officers or employees, including without limitation taking any
action that accelerates the vesting or exercise of any benefits payable
thereunder;
(4) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or
encumber any of its assets, nor dispose of any of its assets in any other
manner, except in the ordinary course of its business and for adequate
value, or as otherwise specifically permitted in this Agreement;
(5) Change its lending, investment, asset/liability management or
other material banking policies in any material respect, except as may be
required by applicable law;
(6) Alter, amend or repeal its bylaws or articles of incorporation;
(7) Take any other action which would make any representation or
warranty in Article 2 hereof untrue; or
(8) Agree or commit to do anything prohibited by this Section 4.4.
4.5 Operation of the Business of F&M
F&M agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by Security, during the period
from the date hereof to the Effective Date:
<PAGE>
(a) F&M will and will cause each of the F&M Subsidiaries to conduct their
respective operations only in the ordinary and usual course of business
consistent with past practice and will use its best efforts to preserve intact
their respective business organizations, keep available the services of their
officers and employees and maintain satisfactory relationships with customers,
suppliers, employees and others having business relationships with them.
(b) F&M shall not, and shall not permit any of the F&M Subsidiaries to,
take any action, engage in any transactions or enter into any agreement which
would adversely affect or delay in any material respect the ability of F&M or
Security to obtain any necessary approvals, consents or waivers of any
governmental authority or third party required for the transactions contemplated
hereby or to perform its covenants and agreements on a timely basis under this
Agreement.
4.6 No Dividends
Security will not declare or pay any cash dividend or make any other
distribution in respect of Security Common Stock prior to the Effective Date.
4.7 No Solicitation of Other Offers
Without the prior consent of F&M, Security shall not, and shall cause its
officers, directors, agents, advisors and affiliates not to, solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, an
Acquisition Transaction (as hereinafter defined); provided, however, that
nothing contained in this Section 4.7 shall prohibit the Board of Directors of
Security from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited, written bona
fide proposal regarding an Acquisition Transaction if, and only to the extent
that (A) the Board of Directors of Security concludes in good faith, after
consultation with and based upon the advice of outside counsel, that it is
required to furnish such information or enter into such discussions or
negotiations in order to comply with its fiduciary duties to shareholders under
applicable law, (B) prior to taking such action, Security receives from such
person or entity an executed confidentiality agreement, and (C) the Board of
Directors of Security concludes in good faith that the proposal regarding the
Acquisition Transaction contains an offer of consideration that is superior to
the consideration set forth herein. Security shall immediately notify F&M orally
and in writing of its receipt of any such proposal or inquiry, of the material
terms and conditions thereof, and of the identity of the person making such
proposal or inquiry. For purposes of this Agreement, "Acquisition Transaction"
means any merger, consolidation, share exchange, joint venture, business
combination or similar transaction involving Security or any purchase of all or
any material portion of the assets of Security.
4.8 Regulatory Filings
F&M and Security shall use their reasonable best efforts to prepare and
file as soon as practicable after the date hereof all required applications for
regulatory approval of the Merger. F&M shall use its best efforts to obtain
prompt approval of each required application.
4.9 Public Announcements
<PAGE>
Each party will consult with the other before issuing any press release or
otherwise making any public statements with respect to the Merger and shall not
issue any such press release or make any such public statement prior to such
consultations, except as may be required by law.
4.10 Accounting Treatment
F&M and Security shall each use their best efforts to ensure that the
Merger qualifies for pooling-of-interests accounting treatment under generally
accepted accounting principles and, as of the date hereof, F&M is aware of no
reason why the Merger may not be accounted for as a pooling-of-interests.
4.11 Affiliate Agreements
Security has identified to F&M all persons who are, as of the date hereof,
directors or executive officers of Security (the "Affiliates"). Security has
delivered a written letter agreement in the form of Exhibit B hereto from each
Affiliate.
4.12 Benefit Plans
Upon consummation of the Merger, as soon as administratively practicable,
employees of Security shall be entitled to participate in the F&M pension,
health and welfare benefit and similar plans on the same terms and conditions as
employees of the F&M Companies, giving effect to years of service for purposes
of eligibility to participate, eligibility for benefits, and vesting with
Security as if such service were with F&M. Prior to the consummation of the
Merger, the Security Bank Corporation 401(k) Profit Sharing Plan will be
terminated. As of the Effective Date, F&M will assume and honor the terms of all
deferred compensation plans of Security.
4.13 NYSE Listing
F&M shall use its reasonable best efforts to list, as of the Effective
Date, on the New York Stock Exchange upon official notice of issuance, the
shares of F&M Common Stock to be issued in the Merger.
4.14 Indemnification
Following the Effective Date and for a period of six years thereafter, F&M
shall indemnify, defend and hold harmless any person who has rights to
indemnification from Security, to the same extent and on the same conditions as
such person is entitled to indemnification pursuant to applicable law and
Security's Articles of Incorporation or Bylaws, as in effect on the date of this
Agreement, to the extent legally permitted to do so with respect to matters
occurring on or prior to the Effective Date; provided, however, that F&M's
obligation to provide such indemnification shall not apply to material
litigation, proceeding or controversy required to be Previously Disclosed in the
Security Disclosure Schedule that is not included in such Disclosure Schedule.
Without limiting the foregoing, in any case in which corporate approval may be
required to effectuate any indemnification, F&M shall direct, at the election of
the party to be indemnified, that the determination of permissibility of
indemnification shall be made by independent counsel mutually agreed upon
between F&M and the indemnified party. F&M shall use its reasonable best efforts
to maintain Security's existing directors' and officers' liability policy, or
some other policy, including F&M's existing policy, providing at least
comparable coverage, covering persons who are currently covered by such
insurance of Security for a period of three years after the Effective Date on
terms no less favorable than those in effect on the date hereof.
<PAGE>
ARTICLE 5
CONDITIONS TO THE MERGER
5.1 General Conditions
The respective obligations of each of F&M and Security to effect the Merger
shall be subject to the fulfillment or waiver at or prior to the Effective Date
of the following conditions:
(a) Corporate Action. All corporate action necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby shall have been duly and validly taken,
including without limitation the approval of the shareholders of Security.
(b) Registration Statement; NYSE Listing. The Registration Statement shall
have been declared effective under the Securities Act, and F&M shall have
received all state securities laws or "blue sky" permits and other
authorizations or there shall be exemptions from registration requirements
necessary to issue F&M Common Stock in connection with the Merger, and neither
the Registration Statement nor any such permit or authorization shall be subject
to a stop order or any threatened stop order of the SEC or any state securities
commissioner. The shares of F&M Common Stock to be issued in connection with the
Merger shall have been approved for listing on the New York Stock Exchange.
(c) Regulatory Approvals. F&M and Security shall have received all
regulatory approvals required in connection with the transactions contemplated
by this Agreement, all notice periods and waiting periods required after the
granting of any such approvals shall have passed, and all such approvals shall
be in effect; provided, however, that no such approvals shall have imposed any
condition or requirement which, in the reasonable opinion of the Boards of
Directors of F&M or Security, would so materially adversely impact the economic
or business benefits of the transactions contemplated by this Agreement as to
render consummation of the Merger inadvisable or unduly burdensome.
(d) Tax Opinion. F&M and Security shall have received the opinion of
LeClair Ryan, A Professional Corporation, counsel to F&M, in form and substance
satisfactory to F&M and Security and dated as of the Effective Date to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code and that no gain or loss will be recognized by
the shareholders of Security to the extent they receive F&M Common Stock solely
in exchange for their Security Common Stock in the Merger. In rendering its
opinions, such counsel may rely upon representations contained in certificates
of officers of F&M, Security and others.
(e) Opinions of Counsel. Security shall have delivered to F&M and F&M shall
have delivered to Security opinions of counsel, dated as of the Effective Date,
as to such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) Legal Proceedings. Neither F&M nor Security shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Merger.
5.2 Conditions to Obligations of F&M
<PAGE>
The obligations of F&M to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
Security set forth in Article 2 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. Security shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date.
(c) Officers' Certificate. Security shall have delivered to F&M a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.2(a) and
5.2(b) have been satisfied.
(d) Accountants' Letter. F&M shall have received a letter, dated as of the
Effective Date, from Yount, Hyde & Barbour, P.C., satisfactory in form and
substance to F&M, that the Merger will qualify for pooling-of-interests
accounting treatment; provided, however, that such letter shall not be a
condition to the consummation of the Merger if F&M takes any action which would
prevent the Merger from qualifying for pooling-of-interests accounting
treatment.
5.3 Conditions to Obligations of Security
The obligations of Security to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
F&M set forth in Article 3 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. F&M shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) Officers' Certificate. F&M shall have delivered to Security a
certificate, dated the Effective Date and signed by its Chairman or President,
to the effect that the conditions set forth in Sections 5.1(a), 5.1(b), 5.1(c),
5.3(a) and 5.3(b) have been satisfied.
(d) Investment Banking Letter. Security shall have received an updated
fairness opinion from Scott & Stringfellow, Inc., financial advisor to Security,
addressed to Security and dated on or about the date the Proxy Statement is
mailed to shareholders of Security, to the effect that the terms of the Merger
are fair to the shareholders of Security from a financial point of view.
<PAGE>
ARTICLE 6
TERMINATION
6.1 Termination
This Agreement and the Plan of Merger may be terminated at any time before
the Effective Date, whether before or after approval thereof by the shareholders
of Security at the Security Meeting, as provided below:
(a) Mutual Consent. By the mutual consent in writing of F&M and Security.
(b) Closing Delay. At the election of either party, evidenced by written
notice, if the Effective Date shall not have occurred on or before September 30,
1999, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 6.1(b) shall
not be available to either party whose failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the
Effective Date to occur on or before such date.
(c) Conditions to F&M Performance Not Met. By F&M upon delivery of written
notice of termination to Security if any event occurs which renders impossible
the satisfaction in any material respect of one or more of the conditions to the
obligations of F&M to effect the Merger set forth in Sections 5.1 and 5.2, and
such noncompliance is not waived by F&M.
(d) Conditions to Security Performance Not Met. By Security upon delivery
of written notice of termination to F&M if any event occurs which renders
impossible the satisfaction in any material respect of one or more of the
conditions to the obligations of Security to effect the Merger set forth in
Sections 5.1 and 5.3, and such noncompliance is not waived by Security.
6.2 Effect of Termination
In the event this Agreement is terminated pursuant to Section 6.1 hereof,
both this Agreement and the Plan of Merger shall become void and have no effect,
except that (i) the provisions hereof relating to confidentiality, press
releases and expenses set forth in Sections 4.2, 4.9 and 6.4, respectively,
shall survive any such termination and (ii) a termination pursuant to 6.1(c) or
6.1(d) hereof shall not relieve the breaching party from liability for an
uncured intentional breach of any provision of this Agreement giving rise to
such termination.
6.3 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement and the
Plan of Merger shall not survive the Effective Date and shall be terminated and
extinguished at the Effective Date. From and after the Effective Date, the
parties hereto shall have no liability to the other on account of any breach of
any of those representations, warranties and covenants; provided, however, that
the foregoing clause shall not (i) apply to agreements of the parties which by
their terms are intended to be performed after the Effective Date, and (ii)
shall not relieve any person for liability for fraud, deception or intentional
misrepresentation.
<PAGE>
6.4 Fees and Expenses
(a) Except as provided below, each of the parties shall bear and pay all
costs and expenses incurred by it in connection with the transactions
contemplated herein, including fees and expenses of its own financial
consultants, accountants and counsel, except that printing expenses shall be
shared equally between F&M and Security.
(b) Notwithstanding any provision in this Agreement to the contrary, if for
any reason the Merger is not approved by Security's shareholders at the Security
Meeting or any adjournment thereof, then Security shall reimburse F&M for
one-half of its reasonable out-of-pocket and other expenses incurred by F&M in
connection with entering into this Agreement and the transactions contemplated
hereunder, provided that the maximum amount that Security shall be responsible
to F&M under this Section 6.4(b) shall be limited to $50,000.
(c) If this Agreement is terminated by F&M or Security because of a willful
and material breach by the other of any representation, warranty, covenant,
undertaking or restriction set forth herein, and provided that the terminating
party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall reimburse the other party for all
reasonable out-of-pocket expenses incurred by it in connection with the
transactions contemplated by this Agreement and the enforcement of its rights
hereunder.
(d) Final settlement with respect to the reimbursement of such fees and
expenses by the parties shall be made within thirty days after the termination
of this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 Entire Agreement
This Agreement contains the entire agreement among F&M and Security with
respect to the Merger and the related transactions and supersedes all prior
arrangements or understandings with respect thereto.
7.2 Binding Effect; No Third Party Rights
This Agreement shall bind F&M and Security and their respective successors
and assigns. Other than Section 4.14, nothing in this Agreement is intended to
confer upon any person, other than the parties hereto or their respective
successors, any rights or remedies under or by reason of this Agreement.
7.3 Waiver and Amendment
Any term or provision of this Agreement may be waived in writing at any
time by the party that is, or whose shareholders are, entitled to the benefits
thereof, and this Agreement may be amended or supplemented by a written
instrument duly executed by the parties hereto at any time, whether before or
after the later of the date of the Security Meeting, except statutory
requirements and requisite approvals of shareholders and regulatory authorities.
<PAGE>
7.4 Governing Law
This Agreement shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Virginia without regard to the conflict of law
principles thereof.
7.5 Notices
All notices or other communications that are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
registered or certified mail, postage prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
38 Rouss Avenue
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282
Copy to:
George P. Whitley, Esquire
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003
If to Security:
Danny R. May
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 20110
Tele: (703) 361-1986
Copy to:
Jody M. Wagner, Esq.
Kaufman & Canoles
One Commercial Place
Post Office Box 3037
Norfolk, Virginia 23514
Tele: (757) 624-3000
<PAGE>
7.6 Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but such counterparts together shall constitute one
and the same agreement.
7.7 Severability
In the event that any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provisions hereof. Any provision of
this Agreement held invalid or unenforceable only in part or degree shall remain
in full force and effect to the extent not held invalid or unenforceable.
Further, the parties agree that a court of competent jurisdiction may reform any
provision of this Agreement held invalid or unenforceable so as to reflect the
intended agreement of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
Winchester, Virginia
By: /s/ Alfred B. Whitt
-------------------
Alfred B. Whitt
Vice Chairman, President and
Chief Financial Officer
F&M BANK-NORTHERN VIRGINIA
Fairfax, Virginia
By: /s/ T. Earl Rogers
------------------
T. Earl Rogers
President
SECURITY BANK CORPORATION
Manassas, Virginia
By: /s/ John O. Gregory
-------------------
John O. Gregory
Chairman of the Board
<PAGE>
EXHIBIT A
To the Agreement and
Plan of Reorganization
PLAN OF MERGER
BETWEEN
F&M BANK-NORTHERN VIRGINIA
AND
SECURITY BANK CORPORATION
Pursuant to this Plan of Merger ("Plan of Merger"), Security Bank
Corporation, a Virginia banking corporation ("Security"), shall merge with and
into F&M Bank-Northern Virginia, a wholly-owned Virginia banking subsidiary of
F&M National Corporation.
ARTICLE I
TERMS OF THE MERGER
1.1 The Merger
Subject to the terms and conditions of the Agreement and Plan of
Reorganization, dated as of November 25, 1998, by and among F&M National
Corporation, a Virginia corporation ("F&M"), F&M Bank-Northern Virginia, and
Security (the "Agreement"), at the Effective Date Security shall be merged with
and into F&M Bank-Northern Virginia (the "Merger") in accordance with the
provisions of Virginia law and with the effect specified in Section 13.1-721 of
the Virginia Stock Corporation Act. F&M Bank-Northern Virginia shall be the
surviving corporation of the Merger, and its name shall remain F&M Bank-Northern
Virginia (F&M Bank-Northern Virginia as existing on and after the Effective Date
is sometimes referred to as the "Continuing Bank"). The Merger shall become
effective on such date and time as may be determined in accordance with Section
1.5 of the Agreement (the "Effective Date").
1.2 Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of F&M Bank-Northern Virginia in
effect immediately prior to the consummation of the Merger shall remain in
effect following the Effective Date until otherwise amended or repealed.
ARTICLE II
MANNER OF CONVERTING SHARES
2.1 Conversion of Shares
Upon and by reason of the Merger becoming effective and except as set
forth in Section 2.3 below, no cash shall be allocated to the shareholders of
Security and stock shall be issued and allocated as follows:
(a) Each share of common stock, par value $5.00 per share, of Security
("Security Common Stock") issued and outstanding immediately prior to the
Effective Date shall, by operation of law, be automatically exchanged for the
number of shares of common stock, par value $2.00 per share, of F&M ("F&M Common
Stock"), whose aggregate market value equals $17.25. The market value of F&M
Common Stock will be its average closing price as reported on the New York Stock
Exchange (the "NYSE") for each of the ten full trading days ending on the fifth
day prior to the Effective Date (the "Average Closing Price") (the ten full
trading day period during which the Exchange Ratio will be determined is
referred to as the "Exchange Ratio Determination Period"). The ratio of shares
of F&M Common Stock that will be exchanged for each outstanding share of
Security Common Stock shall be referred to herein as the "Exchange Ratio," which
shall be rounded to the nearest third decimal point. Notwithstanding the
foregoing, in the event: (A) F&M shall have entered into an agreement with any
person to (i) acquire, merge or consolidate, or enter into any similar
transaction, with F&M, (ii) purchase, lease or otherwise acquire all or
substantially all of the assets of F&M or (iii) purchase or otherwise acquire
securities representing 10% or more of the voting power of F&M; or (B) any
person shall have made a bona fide proposal to F&M by public announcement or
written communication that is or becomes the subject of public disclosure to
acquire F&M by merger, share exchange, consolidation, purchase of all or
substantially all of its assets or any similar transaction, the Average Closing
Price will be based on the average closing price of F&M Common Stock for each of
the ten trading days immediately preceding the public announcement of a
transaction or event described in either (A) or (B).
<PAGE>
(b) Each holder of a certificate representing shares of Security Common
Stock upon the surrender of his Security stock certificates to the Exchange
Agent (as defined in Section 2.2), duly endorsed for transfer in accordance with
Section 2.2 below, will be entitled to receive in exchange therefor a
certificate or certificates representing the number of shares of F&M Common
Stock that his shares shall be converted into pursuant to the Exchange Ratio.
Each such holder of Security Common Stock shall have the right to receive the
consideration described in this Section 2.1 and Section 2.3 upon the surrender
of such certificate in accordance with Section 2.2. In the event F&M changes (or
establishes a record date for changing) the number of shares of F&M Common Stock
issued and outstanding prior to the Effective Date as a result of any stock
split, stock dividend, recapitalization or similar transaction with respect to
the outstanding shares of F&M Common Stock and the record date therefor shall be
prior to the Effective Date, appropriate and proportional adjustments will be
made to the Exchange Ratio.
(c) Each share of common stock of F&M Bank-Northern Virginia issued and
outstanding immediately prior to the Effective Date shall continue unchanged as
an outstanding share of common stock of the Continuing Bank.
(d) From and after the Effective Date, all employee and director stock
options to purchase shares of Security Common Stock (each, a "Security Stock
Option") that are then outstanding and unexercised, shall be converted into and
become options to purchase shares of F&M Common Stock, and F&M shall assume each
such Security Stock Option in accordance with the terms of the plan and
agreement by which it is evidenced; provided, however, that from and after the
Effective Date (i) each such Security Stock Option assumed by F&M may be
exercised solely to purchase shares of F&M Common Stock, (ii) the number of
shares of F&M Common Stock purchasable upon exercise of such Security Stock
Option shall be equal to the number of shares of Security Common Stock that were
purchasable under such Security Stock Option immediately prior to the Effective
Date multiplied by the Exchange Ratio and rounding down to the nearest whole
share, with cash being paid for any fractional share interest that otherwise
would be purchasable, and (iii) the per share exercise price under each such
Security Stock Option shall be adjusted by dividing the per share exercise price
of each such Security Stock Option by the Exchange Ratio, and rounding down to
the nearest cent. The terms of each Security Stock Option shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar transaction with
respect to F&M Common Stock on or subsequent to the Effective Date. It is
intended that the foregoing assumption shall be effected in a manner that is
consistent with the requirements of Section 424 of the Internal Revenue Code of
1986, as amended (the "Code") as to any Security Stock Option that is an
"incentive stock option" (as defined in Section 422 of the Code).
<PAGE>
2.2 Manner of Exchange of Security Common Stock Certificates
As promptly as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent ("Exchange
Agent"), to send to each former holder of record of Security Common Stock
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of Security Common Stock for the
consideration set forth in Section 2.1 above. Any dividends paid on any shares
of F&M Common Stock that such shareholder shall be entitled to receive prior to
the delivery to the Exchange Agent of such shareholder's certificates
representing all of such shareholder's shares of Security Common Stock, will be
delivered to such shareholder only upon delivery to the Exchange Agent of the
certificates representing all of such shares (or indemnity satisfactory to F&M
and the Exchange Agent, in their judgment, if any of such certificates are lost,
stolen or destroyed). No interest will be paid on any such dividends to which
the holder of such shares shall be entitled to receive upon such delivery.
2.3 No Fractional Shares
No certificates or scrip for fractional shares of F&M Common Stock will be
issued. In lieu thereof, F&M will pay the value of such fractional shares in
cash on the basis of the Average Closing Price of F&M Common Stock.
2.4 Dividends
No dividend or other distribution payable to the holders of record of F&M
Common Stock at or as of any time after the Effective Date shall be paid to the
holder of any certificate representing shares of Security Common Stock issued
and outstanding at the Effective Date until such holder physically surrenders
such certificate for exchange as provided in Section 2.2 of this Plan of Merger,
promptly after which time all such dividends or distributions shall be paid
(without interest).
ARTICLE III
BOARD OF DIRECTORS
At the Effective Date, the Board of Directors of the Continuing Bank shall
consist of all the current directors of F&M Bank-Northern Virginia and four of
the current directors of Security designated by Security and approved by F&M.
ARTICLE IV
CONDITIONS PRECEDENT
The obligations of F&M, F&M Bank-Northern Virginia and Security to effect
the Merger as herein provided shall be subject to satisfaction, unless duly
waived, of the conditions set forth in the Agreement.
ARTICLE V
TERMINATION
This Plan of Merger may be terminated at any time prior to the Effective
Date by the parties hereto as provided in Article 6 of the Agreement.
<PAGE>
APPENDIX II
STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of November 10, 1998 (the "Option
Agreement"), by and between SECURITY BANK CORPORATION, a Virginia banking
corporation ("Security"), and F&M NATIONAL CORPORATION, a Virginia corporation
("F&M").
WITNESSETH
WHEREAS, the Board of Directors of the parties hereto approved a letter of
intent (the "Letter of Intent") dated as of the date hereof, setting forth the
principal terms and conditions to be included in a definitive Agreement and Plan
of Reorganization and a related Plan of Merger (together referred to herein as
the "Merger Agreements"), providing for the merger of Security with and into F&M
Bank-Northern Virginia, a wholly-owned Virginia banking subsidiary of F&M (the
"Merger"); and
WHEREAS, as a condition to and as consideration for F&M's entry into the
Letter of Intent and to induce such entry and the subsequent entry into the
Merger Agreements, Security has agreed to grant to F&M the option set forth
herein to acquire authorized but unissued shares of common stock of Security
("Security Common Stock").
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions
Capitalized terms used in this Option Agreement shall have the meanings
ascribed to them herein.
2. Grant of Option
Subject to the terms and conditions set forth herein, Security hereby
grants to F&M an option (the "Option") to acquire up to 191,300 shares of
Security Common Stock at a price of $11.00 per share (the "Exercise Price") in
exchange for the consideration provided in Section 4 hereof; provided, however,
that in the event Security issues or agrees to issue any shares of Security
Common Stock (other than as permitted under the Merger Agreements) at a price
less than $11.00 per share (as adjusted pursuant to Section 6 hereof), the
Exercise Price shall be equal to such lesser price. Notwithstanding anything
else in this Option Agreement to the contrary, the number of shares of Security
Common Stock subject to the Option shall be reduced if and to the extent
necessary so that the number of shares for which this Option is exercisable
shall not exceed 19.9% of the issued and outstanding shares of Security Common
Stock, before giving effect to the exercise of the Option. The number of shares
of Security Common Stock that may be received upon the exercise of the Option is
subject to adjustment as set forth herein.
3. Exercise of Option
(a) Subject to compliance with applicable law and regulation, F&M may
exercise the Option, in whole or part, at any time or from time to time if a
Purchase Event (as defined below) shall have occurred and be continuing.
<PAGE>
(b) Security shall notify F&M promptly in writing of the occurrence of any
transaction, offer or event giving rise to a Purchase Event. If more than one of
the transactions, offers or events giving rise to a Purchase Event is undertaken
or effected by the same person or occurs at the same time, then all such
transactions, offers and events shall give rise only to one Purchase Event,
which Purchase Event shall be deemed continuing for all purposes hereof until
all such transactions are terminated or abandoned by such person and all such
events have ceased or ended.
(c) In the event that F&M wishes to exercise the Option, it shall send
Security a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of shares it will acquire
pursuant to such exercise, and (ii) a place and date not earlier than three
business days nor later than 60 business days from the Notice Date for the
closing of such transaction (the "Closing Date"); provided that if prior
notification to or approval of any federal or state regulatory agency is
required in connection with such acquisition, F&M shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification period has
expired or been terminated or such approval has been obtained and any requisite
waiting period shall have passed.
(d) The Option shall expire and terminate, to the extent not previously
exercised, upon the earlier of:
(1) upon the termination of the Letter of Intent as provided for
therein, except that if Security breaches the non-solicitation covenant
set forth in Paragraph 8 of the Letter of Intent prior to such termination
date, then this Option shall continue in full force and effect through
April 15, 1999, after which date it shall expire and terminate; or
(2) if the Merger Agreements have been entered into by the parties
hereto, (A) the date shown on the Certificate of Merger issued by the
Virginia State Corporation Commission effecting the Merger; (B) upon
termination of the Merger Agreements in accordance with the provisions
thereof, other than a termination based upon, following or in connection
with either (i) a material breach by Security of a Specified Covenant (as
defined below) or (ii) the failure of Security to obtain shareholder
approval of the Merger Agreements by the vote required under applicable
law, in the case that either (i) or (ii) follow the occurrence of a
Purchase Event; or (C) 12 months after termination of the Merger
Agreements based upon a material breach by Security of a Specified
Covenant or the failure of Security to obtain shareholder approval of the
Merger Agreements by the vote required under applicable law, in either
case following the occurrence of a Purchase Event.
(e) As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(1) Security, without having received F&M's prior written consent,
shall have entered into an agreement with any person to (i) acquire, merge
or consolidate, or enter into any similar transaction, with Security, (ii)
purchase, lease or otherwise acquire all or substantially all of the
assets of Security, or (iii) purchase or otherwise acquire directly from
Security securities representing 10% or more of the voting power of
Security;
<PAGE>
(2) any person shall have acquired beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the outstanding shares
of Security Common Stock after the date hereof (the term "beneficial
ownership" for purposes of this Option Agreement having the meaning
assigned thereto in Section 13(d) of the Securities Exchange Act of 1934,
as amended, and the regulations promulgated thereunder); or
(3) any person shall have made a bona fide proposal to Security by
public announcement or written communication that is or becomes the
subject of public disclosure to acquire Security by merger, share
exchange, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, and following such bona fide
proposal the shareholders of Security vote not to approve the Merger
Agreements.
(f) As used herein, "Specified Covenant" means any covenant or agreement
contained in the Merger Agreements.
4. Payment and Delivery of Certificates
(a) At the Closing Date, F&M shall tender certified funds in an amount
equal to the aggregate Exercise Price for the number of shares with respect to
which F&M is exercising the Option.
(b) At such closing, Security shall deliver to F&M a certificate or
certificates representing the number of shares of Security Common Stock
exchanged for the Exercise Price and F&M shall deliver to Security a letter
agreeing that F&M will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Option Agreement.
5. Representations
Security hereby represents, warrants and covenants to F&M as follows:
(a) Security shall at all times maintain sufficient authorized but
unissued shares of Security Common Stock so that the Option may be exercised
without authorization of additional shares of Security Common Stock.
(b) The shares to be issued upon due exercise, in whole or in part, of the
Option, when paid for as provided herein, will be duly authorized, validly
issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization
In the event of any change in Security Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of Security Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement or pursuant to the exercise of warrants or
options to acquire shares of Security Common Stock outstanding as of the date of
the Merger Agreements or that may be issued after the date of the Merger
Agreements without constituting a breach thereof), the number of shares of
Security Common Stock subject to the Option shall be adjusted so that, after
such issuance, it equals 19.9% of the number of shares of Security Common Stock
then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option or any shares issued pursuant to the exercise of
options to acquire shares of Security Common Stock outstanding as of the date of
the Merger Agreements or that may be issued after the date of the Merger
Agreements without constituting a breach thereof. Nothing contained in this
Section 6 shall be deemed to authorize Security to breach any provision of the
Merger Agreements.
<PAGE>
7. Severability
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option Agreement will not permit the holder to
acquire the full number of shares of Security Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of Security to allow the holder to acquire, or to require Security to repurchase
to the extent permitted under applicable law, such number of shares as may be
necessary to comply with such court or regulatory agency's determination of the
permissible number of shares, without any amendment or modification hereof.
8. Miscellaneous
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
Option Agreement contains the entire agreement between the parties with respect
to the transactions contemplated hereunder and supersedes all prior arrangements
or understandings with respect thereto, written or oral. The terms and
conditions of this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. Nothing in
this Option Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Option Agreement, except as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any of its rights
or obligations under this Option Agreement or the Option created hereunder to
any other person, without the express written consent of the other party, except
that F&M may assign in whole or in part the Option and other benefits and
obligations hereunder without limitation to any of its wholly-owned
subsidiaries, and F&M may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation in the event a Purchase
Event shall have occurred and F&M shall have delivered to Security a copy of a
letter from the staff of the Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to Security, to the effect that such
assignment will not violate the requirements of the Securities Act of 1933, as
amended; provided that prior to any such assignment, F&M shall give written
notice of the proposed assignment to Security, and within 24 hours of such
notice of a bona fide proposed assignment, Security may purchase the Option at a
price and on other terms at least as favorable to F&M as that set forth in the
notice of assignment.
(d) Notices. All notices or other communications that are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage
<PAGE>
prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
9 Court Square
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282)
Copy to:
George P. Whitley, Esquire
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003)
If to Security:
Danny R. May
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 22210
Tele: (703) 361-1986
Copy to:
Jody M. Wagner, Esq.
Kaufman & Canoles
One Commercial Place
Post Office Box 3037
Norfolk, Virginia 23514
Tele: (757) 624-3000
(e) Counterparts. This Option Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Option Agreement by
either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the conflicts of laws principles thereof.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Option Agreement as of the day and year first written above.
SECURITY BANK CORPORATION
By: /s/ John O. Gregory
-------------------
John O. Gregory
Chairman of the Board
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
-------------------
Alfred B. Whitt
President
<PAGE>
APPENDIX III
OPINION OF SCOTT & STRINGFELLOW, INC.
<PAGE>
[Scott & Stringfellow letterhead]
February 2, 1999
Board of Directors
Security Bank Corporation
8780 Centreville Road
Manassas, Virginia 22110
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Security Bank Corporation
("Security") of the terms of an Agreement and Plan of Reorganization between F&M
National Corporation ("F&M") and Security dated November 25, 1998 (the
"Agreement"). The Agreement provides for the merger of Security with and into
F&M Bank-Northern Virginia, a subsidiary bank of F&M (the "Merger") and further
provides that each share of Common Stock of Security which is issued and
outstanding immediately prior to the Effective Date of the Merger shall be
converted into a number of shares of F&M Common Stock whose aggregate market
value equals $17.25.
Scott & Stringfellow, as a customary part of its investment banking
business, is engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements, and valuation for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
Security in connection with the transaction described above. We are familiar
with Security, having acted as its financial advisor in the past and have
provided certain investment banking services from time to time.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Agreement; (2) the proxy statement/prospectus; (3) Security's
financial statements for the three years ended December 31, 1997; (4) Security's
unaudited financial statements for the nine months ended September 30, 1998, and
other internal information relating to Security prepared by Security's
management; (5) information regarding the trading market for the common stocks
of Security and F&M and the price ranges within which the respective stocks have
traded; (6) the relationship of prices paid to relevant financial data such as
net worth, assets, deposits and earnings in certain bank and bank holding
company mergers and acquisitions in Virginia in recent years; (7) F&M's annual
reports to shareholders and its financial statements for the three years ended
December 31, 1997; and (8) F&M's unaudited financial statements for the nine
months ended 1998, and certain other internal information relating to F&M
prepared by F&M's management. We have discussed with members of management of
Security and F&M the background to the Merger, reasons and basis for the Merger
and the business and future prospects of Security and F&M individually and as a
combined entity. Finally, we have conducted such other studies, analyses and
investigations, particularly of the banking industry, and considered such other
information as we deemed appropriate.
<PAGE>
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the information furnished to us by
or on behalf of Security and F&M. We have not attempted independently to verify
such information, nor have we made any independent appraisal of the assets of
Security or F&M. We have taken into account our assessment of general economic,
financial market and industry conditions as they exist and can be evaluated at
the date hereof, as well as our experience in business valuation in general.
Furthermore, we are expressing no opinion as to the price which F&M's Common
Stock will trade at in any future time
Our advisory services and opinion expressed herein were prepared for the
use of the Board of Directors of Security and do not constitute a recommendation
to the Security shareholders as to how they should vote at the stockholders,
meeting in connection with the Merger. We hereby consent, however, to the
inclusion of this opinion as an exhibit to any proxy or registration statement
distributed in connection with the Merger.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions and assumptions noted above, it is our opinion that, as of the date
hereof the terms of the Agreement are fair from a financial point of view to the
shareholders of Security Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ Gary S. Penrose
--------------------------------
Gary S. Penrose
Managing Director
Financial Institutions Group
<PAGE>
APPENDIX IV
Security Bank Corporation
1997 Annual Report to Shareholders
<PAGE>
To our shareholders
We are pleased to report that 1997 was an excellent year of growth for your
bank. Assets increased 13.2% to $56,357,879, net loans increased 21% to
$31,933,777, and deposits increased 14.6% to $47,673,682.
Net income for the twelve months was $526,201, a decrease from the $641,093
earned during the same period in 1996. The decrease in earnings was anticipated
as a direct result of expenses relative to opening our first branch office in
the KMart Center on Sudley Road in Manassas. We believe the growth of this
office will contribute significantly to the future profitability of the bank. It
should be noted that in 1997 we earned back all of the remaining loss
carryforward from prior years.
Return on average assets was 1.021 % for 1997, compared to 1.41 % for 1996. The
book value per share of common stock on December 31, 1997 was $8.14 compared to
$7.57 on December 31,1996. In 1997, there was a significant increase in the
trading price of the bank's common stock. At the close of the year, the stock
was trading for $12.875 per share as compared to $8.75 at the end of 1996, an
increase of 47.1 %. Our stock is traded on the NASDAQ Small Cap market under the
symbol SecurityM.
On May 19,1997, we moved from our temporary Sudley Road office into a beautiful,
newly constructed branch office. The stately brick colonial building complete
with a clock tower, offers to our customers the convenience of three drive-in
windows, a 24 hour teller (ATM) machine, and full banking services. Also in
1997, we completed an expensive, but necessary, mission of upgrading ail of our
computers and networking them throughout the bank, which will improve our
employee efficiency. Coming in early 1998, we will introduce 24-hour banking by
phone and debit card to expand our customer service.
Ms. Edna T. Brannan joined the bank as Vice President and Commercial Loan
Officer in February 1997. She brings to us over 17 years of community banking
experience, the majority of which has been here in Prince William County.
[PHOTOS]
John 0. Gregory Danny R. May
We continue to pursue opportunities to improve and expand our customer services,
as well as to perfect our commitment to offer the personal and individual
attention you have come to expect from your home town community bank. On behalf
of the Board of Directors, Management and staff, we thank you for your continued
support. We encourage you to stop by your bank, say hello, and have a cup of
coffee.
/s/ John O. Gregory
- ----------------------
John O. Gregory
Chairman of the Board
/s/ Danny R. May
- ---------------------
Danny R. May
President
Chief Executive Officer
<PAGE>
Security Bank Corporation
Selected Financial Data
<TABLE>
<CAPTION>
Years ended December 31.
(Dollars in thousands, except ratios and per share data) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 3,769 $ 3,365 $ 3,143 $ 2,544 $ 2,324
Interest expense 1,476 1,348 1,400 1,069 901
------- ------- ------- ------- -------
Net interest income 2,293 2,017 1,743 1,475 1,423
Provision for loan losses 48 137 337 90 235
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,245 1,880 1,406 1,385 1,188
Noninterest income 397 378 408 253 307
Noninterest expense 2,080 1,617 1,612 1,502 1,276
------- ------- ------- ------- -------
Income before income taxes 562 641 202 136 219
Income taxes 36 - - - -
------- ------- ------- ------- -------
Net income $ 526 $ 641 $ 202 $ 136 $ 219
======= ======= ======= ======= =======
Per Share Data:
Net income, basic $ 0.55 $ 0.84 $ 0.36 $ 0.25 $ 0.46
Net income, diluted $ 0.54 $ 0.83 $ 0.36 $ 0.25 $ 0.46
Cash dividends - - - - -
Book value at period end 8.14 7.57 6.79 6.11 6.11
Balance Sheet Data:
Total assets $56,358 $49,771 $44,278 $40,125 $38,636
Loans, net 31,934 26,376 24,511 21,508 20,536
Securities 17,801 13,980 12,184 11,704 9,035
Deposits 47,674 41,599 39,906 36,529 35,343
Shareholders' equity 7,800 7,251 3,765 3,385 3,166
Average shares outstanding 958 765 554 548 472
Performance Ratios:
Return on average assets 1.02% 1.41% 0.47% 0.34% 0.63%
Return on average equity 7.00 11.48 5.51 3.96 7.77
Net interest margin (1) 5.08 4.96 4.58 4.26 4.74
Efficiency (2) 76.33 67.51 76.25 86.92 76.78
Capital and Liquidity Ratios:
Leverage 13.91% 15.07% 8.58% 8.79% 9.03%
Risk-based:
Tier 1 capital 19.63 21.80 12.00 12.27 11.88
Total capital 20.70 23.02 12.84 13.52 13.13
Average loans to average deposits 64.90 65.40 58.68 58.36 65.04
</TABLE>
(1) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Bank's net yield on its earning assets.
(2) Computed by dividing noninterest expense by the sum of tax equivalent net
interest income and noninterest income, net of securities gains or losses.
<PAGE>
Security Bank Corporation
Management's
Discussion and Analysis
The following discussion provides information about the major components of the
results of operations and financial condition, liquidity, and capital resources
of Security Bank Corporation. This discussion and analysis should be read in
conjunction with the Financial Statements and Notes to the Financial Statements.
Overview
Net income totaled $526,201 in 1997, a decrease of 17.92% from 1996. In 1996,
net income totaled $641,093, a 217.2% increase over 1995 which totaled $202,091.
Basic earnings per share \were $.55, $.84. and $.36 in 1997,1996, and 1995
respectively. Diluted earnings per share were $.54, $.83 and $.36 in 1997. 1996
and 1995 respectively. Net income decreased in 1997 due to the opening of our
first branch on Sudley Road in Manassas, VA, in a temporary location on January
6,1997, and in the permanent location on May l 9,1997. Net income for 1996
increased due to improved net interest margin and the reduction of loan
charge-offs which allowed for a reduction in the provision for loan losses.
Profitability as measured by the Bank 's return on average assets (ROA) was
1.02% in 1997, down from 1.41% in 1996, and .47% in 1995. The Bank's return on
average assets decreased in 1997 due to the opening of the new branch location.
Another key indicator of performance, the return on average equity (ROE) for
1997 was 7.00%, compared to 1 1 .48% and 5.51 % for 1996 and 1995 respectively.
The decrease in the return on average equity is due to a higher amount of equity
for the entire year of 1997. In 1996 the stock offering added $2.9 million to
equity as of June 24, 1 996. The ratio of net income to average total assets
(ROA) and on average shareholder's equity (ROE) and certain other ratios for the
periods indicated are presented in the table of Selected Financial Data.
At the end of 1997, the Bank had total assets of $56.358 million, up $6.587
million, or 13.2% over the previous year-end. In 1996, there was an increase of
12.4% over year-end 1995, $2.9 million of which was attributable to the stock
offering in June of 1996. The growth in 1997 was funded primarily by
interest-bearing deposits while the growth in 1996 was funded both by the stock
offering and interest-bearing deposits.
Net Interest Income
Net interest income is the major component of the Bank's earnings and is equal
to the amount by which interest income exceeds interest expense. The net
interest margin is net interest income expressed as a percentage of interest
earning assets. Changes in the volume and mix of earning assets and
interest-bearing liabilities, as well as their respective yields and rates. have
a significant impact on the level of net interest income and the net interest
margin.
During 1997. net interest income increased 13.7% to $2.293 million from $2.017
million in 1996. The Bank's net interest margin increased to 5.08% from 4.96% in
1996 and 4.58% in 1995. This is primarily due to the increased earning assets
and the change in the mix of earning assets. In addition, the 1997 yields are
adjusted for tax-equivalent yield while the 1996 and 1995 numbers were not
adjusted because of the NOL carryforward. The yield on average earning assets
increased to 8.30% in 1997 from 8.27% in 1996 and 8.26% in 1995. The yield on
average interest-bearing liabilities decreased to 4.38% in 1997, compared to
4.39% and 4.37% in 1996 and 1995 respectively. Average earning assets increased
$5.189 million, or 12.8% in 1997. Average interest-bearing liabilities increased
9.8% to $33.703 million during the same period.
<PAGE>
Interest Sensitivity
An important element of earnings performance and the maintenance of sufficient
liquidity is proper management of the interest sensitivity position ("GAP"). The
interest sensitivity GAP is the difference between interest sensitive assets and
interest sensitive liabilities in a specific time interval. This GAP can be
managed by repricing assets and/or liabilities, by selling investments
available-for-sale, by replacing an asset or liability at maturity or by
adjusting the interest rate during the life of the asset or liability. Matching
the amounts of assets and liabilities maturing in the same interval helps to
hedge interest risk and to minimize the impact on net interest income in periods
of rising or falling interest rates.
The Bank evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and pricing, fun ing sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
On December 31, 1997, the Bank held $4.564 million more in interest-sensitive
assets than liabilities that repriced within three months or less, and was
therefore in an asset-sensitive position. The Bank's cumulative gap continues to
decrease through the end of one year, thereby causing the Bank to be
liability-sensitive at ($7.719) million. An asset-sensitive institution's net
interest margin and net interest income generally will be impacted favorably by
rising interest rates, while that of a liability-sensitive institution generally
will be impacted favorably by declining interest rates.
Noninterest Income
The Bank's principal sources of noninterest income are service charges and
fees on deposit accounts, particularly transaction accounts. In 1997 noninterest
income increased 5.0% or $18,953. 1996 noninterest income increased $42,866, or
13.0% over 1995 after taking into account one-time gains on the sale of other
real estate owned. Service charges on deposit accounts increased 12.6% in 1997
over 1996 and 30.7% in 1996 over 1995. The majority of this increase is
attributed to overdraft charges paid by several customers.
Noninterest Expense
Noninterest expense increased 28.6% or $462,933 in 1997. $191,073 of this change
is an increase in salary and benefits due to the opening of the branch office
and $137,198 is an increase in building and equipment costs associated with the
new facility. Other operating costs such as data processing, supplies and
advertising also increased because of the new facility. In addition, the Bank
installed a local area network in both offices with a wide area network to tie
the two locations together. This necessitated upgrading most of the computers in
the Bank. Noninterest expense increased 5.5% or $83,908 in 1996 after taking
into account a writedown on other real estate owned in 1995 in the amount of
$78,606. The increase in 1995 was 2.1% after the above adjustment. Increases in
noninterest expense in 1996 can be attributed to two new officers hired in
November to staff the new branch and the costs associated with opening the new
branch on January 6,1997.
Income Taxes
Income tax expense at December 31,1997, was $35,731, up from zero in 1996 and
1995. This amount was determined after the utilization of the net operating loss
carryforward of $384,525. Note 7 to the Financial Statements for year end
provide a reconciliation between the amount of income tax expense computed using
the federal statutory income tax rate and the Bank's actual income tax expense.
Also included in Note 7 to the Financial Statements is information regarding the
principal items giving rise to deferred taxes for 1997 and 1996.
<PAGE>
Asset Quality - Allowance for Loan Losses
The allowance is to provide for potential losses inherent in the loan portfolio.
Among other factors, management considers the Bank's historical loss experience,
the size and composition of the loan portfolio, the value and adequacy of
collateral and guarantors, non-performing credits, and current and anticipated
economic conditions. There are additional risks of future loan losses which
cannot be precisely quantified or attributed to particular loans or classes of
loans. Since those risks include general economic trends as well as conditions
affecting individual borrowers, the allowance for loan losses is an estimate.
The allowance is also subject to regulatory examinations and determination as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
banks identified by regulatory agencies.
In 1997, the Bank had a provision expense of $48,000 compared to $137,500 in
1996 and $337,421 in 1995. Loans charged off during 1997 amounted to $78,676
compared to $116,195 in 1996 and $606,031 in 1995. Recoveries amounted to
$46,808, $135,322 and $37,138, in 1997,1996, and 1995 respectively. The ratio of
net charge-offs to average outstanding loans was .12% in 1997, (.07%) in 1996,
and 2.48% in 1995.
Nonperforming Assets
Total nonperforming assets, which consist of the Bank's nonaccrual loans and
other real estate owned, were $1.469 million at December 31,1997, a decrease of
$168,000 from December 31,1996. The improvement in nonperforming assets was due
to the sale of two of the four pieces of other real estate owned offset by an
increase in nonaccrual loans.
The Bank places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of both principal and
interest is doubtful. Policy is to place loans on nonaccrual status if principal
or interest is past due for 90 days or more unless the debt is both well secured
and in the process of collection.
Of the total nonperforming assets as of December 31, 1997, $662,594 represents
two pieces of property. This is a decrease from 1996 of $284,243. These
properties are not currently listed with a real estate agent for sale.
Securities
The securities portfolio plays a primary role in the management of interest rate
sensitivity and generates substantial interest income. In addition the portfolio
serves as a source of liquidity and is used as needed to meet collateral
requirements.
At year-end 1997, total securities were $17.801 million, up 27.3% from $13.980
million at year-end 1996. Securities of U.S. Treasury and other U.S. Government
Agencies and Corporations represent 89.4% of the total securities portfolio. The
remainder consists of investment grade corporate securities and one municipal
security of $110,147. The growth of the securities portfolio is primarily due to
the growth in assets and lending activities that did not keep pace. The greater
majority of the U.S. Government Agencies are callable. bonds with varying call
dates. Although there is a risk that these bonds will be called in a decreasing
rate environment, the bonds were purchased with the call provision in mind as a
means of funding an increase in the loan portfolio.
Effective December 31, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As a result, the securities portfolio
consists of two components, investment securities held to maturity and
securities available for sale. Securities are classified as investment
securities based on management's intent and ability, at the time of purchase, to
hold such securities to maturity. These
<PAGE>
securities are carried at amortized cost. Securities which may be sold in
response to changes in the market interest rates, changes in the securities'
prepayment risk, increases in loan demand, general liquidity needs, and other
similar factors are classified as available for sale and are carried at
estimated fair market value.
Loan Portfolio
At December 31,1997, loans, net of unearned income and the reserve for loan
losses, totaled $31.934 million, an increase of 21.1% over the 1996 total of
$26.376 million. Net loans increased 7.6% and 14% in 1996 and 1995 respectively.
The Bank is making a concerted effort to increase the gross loan/deposit ratio
from the yearend total of 68%.
The Bank's lending activities are its principal source of income. The Bank's
loan portfolio is comprised of commercial loans, construction loans, real estate
loans, and consumer loans. The primary market in which the Bank makes loans is
Prince William County (including the Cities of Manassas and Manassas Park) and
the adjacent counties of Fauquier and Fairfax. The major portion of the loan
portfolio is in real estate lending.
Deposits
The Bank's predominate source of funds is depository accounts. The Bank's
deposit base is comprised of demand deposits, savings and money market accounts,
and time deposits. The Bank's deposits are provided by individuals and
businesses located within Prince William County and the Cities of Manassas and
Manassas Park.
Total deposits increased $6.075 million, or 14.6%, in 1997 over 1996. In 1997,
this growth was mainly in interest-bearing deposits due to the opening of the
branch and a special certificate of deposit program offered during September and
October 1997 on 1 year CDs. In 1996, total deposits increased $1.693 million, or
4.2% over 1995.
Liquidity
Liquidity represents the Bank's ability to meet present and future financial
obligations through either the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold, and
investments and loans maturing within one year. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
which is sufficient to satisfy its depositors' requirements and to meet
customers' credit needs.
At December 31,1997, cash, securities maturing within one year, and federal
funds sold were 9.9% of deposits plus other liabilities, compared to 22.2% at
December 31, 1996. Most of the loan growth was in the last half of 1997 and was
funded with federal funds sold and maturing or called investments.
Additional resources of liquidity available to the Bank include the Bank's
capacity to borrow additional funds through an established line of credit with a
correspondent bank in an amount not to exceed 50% of capital.
Capital Resources
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, and changing competitive conditions
and economic forces. The adequacy of the Bank's capital is reviewed by
management on an ongoing basis. Management seeks to maintain a capital structure
that will assure an adequate level of capital to support anticipated asset
growth and to absorb potential losses.
The Bank's capital position continues to exceed regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier 1 capital, total risk-based capital, and leverage ratios.
Tier 1 capital consists of common stock, surplus, and retained earnings. Total
capital includes Tier 1 and a portion of the Allowance for Loan and Lease
Losses. Riskbased capital ratios are calculated with reference to riskweighted
assets. The Bank's Tier 1 capital ratio was 19.6% at December 31,1997, compared
to 21.8% at December 31,1996. The total risk-based capital ratio was 20.7% at
December 31,1997, compared to 23.0% at December 31, 1996. These ratios are in
excess of the mandated minimum requirement of 4% and 8% respectively.
<PAGE>
Shareholders' equity reached $7.800 million at year-end 1997 compared to $7.251
million at year-end 1996. The leverage ratio consists of Tier 1 capital divided
by average assets. At December 31, 1997, the Bank's leverage ratio was 15.2%
compared to 15.1 % at December 31,1996. Each of these exceeds the required
minimum leverage ratio of 4%.
Impact of Inflation and Changing Prices
The financial statements and related data 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.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services, since such prices are
affected by inflation. Another impact of inflation is on noninterest expenses,
which tend to rise during periods of general inflation. The values of real
estate collateralizing the Bank's loans and foreclosed property could be
affected by inflation or changing prices due to market conditions.
Other Matters
Year 2000. The Bank has formed a Year 2000 committee consisting of officers
representing the operating departments of the Bank. A list has been compiled of
all the hardware, software, and equipment vendors that the Bank uses.
Assignments have been made so that each vendor will be contacted to determine
their compliance with Year 2000 needs.
The main vendor that could affect the Bank is an outside service bureau which
processes deposit and loan accounts, and general ledger transactions. This
outside servicer reported as of the end of December 1997 that they are 86%
complete on their Year 2000 project and testing of the system changes is
expected to be complete by May 1998.
The Bank expects its hardware, software, and equipment to be compliant by the
end of 1998. An on-going part of the project is interaction with loan customers
regarding what each of them has done to bring their own businesses into
compliance with the needs of the Year 2000.
Accounting Rule Changes
FASB Statement No. 130, "Reporting Comprehensive Income", was issued in June
1997 and establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 15, 1997.
The effects of these Statements on the Bank's financial statements are not
expected to be material.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Security Bank Corporation
Manassas, Virginia
We have audited the accompanying balance sheets of Security Bank
Corporation as of December 31, 1997 and 1996, and the related statements of
income, stockholders' equity, and cash flows for the years ended December 31,
1997, 1996 and 1995. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Bank Corporation as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 7, 1998
<PAGE>
SECURITY BANK CORPORATION
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
----------- ---------
<S> <C> <C>
Cash and due from banks (Note 8) $ 1,856,746 $ 2,985,955
Federal funds sold 1,045,000 3,422,000
Securities (fair value: 1997, $17,844,791;
1996, $13,972,633) (Note 2) 17,801,393 13,979,524
Loans, net (Notes 3, 4 and 10) 31,933,777 26,375,537
Other real estate 662,594 946,837
Bank premises and equipment (Notes 5 and 8) 2 344,878 1,568,217
Accrued interest receivable 453,909 358,378
Other assets 259,582 134,181
----------- -----------
Total assets $56,357,879 $49,770,629
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 6)
Noninterest-bearing demand deposits $12,212,673 $10,468,583
Savings and interest-bearing demand deposits 11,098,547 11,229,014
Time deposits 24,362,462 19,901,474
----------- -----------
Total deposits $47,673,682 $41,599,071
Securities sold under agreement to repurchase 430,786 643,739
Accrued interest payable 128,029 109,364
Other liabilities and accrued expenses 325,672 167,684
Commitments and contingent liabilities (Notes 8 and 9) - - - -
----------- ------------
Total liabilities $48,558,169 $42,519,858
----------- -----------
Shareholders' Equity
Capital stock $5 par value; authorized 3,000,000
shares, issued and outstanding 958,267 shares
in 1997 and 1996 (Note 12) $ 4,791,335 $ 4,791,335
Surplus 2,678,730 2,678,730
Retained earnings (deficit) (Note 13) 320,221 (205,980)
Unrealized gain (loss) on securities available for
sale, net 9,424 (13,314)
-------- ----------
Total shareholders' equity $ 7,799,710 $7,250,771
----------- ----------
Total liabilities and shareholders' equity $56,357,879 $49,770,629
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
SECURITY BANK CORPORATION
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 2,658,092 $ 2,462,502 $ 2,271,197
Interest on federal funds sold 180,331 129,549 171,452
Interest on investment securities, taxable 315,928 226,380 392,306
Interest and dividends on securities available for sale:
Taxable 600,467 537,933 301,744
Dividends 13,845 8,904 6,795
----------- ----------- -----------
Total interest income $ 3,768,663 $ 3,365,268 $ 3,143,494
----------- ----------- -----------
Interest Expense
Interest on deposits $ 1,440,628 $ 1,318,844 $ 1,389,745
Interest on short-term borrowings 35,282 27,363 10,328
Interest on federal funds purchased 115 1,742 -
----------- ----------- -----------
$ 1,476,025 $ 1,347,949 $ 1,400,073
----------- ----------- -----------
Net interest income $ 2,292,638 $ 2,017,319 $ 1,743,421
Provision for loan losses (Note 4) 48,000 137,500 337,421
----------- ----------- -----------
Net interest income after provision for loan losses $ 2,244,638 $ 1,879,819 $ 1,406,000
----------- ----------- -----------
Other Income
Fees on deposit accounts $ 366,251 $ 325,213 $ 241,321
Other service charges and fees 27,922 29,383 29,896
Securities gains, net - - 37,383
Rent income - 90 14,782
Gain (loss) on sale of other real estate (7,810) 5,547 77,928
Other operating income 10,637 17,814 6,252
----------- ----------- -----------
$ 397,000 $ 378,047 $ 407,562
----------- ----------- -----------
Other Expense
Salaries and employee benefits $ 1,078,702 $ 877,591 $ 787,116
Occupancy expense 190,435 113,929 101,701
Furniture and equipment expense 154,508 109,671 112,976
Loss on other real estate - - 78,606
Other operating expenses (Note 17) 656,061 515,582 531,072
----------- ----------- -----------
$ 2,079,706 $ 1,616,773 $ 1,611,471
----------- ----------- -----------
Income before income taxes $ 561,932 $ 641,093 $ 202,091
Provision for income taxes (Note 7) 35,731 - -
----------- ----------- -----------
Net income $ 526,201 $ 641,093 $ 202,091
=========== =========== ===========
Earnings per share
Basic (Note 14) $ .55 $ .84 $ .36
=========== =========== ===========
Assuming dilution (Note 14) $ .54 $ .83 $ .36
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
SECURITY BANK CORPORATION
Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
Retained Gain (Loss) Total
Capital Earnings Available Shareholders'
Stock Surplus (Deficit) for Sale Equity
------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 2,771,000 $ 1,784,251 $(1,049,164) $ (120,683) $ 3,385,404
Net income - 1995 -- -- 202,091 -- 202,091
Change in unrealized gain (loss)
on securities available for sale -- -- -- 177,752 177,752
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 $ 2,771,000 $ 1,784,251 $ (847,073) $ 57,069 $ 3,765,247
Net income - 1996 -- -- 641,093 -- 641,093
Sale of common stock - stock
offering (Note 12) 2,012,500 892,912 -- -- 2,905,412
Issuance of common stock -
exercise of warrants (Note 12) 7,835 1,567 -- -- 9,402
Change in unrealized gain (loss)
on securities available for sale -- -- -- (70,383) (70,383)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 4,791,335 $ 2,678,730 $ (205,980) $ (13,314) $ 7,250,771
Net income - 1997 -- -- 526,201 -- 526,201
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes of
$4,855 -- -- -- 22,738 22,738
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 4,791,335 $ 2,678,730 $ 320,221 $ 9,424 $ 7,799,710
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
SECURITY BANK CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ -------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 526,201 $ 641,093 $ 202,091
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 48,000 137,500 337,421
Depreciation and amortization 170,341 113,325 118,246
Writedown in value of other real estate owned -- -- 78,606
(Gain) loss on other real estate owned 7,810 (5,547) (77,928)
Net premium amortization (discount accretion)
on securities 8,673 19,629 (5,039)
(Gain) on sale of securities -- -- (37,383)
(Gain) loss on disposition of fixed assets (8,505) (9,249) 1,334
Changes in assets and liabilities:
(Increase) in accrued interest receivable (95,531) (17,511) (65,098)
Increase in accrued interest payable 18,665 447 50,869
(Increase) decrease in other assets (14,604) 4,117 (39,469)
Increase (decrease) in other liabilities 19,974 30,511 (62,985)
Net cash provided by operating activities $ 681,024 $ 914,315 $ 500,665
Cash Flows from Investing Activities
Proceeds from maturities and principal payments of
investment securities $ 2,619,402 $ 1,846,613 $ 2,721,299
Proceeds from maturities of securities available for sale 7,673,941 6,256,810 6,665,514
Proceeds from sale of securities available for sale -- -- 1,828,665
Purchases of investment securities (5,484,255) (1,487,549) (2,664,536)
Purchases of securities available for sale (8,612,037) (8,501,256) (8,810,747)
Net (increase) in loans (5,285,477) (1,929,736) (3,522,648)
Purchases of premises and equipment (953,487) (23,278) (124,706)
Proceeds from sale of other real estate -- -- 768,458
Selling expenses on sale of other real estate owned (19,178) -- --
Proceeds from sale of fixed assets 12,200 15,347 --
------------ ------------- ------------
Net cash (used in) investing activities $(10,048,891) $ (3,823,049) $ (3,138,701)
------------ ------------- ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts $ 1,611,413 $ (370,156) $ 1,985,923
Net increase in certificates of deposit 4,463,198 2,062,918 1,391,521
Increase (decrease) in securities sold under
agreement to repurchase (212,953) 258,714 385,025
Proceeds from sale of common stock -- 2,914,814 --
------------ ------------- ------------
Net cash provided by financing activities $ 5,861,658 $ 4,866,290 $ 3,762,469
------------ ------------- ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
SECURITY BANK CORPORATION
Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ -------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents $ (3,506,209) $ 1,957,556 $ 1,124,433
Cash and Cash Equivalents
Beginning 6,407,955 4,450,399 3,325,966
------------ ------------ ------------
Ending $ 2,901,746 $ 6,407,955 $ 4,450,399
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash payments for Interest $ 1,457,360 $ 1,347,502 $ 1,349,204
============ ============ ============
Cash payments for income taxes $ 21,462 $ -- $ --
============ ============ ============
Supplemental Disclosure of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans $ -- $ -- $ 182,575
============ ============ ============
Loans originated from sale of other real estate $ 302,000 $ 47,199 $ --
============ ============ ============
Unrealized gain (loss) on securities available for sale $ 27,593 $ (70,383) $ 177,752
============ ============ ============
Unrealized income on loans refinanced $ 18,763 $ 25,341 $ --
============ ============ ============
Investments originated through deferred compensation
agreement $ 32,952 $ 17,063 $ --
============ ============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
SECURITY BANK CORPORATION
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Security Bank Corporation
conform to generally accepted accounting principles and to the
reporting guidelines prescribed by regulatory authorities. The
following is a description of the more significant of those policies
and practices.
Securities
Investments are to be classified in three categories and accounted for
as follows:
Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Bank has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the
interest method over their contractual lives.
Securities Available for Sale
Securities classified as available for sale are those debt and equity
securities that the Bank intends to hold for an indefinite period of
time but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the
maturity mix of the Bank's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in stockholders'
equity. Realized gains or losses, determined on the basis of the cost
of specific securities sold, are included in earnings.
Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are included in
interest income on trading account securities. The Bank had no
securities classified as trading securities at December 31, 1997 and
1996.
<PAGE>
Loans
Security Bank Corporation grants commercial, financial, residential and
consumer loans to customers in Northern Virginia. The loan portfolio is
well diversified and generally is collateralized by assets of the
customers. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
Loans are shown on the balance sheets net of unearned income and the
allowance for loan losses. Interest is computed by methods which result
in level rates of return on principal. Loans are charged off when in
the opinion of management they are deemed to be uncollectible after
taking into consideration such factors as the current financial
condition of the customer and the underlying collateral and guarantees.
The Bank adopted FASB No. 114, "Accounting by Creditors for Impairment
of a Loan." This statement has been amended by FASB No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." Statement 114, as amended, requires that the
impairment of loans that have been separately identified for evaluation
is to be measured based on the present value of expected future cash
flows or, alternatively, the observable market price of the loans or
the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for which
management has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of the
collateral. Statement 114, as amended, also requires certain
disclosures about investments in impaired loans and the allowance for
credit losses and interest income recognized on loans.
The Bank considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to
impairment under FASB 114. A loan is considered impaired when it is
probable that the Bank will be unable to collect all principal and
interest amounts according to the contractual terms of the loan
agreement. Factors involved in determining impairment include, but are
not limited to, expected future cash flows, financial condition of the
borrower, and current economic conditions. A performing loan may be
considered impaired, if the factors above indicate a need for
impairment. A loan on nonaccrual status may not be impaired if in the
process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of
less than 5% of the required principal and interest payment generally
does not indicate an impairment situation, if in management's judgment
the loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired loan
under FASB 114. Charge-offs for impaired loans occur when the loan, or
portion of the loan is determined to be uncollectible, as is the case
for all loans.
Loans are placed on nonaccrual when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income generally is not
recognized on nonaccrual loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
credit concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired loans
are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowances relating to
impaired loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio
and the related allowance may change in the near term.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Other Real Estate
Real estate acquired by foreclosure is carried at the lower of cost or
fair market value less an allowance for estimated selling expenses on
the future disposition of the property.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of 31.5 years for office buildings and
3 to 10 years for furniture, equipment and vehicles. Maintenance and
repairs are charged to income as incurred; improvements and betterments
are capitalized. When items are retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the
accounts and any resulting gains or losses are included in the
determination of net income.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating
loss carryforwards, and tax credit carryforwards. Deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Nonrefundable Loan Fees and Costs
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as an
adjustment of the related loan's yield.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform
to the Statement 128 requirements.
<PAGE>
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Bank considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Cash and cash equivalents
consist of cash on hand, funds due from banks, and federal funds sold.
Advertising Costs
The Bank follows the policy of charging the costs of advertising to
expense as they are incurred.
Note 2. Securities
Amortized costs and fair values of the securities being held to
maturity as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- --------- ---------
1997
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 200,104 $ 271 $ -- $ 200,375
U.S. Governmental corporations and
agencies 5,673,724 43,910 (1,009) 5,716,625
Mortgage-backed securities 190,391 2,011 -- 192,402
Obligations of states and
political subdivisions 110,147 -- -- 110,147
Corporate securities 743,670 1,914 (3,699) 741,885
----------- -------- ---------- ----------
$6,918,036 $ 48,106 $ (4,708) $6,961,434
========== ========== ========== ==========
1996
----------------------------------------------------
U.S. Treasury securities $1,506,805 $ 5,887 $ (3,035) $1,509,657
U.S. Governmental corporations and
agencies 1,595,697 6,589 (1,435) 1,600,851
Mortgage-backed securities 211,261 -- (2,582) 208,678
Corporate securities 741,565 -- (12,315) 729,251
----------- ---------- ----------- ----------
$4,055,328 $ 12,476 $ (19,367) $4,048,437
=========== ========== =========== ==========
</TABLE>
The amortized cost and fair value of securities being held to maturity
as of December 31, 1997, by contractual maturities, are shown below.
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be
called or repaid without any penalties. Therefore, these securities are
not included in the maturity categories in the maturity summary.
Amortized Fair
Cost Value
----------- ----------
1997
------------------------
Due in one year or less $ 600,104 $ 599,275
Due after one through five years 2,985,062 3,003,190
Due after five through ten years 3,032,332 3,056,420
Due after ten years 110,147 110,147
Mortgage-backed securities 190,391 192,402
---------- ----------
$6,918,036 $6,961,434
========== ==========
Amortized costs and fair values of securities available for sale as of
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ------------ ---------- ---------
1997
---------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 906,029 $ 1,752 $ -- $ 907,781
U.S. Governmental corporations and
agencies 8,768,488 28,122 (13,307) 8,783,303
Mortgage-backed securities 165,921 -- (3,268) 162,653
Corporate securities 748,540 1,113 (133) 749,520
Other securities 280,100 -- -- 280,100
---------- ---------- --------- ----------
$10,869,078 $ 30,987 $ (16,708) $10,883,357
=========== ========== ======== ===========
1996
----------------------------------------------------
U.S. Treasury securities $ 1,610,837 $ 3,107 $ (1,506) $ 1,612,438
U.S. Governmental corporations and
agencies 6,765,871 24,385 (44,442) 6,745,814
Mortgage-backed securities 241,849 2,556 -- 244,405
Corporate securities 1,050,453 4,944 (2,358) 1,053,039
Other securities 268,500 -- -- 268,500
---------- ---------- --------- ----------
$ 9,937,510 $ 34,992 $ (48,306) $ 9,924,196
========== ========== ========= ==========
</TABLE>
The amortized cost and fair value of securities available for sale as
of December 31, 1997, by contractual maturities, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations.
Amortized Fair
Cost Value
----------- ----------
1997
Due in one year or less $ 1,296,120 $ 1,297,655
Due after one through five years 6,121,712 6,135,162
Due after five through ten years 3,005,225 3,007,787
Mortgage-backed securities 165,921 162,653
Other 280,100 280,100
---------- ----------
$10,869,078 $10,883,357
=========== ===========
Proceeds from maturities and principal payments of securities being
held to maturity during 1997, 1996 and 1995 were $2,619,402,
$1,846,613 and $2,721,299.
There were no sales during 1997, 1996 and 1995.
Proceeds from sales and maturities of securities available for sale
during 1997, 1996 and 1995 were $7,673,941, $6,256,810 and $8,494,179.
Gross realized gains of $37,383 were realized on those sales in 1995.
There were no sales during 1997 or 1996.
Securities having a book value of $2,921,201 and $2,969,735 at
December 31, 1997 and 1996, were pledged to secure public deposits and
for other purposes required by law.
<PAGE>
Note 3. Loans, Net
Net loans at December 31, 1997 and 1996, are summarized as follows:
1997 1996
-------------------------
(Thousands)
Loans secured by real estate:
Construction and land development $ 3,256 $ 1,524
Secured by 1-4 family residential properties 4,180 3,381
Secured by nonfarm nonresidential properties 17,148 14,943
Commercial and industrial loans 5,062 4,274
Consumer loans 2,761 2,667
Other 27 52
---------- --------
Total loans $ 32,434 $ 26,841
---------- --------
Deduct:
Unearned income $ 75 $ 56
Allowance for loan losses 425 409
---------- --------
$ 500 $ 465
---------- --------
$ 31,934 $ 26,376
========== ========
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December
31, 1997, 1996 and 1995, were as follows:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $408,688 $252,061 $483,533
Provision charged to operating expense 48,000 137,500 337,421
Loan recoveries 46,808 135,322 37,138
Loan charge-offs (78,676) (116,195) (606,031)
Balance at end of year $424,820 $408,688 $252,061
======== ======== ========
Information about impaired loans as of and for the years ended
December 31, 1997 and 1996 is as follows:
1997 1996
--------- --------
Impaired loans for which an allowance
has been provided $ 441,488 $ 448,389
Impaired loans for which no allowance
has been provided -- --
--------- --------
Total impaired loans $ 441,488 $ 448,389
========= ========
Allowance provided for impaired loans,
included in the allowance for loan losses $ 117,627 $ 118,469
Average balance in impaired loans $ 449,473 $ 457,162
Interest income recognized $ 5,961 $ 7,763
Nonaccrual loans which were excluded from impaired loan disclosure
under FASB 114 amounted to $364,213 and $247,433 at December 31, 1997
and 1996, respectively. If interest on these loans had been accrued,
such income would have approximated $16,460 and $15,824 for 1997 and
1996, respectively.
<PAGE>
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows at December 31,
1997 and 1996:
1997 1996
------- -------
Land $ 477,204 $ 477,204
Bank building 1,277,562 1,277,562
Leasehold improvements 491,484 --
Furniture and equipment 1,024,840 680,909
Vehicle 28,326 27,022
---------- ----------
$3,299,416 $2,462,697
Less accumulated depreciation
and amortization 954,538 894,480
---------- ----------
$2,344,878 $1,568,217
========== ==========
Depreciation and amortization expense included in the operating
expenses amounted to $170,341, $113,325 and $118,246 in 1997, 1996 and
1995, respectively.
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $7,028,809 and $6,377,190
in 1997 and 1996, respectively. At December 31, 1997, the scheduled
maturities of time deposits (in thousands) are as follows:
(Dollars in thousands) 1997
----
Three months or less $ 4,133
Over three months through twelve months 15,965
Over one year through three years 3,755
Over three years 509
-------
$24,362
=======
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1997 and 1996:
1997 1996
------ ------
Deferred tax assets:
Deferred compensation $ 19,943 $ --
Other real estate expense 30,131 41,923
Interest on nonaccrual loans 6, 291 50,249
Loss carryforward -- 138,465
Deferred loan fees 2,621 3,494
Unrealized gain on other
real estate 10,993 7,378
AMT credit carryforwards 79,411 8,962
Securities available for sale -- 4,527
--------- ---------
$ 204,390 $254,998
---------- ---------
Deferred tax liabilities:
Property and equipment $ 28,707 $ 23,830
Allowance for loan losses 71,418 87,738
Securities available for sale 4,855 --
--------- ---------
$ 104,980 $111,568
---------- --------
$ 99,410 $143,430
Less: valuation allowance -- (143,430)
------- ---------
$ 99,410 $ --
========== =========
<PAGE>
The provision for income taxes charged to operations for the years
ended December 31, 1997, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- -----------
<S> <C> <C> <C>
Current tax expense $ 198,741 $ 8,962 $ --
Deferred tax expense (benefit) (24,854) 156,310 50,142
Benefit of net operating loss (138,156) (165,272) (50,142)
--------- --------- ---------
$ 35,731 $ -- $ --
========= ========= =========
</TABLE>
The income tax expense differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income from
continuing operations for the years ended December 31, 1997, 1996 and
1995, due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense $ 191,057 $ 217,972 $ 62,065
Increase (decrease) in income taxes resulting from:
Tax-exempt interest (20,951) (17,555) (17,450)
Benefit of net operating loss (138 156 (165,272 (50,142)
Other 3,781 (35,145) 5,527
--------- --------- ---------
$ 35,731 $ -- $ --
========= ========= =========
</TABLE>
At December 31, 1996, the Bank had net operating loss carryforwards of
$407,250 available under provisions of the Internal Revenue Code to be
applied against future federal taxable income. These carryforwards were
fully utilized in 1997.
Note 8. Commitments and Contingent Liabilities
In the normal course of business, there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying financial statements. The Bank does not anticipate any
material loss as a result of these transactions.
As a member of the Federal Reserve System, the Bank is required to
maintain certain average reserve balances. Those reserve balances
include usable vault cash and amounts on deposit with the Federal
Reserve. For the final weekly reporting period in the years ended
December 31, 1997 and 1996, the amount of daily average required
balances was approximately $557,000 and $726,000.
The Bank entered into a ten-year noncancellable lease agreement for a
branch location on July 11, 1996. This lease requires payment of
certain operating expenses and contains a renewal option clause for
four additional five-year terms. The total minimum rental commitment
under the lease is $598,542 at December 31, 1997 which is due as
follows:
Due in the year ending December 31,
1998 $ 65,000
1999 65,000
2000 65,000
2001 65,000
2002 65,000
--------
Later years 273,542
---------
$ 598,542
==========
<PAGE>
Note 9. 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 consist primarily of
commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract or
notional 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 is represented by the contractual notional 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.
Contract or
Notional Amount
---------------------
1997 1996
---------------------
Financial instruments whose contract
amounts represent credit risk
Commitments to finance real estate
acquisitions and construction $2,678,729 $1,221,000
Unfunded lines-of-credit 3,473,543 2,810,000
Letters of credit 121,562 283,000
---------- --------
Total $6,273,834 $4,314,000
========== ==========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments 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, if deemed necessary by
the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral normally consists of real
property.
Standby letters of credit are conditional commitments by the Bank to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
The Bank holds real estate and bank deposits as collateral supporting
those commitments for which collateral is deemed necessary. The extent
of collateral held for those commitments at December 31, 1997, varies
from 0 percent to 100 percent; the average amount collateralized is 70
percent.
<PAGE>
Note 10. Related Party Transactions
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
principal officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with others. These persons and firms were indebted to the Bank for
loans totaling $2,563,287 and $1,410,488 at December 31, 1997 and 1996,
respectively. During 1997, total principal additions were $1,561,093
and total principal payments were $408,294.
In 1997, the Bank had business dealings with companies owned by
directors of the Bank. Expenditures made to these companies in 1997
include insurance expense of $17,157, engineering fees of $12,485,
automobile purchase of $28,326 and capital expenditures related to
branch construction of $425,390.
Note 11. Stock Option Plans
In 1997, the shareholders approved the 1996 Employee Stock Option Plan.
The plan allows for incentive stock options and nonqualified stock
options. 200,000 shares of the Bank's Common Stock have been reserved
for the issuance of stock options under the Employee Plan. The Board
granted 32,150 options to key employees of the Bank at $9.09. Of the
32,150 options, a total of 19,250 were vested as of December 31, 1997
with the remaining options vesting 4,300 per year on December 31 for
the next three years. The options expire five years following the date
of vesting.
In 1997, the shareholders approved the 1996 Director Stock Option Plan.
100,000 shares of the Bank's Common Stock have been reserved for the
issuance of stock options under the Director Plan. The exercise price
of all stock options under the Director Plan is the fair market value
of the Common Stock on the date of grant. Directors have received an
initial option to purchase 19,200 shares, of which 100% are vested, at
$8.00. Directors also received an additional option to purchase 28,800
shares at $8.43, of which 9,600 shares were vested as of December 31,
1997 with the remaining options vesting 9,600 per year on December 31
for the next two years. The options expire five years following the
date of vesting.
Under the Employee and Director Plans, in no event may the shares for
which awards may be granted under the plans exceed 11.5% of the issued
and outstanding shares of Common Stock of the Bank at any time. All
shares vest immediately upon change of control of the Bank.
The fair value of each employee-related grant is estimated at the grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997: Dividend rate of 0%,
price volatility of 12.73%, risk-free interest rate of 5.31% and
expected lives of 5 years.
<PAGE>
The Bank applies APB Opinion 25 in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for
1997. Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net income and earnings per share
would have been as follows:
1997
Net income
As reported $ 526,201
==========
Proforma $ 490,296
==========
Basic earnings per share
As reported $ .55
==========
Proforma $ .51
==========
Diluted earnings per share
As reported $ .54
==========
Proforma $ .50
==========
The status of the stock option plans during 1997 is as follows:
<TABLE>
<CAPTION>
1996 Employee 1996 Director
Stock Option Plan Stock Option Plan
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 $ -- $ -- -- $ --
Granted during 1997 32,150 9.09 48,000 8.26
Exercised during 1997 -- -- -- --
Forfeited during 1997 -- -- -- --
------- -------
Outstanding at December 31, 1997 32,150 9.09 48,000 8.26
======= =======
Weighted average fair value of
options granted during 1997 $ 2.31 $ 2.11
======= =======
</TABLE>
The status of the options outstanding at December 31, 1997 is as
follows:
Remaining
Exercise Contractual
Price Number Life in Years
---------- ------- --------------
$ 9.09 14,950 4
9.09 4,300 5
9.09 4,300 6
9.09 4,300 7
9.09 4,300 8
8.00 19,200 3.5
8.43 9,600 5
8.43 9,600 6
8.43 9,600 7
<PAGE>
Note 12. Capital Stock
At the Bank's Annual Meeting of Stockholders held on May 1, 1996, the
stockholders approved an amendment to the Bank's Articles of
Incorporation increasing the number of shares of common stock from
1,500,000 to 3,000,000.
In June, 1996, the Bank sold 402,500 shares of its common stock in a
public offering. Net proceeds from the sale were $2,905,412 after
deducting underwriting commissions of $184,400 and direct offering
costs of $80,188. Of the net proceeds, $2,012,500 was credited to
common stock and $892,912 was credited to surplus.
On September 15, 1993, Security Bank Corporation offered for sale
168,000 shares of common stock with one common stock purchase warrant
("warrant") attached to every four shares. A total of 35,906 and 48,452
shares were sold as of December 31, 1994 and 1993, respectively, at
$6.00 per share. Proceeds totaled $215,436 in 1994 and $281,590 in
1993.
Total warrants issued in the offering were 21,077. Warrants exercised
totaled -0-, 1,567 and -0- in 1995, 1996 and 1997, respectively. As of
December 31, 1997, warrants outstanding totaled 19,460. Warrants are
transferable and entitle the holder to purchase one share of common
stock at a price of $6.00 per share for a five-year period ending on
December 1, 1998.
<PAGE>
Note 13. Retained Earnings
Federal regulations limit the amount of dividends which the Bank can
pay without obtaining prior approval and, additionally, require that
the Bank maintain a ratio of total capital to assets, as defined by
regulatory authorities. As of December 31, 1997, the Bank could declare
dividends up to $320,221 or 4.1% of net assets without prior approval.
Note 14. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Potential dilutive common
stock had no effect on income available to common shareholders.
Earnings per share amounts for prior periods have been restated to give
effect to the application of Statement 128 which was adopted by the
Bank in 1997.
<TABLE>
<CAPTION>
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share 958,267 $ .55 765,496 $ .84 554,200 $ .36
======== ======== =======
Effect of dilutive securities:
Stock options 14,039 -- --
Warrants 7,756 5,439 863
------- ------- -------
Diluted earnings per share 980,062 $ .54 770,935 $ .83 555,063 $ .36
======= ========= ======= ======== ======= =======
</TABLE>
<PAGE>
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes.
Loan Receivables
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date.
At December 31, 1997 and 1996, the carrying amounts and fair values of
loan commitments and stand-by letters of credit were immaterial.
<PAGE>
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(Dollars in thousands) 1997 1996
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 2,902 $ 2,902 $ 6,408 $ 6,408
Securities 17,801 17,845 13,980 13,973
Loans 32,359 32,012 26,785 26,359
Less: allowance for loan losses (425) -- (409) --
-------- -------- -------- --------
Total financial assets $ 52,637 $ 52,759 $ 46,764 $ 46,740
======== ======== ======== ========
Financial liabilities:
Deposits $ 47,674 $ 47,700 $ 41,599 $ 41,609
Short-term borrowings 431 431 644 644
-------- -------- -------- --------
Total financial liabilities $ 48,105 $ 48,131 $ 42,243 $ 42,253
======== ======== ======== ========
</TABLE>
<PAGE>
Note 16. Capital Requirements
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 - possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes,
as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the
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>
(Amount in Thousands)
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $ 8,215 20.70% > $ 3,174 > 8.0% > $ 3,968 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted Assets) $ 7,790 19.63% > $ 1,587 > 4.0% > $ 2,381 > 6.0%
- - - -
Tier 1 Capital (to Average Assets) $ 7,790 13.91% > $ 2,241 > 4.0% > $ 2,801 > 5.0%
- - - -
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $ 7,672 23.02% > $ 2,666 > 8.0% > $ 3,333 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted Assets) $ 7,264 21.80% > $ 1,333 > 4.0% > $ 2,000 > 6.0%
- - - -
Tier 1 Capital (to Average Assets) $ 7,264 15.07% > $ 1,962 > 4.0% > $ 2,452 > 5.0%
- - - -
</TABLE>
Note 17. Other Expenses
The principal components of "Other expenses" in the Statements of
Income are:
1997 1996 1995
------------ ---------- ----------
Miscellaneous OREO expenses $ 3,758 $ 5,506 $ 25,130
Printing, stationery and supplies 69,406 46,586 45,008
FDIC assessment 16,476 13,604 66,161
Audit and legal expenses 54,467 71,182 62,613
Data processing 121,503 92,430 80,877
Other (includes no items in excess
of 1% of total revenue) 390,451 286,274 251,283
-------- -------- --------
$656,061 $515,582 $531,072
======== ======== ========
<PAGE>
Corporate Information
Board of Directors
John O. Gregory
Chairman of the Board
President, Gregory Construction Company
Danny G. Snow
Vice Chairman of the Board
President, Ice Components, Inc.
Harry J. Parrish II
Secretary of the Board
President, MIFCO
John T. DeBell
President, Bengtson, DeBell and Elkin, Ltd.
Michael C. Martin
Dealer/Operator, Dudley Martin Chevrolet
Danny R. May
President and CEO, Security Bank Corporation
Richard J. Ratcliffe
President, R. Jackson Ratcliffe, Inc.
Kenneth B. Swenson
President, Prince William Hospital
C. Dianne Kirkman
Assistant Secretary of the Board
Officers
John O. Gregory
Chairman of the Board
Danny R. May
President and CEO
L. Thomas Campbell
Executive Vice President/Senior Credit Officer
Carol S. Brandon
Vice President/Cashier and CFO
Edna T. Brannan
Vice President/Commercial Loans
Deborah C. Kahley
Vice President/Marketing and Branch Administration
Peggy J. Clark
Assistant Vice President/Operations
Shirley J. Holt
Assistant Vice President/Loan Administration
<PAGE>
Transfer Agency
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Legal Counsel
Russell Norwood Wells
Independent Auditors
Yount, Hyde & Barbour, P.C.
Winchester, VA
Security Bank Corporation
8780 Centreville Road
Manassas, VA 20110-5267
703-361-1986
7801 Sudley Road
Manassas, VA 20109-2805
703-335-8768
Investment Information
Market Price Per Share: 1997
High $13.875
Low $ 9.00
Last $12.875
Book Value Per Share
(as of December 31, 1997): $ 8.14
Annual Meeting
The Annual Meeting of the Shareholders will be held May 20, 1998 at 7:30 P.M. at
the office of Security Bank Corporation at 8780 Centreville Road, Manassas,
Virginia.
Exchange Listing
Security Bank Corporation common stock is traded on the NASDAQ SmallCap Market
under the symbol SecurityM.
Form 10-KSB
Copies of the 1997 annual report filed with the Board of Governors of the
Federal Reserve System on Form 10-KSB and supplemental quarterly information
may be obtained by contacting: C. Dianne Kirkman, Security Bank Corporation,
8780 Centreville Road, Manassas, VA 20110.
<PAGE>
APPENDIX V
SECURITY BANK CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<PAGE>
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Washington, D. C. 20551
- --------------------------------------------------------------------------------
Form 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
- --------------------------------------------------------------------------------
SECURITY BANK CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1337782
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8780 Centreville Road, Manassas, Virginia 20110
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (703) 361-1986
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Common Stock Number of shares 961,378 Outstanding at November 10, 1998
<PAGE>
SECURITY BANK CORPORATION
Index
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial information
Item 1. Financial Statements (unaudited) 3
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Income - Nine months ended September 30, 1998 and
1997 4
Statements of Shareholders' Equity - Nine months ended September
30, 1998 and 1997 5
Statements of Cash Flows - Nine months ended September 30, 1998 and
1997 6
Notes to Financial Statements - September 30, 1998 7
Item 2. Management's Discussion and Analysis of Financial Results of
Operations 11
Part II. Other information
Item 6 Exhibits and reports on Form 8-K 14
Signatures 16
</TABLE>
<PAGE>
SECURITY BANK CORPORATION
BALANCE SHEETS
as of
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Unaudited
9/30/98 12/31/97
--------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,130,552 $ 1,856,746
Federal funds sold 4,417,000 1,045,000
Securities (fair value: 1998, $16,856,305 16,799,467 17,801,393
and 1997, $17,844,791)
Loans, net 33,243,419 31,933,777
Other real estate owned 712,594 662,594
Bank premises & equipment, net 2,232,884 2,344,878
Accrued interest receivable 442,324 453,909
Other assets 457,742 259,582
--------------- -------------
TOTAL ASSETS $ 60,435,982 $ 56,357,879
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 14,478,780 $ 12,212,673
Interest bearing 36,895,873 35,461,009
--------------- -------------
Total Deposits 51,374,653 47,673,682
--------------- -------------
Securities sold under agreement to repurchase 374,262 430,786
Accrued interest payable 174,475 128,029
Other liabilities and accrued expenses 396,499 325,672
--------------- -------------
Total Liabilities 52,319,889 48,558,169
--------------- -------------
SHAREHOLDERS' EQUITY
Capital stock, $5.00 par value
authorized 3,000,000 shares,
issued 961,198 in 1998 and 958,267 shares in 1997 4,805,990 4,791,335
Surplus 2,687,068 2,678,730
Retained earnings 576,612 320,221
Accumulated other comprehensive income 46,423 9,424
--------------- -------------
Total Shareholders' Equity 8,116,093 7,799,710
--------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,435,982 $ 56,357,879
=============== =============
</TABLE>
<PAGE>
SECURITY BANK CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Quarter Ended
9/30/98 9/30/97 9/30/98 9/30/97
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,305,513 $ 1,946,461 $ 776,843 $ 674,804
Interest on federal funds sold 136,870 121,488 70,957 47,740
Interest and dividends on investment
securities:
Taxable interest income 281,078 226,007 77,937 78,504
Tax exempt interest income 7,741 - 4,159 -
Interest and dividends on securities
available for sale:
Taxable interest income 400,880 432,500 128,618 141,454
Dividends 10,141 9,915 3,381 3,367
------------- ------------- ------------ ------------
Total interest income 3,142,223 2,736,371 1,061,895 945,869
------------- ------------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 1,221,305 1,025,925 413,435 355,122
Interest on short-term borrowings 19,870 27,480 5,993 10,091
------------- ------------- ------------ ------------
Net interest income 1,901,048 1,682,966 642,467 580,656
------------- ------------- ------------ ------------
Provision for loan losses 205,000 27,000 45,000 21,000
------------- ------------- ------------ ------------
Net Interest Income after provision
for loan losses 1,696,048 1,655,966 597,467 559,656
------------- ------------- ------------ ------------
OTHER INCOME
Fees on deposit accounts 254,644 266,502 81,196 85,673
Other service charges and fees 33,414 19,600 14,647 7,860
Securities gains, net 10,663 - - -
Other operating income 11,766 6,286 8,561 4,508
------------- ------------- ------------ ------------
310,487 292,388 104,404 98,041
------------- ------------- ------------ ------------
OTHER EXPENSE
Salaries and employee benefits 789,270 820,430 250,590 271,932
Occupancy expense 163,224 136,853 56,632 53,075
Furniture and equipment expense 134,350 111,638 48,459 49,207
Other operating expenses 556,618 501,871 185,982 153,366
------------- ------------- ------------ ------------
1,643,462 1,570,792 541,663 527,580
------------- ------------- ------------ ------------
Income before income taxes 363,073 377,562 160,208 130,117
Provision for income taxes 106,682 - 48,512 -
------------- ------------- ------------ ------------
NET INCOME $ 256,391 $ 377,562 $ 111,696 $ 130,117
============= ============= ============ ============
PER COMMON SHARE
Basic $ 0.27 $ 0.39 $ 0.12 $ 0.14
============= ============= ============ ============
Assuming dilution $ 0.26 $ 0.39 $ 0.11 $ 0.13
============= ============= ============ ============
</TABLE>
<PAGE>
SECURITY BANK CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Comprehensive Earnings Comprehensive Common
Total Income(Loss) (Deficit) Income(Loss) Stock Surplus
--------------- ---------------- -------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 7,250,771 $ -- $ (205,980) $ (13,314) $ 4,791,335 $2,678,730
Comprehensive Income(loss):
Net income $ 377,562 377,562 377,562
Other comprehensive income(loss)
Unrealized gains(losses) on securities
available for sale 28,920 28,920 28,920
--------------- -------------
Total comprehensive income(loss) $ 406,482
============= -------------- ------------------------------------------
Balance, September 30, 1997 $ 7,657,253 $ 171,582 $ 15,606 $ 4,791,335 $ 2,678,730
============ ========== ========= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Retained Other
Comprehensive Earnings Comprehensive Common
Total Income(Loss) (Deficit) Income(Loss) Stock Surplus
------------- ----------- ---------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 7,799,710 $ -- $ 320,221 $ 9,424 $ 4,791,335 $ 2,678,730
Comprehensive Income(loss):
Net income 256,391 256,391 256,391
-------------
Other comprehensive income, net of tax
Unrealized gains(losses) on securities
available for sale 47,662
Less: reclassification adjustment (10,663)
Other comprehensive income, net of tax 36,999 36,999 36,999
------------
Total comprehensive income $ 293,390
=============
Issuance of common stock -
exercise of options (1,750) shares 15,907 8,750 7,157
Issuance of common stock-
exercise of warrants (1,181 shares) 7,086 5,905 1,181
------
---------------------- ------------------------------
Balance, September 30, 1998 $ 8,116,093 $ 576,612 $ 46,423 $ 4,805,990 $ 2,687,068
============ ========== ========= ============ ===========
</TABLE>
<PAGE>
SECURITY BANK CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 256,391 $ 377,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 205,000 27,000
Deferred income taxes(credits) (52,371) -
Depreciation 145,448 119,565
Net premium amortization(discount accretion) on securites 10,744 4,827
(Gain) on sale of securities (10,663) -
(Gain)loss on disposition of fixed assets - 3,188
Changes in assets and liabilities:
(Increase)decrease in accrued interest receivable 11,585 (8,244)
(Increase)decrease in other assets (131,357) (67,536)
Increase(decrease) in accrued interest payable 46,446 22,484
Increase(decrease) in other liabilities 123,060 7,512
----------------- ------------------
Net cash provided by (used in) operating activities 604,283 486,358
----------------- ------------------
Cash Flows from Investing Activities
Investments
Proceeds from maturities & principal payments of securities
held to maturity 2,882,037 2,164,972
Proceeds from maturities of securities available for sale 7,958,900 4,549,363
Proceeds from sale of securities available for sale 860,078 -
Purchases of securities held to maturity (313,379) (2,085,027)
Purchases of securities available for sale (10,329,732) (6,601,725)
Net (increase) decrease in loans (1,659,735) (1,569,275)
Purchase of other real estate owned (50,000) -
Sale of other real estate owned 60,000 -
Purchase of premises and equipment (34,086) (928,503)
----------------- ------------------
Net cash provided by(used in) investing activities (625,917) (4,470,195)
----------------- ------------------
Cash Flows from Financing Activities
Net increase(decrease) in DDA, NOW, and savings accounts 3,019,109 1,250,176
Net increase in certificates of deposit 681,862 2,908,245
Increase(decrease) in repurchase agreements (56,524) 532,577
Proceeds from sale of common stock 22,993 -
----------------- ------------------
Net cash provided by (used in) financing activities 3,667,440 4,690,998
----------------- ------------------
Increase (decrease) in cash and cash equivalents 3,645,806 707,161
Cash and Cash Equivalents
Beginning 2,901,746 6,407,955
----------------- ------------------
Ending $ 6,547,552 $ 7,115,116
================= ==================
Supplemental Disclosures of Cash Flow Information,
Cash payments for interest $ 1,194,729 $ 1,030,921
================= ==================
Supplemental Disclosure of Noncash Investing and Financing Activities:
Unrealized gain(loss) on securities available for sale $ 56,059 $ 28,920
================= ==================
Investments originated through deferred compensation agreements $ 101,647 $ 29,141
================= ==================
Other real estate acquired in settlement of loans $ 60,000 $ -
================= ==================
</TABLE>
<PAGE>
SECURITY BANK CORPORATION
Notes to Financial Statements
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-QSB and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles.
2. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 30, 1998
and December 31, 1997, and the result of operations and cash flows for the
nine months ended September 30, 1998 and 1997. The statements should be read
in conjunction with the Notes to Financial Statements included in the bank's
Annual Report for the year ended December 31, 1997.
3. The results of operations for the nine month period ended September 30, 1998
and 1997, are not necessarily indicative of the results to be expected for
the full year.
4. Securities held to maturity and available for sale as of September 30, 1998,
and December 31, 1997, are:
<TABLE>
<CAPTION>
December 31,
September 30, 1998 1997
Held to Maturity Amortized Cost Amortized Cost
------------------- -----------------
<S> <C> <C>
U. S. treasury securities $ 0 $ 200,104
U. S. governmental corporations and
agencies 3,227,084 5,673,724
Mortgage-backed securities 158,642 190,391
Obligation of states and political
subdivisions 422,793 110,147
Corporate securities 545,221 743,670
------------ ------------
$4,353,740 $6,918,036
============ ============
Fair Value Fair Value
------------ ------------
U. S. treasury securities $ 0 $ 200,375
U. S. governmental corporations and
agencies 3,275,520 5,716,625
Mortgage-backed securities 161,731 192,402
Obligation of states and political
subdivisions 422,133 110,147
Corporate securities 551,194 741,885
------------ ------------
$4,410,578 $6,961,434
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
Available for Sale Amortized Cost Amortized Cost
-------------------- -------------
<S> <C> <C>
U. S. treasury securities $ 902,353 $ 906,029
U. S. governmental corporations and
agencies 9,467,322 8,768,488
Mortgage-backed securities 1,290,952 165,921
Corporate securities 249,462 748,540
Other securities 465,300 280,100
-------------------- -------------
$12,375,389 $10,869,078
==================== =============
Fair Value Fair Value
-------------------- -------------
U. S. treasury securities $ 904,221 $ 907,781
U. S. governmental corporations and
agencies 9,527,765 8,783,303
Mortgage-backed securities 1,298,569 162,653
Corporate securities 249,872 749,520
Other securities 465,300 280,100
-------------------- -------------
$12,445,727 $10,883,357
==================== =============
</TABLE>
5. Net loans at September 30, 1998, and December 31, 1997, are summarized as
follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ------------------
<S> <C> <C>
Loans secured by real estate:
Construction & land development $ 5,433,900 $ 3,256,285
Secured by 1-4 family residential
properties 3,898,942 4,179,316
Secured by nonfarm nonresidential
properties 15,774,440 17,148,178
Commercial & industrial loans 5,712,706 5,062,361
Consumer loans 2,803,568 2,760,625
Other 13,374 26,568
--------------------- ------------
Gross loans 33,636,930 32,433,333
Deduct:
Unearned discount 57,691 74,736
Allowance for loan losses 335,820 424,820
--------------------- ------------
393,511 499,556
--------------------- ------------
Net loans $33,243,419 $31,933,777
===================== ============
</TABLE>
<PAGE>
6. Reserve for Loan Losses
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- ---------------------
<S> <C> <C>
Balance, beginning $424,820 $408,688
Provision charged to operating
expense 205,000 48,000
Loan recoveries 21,846 46,808
Loan charge-offs (315,846) (78,676)
-------------------- ---------------------
Balance, ending $335,820 $424,820
==================== =====================
</TABLE>
7. Earnings per Share
<TABLE>
<CAPTION>
Third Quarter 1998 Third Quarter 1997
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $111,696 960,500 $ .12 $130,117 958,267 $ .14
=============== ============ ============= =================
Effect of Dilutive
Securities:
Warrants 9,576 7,606
Employee options 7,297 2,481
Director options 16,052 7,748
--------------- ------------
Diluted EPS
Income available to
common stockholders
+
assumed conversions $111,696 993,425 $.11 $130,117 976,102 $.13
========================================== ==========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Third Quarter 1998 Year to Date Third Quarter 1997 Year to Date
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $256,391 959,346 $ .27 $377,562 958,267 $ .39
=============== ============ ============= =================
Effect of Dilutive
Securities:
Warrants 9,895 7,448
Employee options 8,489 1,008
Director options 16,658 3,486
--------------- ------------
Diluted EPS
Income available to
common stockholders
+
assumed conversions $256,391 994,388 $ .26 $377,562 970,209 $ .39
========================================== ==========================================
</TABLE>
8. New Accounting Pronouncements
Effective January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. Financial statements for prior periods
have been restated as required.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets and liabilities, measured
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This statement is effective for
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
The Bank will adopt this accounting standard as required by January 1, 2000.
This statement is not expected to have a material impact on the Bank's
financial statements.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. This SOP requires that entities capitalize certain
internal-use software costs once certain criteria are met. This statement is
not expected to have a material impact on the Bank's financial statements.
<PAGE>
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities and organization
costs to be expensed as incurred. This statement is effective for the fiscal
year 1999 financial statements. This statement is not expected to have a
material impact on the Bank's financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, the following discussion contains
forward-looking statements regarding management's earnings expectations and
the anticipated effect of the Bank's branching efforts. The actual results of
Security Bank Corporation may differ from those anticipated by management as
a result of several factors including, but not limited to, imposition of
federal taxes due to exhaustion of the tax loss carryforward, expenses
associated with the branch, changes in interest rates, increased competition,
deterioration in the quality of loans, and other factors that may effect a
bank's performance.
FINANCIAL SUMMARY
Net income for the nine months ended September 30, 1998, decreased 32.1% to
$256,391 or $.27 per share (basic) and $.26 (assuming dilution) compared to
$377,562 or $.39 (basic and assuming dilution) for the first nine months of
1997. Annualized returns on average assets and average equity for the period
ended September 30, 1998, were .59% and 4.3%, respectively, compared to 1.0%
and 6.8% for the same period in 1997. The greatest impact on the net income
for 1998 was the $205,000 addition to the loan loss reserve while in 1997
there was a provision of $27,000. In addition, 1998 saw the provision of
$106,682 for federal income taxes while 1997 was covered by a net operating
loss carryforward. The annualized return on equity in 1998 and 1997 was
affected by the large amount of capital in the Bank. The decreased return on
average assets was caused by decreased earnings and an increase in average
assets in 1998 to $57,638,500 from $50,029,712 in the first nine months of
1997.
The total assets of the Bank increased to $60,435,982 at September 30, 1998,
compared to $56,357,879 at December 31, 1997, representing an increase of
$4,078,103 or 7.2%. Gross loans outstanding improved 3.7% to $33,636,930 at
September 30, 1998, from $32,433,333 at December 31, 1997. Total deposits
increased $3,700,971, or 7.8%, to $51,374,653 at September 30, 1998, compared
to $47,673,682 at December 31, 1997.
Shareholders' equity at September 30, 1998, totaled $8,116,093 compared to
$7,799,710 at December 31, 1997. Book value per share of common stock on
September 30, 1998, was $8.44 per share compared to $8.14 at December 31,
1997. The book value increased due to earnings and the increase in
accumulated other comprehensive income.
<PAGE>
Net Interest Income
Net interest income is the Bank's primary source of earnings and represents
the difference between interest and fees earned on earning assets and the
interest expense paid on deposits and other interest bearing liabilities. Net
interest income totaled $3,142,223 for the first nine months of 1998 compared
to $2,736,371 for the same period in 1997. The improvement in net interest
income was attributable to a higher volume of earning assets.
Noninterest Income
Service charges on deposit accounts for the nine months of 1998 totaled
$254,644 compared to $266,502 for the same period in 1997, a decrease of
4.4%. The Bank is closing accounts of customers who frequently overdraw more
quickly to reduce the risk of loss to the Bank. The Bank currently derives
most of its other noninterest income from service charges and return check
charges on checking, money market and NOW accounts.
Noninterest Expenses
In support of the Bank's continued growth, total noninterest expenses
consisting of employee related costs, occupancy and other overhead totaled
$1,643,462 for the first nine months of 1998, compared to $1,570,792 for the
same period in 1997, representing an increase of $72,670 or 4.6%. The
decrease in salary and employee benefits is attributable to a reduction in
staff at the Sudley Road office offset by an accrual of $30,000 for the
severance package of the President and CEO. The increased costs in 1998 in
both occupancy and furniture and equipment expense are associated with the
opening of the Sudley Road office as well as the installation of a local area
network and wide area network in 1997. Costs for the above are included for a
full nine months in 1998 while costs for 1997 began in May. In addition, in
1998, the Bank has experienced increased equipment costs to test the local
area networks for compatibility with the Year 2000.
Allowance for Loan Losses
The allowance for loan losses as of September 30, 1998, was $335,820. This
decrease is primarily the result of charge offs taken on long-term workouts
where all efforts to effect collection have been exhausted. The current ratio
of the allowance for loan losses to gross loans is 1.0%. In the first nine
months of 1998, a provision of $205,000 was taken as compared to a provision
for loan losses of $27,000 taken in 1997. The lower provision in 1997 was due
to a recovery on a previously charged-off loan. Management believes that the
allowance for loan losses is adequate to cover credit losses inherent in the
loan portfolio at September 30, 1998. Although loans classified as loss,
doubtful, substandard or special mention are not expected to have a material
impact beyond what has been reserved, it is management's intention to
increase the reserve by $15,000 per month for the remainder of 1998.
<PAGE>
Capital Resources
Shareholders' equity on September 30, 1998, was $8,116,093 compared to
$7,799,710 on December 31, 1997. Factors contributing to the change in
shareholders' equity were the retention of net income, the conversion of
1,181 warrants into common stock, the conversion of 1,750 options into common
stock, and the increase in accumulated other comprehensive income due to the
change in the value of securities available for sale.
At September 30, 1998, the Bank's Tier 1 and total risk-based capital ratios
were 19.72% and 20.54%, respectively, compared to 19.63% and 20.70% at
December 31, 1997. The Bank's leverage ratio was 13.36% at September 30,
1998, compared to a ratio of 13.91% at December 31, 1997. The Bank's capital
structure places it above the Federal Reserve Board's guidelines, as the Bank
maintains a strong capital base to take advantage of business opportunities
while ensuring that it has the resources to protect against the risks
inherent in its business.
Other Matters - Year 2000
The Bank has established a committee to address and evaluate problems that
may be encountered with respect to the Year 2000. By the end of 1997 the Bank
completed a thorough assessment of each of our computer related vendors,
service providers, and equipment vendors. The systems deemed to be critical
to the continued, uninterrupted operation of the bank and the service the
Bank provides to its customers were renovated and thoroughly tested by both
the vendor and the bank by September 30, 1998. The renovated programs have
been incorporated into the daily operations of the data center.
The Bank has an on-going project of contacting commercial loan customers with
a survey form that both informs the customers of some of the issues and tries
to determine the readiness of our loan customers when it comes to the Year
2000. These results will be incorporated into loan policy and decisions as
necessary to reduce the risk to the Bank of future loan problems resulting
from the failure of some of our customers to address the issue.
Year to date in 1998 the Bank has expensed approximately $13,000 for the
testing of computer systems. It has been determined that the Bank will not
need to replace any equipment in order to meet Year 2000 requirements. It is
the opinion of the Bank that the cost of addressing Year 2000 problems will
not represent a material event or uncertainty that would reasonably be
expected to adversely affect future financial results.
The Bank is currently working to complete contingency plans which would be
implemented in the event a problem occurs. This project is expected to be
complete by December 31, 1998.
<PAGE>
Other Matters
During the third quarter, the Bank was accepted into membership with the
Federal Home Loan Bank. This action increases the ability of the Bank to
borrow funds as needed.
Part II. Other information
Item 1. Legal proceedings.
None
Item 2. Change in securities.
None
Item 3. Defaults upon senior securities.
None
Item 4. Submission of matters to a vote of security holders.
None
Item 5. Other information.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit 2 Not applicable
Exhibit 3 (I) Articles of Incorporation incorporated by
reference to Exhibit 3 to the Bank's Annual Report
on Form 10-KSB for the year ended December 31,
1996
(II) Bylaws, Security Bank Corporation
incorporated by reference to Exhibit 3 (II) to the
Bank's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1998
Exhibit 4 Not applicable
<PAGE>
Exhibit 10 a. Lease Agreement dated July 11, 1996, between
Security Bank Corporation and Twelve Knotts
Limited Partnership, Incorporated by reference
to Exhibit 10 to the Bank's Quarterly Report on
Form 10-QSB for the quarter ended September 30,
1996
b. Employment Agreement between Security Bank
Corporation and Danny R. May dated May 1, 1998
incorporated by reference to Exhibit 10(b) to
the Bank's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1998
Exhibit 11 Not applicable
Exhibit 15 Not applicable
Exhibit 18 Not applicable
Exhibit 19 Not applicable
Exhibit 22 Not applicable
Exhibit 23 Not applicable
Exhibit 24 Not applicable
Exhibit 27 Not applicable
Exhibit 99 Not applicable
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY BANK CORPORATION
DATE: November 10, 1998 Danny R. May
Principal Executive Officer
DATE: November 10, 1998 Carol S. Brandon
Principal Financial Officer
