Filed Pursuant to Rule 424(b)(3)
File Number 333-90427
[State Bank letterhead]
AFFILIATION PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Fellow Shareholders:
We cordially invite you to attend a special meeting of shareholders of
The State Bank of the Alleghenies to be held at State Bank's main office located
at 116 Riverside Avenue, Covington, Virginia on Tuesday, December 28, 1999 at
7:00 p.m.
The purpose of the meeting will be to consider and vote on the
affiliation of State Bank with F&M National Corporation, a bank holding company
headquartered in Winchester, Virginia.
AS A RESULT OF THE AFFILIATION, YOU WILL RECEIVE SHARES OF F&M COMMON
STOCK WITH AN AGGREGATE MARKET VALUE OF $18.00, SUBJECT TO A MAXIMUM OF 0.651
AND A MINIMUM OF 0.554 SHARES, FOR EACH SHARE OF STATE BANK 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
affiliation date based on its average closing price over a 10 day period.
Accordingly, the number of F&M shares you will receive in the affiliation cannot
be determined now, although you will receive no less than 0.554 shares and no
more than 0.651 shares for each State Bank share you own. On November 18, 1999,
the closing price of F&M stock was $29.50. If this were the stock price just
before the affiliation occurred, you would have received 0.610 shares of F&M
common stock for each common share of State Bank you own. The most recent sale
of State Bank common stock as of that date occurred on October 6, 1999 at $16.85
per share, based on information received by State Bank. These prices will
fluctuate between now and the affiliation.
THE AFFILIATION CANNOT BE COMPLETED UNLESS HOLDERS OF MORE THAN
TWO-THIRDS OF STATE BANK COMMON STOCK APPROVE IT. If approved, we anticipate the
affiliation will occur in early January 2000.
This proxy statement/prospectus provides you with detailed information
about the proposed affiliation. 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 State Bank in
documents it has filed with the Federal Reserve.
YOUR BOARD OF DIRECTORS HAS APPROVED THE AFFILIATION AND BELIEVES IT IS
IN THE BEST INTERESTS OF STATE BANK AND YOU, OUR SHAREHOLDERS. ACCORDINGLY, THE
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE AFFILIATION.
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 AFFILIATION. You can
revoke your proxy by writing to State Bank's 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,
Don E. Stone, Jr.
President and Chief Executive Officer
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Neither the Securities and Exchange Commission nor any state securities
regulators have approved the F&M common stock to be issued in the affiliation or
determined if this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
This proxy statement/prospectus is dated November 19, 1999 and is
expected to be mailed to shareholders on November 22, 1999.
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THE STATE BANK OF THE ALLEGHENIES
Covington, Virginia
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 28, 1999
-------------------------
A special meeting of shareholders of The State Bank of the Alleghenies
("State Bank") will be held on Tuesday, December 28, 1999 at 7:00 p.m. at State
Bank's main office located at 116 Riverside Avenue, Covington, Virginia for the
following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
October 5, 1999, by and between F&M National Corporation ("F&M") and State Bank
and a related plan of share exchange, providing for the affiliation of State
Bank with F&M upon the terms and conditions therein, including, among other
things, that each issued and outstanding share of State Bank common stock will
be exchanged for shares of F&M common stock with an aggregate market value equal
to $18.00, subject to a maximum of 0.651 and a minimum of 0.554 shares of F&M
stock, with cash being paid instead of issuing fractional shares. The
affiliation 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 November 17, 1999, as the
record date for the special meeting. Only holders of record of State Bank 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
Benny A. Williams, Jr.
Secretary
November 19, 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 STATE BANK UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE AFFILIATION AGREEMENT.
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QUESTIONS AND ANSWERS ABOUT THE AFFILIATION
Q: WHY IS STATE BANK AFFILIATING WITH F&M?
A: Both the State Bank Board and the F&M Board believe the affiliation 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
affiliation will permit the combined operations of State Bank and F&M to be
better positioned to be a stronger competitor in the rapidly changing and
consolidating financial services industry in Virginia. To review the background
and reasons for the affiliation in greater detail, see pages 11 through 14.
Q: WHAT WILL I RECEIVE IN THE AFFILIATION?
A: You will receive the number of shares
of F&M common stock that have an aggregate market value equal to $18.00, subject
to a maximum of 0.651 shares and a minimum of 0.554 shares, in exchange for each
share of State Bank 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 sixth business day before
the date of the affiliation.
Because the market price of F&M common stock fluctuates, the number of
shares you will receive in the affiliation cannot be determined at this time,
although you will receive no more than 0.651 shares and no less than 0.554
shares of F&M stock for each State Bank share you own. As an example, based on
the $29.50 closing price of F&M common stock on November 18, 1999, you would
have received 0.610 shares of F&M common stock for each common share of State
Bank you own. The most recent sale of State Bank common stock occurred on
October 6, 1999 at $16.85 per share, based on information received by State
Bank.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE AFFILIATION 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 25 and 26.
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
AFFILIATION TO YOU.
Q: WILL I RECEIVE DIVIDENDS AFTER THE AFFILIATION?
A: For more than 56 consecutive years, F&M has paid dividends to its
shareholders. State Bank has paid dividends on its common stock for 16 years.
F&M currently pays a quarterly dividend of $0.235 per share. F&M expects that it
will continue to pay at least this amount in quarterly dividends. After the
affiliation, 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 affiliation agreement. The affiliation
agreement provides for the acquisition by F&M of State Bank, and for the
exchange of each of your shares of State Bank common stock for shares of F&M
common stock that have an aggregate market value of $18.00, subject to a maximum
of 0.651 and a minimum of 0.554 shares of F&M stock for each State Bank share.
After the transaction, State Bank will continue to operate a separate banking
subsidiary of F&M under the name of "F&M Bank-Highlands." Approval of the
affiliation requires the affirmative vote of more than two-thirds of State Bank
common stock.
THE STATE BANK BOARD APPROVED AND ADOPTED THE AFFILIATION AGREEMENT AND
RECOMMENDS VOTING FOR THE APPROVAL OF THE AFFILIATION AGREEMENT.
<PAGE>
Q: WHAT SHOULD I DO NOW?
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 affiliation. 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 affiliation.
The special meeting will take place at 7:00 p.m. on Tuesday, December
28, 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 10 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 State Bank 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 affiliation.
Q: WHEN IS THE AFFILIATION EXPECTED TO BE COMPLETED?
A: We are working to complete the affiliation in early January 2000.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the affiliation is completed we will send you written instructions
for exchanging your State Bank 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 affiliation, you should contact:
Benny A. Williams, Jr.
Secretary
The State Bank of the Alleghenies
116 West Riverside Avenue
P. O. Box 860
Covington, Virginia 24426
Telephone: (540) 965-1100
<PAGE>
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT THE AFFILIATION....................................i
SUMMARY........................................................................1
THE SPECIAL MEETING............................................................9
THE AFFILIATION...............................................................10
Terms of the Affiliation.............................................10
Background of and Reasons for the Affiliation........................11
Opinion of Financial Advisor.........................................15
Effective Date.......................................................20
Surrender of Stock Certificates......................................20
Representations and Warranties; Conditions to the Affiliation........20
Regulatory Approvals.................................................21
Business Pending the Affiliation.....................................21
No Solicitation; Board Action........................................22
Waiver, Amendment and Termination....................................23
Termination Fee......................................................23
Resales of F&M Common Stock..........................................24
Accounting Treatment.................................................24
Interests of Certain Persons in the Affiliation......................25
Material Federal Income Tax Consequences.............................25
Dissenters' Rights...................................................26
Certain Differences in Rights of Shareholders........................28
Expenses of the Affiliation..........................................28
Cautionary Statement Concerning Forward-Looking Statements...........29
MARKET PRICES AND DIVIDENDS...................................................29
THE STATE BANK OF THE ALLEGHENIES.............................................31
General..............................................................31
History and Business.................................................31
Competition..........................................................32
BUSINESS OF F&M ..............................................................32
History and Business.................................................32
F&M's Acquisition Program............................................33
COMPARATIVE RIGHTS OF SHAREHOLDERS............................................33
DESCRIPTION OF F&M CAPITAL STOCK..............................................38
OTHER MATTERS.................................................................39
EXPERTS.......................................................................39
LEGAL OPINIONS................................................................39
WHERE YOU CAN FIND MORE INFORMATION...........................................40
APPENDICES
I Agreement and Plan of Reorganization and Plan of Share Exchange
II Opinion of Baxter Fentriss and Company
III State Bank's Annual Report on Form 10-K for the year ended
December 31, 1998
IV State Bank's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999
V Article 15 of the Virginia Stock Corporation Act Relating to
Dissenters' Rights
<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 affiliation more fully, and for a more
complete description of the legal terms of the affiliation, you should read
carefully this entire document and the documents to which we refer you. See
"Where You Can Find More Information" on page 40.
EXCHANGE RATIO TO BE NUMBER OF SHARES OF F&M COMMON STOCK WITH MARKET VALUE OF
$18.00 FOR EACH STATE BANK SHARE; MAXIMUM OF 0.651 AND MINIMUM OF 0.554 F&M
SHARES FOR EACH STATE BANK SHARE (PAGE 10)
As a result of the affiliation, you will receive shares of F&M common stock
that have an aggregate market value equal to $18.00, subject to a maximum of
0.651 and a minimum of 0.554 shares, for each share of State Bank 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 sixth business day before the date of the
affiliation. The number of shares of F&M common stock for which each outstanding
share of State Bank common stock will be exchanged will be established by
dividing $18.00 by the F&M average closing price. If the F&M average closing
price is $32.50 or greater, you will receive 0.554 shares of F&M stock, and if
the average closing price is $27.65 or less, you will receive 0.651 shares of
F&M stock, for each State Bank share you own.
Because the market price of F&M common stock fluctuates, the number of
shares you will receive in the affiliation cannot be determined at this time. As
an example, however, based on the $29.50 closing price of F&M common stock on
November 18, 1999, you would have received 0.610 shares of F&M common stock for
each common share of State Bank you own.
NO FEDERAL INCOME TAX ON SHARES RECEIVED IN AFFILIATION (PAGE 25)
We expect that you will not recognize any gain or loss for federal income
tax purposes as a result of the affiliation, 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 affiliation.
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
affiliation will affect you.
F&M DIVIDEND POLICY FOLLOWING THE AFFILIATION
F&M currently pays quarterly dividends of $0.235 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 or other factors.
F&M's next dividend is payable January 25, 2000 to shareholders of record
on December 24, 1999. Because the affiliation will not be effective by December
24, 1999, the dividend will not be paid on shares of F&M common stock issued in
the affiliation to State Bank's shareholder. However, State Bank will pay a
dividend of $0.16 per share on November 22, 1999, to its shareholders of record
on November 10, 1999.
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STATE BANK BOARD RECOMMENDS SHAREHOLDER APPROVAL (PAGE 10)
The State Bank Board approved the affiliation and the affiliation
agreement. The Board believes that the affiliation is fair to you and in your
best interests. The State Bank Board recommends that you vote "FOR" approval of
the affiliation. The State Bank Board believes that, as a result of the
affiliation, State Bank shareholders will have less financial risk, have greater
liquidity, and will experience greater stock value appreciation than they would
if State Bank remained independent.
EXCHANGE RATIO FAIR TO SHAREHOLDERS, ACCORDING TO INVESTMENT BANK (PAGE 15)
Baxter Fentriss and Company has given an opinion to the State Bank Board
that the exchange ratio is fair from a financial point of view to State Bank
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 II. We encourage you to read the opinion
carefully. If the affiliation is completed, Baxter Fentriss and Company will
receive a fee equal to approximately $530,000 in exchange for its advice and for
providing its fairness opinion.
MEETING TO BE HELD DECEMBER 28, 1999 (PAGE 9)
The special shareholders' meeting will be held on Tuesday, December 28,
1999 at 7:00 p.m. at State Bank's main office located at 116 Riverside Avenue,
Covington, Virginia.
THE COMPANIES (PAGES 31 AND 32)
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 seven banking affiliates in Virginia, one bank affiliate in West
Virginia and one bank affiliate in Maryland which serve the Shenandoah Valley,
northern, central and southside Virginia, the eastern panhandle of West Virginia
and the counties of Montgomery and Prince George's in Maryland. At September 30,
1999, F&M had total assets of $2.9 billion, total deposits of $2.5 billion and
total shareholders' equity of $291.3 million.
THE STATE BANK OF THE ALLEGHENIES
116 West Riverside Avenue
P.O. Box 860
Covington, Virginia 24426
(540) 965-1100
State Bank is a community bank headquartered in Covington, Virginia that
operates three banking offices in the Alleghany and Bath County area. At
September 30, 1999, State Bank had total assets of $156.0 million, total
deposits of $138.7 million and total shareholders' equity of $17.3 million.
THE AFFILIATION (PAGE 10)
The affiliation agreement provides that after the share exchange State Bank
will continue to operate as a separate banking subsidiary of F&M under the name
"F&M Bank-Highlands." The affiliation agreement and the related plan of share
exchange are attached to this proxy statement/prospectus as Appendix I. We
encourage you to read the affiliation agreement, as it is the legal document
that governs the affiliation.
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TWO-THIRDS STATE BANK SHAREHOLDER VOTE REQUIRED (PAGE 9)
Approval of the affiliation requires the affirmative vote of more than
two-thirds of the outstanding shares of State Bank common stock. Your failure to
vote will have the effect of a vote against approval of the affiliation. Certain
directors and executive officers of State Bank own about 14.5% of the shares
entitled to vote at the meeting, and we expect them to vote their shares in
favor of the affiliation.
Brokers who hold shares of State Bank common stock as nominees will not
have authority to vote such shares with respect to the affiliation unless
shareholders provide voting instructions.
The affiliation does not require the approval of F&M's shareholders.
RECORD DATE SET AT NOVEMBER 17, 1999; ONE VOTE PER SHARE OF STATE BANK STOCK
(PAGE 9)
You are entitled to vote at the special meeting if you owned shares of
State Bank common stock at the close of business on November 17, 1999. On
November 17, 1999, there were 2,960,000 shares of State Bank common stock
outstanding.
You will have one vote at the meeting for each share you owned on November
17, 1999.
MONETARY BENEFITS TO MANAGEMENT IN THE AFFILIATION (PAGE 25)
When considering the recommendation of the State Bank Board, you should be
aware that some State Bank directors and officers have interests in the
affiliation that differ from the interests of other State Bank shareholders.
State Bank's President and Chief Executive Officer, Don E. Stone, Jr., will
remain Chief Executive Officer and will become Vice Chairman of the State Bank
board. Benny A. Williams, Jr., Executive Vice President of State Bank, will
succeed Mr. Stone as President and also will become Chief Administrative Officer
of State Bank. Mr. Williams also will succeed Mr. Stone as Chief Executive
Officer on July 1, 2000. After stepping down as Chief Executive Officer, Mr.
Stone will receive an annual fee of $50,000 for two years in accordance with an
agreement to be entered into with F&M. Mr. Williams has been offered a
three-year agreement that will provide severance payments and other benefits if
there is a change in control of F&M. In addition, a split dollar insurance plan
will be gifted to each of Messrs. Stone and Williams, and H.C. Rhodes, Jr.,
State Bank's Senior Vice President.
The State Bank Board was aware of these and other interests and considered
them before approving and adopting the affiliation agreement.
CONDITIONS THAT MUST BE SATISFIED FOR THE AFFILIATION TO OCCUR (PAGE 20)
The following conditions must be met for us to complete the affiliation:
o approval of the affiliation by State Bank 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
affiliation qualifies for pooling of interests accounting treatment;
and
3
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o receipt of a legal opinion concerning the tax consequences of the
affiliation.
We cannot complete the affiliation unless we obtain the approval of the
Board of Governors of the Federal Reserve System and the Virginia State
Corporation Commission. On November 9, 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 State Bank or F&M could elect to waive a
condition that has not been satisfied and complete the affiliation anyway.
TERMINATION OF THE AFFILIATION AGREEMENT (PAGE 23)
We can agree to terminate the affiliation agreement at any time without
completing the affiliation. Either company may also terminate the affiliation
agreement in the following circumstances:
o the affiliation is not completed on or before June 30, 2000; 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.
TERMINATION FEE (PAGE 23)
To discourage other companies from acquiring State Bank, the affiliate
agreement can be terminated by F&M if another party attempts to acquire control
of State Bank. If F&M terminates the agreement under those circumstances, State
Bank has agreed to pay F&M a termination fee of $2.0 million. As of the date of
this document, we do not believe an event that would cause the payment of the
termination fee has occurred.
AFFILIATION TO TAKE PLACE IN EARLY JANUARY 2000 (PAGE 20)
The affiliation will become effective at the date and time stated on the
certificate of share exchange issued by the Virginia State Corporation
Commission. We anticipate the affiliation will take place in early January 2000.
DISTRIBUTION OF STOCK CERTIFICATES (PAGE 20)
After the affiliation, you will need to exchange your State Bank 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.
F&M TO USE POOLING OF INTEREST ACCOUNTING TREATMENT (PAGE 24)
We expect that the affiliation 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 affiliation and enable F&M to also avoid charges
against future earnings resulting from amortizing goodwill. This accounting
method also means that after the affiliation F&M will report financial results
as if State Bank had always been combined with F&M.
DISSENTERS' RIGHTS (PAGE 26)
If you file a demand for appraisal before the vote on the affiliation, and
do not vote for
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the affiliation, you may have the right to obtain a cash payment for the "fair
value" of your shares of State Bank common stock, excluding any element of value
arising from the affiliation. To exercise these rights, you must comply with the
procedural requirements of Article 15 of the Virginia Stock Corporation Act,
which we have attached to this proxy statement/prospectus as Appendix V. The
"fair value" of State Bank common stock would be determined in judicial
proceedings, and we cannot predict what the results would be. Failure to take
any of the steps required under Article 15 may result in a loss of dissenter's
rights.
SHARE PRICE INFORMATION
F&M common stock is listed on the New York Stock Exchange. State Bank
common stock is not registered on any exchange, traded in the over-the-counter
market, or quoted by the Nasdaq Stock Market. State Bank common stock has
periodically been sold in a limited number of privately negotiated transactions.
Based on information made available to it, State Bank believes that the most
recent sale of State Bank common stock as of October 5, 1999, the last business
day before the public announcement of the affiliation, occurred on August 18,
1999 at a price of $17.50 per share. On October 5, 1999, F&M stock closed at
$27.43. To the best knowledge of State Bank, between October 5, 1999 and
November 18, 1999, the only sale of State Bank common stock occurred on October
6 at a price of $16.85 per share. On November 18, 1999, F&M stock closed at
$29.50.
LISTING OF F&M STOCK
F&M will list the shares of its common stock to be issued in the
affiliation on the New York Stock Exchange.
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MARKET PRICES
This table provides the last reported sale price of F&M common stock on the
NYSE and the most recent sale price of State Bank common stock to the best
knowledge of State Bank as of the close of business on October 5, 1999, the last
business day before the public announcement of the affiliation, and November 18,
1999, the last practicable date before the mailing of this proxy
statement/prospectus. Based on information made available to it, State Bank
believes the sales occurred on August 18 and October 6, 1999.
Market Price Per Share
------------------------------------------------
F&M State Bank
Common Stock Common Stock
------------ ------------
October 5, 1999............... $27.43 $17.50
November 18, 1999............. $29.50 $16.85
If the affiliation had been effective on October 5, 1999, the exchange
ratio would have been 0.651 shares of F&M common stock for each share of State
Bank common stock, using the closing price for F&M common stock on the NYSE on
October 5, 1999 of $27.43 as the average closing price. If the affiliation had
been effective on November 18, 1999, the exchange ratio would have been 0.610
shares of F&M common stock per share of State Bank common stock, using the
closing price of F&M common stock on November 18, 1999 of $29.50 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 affiliation is completed. As a
result, the number of shares of F&M common stock that you will receive in the
affiliation may increase or decrease prior to the date of the affiliation.
However, you will not receive more than 0.651 shares or less than 0.554 shares
of F&M common stock for each State Bank share you own. See "Market Prices and
Dividends" on page 29 for more information.
COMPARATIVE PER SHARE INFORMATION
The following table shows information about our earnings per share, cash
dividends per share and book value per share, and similar information reflecting
the affiliation which we refer to as "pro forma" information. In presenting the
comparative pro forma information for certain time periods, we assumed that we
had been affiliated throughout those periods.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes, a method known as
"pooling of interests" accounting. The information listed as "pro forma
equivalent" was obtained by multiplying the pro forma amounts by an assumed
exchange ratio of 0.610. This assumed exchange ratio is based on the $29.50
closing price of F&M common stock on the NYSE on November 18, 1999, the last
practicable date before the mailing of this proxy statement/prospectus. We
present this information to reflect the fact that you will receive less than one
share of F&M common stock for each share of State Bank common stock you own, and
no more than 0.651 shares and no less than 0.554 shares of F&M common stock will
be exchanged in the affiliation for each State Bank share. We have not used
these maximum and minimum numbers in the table because the F&M stock price on
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<PAGE>
November 18, 1999 was $29.50 which, under the terms of the affiliation
agreement, would result in the exchange ratio assumed in the table. We are using
the assumed exchange ratio for illustrative and informational purposes only. It
may not be the exchange ratio on which the number of shares of F&M common stock
you will receive in the affiliation is based.
We expect that we will incur reorganization and restructuring expenses as a
result of the affiliation. We also anticipate that the affiliation will provide
F&M and State Bank with financial benefits that include reduced operating
expenses and the opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, doesn't attempt to predict or suggest
future results.
The information in the following table is based on the historical financial
information that F&M presented in its Securities and Exchange Commission filings
and State Bank presented in its Federal Reserve filings. The amounts previously
reported by F&M in quarterly and annual reports for the periods presented have
been retroactively restated to reflect the acquisition of Security Bank
Corporation on March 22, 1999 and a three percent stock dividend effective
August 11, 1999. We have incorporated this material into this proxy
statement/prospectus by reference. See "Where You Can Find More Information" on
page 40.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------
1999 1998 1997 1996
---- ---- ---- ----
EARNINGS PER COMMON SHARE
BASIC:
State Bank historical.............. $ 0.72 $ 0.84 $ 0.83 $ 0.75
F&M historical..................... 1.34 1.57 1.45 1.37
Pro forma combined................. 1.33 1.56 1.44 1.36
State Bank pro forma equivalent.... 0.81 0.95 0.88 0.83
DILUTED:
State Bank historical.............. $ 0.72 $ 0.84 $ 0.83 $ 0.75
F&M historical..................... 1.33 1.56 1.44 1.35
Pro forma combined................. 1.32 1.54 1.43 1.35
State Bank pro forma equivalent.... 0.81 0.94 0.87 0.82
CASH DIVIDENDS DECLARED PER COMMON
SHARE
State Bank historical.............. $ 0.24 $ 0.35 $ 0.30 $ 0.25
F&M historical..................... 0.67 0.76 0.73 0.69
Pro forma combined................. 0.67 0.76 0.73 0.69
State Bank pro forma equivalent.... 0.41 0.46 0.45 0.42
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
BOOK VALUE PER COMMON SHARE
State Bank historical.............. $ 5.86 $ 5.72
F&M historical..................... 12.67 13.11
Pro forma combined................. 12.45 12.83
State Bank pro forma equivalent.... 7.59 7.83
7
<PAGE>
SELECTED FINANCIAL DATA
We are providing the following information to help you analyze the
financial aspects of the affiliation. We derived this information from audited
financial statements for 1994 through 1999 and unaudited financial statements
for the nine months ended September 30, 1999. This information is only a
summary, and you should read it in conjunction with the historical financial
statements and the related notes contained in the annual and quarterly reports
and other documents that F&M has filed with the Securities and Exchange
Commission and State Bank has filed with the Federal Reserve. See "Where You Can
Find More Information" on page 40. The amounts previously reported by F&M in
quarterly and annual reports for the periods presented have been retroactively
restated to reflect the acquisition of Security Bank Corporation on March 22,
1999 and a three percent stock dividend effective August 11, 1999. You should
not rely on the nine-month information as being indicative of results expected
for the entire year.
F&M - HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C>
Net interest
income.......... $ 93,763 $ 88,903 $ 119,518 $ 112,684 $ 104,720 $ 98,652 $ 92,866
Net income........ 31,002 27,086 36,465 33,330 31,543 27,297 25,619
Diluted
earnings
per share....... 1.33 1.16 1.56 1.44 1.35 1.18 1.14
Cash
dividends
per share....... 0.67 0.57 0.76 0.73 0.69 0.61 0.54
Book value
per share....... 12.67 12.85 13.11 12.11 11.25 10.76 9.68
Total assets...... 2,922,258 2,819,492 2,949,934 2,734,293 2,508,202 2,390,636 2,189,942
Shareholders'
equity.......... 291,324 289,491 295,019 272,651 253,303 239,831 211,316
</TABLE>
8
<PAGE>
STATE BANK - HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C>
Net interest
income........... $4,400 $ 4,149 $ 5,567 $ 5,414 $ 5,064 $ 4,613 $ 4,494
Net income......... 2,141 2,018 2,473 2,444 2,221 2,001 1,886
Diluted earnings
per share........ 0.72 0.68 0.84 0.83 0.75 0.68 0.64
Cash dividends
per share........ 0.24 0.21 0.35 0.30 0.25 0.20 0.16
Book value
per share........ 5.86 5.76 5.72 5.17 4.57 4.17 3.56
Total assets....... 156,381 149,490 149,982 141,145 134,035 122,484 115,979
Shareholders'
equity........... 17,349 17,055 16,929 15,297 13,541 12,289 10,496
</TABLE>
9
<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 State Bank for use at a special meeting of shareholders of State
Bank. The special meeting will be held at State Bank's main office located at
116 Riverside Avenue, Covington, Virginia on Tuesday, December 28, 1999 at 7:00
p.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 October 5, 1999, by and
between F&M and State Bank, and a related plan of share exchange. The
affiliation 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 November 17,
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 November 17,
1999, there were 2,960,000 shares of State Bank common stock issued and
outstanding held by approximately 1,107 shareholders of record.
VOTE REQUIRED
Each share of State Bank common stock outstanding on November 17, 1999,
entitles the holder to cast one vote upon each matter properly submitted at the
special meeting. Approval of the affiliation requires the affirmative vote of
the holders of more than two-thirds of the shares of State Bank common stock
outstanding as of November 17, 1999, in person or by proxy.
Brokers who hold shares of State Bank 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 State Bank 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 affiliation.
BECAUSE APPROVAL OF THE AFFILIATION REQUIRES THE AFFIRMATIVE VOTE OF
MORE THAN TWO-THIRDS OF THE OUTSTANDING SHARES OF STATE BANK COMMON STOCK,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
APPROVAL OF THE AFFILIATION AGREEMENT. ACCORDINGLY, THE STATE BANK BOARD URGES
YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE.
As of November 17, 1999, directors and executive officers of State Bank
and their affiliates, beneficially owned an aggregate of 429,390 shares of State
Bank common stock, or 14.5% of the shares of State Bank common stock outstanding
on that date. We currently expect that all directors and executive officers of
State Bank will vote their shares of State Bank common stock in favor of the
affiliation.
10
<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 State Bank 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 State Bank common stock
represented by the proxy will be voted "FOR" the affiliation 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 affiliation 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 State Bank, by executing and
delivering a substitute proxy to State Bank 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 December 27, 1999, to
Secretary, The State Bank of the Alleghenies, 116 West Riverside Avenue, P.O.
Box 860, Covington, Virginia 24426.
SOLICITATION OF PROXIES
State Bank 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 State Bank, 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 State Bank has approved the affiliation
agreement and the transactions contemplated thereby. The State Bank board
believes that the proposed transaction is fair to and in the best interests of
State Bank and its shareholders. The State Bank board unanimously recommends
that you vote "FOR" approval of the affiliation.
THE AFFILIATION
The following is a summary description of the material aspects of the
affiliation. This description does not purport to be complete and is qualified
in its entirety by reference to the appendices attached to this proxy
statement/prospectus, including the affiliation agreement and the plan of share
exchange, which are attached as Appendix I to this proxy statement/prospectus.
We urge you to read the appendices in their entirety.
TERMS OF THE AFFILIATION
The affiliation agreement provides for the exchange of each outstanding
share of State Bank common stock for a number of shares of F&M common stock to
be determined closer to the affiliation date. At the date and time the
affiliation is effected, each outstanding share of State Bank common stock will
be converted into the right to receive shares of F&M common stock having an
aggregate market value of $18.00 per share provided, however, that in no event
will F&M issue more than 0.651 shares or less than 0.554 shares of its common
11
<PAGE>
stock for each share of State Bank common stock. F&M will then serve as the
parent bank holding company for State Bank, which will continue to carry on its
banking business in substantially the same manner as before the affiliation
under the name "F&M Bank-Highlands."
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 sixth business day prior to the effective date of the affiliation. The
number of shares of F&M common stock that will be exchanged for each outstanding
share of State Bank common stock will then be established by dividing $18.00 by
the average closing price of F&M common stock. This will be the "exchange
ratio." If the F&M average closing price is $32.50 or greater, you will receive
0.554 shares of F&M stock, and if the average closing price is $27.65 or less,
you will receive 0.651 shares of F&M stock, for each State Bank share you own.
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.
State Bank has no right to terminate the affiliation solely as a result
of a decrease in the exchange ratio below a specified level. Similarly, F&M has
no right to terminate the affiliation 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 affiliation, 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 affiliation.
Shareholders of State Bank are entitled to exercise their dissenters'
rights with respect to the affiliation. See "--Dissenters' Rights."
BACKGROUND OF AND REASONS FOR THE AFFILIATION
Background of the Affiliation. During the last several years there have
been significant developments in the banking and financial services industries.
These developments have included increased emphasis and dependence on
automation, specialization of products and services, increased competition from
other financial institutions, increased competition from other less regulated
financial service institutions, and a trend toward consolidation.
To address the changing financial and regulatory landscape, and as part
of its ongoing strategic planning process, State Bank's board annually addresses
the operational and financial performance of the bank and seeks to enhance the
income growth opportunities available to the bank. Over the last two years,
State Bank's management and board have engaged in various, less formal,
discussions relating to State Bank's possible acquisition of other financial
institutions to augment and diversify State Bank's core income growth in order
to create ongoing shareholder value. For a variety of reasons, including stock
liquidity issues, lack of a formal market for State Bank's common stock, price
expectations of potential acquisition candidates and the lack of branch
opportunities, and other related matters, State Bank had not been able to expand
in this regard.
During late 1998, Rodney Martin, Managing Director at Baxter Fentriss
and Company, an investment banking firm specializing in providing investment
banking services to financial institutions, contacted Don Stone, President and
Chief Executive Officer of State Bank, about a possible acquisition by State
Bank of branches in markets outside of State Bank's operating area. While those
12
<PAGE>
discussions were not fruitful, as part of the discussion, Mr. Stone inquired as
to other opportunities that might be available or that might be pursued and
asked to meet with Mr. Martin in November of 1998. As a result of this original
meeting and additional conversations about State Bank's strategic process, Mr.
Stone asked Mr. Martin to return in December to discuss generally the merger and
acquisition environment, including pricing, structure, and current events from
the perspective of either an acquiror or acquiree.
On December 22, 1998, Mr. Martin and Jim Baxter, President of Baxter
Fentriss, met with Mr. Stone to discuss the current merger and acquisition
environment, potential acquisition opportunities, trends in pricing and
structure, current events, and the proposed changes to accounting practices
surrounding merger and acquisition transactions. After reviewing the information
supplied by representatives of Baxter Fentriss, Mr. Stone shared the information
with the State Bank board and proposed a meeting to review the information
presented by Baxter Fentriss as part of State Bank's ongoing strategic planning
process.
On January 26, 1999, Baxter Fentriss met with the State Bank board to
address the matters previously presented to Mr. Stone and those identified by
the board. On February 17, 1999, as a result of this review, State Bank engaged
Baxter Fentriss to explore alternatives available to State Bank to maximize
shareholder value. With assistance from Baxter Fentriss, the State Bank board
reviewed the economic and competitive conditions in State Bank's market areas,
changes in the banking industry, the trend toward consolidation among depository
institutions nationally and in Virginia, merger market prices paid for
depository institutions, and proposed accounting changes involving
"pooling-of-interests" and "purchase" accounting methodologies including the
potential impact on merger and acquisition transactions in the future.
The board of directors considered several options, with the assistance
of Baxter Fentriss, for State Bank's future, including:
o remaining independent and seeking to generate growth and added
profitability by expanding and diversifying State Bank's financial
services and product offerings;
o establishing de novo branches in surrounding markets exhibiting
enhanced growth prospects;
o acquiring smaller financial institutions or selected branches of other
financial institutions;
o merging or affiliating with an institution of similar size; and
o merging or affiliating with a larger bank holding company.
The board carefully reviewed each option and concluded that the best interests
of State Bank and State Bank's shareholders would be served by exploring the
possibility of combining with a larger institution. This determination was based
upon:
o the board's review of current national and local business conditions;
o the lack of substantial in-market growth opportunities (especially
given State Bank's current strong market share);
o the risks and expenses of further expanding its products, services
and/or branch network on an independent basis;
13
<PAGE>
o the continued competitive pressures from larger financial
institutions (regulated and non-regulated) with much greater
resources than State Bank; and
o the pricing expectations for financial institutions and branches that
may be, or become, available;
The State Bank board then directed Baxter Fentriss to assist in identifying
financial institutions that it believed would have an interest in a business
combination with State Bank and the financial resources necessary to complete a
transaction with State Bank.
In late February and early March 1999, Baxter Fentriss contacted
selected parties to determine preliminary interest in State Bank. This process
produced publicly traded acquirors from 10 states that had publicly stated, or
stated to Baxter Fentriss, a desire to expand upon or enter the Virginia market.
From this list of potential acquirors, approximately 20 parties requested a
memorandum containing additional information on State Bank including F&M
National Corporation.
On April 20, 1999, Baxter Fentriss and State Bank met to review
preliminary indications of interest received by Baxter Fentriss regarding an
affiliation with State Bank. In all, Baxter Fentriss received four non-binding
proposals regarding the acquisition of or affiliation with State Bank. These
proposals did not include a proposal by F&M. From this review and analysis, the
board instructed Baxter Fentriss to return to the top two parties submitting
proposals and ask for refinement of their positions. Also, the board directed
Baxter Fentriss to follow up with certain selected parties with timing issues to
ascertain the seriousness of their particular interest.
During this time frame Baxter Fentriss reestablished contact with F&M
regarding their potential interest. F&M indicated that it did have interest in
pursuing an affiliation with State Bank. From these discussions, Baxter Fentriss
indicated a time frame for F&M to submit their proposal in order for the State
Bank board to adequately review it as part of the process currently in place.
On July 20, 1999, Baxter Fentriss met with the State Bank board to
review the proposals from interested parties as well as the renewed interest by
F&M. After the board thoroughly reviewed the Baxter Fentriss presentation that
summarized the board's fiduciary responsibilities, valuation levels and
underlying values of each proposal, and State Bank strategic alternatives, the
board directed Baxter Fentriss to determine the due diligence requirements of
one of the original proposals under review ("Potential Acquiror"), and if
appropriate, move forward with due diligence. The board also directed Baxter
Fentriss to continue negotiations with F&M, if appropriate.
During the scheduling of due diligence regarding the Potential
Acquiror, F&M submitted a comprehensive non-binding proposal that addressed all
of the material issues deemed important by the State Bank board. State Bank's
board asked Baxter Fentriss to evaluate all proposals under review with specific
regard to alternatives facing State Bank. Baxter Fentriss met with the board on
September 14, 1999, and reevaluated proposals received to date, including the
F&M proposal. After considering the Baxter Fentriss presentation, and discussing
the options available to State Bank at length, the board directed Baxter
Fentriss to negotiate with F&M exclusively subject to the refinement of some
relatively minor open issues. After resolving the issues identified by the
board, State Bank's board invited F&M to conduct due diligence. The senior
members of both organizations also met to ensure that the two institutions share
common goals and that a compatible affiliation could be achieved. Concurrent
with due diligence, F&M submitted a proposed affiliation agreement addressing
the terms of a proposed transaction.
14
<PAGE>
On October 5, 1999, the State Bank board met again with members of
Baxter Fentriss and with special counsel to discuss, review, and consider the
proposed affiliation agreement between F&M and State Bank. The terms of the
affiliation agreement were reviewed with the board of directors by special
counsel. The financial terms were reviewed and summarized again by Baxter
Fentriss. Baxter Fentriss rendered its opinion to the board that the exchange
ratio was fair to the State Bank shareholders from a financial point of view.
After a lengthy discussion, the board voted to approve the affiliation agreement
and also to recommend the approval of the transaction to the State Bank
shareholders.
State Bank's Reasons for the Affiliation. In reaching its determination
that the affiliation agreement with F&M is in the best interest of State Bank
and its shareholders, the State Bank board considered a number of factors. The
State Bank board did not assign any relative or specific weights to the factors
considered. The principal factors that led the State Bank board to approve the
affiliation were:
o The terms of the affiliation agreement and plan of share exchange,
including the exchange ratio;
o The fact that F&M common stock is more liquid since it is traded
on the New York Stock Exchange while State Bank common stock has
been traded only internally by matching prospective buyers and
sellers;
o The terms of the affiliation agreement and past F&M practices in
affiliations concerning the retention of valued employees and
continued contributions in the communities served by F&M Bank
affiliates;
o The compatibility of F&M's and State Bank's operating philosophies and
similarity of customer orientation;
o The opinion of Baxter Fentriss to the State Bank board that the
exchange ratio is fair from a financial point of view to State
Bank shareholders;
o The historical dividends paid by F&M on its common stock when compared
to the dividends paid on State Bank common stock;
o The expectation that the affiliation will be tax-free for federal
income tax purposes to State Bank and its shareholders, except for
cash paid instead of fractional shares;
o The opportunities for growth and diversification through
affiliation with F&M, a well-capitalized institution with a
broader geographical market area; and
o The enhanced products and services that State Bank can offer to its
customers as a result of affiliating with F&M.
The above discussion of the information and factors considered by the
State Bank board is not exhaustive but constitutes the material factors
considered. You are encouraged to read the "Background" section above for a more
full understanding of the process the State Bank board went through in reaching
its decision.
THE STATE BANK BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE
AFFILIATION.
15
<PAGE>
OPINION OF FINANCIAL ADVISOR
Baxter Fentriss has acted as financial advisor to State Bank in
connection with the affiliation. Baxter Fentriss assisted State Bank in
identifying and negotiating with prospective acquirors. Baxter Fentriss
delivered to State Bank its opinion dated October 5, 1999, that on the basis of
matters referred to in this proxy statement/prospectus, the exchange ratio was
fair, from a financial point of view, to the holders of State Bank common
stock. In rendering its opinion Baxter Fentriss consulted with the management
of State Bank and F&M, and reviewed the affiliation agreement as entered into
on October 5, 1999. Baxter Fentriss also reviewed certain publicly available
information on the parties and certain additional materials made available by
the management of the respective banks.
In addition Baxter Fentriss discussed with State Bank's management and
F&M their respective businesses and outlook. Baxter Fentriss was involved in the
negotiations between State Bank and F&M. No limitations were imposed by State
Bank's board of directors upon Baxter Fentriss with respect to the investigation
made or procedures followed by it in rendering its opinion. The full text of
Baxter Fentriss' written opinion, updated to the date of this proxy
statement/prospectus, is attached as Appendix II to this proxy
statement/prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered and qualifications and
limitations on the review undertaken by Baxter Fentriss.
Baxter Fentriss' opinion is directed to State Bank's board of
directors, and is directed only to the fairness, from a financial point of view,
of the exchange ratio to the holders of State Bank common stock. It does not
address State Bank's underlying business decision to effect the proposed
affiliation, nor does it constitute a recommendation to any State Bank
shareholder as to how a shareholder should vote with respect to the affiliation
at the special meeting or as to any other matter.
Baxter Fentriss' opinion was one of many factors taken into
consideration by State Bank's board of directors in making its determination to
approve the affiliation, and the receipt of Baxter Fentriss' opinion is a
condition precedent to State Bank's consummating the affiliation. The opinion of
Baxter Fentriss does not address the relative merits of the affiliation as
compared to any alternative business strategies that might exist for State Bank
or the effect of any other business combination in which State Bank might
engage.
Baxter Fentriss, as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter Fentriss is a nationally recognized
advisor to firms in the financial services industry on mergers and acquisitions.
State Bank selected Baxter Fentriss as its financial advisor because Baxter
Fentriss is an investment banking firm focusing on transactions involving
community banks and thrifts and because of the firm's extensive experience and
expertise in transactions similar to the affiliation. Baxter Fentriss is not
affiliated with State Bank or F&M.
In connection with rendering its opinion to State Bank's board of
directors, Baxter Fentriss performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed in this proxy
statement/prospectus, Baxter Fentriss considered such financial and other
factors as it deemed appropriate under the circumstances including, among
others, the following:
o the historical and current financial condition and results of
operations of State Bank and F&M including interest income,
interest expense, interest sensitivity, noninterest income,
noninterest expense, earnings, book value, returns on assets and
equity, and possible tax consequences resulting from the
transaction;
16
<PAGE>
o the business prospects of State Bank and F&M;
o the economies of State Bank and F&M's respective market areas; and
o the nature and terms of certain other merger transactions that it
believed to be relevant.
Baxter Fentriss also considered its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its knowledge
of the financial institutions industry, its experience in connection with
similar transactions, its knowledge of securities valuation generally, and its
knowledge of merger transactions in Virginia and throughout the United States.
In connection with rendering its opinion, Baxter Fentriss reviewed:
o the affiliation agreement;
o drafts of this proxy statement/prospectus;
o the annual reports to shareholders of State Bank for the four
years ended December 31, 1995, 1996, 1997 and 1998, State Bank's
1998 Form 10-K and June 30, 1999 Form 10-Q, as well as certain
current interim reports to shareholders and regulatory agencies;
o the annual reports to shareholders of F&M for the three years
ended December 31, 1996, 1997 and 1998, F&M's 1998 Form 10-K and
June 30, 1999 Form 10-Q, as well as certain current interim
reports to shareholders and regulatory agencies; and
o certain additional financial and operating information with
respect to the business, operations and prospects of State Bank
and F&M as it deemed appropriate.
Baxter Fentriss also:
o held discussions with members of State Bank's and F&M's senior
management regarding the historical and current business
operation, financial condition and future prospects of their
respective companies;
o reviewed the historical market prices and trading activity for
State Bank's common stock and F&M's common stock, as applicable,
and compared them with those of certain publicly traded companies
that it deemed to be relevant;
o compared the results of operations of State Bank and F&M with
those of certain banking companies that it deemed to be relevant;
o analyzed the pro forma financial impact of the affiliation on F&M; and
o conducted such other studies, analyses, inquiries and examinations as
Baxter Fentriss deemed appropriate.
The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
17
<PAGE>
description. Moreover, the evaluation of fairness, from a financial point of
view, of the exchange ratio to holders of State Bank common stock was to some
extent a subjective one based on the experience and judgment of Baxter Fentriss
and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors as summarized below, Baxter
Fentriss believes that its analyses must be considered as a whole and that
selecting portions of its analyses 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. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Baxter
Fentriss' view of the actual value of State Bank or F&M.
In performing its analyses, Baxter Fentriss made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of State Bank and F&M. The
analyses performed by Baxter Fentriss are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Additionally, analyses relating to the values of
businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold. In rendering its opinion, Baxter Fentriss
assumed that, in the course of obtaining the necessary regulatory approvals for
the affiliation, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the affiliation, on a pro forma basis, to
F&M.
The following is a summary of selected analyses performed by Baxter
Fentriss in connection with its opinion.
Stock Price History. Baxter Fentriss studied the history of the trading
prices and volume for State Bank's common stock and compared them to other
publicly traded banks in Virginia and to the price offered by F&M. As of June
30, 1999 the book value for State Bank's common stock was $5.78 per share.
Comparative Analysis. Baxter Fentriss analyzed and compared the price
to earnings multiple, price to book multiple, price to assets, and premium on
deposits of the offer with 22 other merger transactions in Virginia involving
community banking organizations with assets between $50 million and $2 billion
as of their respective announcement dates over the last five years. The average
pricing multiples for the comparables were price to earnings of 19.97x, price to
book of 2.38x, price to assets of 23.50% and premium on deposits of 18.41%.
Using an aggregate value of $18.00 for every share of State Bank common stock,
the total price which F&M agreed to pay is approximately $53.3 million. Using
this price, the respective multiples for the affiliation are 21.18x, 3.12x,
34.24% and 26.25%. The State Bank transaction ranks eighth out of twenty-three
transactions on price to earnings, second out of twenty-three transactions on
price to book, third out of twenty-three transactions on price to assets and
fifth out of twenty-three transactions on premium on deposits.
Pro Forma Impact. Baxter Fentriss evaluated the earnings, book value
and market value of the common stock of F&M and considered the pro forma
earnings, book value and potential long range impact that the affiliation would
have on the market value of F&M common stock. Based on this analysis, Baxter
Fentriss concluded the transaction should have a positive long-term impact on
F&M.
Discounted Cash Flow Analysis. Baxter Fentriss performed a discounted
cash flow analysis to determine hypothetical present values for a share of State
Bank's common stock as a five and ten year investment. Under this analysis,
Baxter Fentriss considered various scenarios for the performance of State Bank's
common stock using a range of growth rates from six percent (6%) to twelve
percent (12%) for State Bank's earnings and dividends. A range of terminal
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values from 12 to 22 times earnings was also used in the analysis as well as a
range of discount rates from twelve percent (12%) to fourteen percent (14%).
These ranges of growth rates, discount rates, and terminal values were chosen
based upon what Baxter Fentriss in its judgement, considered to be appropriate
taking into account, among other things, State Bank's past and current
performance, the general level of inflation, rates of return for fixed income
and equity securities in the marketplace generally and for companies of similar
risk profiles. In nearly all of the scenarios considered, the present value of
State Bank's common stock was calculated at less than the value of F&M's offer.
Thus, Baxter Fentriss' discounted cash flow analysis indicated that State Bank
shareholders would be in a better financial position by receiving the F&M common
stock offered in the affiliation rather than continuing to hold State Bank
common stock.
Below is a table that summarizes the discounted cash flow analysis that
Baxter Fentriss performed in forming its fairness opinion. The table presents
the ranges of present values that were calculated using growth rates from 6% to
12%, discount rates from 12% to 14%, terminal values of 12 to 22 times earnings,
and investment time frames of five and ten years. The table uses State Bank's
June 30, 1999 financial data including earnings as of the latest twelve months.
An example of how to read the table is as follows:
Using a discount rate of 12%, a terminal value of 12x, and growth rates
of 6% to 12%, the present value of State Bank's common stock is calculated to be
in the range of $8.44 to $11.02 assuming the shares are sold in five years. The
values in the range are less than the $18.00 which F&M has offered, which means
that under the assumptions of this particular scenario, a shareholder of State
Bank common stock would be better off taking F&M's offer than holding State Bank
common stock.
SUMMARY OF BAXTER FENTRISS DISCOUNTED CASH FLOW ANALYSIS
DISCOUNT RATE OF 12% AND GROWTH RATES FROM 6% TO 12%
RANGE OF PRESENT VALUE CALCULATIONS
TERMINAL VALUE SELL SHARES IN SELL SHARES IN
OF EARNINGS FIVE YEARS TEN YEARS
----------- ---------- ---------
12X $ 8.44 to $11.02 $ 7.12 to $11.85
18X $ 12.31 to $16.12 $ 10.06 to $16.95
22X $ 14.89 to $19.51 $ 12.01 to $20.34
DISCOUNT RATE OF 13% AND GROWTH RATES FROM 6% TO 12%
RANGE OF PRESENT VALUE CALCULATIONS
TERMINAL VALUE SELL SHARES IN SELL SHARES IN
OF EARNINGS FIVE YEARS TEN YEARS
----------- ---------- ---------
12X $ 8.09 to $10.56 $ 6.56 to $10.91
18X $ 11.79 to $15.43 $ 9.25 to $15.57
22X $ 14.26 to $18.68 $ 11.04 to $18.68
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DISCOUNT RATE OF 14% AND GROWTH RATES FROM 6% TO 12%
RANGE OF PRESENT VALUE CALCULATIONS
TERMINAL VALUE SELL SHARES IN SELL SHARES IN
OF EARNINGS FIVE YEARS TEN YEARS
----------- ---------- ---------
12X $ 7.75 to $10.12 $ 6.06 to $10.05
18X $ 11.30 to $14.78 $ 8.52 to $14.31
22X $ 13.66 to $17.89 $ 10.16 to $17.16
The discounted cash flow analysis is a widely used methodology. The
results of such methodology are highly dependent upon the numerous assumptions
that must be made and the results thereof are not necessarily indicative of
actual values or actual future results.
Pro Forma Underlying Value of the F&M Shares Received. Baxter Fentriss
performed an analysis that compares the underlying value of the shares of F&M
that shareholders of State Bank would receive as a result of the affiliation. In
this analysis, the book value per share of $5.78 as of June 30, 1999, earnings
per share of $.85 for the latest twelve months ending June 30, 1999, and
dividends per share of $.35 were compared to the underlying book value,
earnings, and dividends that each shareholder will receive as a result of the
affiliation. The analysis was performed using the different exchange ratios
within the range that is described in the affiliation agreement. At the highest
exchange ratio of .651 shares of F&M common stock for each share of State Bank,
the restated pro forma underlying book value represented by each State Bank
share increases by 39%. The restated pro forma underlying earnings of each State
Bank share increases by 28%. The pro forma quarterly dividends, as represented
by each share of State Bank common stock after consummation of the affiliation,
increases by 75%. At the lowest exchange ratio of .554 shares of F&M common
stock for each share of State Bank, the restated pro forma underlying book value
represented by each State Bank share increases by 20%. The restated pro forma
underlying earnings of each State Bank share increases by 10%. The pro forma
quarterly dividends, as represented by each share of State Bank common stock
after consummation of the affiliation, increases by 49%.
Using publicly available information on State Bank and F&M and applying
the capital guidelines of banking regulators, Baxter Fentriss' analysis
indicated that the affiliation would not dilute the capital and long-term
earnings capacity of F&M and would, therefore, likely not be opposed by the
banking regulatory agencies from a capital perspective. Furthermore, Baxter
Fentriss considered the likely market overlap and the Federal Reserve guidelines
with regard to market concentration and concluded that possible antitrust issues
do not exist.
Baxter Fentriss has relied, without any independent verification, upon
the accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates were reasonably prepared by
management, and reflect their best current judgments. Baxter Fentriss did not
make an independent appraisal of the assets or liabilities of either State Bank
or F&M, and has not been furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to State Bank, F&M or the affiliation. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies used for comparison in the above analysis.
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Baxter Fentriss will be paid (1) a transaction fee, equal to
approximately $530,000 and (2) reasonable out-of-pocket expenses for its
services. State Bank has agreed to indemnify Baxter Fentriss against certain
liabilities, including certain liabilities under federal securities laws.
EFFECTIVE DATE
If the affiliation is approved by the shareholders of State Bank, all
required governmental and other consents are obtained and the other conditions
to the affiliation are satisfied or waived, the affiliation will be consummated
and made effective on the date and at the time indicated on the certificate of
share exchange issued by the Virginia State Corporation Commission pursuant to
the Virginia Stock Corporation Act. See "-- Representations and Warranties;
Conditions to the Affiliation."
It is anticipated that the affiliation will occur in early January
2000.
SURRENDER OF STOCK CERTIFICATES
As soon as practicable after the affiliation, 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 State Bank common stock in exchange for certificates representing
shares of F&M common stock.
STATE BANK SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for State Bank
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 affiliation, you will be entitled to vote the number of
shares of F&M common stock into which your State Bank common stock has been
converted, regardless of whether you have surrendered your State Bank
certificates. The affiliation 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 affiliation will be paid to the holder
of any State Bank 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 AFFILIATION
The affiliation agreement contains representations and warranties by
F&M and State Bank, including representations and warranties with respect to
their individual organizations, authorizations to enter into the affiliation
agreement, capitalization, financial statements and pending and threatened
litigation. These representations and warranties, except as otherwise provided
in the affiliation agreement, will not survive the effective date of the
affiliation.
The obligations of F&M and State Bank to consummate the affiliation are
subject to the following conditions, among others:
o approval and adoption of the affiliation agreement by the shareholders
of State Bank;
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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 State Bank, materially adversely affects the
economic or business benefits of the affiliation so as to render
inadvisable or unduly burdensome consummation of the affiliation;
o the absence of certain actual or threatened proceedings before a court
or other governmental body relating to the affiliation;
o receipt of a fairness opinion from Baxter Fentriss and Company; and
o the receipt of an opinion of counsel as to certain federal income tax
consequences of the affiliation.
Also, under the terms of the affiliation agreement, F&M agreed that,
following the affiliation, it will indemnify those persons associated with State
Bank who are entitled to indemnification as of the effective date of the
affiliation.
In addition, each company's obligation to effect the affiliation,
unless waived, is subject to:
o performance by the other company of its obligations under the
affiliation agreement;
o the accuracy, in all material respects, of the representations and
warranties of the other company contained in the affiliation agreement;
and
o the receipt of certain opinions and certificates from the other
company.
REGULATORY APPROVALS
As indicated above, the affiliation is conditioned on the prior
approval of the affiliation by the Board of Governors of the Federal Reserve
System and the Virginia State Corporation Commission. On November 9, 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 affiliation, in the
judgment of the board of directors of F&M or State Bank, inadvisable or unduly
burdensome.
BUSINESS PENDING THE AFFILIATION
Until the affiliation date, State Bank has agreed to conduct its
operations 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.
In addition, and except with the prior consent of F&M, until the
effective date of the affiliation State Bank may not:
o take any action, engage in any transactions or enter into any
agreements which would adversely affect or delay in any material
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respect the ability of F&M or State Bank to obtain the necessary
approvals, consents or waivers required to effect the affiliation
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 and bonuses awarded to senior officers made in the
ordinary course of business consistent with past practice, and
normal contribution to State Bank's 401(k) Plan;
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 affiliation 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;
o declare or pay dividends on its capital stock; or
o purchase or redeem any of its capital stock.
Pending consummation of the affiliation, 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
State Bank 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 affiliation, consolidation, share exchange,
joint venture, business combination or similar transaction involving State Bank,
or any purchase of all or any material portion of the assets of State Bank (an
"Acquisition Transaction").
Notwithstanding the above-described non-solicitation provision, the
State Bank 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 State Bank 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;
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o prior to taking such action, State Bank receives from such person or
entity an executed confidentiality agreement; and
o the State Bank 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 affiliation agreement.
State Bank 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 affiliation, any
term or condition of the affiliation, except for the general conditions set
forth in Section 5.1(a)-(d) of the affiliation 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 affiliation agreement may be
amended at any time before the affiliation 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 affiliation agreement by the State Bank
shareholders. Any material change in a material term of the affiliation
agreement would require a resolicitation of State Bank's shareholders. Such a
material change would include, but not be limited to, a change in the tax
consequences to State Bank's shareholders.
The affiliation agreement may be terminated at any time before the
affiliation, whether before or after the approval of the affiliation by the
shareholders of State Bank:
o by mutual consent of State Bank and F&M;
o unilaterally by State Bank or F&M, if the affiliation has not
occurred on or before June 30, 2000, except that the party whose
failure to perform any obligation under the affiliation agreement
is the cause of the delay may not terminate the affiliation based
upon the delay; or
o unilaterally by State Bank 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 affiliation 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.
TERMINATION FEE
If the affiliation agreement is terminated by F&M as a result of the
occurrence of a "Termination Event," State Bank shall pay to F&M a termination
fee of $2.0 million in cash within five business days after written notice of
termination. As used in the affiliation agreement, a "Termination Event" means:
o State Bank shall have entered into an agreement with a person,
other than F&M or its affiliates, to: (a) acquire, merge or
consolidate with, or enter into any similar transaction with State
Bank, (b) purchase, lease or otherwise acquire all or
substantially all of the assets of State Bank, or (c) purchase or
otherwise acquire (including by way of affiliation, consolidation,
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share exchange or any similar transaction) securities representing
more than 10% of the voting power of State Bank;
o any person shall have acquired beneficial ownership of more than 20%
of the outstanding shares of State Bank 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
State Bank, and following such proposal the shareholders of State
Bank vote not to approve the affiliation agreement.
The termination fee provision increases the probability of the
affiliation, and may deter the acquisition of a controlling interest in or
business combination with State Bank by a prospective acquiror other than F&M.
State Bank will not be obligated to pay to F&M the termination fee in
the event that at or before the time the fee becomes payable, the affiliation
agreement is terminated
o by mutual consent of State Bank and F&M;
o by State Bank, if the affiliation has not occurred on or before June
30, 2000; or
o unilaterally by State Bank 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.
RESALES OF F&M COMMON STOCK
All shares of F&M common stock received by you in connection with the
affiliation will be freely transferable, except that F&M common stock received
by persons who are deemed to be "affiliates" of State Bank for purposes of Rule
145 under the Securities Act of 1933. To the best knowledge of State Bank and
F&M, the only persons who may be deemed to be affiliates of State Bank subject
to these limitations are the directors and executive officers of State Bank.
ACCOUNTING TREATMENT
We anticipate that the affiliation 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 State Bank are carried
forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and State Bank for the entire fiscal
year in which the affiliation 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 affiliation.
For the affiliation to qualify as a pooling of interests, it must
satisfy a number of conditions including that substantially all of the State
Bank common stock be exchanged for F&M common stock. If any of the conditions to
pooling of interests accounting is not satisfied, then the affiliation would not
qualify for pooling of interests accounting treatment, and a condition to the
obligation of F&M to consummate the affiliation would not be satisfied. Each of
F&M and State Bank have agreed that they will use their respective best efforts
to ensure that the affiliation will qualify for pooling of interests accounting
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treatment. In addition, certain affiliates of F&M and State Bank have agreed
that they will not sell any F&M common stock or State Bank common stock within
30 days before the effective date of the affiliation, 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 State Bank after the affiliation.
INTERESTS OF CERTAIN PERSONS IN THE AFFILIATION
As discussed below, certain members of State Bank's management, as well
as certain members of the State Bank board of directors, have interests in the
affiliation in addition to their interests as shareholders of State Bank. In
each case, the State Bank board was aware of these potential interests, and
considered them, among other matters, in approving the affiliation agreement and
the transactions contemplated thereby.
Indemnification. F&M has generally agreed to indemnify, the officers
and directors of State Bank against certain liabilities arising before the
effective date of the affiliation. F&M also has agreed to provide directors' and
officers' liability insurance for the present officers and directors of State
Bank for a period of three years after the affiliation.
Agreements with Management. At the time of the affiliation, State
Bank's President and Chief Executive Officer, Don E. Stone, Jr., will remain
Chief Executive Officer and will become Vice Chairman of the State Bank board.
Benny A. Williams, Jr., Executive Vice President of State Bank, will succeed Mr.
Stone as President and also will become Chief Administrative Officer of State
Bank. Mr. Williams also will succeed Mr. Stone as Chief Executive Officer on
July 1, 2000. After stepping down as Chief Executive Officer, Mr. Stone will
receive an annual fee of $50,000 for two years in accordance with an agreement
to be entered into with F&M. Mr. Williams has been offered a three-year
agreement that will provide severance payments and other benefits if there is a
change in control of F&M. In addition, a split dollar insurance plan will be
gifted to each of Messrs. Stone and Williams, and H.C. Rhodes, Jr., State Bank's
Senior Vice President.
Employee and Benefit Plans. The affiliation agreement provides that all
officers and employees of State Bank will not change as a result of the
affiliation. As soon as administratively practicable following the affiliation,
employees of State Bank 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 State Bank will receive credit for their years of
service to State Bank for participation and vesting purposes only.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of all material federal income tax
consequences of the affiliation under the Internal Revenue Code to State Bank
shareholders who receive F&M common stock solely in exchange for State Bank
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 State
Bank shareholders. Certain tax consequences of the affiliation may vary
depending upon the particular circumstances of each State Bank shareholder and
other factors.
YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES OF THE AFFILIATION TO YOU.
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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
affiliation. Neither F&M nor State Bank has requested a ruling from the Internal
Revenue Service in connection with the affiliation. To meet a condition to
consummation of the affiliation, F&M and State Bank will receive from LeClair
Ryan, an opinion as to certain federal income tax consequences of the
affiliation. Such opinion is not binding on the Internal Revenue Service.
In the opinion of counsel, the affiliation will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code, if consummated
in the manner set forth in the affiliation agreement. Accordingly, among other
things, in the opinion of such counsel:
o The affiliation 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 State Bank as a result of
the affiliation;
o No gain or loss will be recognized by a State Bank shareholder to
the extent he or she receives F&M common stock solely in exchange
for his State Bank common stock pursuant to the affiliation;
o The tax basis of the F&M common stock received by each State Bank
shareholder will be the same as the tax basis of the State Bank
common stock surrendered in exchange therefor; and
o The holding period for each share of F&M common stock received by
each State Bank shareholder in exchange for State Bank common
stock will include the period for which such shareholder held the
State Bank common stock exchanged therefor, provided such State
Bank 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.
DISSENTERS' RIGHTS
A shareholder of State Bank common stock who objects to the affiliation
(a "Dissenting Shareholder") and who complies with provisions of Article 15 of
Title 13.1 of the Virginia Stock Corporation Act ("Article 15") may demand the
right to receive a cash payment, if the affiliation is consummated, for the fair
value of his or her stock immediately before the effective date of the
affiliation, exclusive of any appreciation or depreciation in anticipation of
the affiliation unless such exclusion would be inequitable. In order to receive
payment, a Dissenting Shareholder must deliver to State Bank before the vote is
taken at the special meeting a written notice of intent to demand payment for
his or her shares if the affiliation is effectuated (an "Intent to Demand
Payment") and must not vote his or her shares in favor of the affiliation. The
Intent to Demand Payment should be delivered to Don E. Stone, Jr., President,
The State Bank of the Alleghenies, 116 West Riverside Avenue, P.O. Box 860,
Covington, Virginia 24426.
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A VOTE AGAINST THE AFFILIATION WILL NOT ITSELF CONSTITUTE WRITTEN
NOTICE AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE OF
INTENT TO DEMAND PAYMENT.
A shareholder of record of State Bank common stock may assert
dissenters' rights as to fewer than all the shares registered in his or her name
only if the shareholder dissents with respect to all shares beneficially owned
by any one person and notifies State Bank in writing of the name and address of
each person on whose behalf he asserts dissenters' rights. The rights of such a
partial dissenter are determined as if the shares as to which he dissents and
his other shares were registered in the names of different shareholders. A
beneficial shareholder of State Bank common stock may assert dissenters' rights
as to shares held on his behalf by a shareholder of record only if
o he submits to State Bank the record shareholder's written consent
to the dissent not later than the time when the beneficial
shareholder asserts dissenters' rights, and
o he dissents with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
Within 10 days after the effective date of the affiliation, State Bank
is required to deliver a notice in writing (a "Dissenter's Notice") to each
Dissenting Shareholder who has filed an Intent to Demand Payment and who has not
voted such shares in favor of the affiliation. The Dissenter's Notice shall
o state where the demand for payment (the "Payment Demand") shall be
sent and where and when stock certificates shall be deposited;
o supply a form for demanding payment;
o set a date by which State Bank must receive the Payment Demand; and
o be accompanied by a copy of Article 15.
A Dissenting Shareholder who is sent a Dissenter's Notice must submit the
Payment Demand and deposit his or her stock certificates in accordance with the
terms of, and within the time frames set forth in, the Dissenter's Notice. As a
part of the Payment Demand, the Dissenting Shareholder must certify whether he
or she acquired beneficial ownership of the shares before or after the date of
the first public announcement of the terms of the proposed affiliation, October
6, 1999. State Bank will specify that date in the Dissenter's Notice.
Except with respect to shares acquired after October 6, 1999, State
Bank shall pay a Dissenting Shareholder the amount State Bank estimates to be
the fair value of his or her shares, plus accrued interest. Such payment shall
be made within 30 days of receipt of the Dissenting Shareholder's Payment
Demand. As to shares acquired after October 6, 1999, State Bank is only
obligated to estimate the fair value of the shares, plus accrued interest, and
to offer to pay this amount to the Dissenting Shareholder conditioned upon the
Dissenting Shareholder's agreement to accept it in full satisfaction of his or
her claim.
If a Dissenting Shareholder believes that the amount paid or offered by
State Bank is less than the fair value of his or her shares, or that the
interest due is incorrectly calculated, that Dissenting Shareholder may notify
State Bank of his or her own estimate of the fair value of his shares and amount
of interest due and demand payment of such estimate, less any amount already
received by the Dissenting Shareholder (the "Estimate and Demand"). The
Dissenting Shareholder must notify State Bank of the Estimate and Demand within
30 days after the date State Bank makes or offers to make payment to the
Dissenting Shareholder.
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Within 60 days after receiving the Estimate and Demand, State Bank must
either commence a proceeding in the appropriate circuit court to determine the
fair value of the Dissenting Shareholder's shares and accrued interest, or State
Bank must pay each Dissenting Shareholder whose demand remains unsettled the
amount demanded. If a proceeding is commenced, the court must determine all
costs of the proceeding and must assess those costs against State Bank, except
that the court may assess costs against all or some of the Dissenting
Shareholders to the extent the court finds that the Dissenting Shareholders did
not act in good faith in demanding payment of the Estimate and Demand.
The above discussion is a summary of the material provisions of Article
15. You are strongly encouraged to review carefully the full text of Article 15,
which is included as Appendix V to this proxy statement/prospectus. The
provisions of Article 15 are technical and complex, and a shareholder failing to
comply strictly with them may forfeit his or her Dissenting Shareholder's
rights. Any shareholder who intends to dissent from the affiliation should
review the full text of those provisions carefully and also should consult with
his or her attorney. NO FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTERS
RIGHTS OR ANY STEPS ASSOCIATED THEREWITH WILL BE FURNISHED TO YOU, EXCEPT AS
INDICATED ABOVE OR OTHERWISE REQUIRED BY LAW.
Any Dissenting Shareholder who perfects his right to be paid the fair
value of his or her shares will recognize gain or loss, if any, for federal
income tax purposes upon the receipt of cash for his or her shares. The amount
of gain or loss and its character as ordinary or capital gain or loss will be
determined in accordance with applicable provisions of the Internal Revenue
Code. See "-- Material Federal Income Tax Consequences."
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Both F&M and State Bank are corporations subject to the provisions of
the Virginia SCA. Your shareholder rights are presently governed by State Bank's
articles of incorporation and bylaws. Upon consummation of the affiliation 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 State Bank
shareholder under State Bank'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 33.
EXPENSES OF THE AFFILIATION
In general, whether or not the affiliation is consummated, State Bank
and F&M will pay their own expenses incident to preparing, entering into and
carrying out the affiliation 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 affiliation agreement.
If either party willfully and materially breaches the affiliation
agreement, that party must pay the costs associated with this transaction
incurred by the non-breaching party. If the affiliation agreement is terminated
by State Bank because it is not approved by State Bank shareholders, State Bank
must pay 50% of F&M's costs in this transaction, up to $50,000.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including information included or
incorporated by reference in this proxy statement/prospectus, 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 State Bank. 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." State Bank common stock is not registered on any exchange, traded in the
over-the-counter market, or quoted by The Nasdaq Stock Market. State Bank common
stock has periodically been sold in a limited number of privately negotiated
transactions.
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 State Bank, the high and low sales prices for the periods
indicated based on information made available to State Bank. The sales prices
shown for State Bank do not necessarily reflect the price that would be paid in
an active and liquid market. In addition, there may have been other transactions
at other prices not known to State Bank.
30
<PAGE>
F&M
---
<TABLE>
<CAPTION>
Closing Sales Prices
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C>
1st Quarter............................ $30.00 $23.87 $36.25 $31.75 $22.88 $19.63
2nd Quarter............................ 33.18 23.93 34.31 32.00 26.38 19.88
3rd Quarter............................ 33.50 26.00 31.56 26.13 30.44 26.00
4th Quarter (through Nov. 18).......... 30.12 26.50 31.69 25.06 36.25 28.56
The closing price of F&M common stock on the NYSE on October 5, 1999,
the last full trading day preceding the public announcement of the proposed
affiliation, was $27.43 per share. The closing price of F&M common stock on the
NYSE on November 18, 1999, the latest practicable date before the date of this
proxy statement/prospectus was $29.50 per share.
</TABLE>
STATE BANK
- ----------
<TABLE>
<CAPTION>
Sales Prices
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C>
1st Quarter............................ $24.00 $15.00 $25.00 $18.00 $15.00 $12.00
2nd Quarter ........................... 21.00 15.00 24.00 19.00 15.00 14.00
3rd Quarter............................ 25.00 17.50 23.00 18.00 20.00 15.00
4th Quarter (through Nov. 18).......... 16.85 16.85 23.00 18.50 27.00 20.00
</TABLE>
As of September 30, 1999, there were 8,292 record holders of F&M common
stock. As of the record date, there were approximately 1,107 record holders of
State Bank common stock.
DIVIDENDS
The tables below reflect the cash dividends declared per share during
each quarter on F&M common stock and State Bank common stock for the periods
indicated. F&M or F&M Bank-Winchester has paid regular cash dividends for more
than 56 consecutive years. State Bank has paid regular cash dividends for more
than 16 consecutive years.
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 and the acquisition on
March 22, 1999 of Security Bank Corporation.
F&M
---
1999 1998 1997
---- ---- ----
1st Quarter................ 0.195 $0.185 $0.180
2nd Quarter................ 0.235 0.185 0.180
3rd Quarter................ 0.235 0.195 0.185
4th Quarter................ 0.235 0.195 0.185
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<PAGE>
State Bank
----------
1999 1998 1997
---- ---- ----
1st Quarter................ $0.08 $0.07 $0.06
2nd Quarter................ 0.08 0.07 0.06
3rd Quarter................ 0.08 0.07 0.06
4th Quarter................ 0.16 0.14 0.12
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." 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.
THE STATE BANK OF THE ALLEGHENIES
GENERAL
Financial and other information relating to State Bank is included in
State Bank's Annual Report on Form 10-K for the year ended December 31, 1998 and
its Quarterly Report on Form 10-Q for the quarter ended September 30, 1999,
copies of which are attached as Appendices III and IV. The audited financial
statements of State Bank as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 are included in State Bank's
Annual Report on Form 10-K for the year ended December 31, 1998. See "Where You
Can Find More Information" on page 40.
HISTORY AND BUSINESS
State Bank was organized in 1976. As of September 30, 1999, State Bank
had total assets of $156.0 million, total deposits of $138.1 million, and total
shareholder's equity of $17.4 million.
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<PAGE>
State Bank is a locally oriented community bank which seeks to serve
the needs of small and medium sized businesses, professionals and consumers in
the Alleghany and Bath County area. State Bank 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. State Bank's deposits
are insured to the fullest extent provided by law by the Bank Insurance Fund of
the FDIC.
State Bank operates three branch locations in Covington, Clifton Forge
and Bath County, Virginia. At September 30, 1999, State Bank employed 40
full-time and 6 part-time employees.
COMPETITION
In attracting deposits and making loans, State Bank encounters
competition from other institutions, including larger commercial banking
organizations, credit unions, other financial institutions and non-bank
financial service companies serving State Bank'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, State Bank 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, State Bank 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.
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 nineteen banks, which expanded its market area
and increased its market share in Virginia, Maryland and West Virginia. F&M has
seven banking affiliates in Virginia, one bank affiliate in West Virginia and
one bank affiliate in Maryland. F&M offers a full range of banking services
principally to individuals and small and middle-market businesses in the
Shenandoah Valley, northern, central and southern Virginia, the eastern
panhandle of West Virginia and the counties of Montgomery and Prince George's in
Maryland.
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 offers
insurance services through its subsidiaries, F&M-Shomo & Lineweaver and F&M-J.V.
Arthur. F&M also operates F&M Mortgage Services, Inc. which engages in
residential mortgage origination and servicing.
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,
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<PAGE>
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.
At September 30, 1999, F&M had total consolidated assets of
approximately $2.9 billion, total consolidated deposits through its banking
subsidiaries of approximately $2.5 billion and consolidated shareholders' equity
of approximately $291.3 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 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 40.
COMPARATIVE RIGHTS OF SHAREHOLDERS
GENERAL
F&M and State Bank are corporations subject to the provisions of the
Virginia Stock Corporation Act (the "Virginia SCA"). Your rights as a
shareholder of State Bank are governed by State Bank's articles of incorporation
and bylaws and by the Virginia SCA. Upon consummation of the affiliation, 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 State Bank and F&M. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE ARTICLES OF INCORPORATION AND BYLAWS OF F&M AND STATE BANK AND
TO THE VIRGINIA SCA.
AUTHORIZED CAPITAL STOCK
F&M. F&M is authorized to issue 30,900,000 shares of common stock, par
value $2.00 per share, of which 22,987,678 shares were issued and outstanding as
of September 30, 1999, and 5,000,000 shares of serial preferred stock, without
par value, of which no shares were issued and outstanding as of September 30,
1999. F&M's articles of incorporation authorize the F&M board, without
shareholder approval, to fix the preferences, limitations and relative rights of
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 38 for additional information.
34
<PAGE>
State Bank. State Bank is authorized to issue 3,000,000 shares of State
Bank common stock, par value $0.25 per share, of which 2,960,000 shares were
issued and outstanding as of September 30, 1999. State Bank 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. 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.
State Bank. The holders of State Bank common stock also are entitled to
share ratably in dividends when and as declared by the State Bank 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 29.
VOTING RIGHTS
The holders of both F&M and State Bank 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 State Bank common stock are entitled to
cumulative voting in the election of directors.
DIRECTORS AND CLASSES OF DIRECTORS
All of F&M's and State Bank's directors are elected each year. There is
no provision relating to the removal of directors in either F&M's or State
Bank's articles of incorporation. Accordingly, the removal of directors is
governed by the Virginia SCA which provides that shareholders may remove
directors with or without cause if the number of votes cast to remove him
constitutes a majority of the outstanding shares of common stock.
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 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.
35
<PAGE>
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 affiliation 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 State Bank 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. These 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:
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
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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 affiliation 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.
RIGHTS OF DISSENT AND APPRAISAL
Under the Virginia SCA, a shareholder of a Virginia corporation is
entitled to dissent from, and to receive payment of the "fair value" of his or
her shares in the event of, any of the following corporation transactions:
o completion of a merger to which the corporation is a party,
provided that either (a) shareholder approval is required for the
merger pursuant to the Virginia SCA or the corporation's articles
of incorporation and the shareholder is entitled to vote or (b)
the corporation is a subsidiary being merged with its parent
pursuant to a particular Virginia SCA provision for such
transactions;
o completion of a plan of share exchange in which the corporation is
the party whose shares will be acquired, provided that the
shareholder is entitled to vote on the plan;
o completion of the sale or exchange of all or substantially all the
property of the corporation, if the shareholder is entitled to
vote on the transaction or the transaction is in furtherance of a
dissolution on which the shareholder is entitled to vote, and
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<PAGE>
provided that the transaction is neither (a) a transaction
pursuant to court order nor (b) a transaction for cash pursuant to
a plan by which all or substantially all of the net proceeds will
be distributed to shareholders within one year; or
o any corporate action taken pursuant to a shareholder vote, to the
extent that the articles of incorporation, the bylaws, or a
resolution of the board of directors provides that voting and
nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
With respect to corporations such as F&M that have a class or series of
shares either listed on a national securities exchange or the Nasdaq Stock
Market or held by more than 2,000 record shareholders, dissenters' rights are
not available to the holders of such shares by reason of a merger, share
exchange or sale or exchange of property unless
o unlike the F&M articles, the articles of incorporation of the
corporation issuing such shares provided otherwise;
o in the case of a merger or share exchange, unlike the affiliation,
the holders of such shares are required to accept anything other
than (a) cash, (b) shares in another corporation that are either
listed on a national securities exchange or held by more than
2,000 record shareholders or (c) a combination of cash and such
shares; or
o the transaction is with a shareholder who owns more than ten
percent of a class of shares and has not been approved by a
majority of the directors unaffiliated with such shareholder.
A shareholder who has the right to object to a transaction and receive
payment of the "fair value" of his or her shares must follow specific procedural
requirements as set forth in the Virginia SCA in order to maintain such right
and obtain such payment.
Holders of State Bank common stock have appraisal rights in connection
with the affiliation.
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
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 State Bank.
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<PAGE>
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.
According to its bylaws, State Bank is required to indemnify a director
or officer in connection with any legal proceeding by reason of the fact the he
is or was a director or officer of State Bank provided (a) the legal proceeding
is prosecuted against the director or officer to final determination and it is
not finally adjudged in the action that he had been derelict in the performance
of his duties as an officer or director, or (b) the legal proceeding is settled
or otherwise terminated against the director or officer without a final
determination on the merits and it is determined by the board of directors that
the director or officer had not in any substantial way been derelict in the
performance of his duties as charged in the legal proceeding.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue 30,900,000 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 September
30, 1999, F&M had issued and outstanding 22,987,678 shares of F&M common stock
held by 8,292 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
those shares of F&M common stock to be issued in connection with the affiliation
will be when issued, fully paid and nonassessable. F&M common stock is listed
and traded on the NYSE.
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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 State Bank 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 State Bank 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, 1998 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 State Bank incorporated in this proxy
statement/prospectus by reference to State Bank's Annual Report on Form 10-K for
the year ended December 31, 1998 and included as Appendix III have been so
incorporated in reliance upon the report of Persinger & Company, L.L.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 to be issued in
connection with the affiliation 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 State Bank concerning certain federal income tax consequences
of the affiliation. See "The Affiliation -- Material Federal Income Tax
Consequences" on page 25.
Certain matters relating to the affiliation will be passed upon for
State Bank by Mays & Valentine, L.L.P., Richmond, Virginia.
40
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
F&M and State Bank 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 State Bank. 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 State
Bank 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 State Bank are also available to the public from commercial document
retrieval services and, for F&M, also should be available for inspection at the
offices of the New York Stock Exchange.
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
affiliation. This document is a part of the registration statement and
constitutes a prospectus of F&M and a proxy statement of State Bank 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 State Bank 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 State Bank have previously filed with the
Commission and the Federal Reserve. These documents contain important business
information about F&M and State Bank.
F&M'S COMMISSION FILINGS (FILE NO. 0-05929) PERIOD
Annual Report on Form 10-K ........... ...... Year ended December 31, 1998
Quarterly Reports on Form 10-Q .............. Quarters ended March 31,
June 30 and September 30, 1999
Current Reports on Form 8-K ................. Dated March 22, April 14,
August 11, September 24 and
October 6, 1999
41
<PAGE>
STATE BANK'S FEDERAL RESERVE FILINGS PERIOD
Annual Report on Form 10-K .................. Year ended December 31, 1998
Quarterly Reports on Form 10-Q............... Quarters ended March 31,
June 30 and September 30, 1999
F&M and State Bank 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 State Bank has supplied all such
information relating to State Bank.
State Bank may have sent you some of the documents incorporated by
reference by State Bank, but you can obtain any of them through State Bank 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 State Bank may
obtain documents incorporated by reference in this document by requesting them
in writing or by telephone from F&M or State Bank at the following addresses:
F&M NATIONAL CORPORATION
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
THE STATE BANK OF THE ALLEGHENIES
116 West Riverside Avenue
P.O. Box 860
Covington, Virginia 24426
Telephone: (540) 965-1100
Attention: Secretary
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM EITHER F&M OR STATE BANK,
PLEASE DO SO BY DECEMBER 21, 1999 IN ORDER TO RECEIVE TIMELY DELIVERY OF THE
DOCUMENTS BEFORE THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote your shares at the special
meeting. F&M and State Bank have not authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated November 19,
1999. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to shareholders nor the
issuance of F&M common stock in the affiliation creates any implication to the
contrary.
42
<PAGE>
Appendix I
=================================
Agreement and Plan of Reorganization
and
Plan of Share Exchange
=================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
Article 1. The Affiliation and Related Matters...........................................................I-1
1.1 The Affiliation...............................................................................I-1
1.2 Conversion of State Bank Stock................................................................I-1
1.3 Directors, Officers and Employees of State Bank; Name.........................................I-2
1.4 Closing; The Effective Date...................................................................I-2
1.5 Definitions...................................................................................I-3
Article 2. Representations and Warranties of State Bank..................................................I-3
2.1 Organization, Standing and Power of State Bank................................................I-3
2.2 Authorized and Effective Agreements...........................................................I-3
2.3 Capital Structure.............................................................................I-4
2.4 Rights........................................................................................I-4
2.5 Financial Statements; Books and Records; Minute Books.........................................I-4
2.6 Absence of Material Changes and Events........................................................I-5
2.7 Absence of Undisclosed Liabilities............................................................I-5
2.8 Legal Proceedings; Compliance with Laws.......................................................I-5
2.9 Tax Matters...................................................................................I-5
2.10 Property......................................................................................I-5
2.11 Employee Benefit Plans........................................................................I-6
2.12 Insurance.....................................................................................I-7
2.13 Loans; Allowance for Loan Losses..............................................................I-7
2.14 Environmental Matters.........................................................................I-8
2.15 Takeover Laws.................................................................................I-9
2.16 Brokers.......................................................................................I-9
2.17 Securities Reports............................................................................I-9
2.18 Statements True and Correct...................................................................I-9
2.19 Year 2000.....................................................................................I-9
Article 3. Representations and Warranties of F&M........................................................I-10
3.1 Organization, Standing and Power.............................................................I-10
3.2 Organization, Standing and Power of F&M Subsidiaries.........................................I-10
3.3 Authorized and Effective Agreement...........................................................I-10
3.4 Capital Structure............................................................................I-11
3.5 Financial Statements; Books and Records; Minute Books........................................I-11
3.6 Absence of Material Changes or Events........................................................I-11
3.7 Absence of Undisclosed Liabilities...........................................................I-12
3.8 Legal Proceedings; Compliance with Laws......................................................I-12
3.9 Tax Matters..................................................................................I-12
3.10 Employee Benefit Plans.......................................................................I-12
3.11 Insurance....................................................................................I-12
3.12 Allowance for Loan Losses....................................................................I-13
3.13 Environmental Matters........................................................................I-13
3.14 Securities Reports...........................................................................I-13
3.15 Statements True and Correct..................................................................I-13
3.16 Year 2000....................................................................................I-13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Article 4. Covenants and Agreements.....................................................................I-14
4.1 Reasonable Best Efforts......................................................................I-14
4.2 Access to Information; Notice of Certain Matters; Confidentiality............................I-14
4.3 Registration Statement; Shareholder Approval.................................................I-14
4.4 Operation of the Business of State Bank......................................................I-15
4.5 Operation of the Business of F&M.............................................................I-16
4.6 Dividends....................................................................................I-16
4.7 No Solicitation of Other Offers..............................................................I-17
4.8 Regulatory Filings...........................................................................I-17
4.9 Public Announcements.........................................................................I-17
4.10 Accounting Treatment.........................................................................I-17
4.11 Affiliate Agreements; Noncompetition Agreements..............................................I-17
4.12 Benefit Plans................................................................................I-18
4.13 NYSE Listing.................................................................................I-18
4.14 Indemnification..............................................................................I-18
Article 5. Conditions to the Affiliation................................................................I-18
5.1 General Conditions...........................................................................I-18
5.2 Conditions to Obligations of F&M.............................................................I-19
5.3 Conditions to Obligations of State Bank......................................................I-20
Article 6. Termination..................................................................................I-20
6.1 Termination..................................................................................I-20
6.2 Effect of Termination........................................................................I-21
6.3 Survival of Representations, Warranties and Covenants........................................I-21
6.4 Fees and Expenses............................................................................I-21
Article 7. General Provisions...........................................................................I-22
7.1 Entire Agreement.............................................................................I-22
7.2 Binding Effect; No Third-Party Rights........................................................I-22
7.3 Waiver and Amendment.........................................................................I-23
7.4 Governing Law................................................................................I-23
7.5 Notices......................................................................................I-23
7.6 Counterparts.................................................................................I-24
7.7 Severability.................................................................................I-24
</TABLE>
EXHIBIT A -- Plan of Share Exchange
EXHIBIT B -- Affiliate Agreements (not included)
EXHIBIT C -- Form of Severance Agreement (not included)
ii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of October 5, 1999, by and among F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), and THE STATE BANK OF THE ALLEGHENIES, a Virginia
banking corporation ("State Bank").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and State Bank have
approved the affiliation of their companies through a share exchange under
Virginia law that will cause State Bank to become a wholly-owned subsidiary of
F&M, all as more specifically provided in the Agreement and the Plan of Share
Exchange in the form attached hereto as Exhibit A (the "Plan of Share
Exchange"); 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 Affiliation and Related Matters
1.1 The Affiliation
Subject to the terms and conditions of this Agreement, at the Effective
Date as defined in Section 1.4 hereof, State Bank shall become a wholly-owned
subsidiary of F&M through the exchange of each outstanding share of common stock
of State Bank for shares of the common stock of F&M in accordance with Section
1.2 of this Agreement and the Plan of Share Exchange attached hereto as Exhibit
A and made a part hereof (the "Affiliation"). From and after the Effective Date,
the Affiliation shall have the effect set forth in Section 13.1-721 of the
Virginia Stock Corporation Act (the "VSCA").
1.2 Conversion of State Bank Stock
(a) At the Effective Date, by virtue of the Affiliation and without any
action on the part of the holders thereof, each share of common stock, par value
$0.25 per share, of State Bank ("State Bank 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 $18.00, provided, that in no event shall F&M issue more than
0.651 shares or less than 0.554 shares for each such share of State Bank. The
market value of F&M Common Stock will be the average of the daily closing sales
prices per share of F&M Common Stock as reported on the New York Stock Exchange
Composite Transactions tape (as reported in The Wall Street Journal or, if not
reported thereby, another authoritative source as chosen by F&M) for the ten
consecutive full trading days in which such shares are traded on the NYSE ending
at the close of trading on the day before the fifth day before the Effective
Date. The ratio of shares of F&M Common Stock that will be exchanged for each
outstanding share of State Bank Common Stock shall be referred to herein as the
"Exchange Ratio," which shall be rounded to the nearest third decimal point.
Cash will be issued for fractional shares in accordance with the Plan of Share
Exchange.
I-1
<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 before
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 either (i) the maximum
and minimum number of shares of F&M Common Stock that may be issued for each
share of State Bank Common Stock in accordance with Section 1.2(a) or (ii) the
Exchange Ratio 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 after
the Exchange Ratio has been established and before the Effective Date.
Notwithstanding the foregoing, the parties agree that no adjustments to the
maximum and minimum number of shares of F&M Common Stock issuable in accordance
with Section 1.2(a) will be made as a result of the 3% stock dividend announced
by F&M on August 11, 1999.
1.3 Directors, Officers and Employees of State Bank; Name
(a) The directors, officers and employees of State Bank will not change
as a result of the Affiliation. The members of State Bank's Board of Directors
will remain in place for their existing terms of office and thereafter shall be
subject to reelection at the discretion of F&M. Dr. William J. Ellis will
continue to serve as Chairman of the Board of State Bank after the Effective
Date.
(b) Mr. Don E. Stone, Jr. will become Vice Chairman of the Board of
State Bank on or about the Effective Date and will continue as Chief Executive
Officer of State Bank through June 30, 2000 on terms described in a letter
agreement to be entered into between Mr. Stone and F&M on or before the
Effective Date. Mr. Benny A. Williams, Jr. will succeed Mr. Stone as President
and also will become Chief Administrative Officer of State Bank on or about the
Effective Date, and F&M shall enter into a severance agreement, effective as of
the Effective Date, with Mr. Williams in the form provided in Exhibit C hereto.
Mr. Williams will succeed Mr. Stone as Chief Executive Officer of State Bank on
July 1, 2000.
(c) From and after the Effective Date, the name of State Bank will be
F&M Bank - Highlands.
1.4 Closing; The Effective Date
The Affiliation shall become effective on the date and at the time
shown on the Certificate of Share Exchange issued by the Virginia State
Corporation Commission effecting the Affiliation (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
Affiliation (the "Closing"), which shall be held on or before the Effective
Date. At or after the Closing, F&M and State Bank shall execute and deliver to
the Virginia State Corporation Commission Articles of Share Exchange containing
the Plan of Share Exchange.
1.5 Definitions
Any term defined in this Agreement and the Plan of Share Exchange shall
have the meaning ascribed to it for purposes of this Agreement. In addition:
I-2
<PAGE>
(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 Affiliation;
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 State Bank 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 STATE BANK
State Bank represents and warrants to F&M as follows:
2.1 Organization, Standing and Power of State Bank
State Bank is a Virginia chartered banking corporation duly organized,
validly existing and in good standing under the laws of Virginia. State Bank 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 State
Bank has the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby (subject to receipt of the approval of the shareholders of State Bank of
this Agreement and the Plan of Share Exchange).
2.2 Authorized and Effective Agreements
(a) Subject to receipt of the approval of the shareholders of State
Bank of this Agreement and the Plan of Share Exchange, this Agreement and the
Plan of Share Exchange and the transactions contemplated hereby and thereby have
been authorized by all necessary corporate action on the part of State Bank on
or prior to the date hereof. This Agreement and the Plan of Share Exchange are
valid and legally binding obligations of State Bank, enforceable against State
Bank 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 and the Plan
of Share Exchange, nor the consummation of the transactions contemplated herein
or therein, nor compliance by State Bank 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 State Bank; (ii) except as Previously
Disclosed in its Disclosure
I-3
<PAGE>
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 State Bank pursuant
to any (A) note, bond, mortgage, indenture, or (B) 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 State Bank.
2.3 Capital Structure
The authorized capital stock of State Bank consists of 3,000,000 shares
of common stock, par value $0.25 per share, of which 2,960,000 shares are issued
and outstanding as of this date. All outstanding shares of State Bank 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.
2.4 Rights
As of the date of this Agreement, there are not any shares of capital
stock of State Bank 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 State Bank 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 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 State Bank
may exercise stock options and a list of those persons that hold outstanding
warrants to purchase State Bank Common Stock).
2.5 Financial Statements; Books and Records; Minute Books
The State Bank Financial Statements (as defined below) fairly present
or will fairly present, as the case may be, the financial position of State Bank
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
State Bank 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 State Bank contain accurate records of all corporate actions of
its shareholders and Board of Directors (including committees of its Board of
Directors). The State Bank Financial Statements shall mean (i) the statements of
financial condition of State Bank as of December 31, 1998 and 1997 and the
related statements of income, stockholders' equity and cash flows for each of
the three years ended December 31, 1998, 1997 and 1996 (including related notes
and schedules, if any) and (ii) the balance sheets of State Bank 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, 1998.
2.6 Absence of Material Changes and Events
Since June 30, 1999 and except as Previously Disclosed in its
Disclosure Schedule, there has not been any change in the financial condition or
results of operations of State Bank which, individually or in
I-4
<PAGE>
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 State Bank made at the request of F&M in order
to bring the allowance for loan losses of State Bank into compliance with F&M's
loan policies shall not be deemed a material change or event.
2.7 Absence of Undisclosed Liabilities
State Bank has not incurred any liability (contingent or otherwise)
that is material to State Bank or that, when combined with all similar
liabilities, would be material to State Bank, except as Previously Disclosed in
its Disclosure Schedule or as disclosed in the State Bank Financial Statements
and except for liabilities incurred in the ordinary course of business
consistent with past practice since the date of the most recent State Bank
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
State Bank, threatened against State Bank or against any property, asset,
interest or right of State Bank, or against any officer, director or employee of
State Bank that would, if determined adversely to State Bank, have a Material
Adverse Effect on State Bank. To the Knowledge of State Bank, 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
State Bank 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 State Bank have been paid, are reflected as a liability in the State Bank
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 State Bank 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 State Bank 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.
2.10 Property
Except as Previously Disclosed in its Disclosure Schedule or reserved
against in the State Bank Financial Statements, State Bank 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 State Bank Financial
Statements as of June 30, 1999 or acquired after such date. To the Knowledge of
State Bank, 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 State Bank, the buildings, structures, and
appurtenances owned, leased, or occupied by it are in good operating condition
and in a state of good
I-5
<PAGE>
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) State Bank 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 State Bank (collectively, the "State Bank
Benefit Plans").
(b) None of the State Bank 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
State Bank Benefit Plans are in compliance in all material respects with
applicable laws and regulations, and State Bank has administered the State Bank
Benefit Plans in accordance with applicable laws and regulations in all material
respects.
(d) Each State Bank 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) State Bank has made available to F&M copies of all State Bank
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 State Bank Benefit Plans.
(f) To the Knowledge of State Bank, it has not engaged in any
prohibited transactions, as defined in Code section 4975 or ERISA section 406,
with respect to any State Bank 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 State Bank 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 State Bank Benefit Plan
contains any provision that would give rise to any severance, termination or
other payments or liabilities as a result of the transactions contemplated by
this Agreement.
(i) State Bank 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 State Bank after a termination of employment, except as required
by the Consolidated Omnibus Budget Reconciliation Act of 1985.
2.12 Insurance
State Bank currently maintains insurance in amounts reasonably
necessary for its operations and, to the Knowledge of State Bank, similar in
scope and coverage to that maintained by other entities similarly
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situated. Since January 1, 1999 and except as Previously Disclosed, State Bank
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 State Bank has not been refused any insurance coverage sought
or applied for, and State Bank 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 State Bank.
2.13 Loans; Allowance for Loan Losses
(a) Except as Previously Disclosed in its Disclosure Schedule, to the
Knowledge of State Bank each loan reflected as an asset in the State Bank
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 State
Bank's standard loan policies.
(b) State Bank 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 State Bank 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
State Bank 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 State Bank 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 State Bank to
make certain adjustments after the date hereof to its allowance for loan losses
in order to bring the allowance for loan losses of State Bank into compliance
with F&M's loan policies.
2.14 Environmental Matters
(a) Except as Previously Disclosed in its Disclosure Schedule, State
Bank is in substantial compliance with all Environmental Laws (as defined
below). State Bank has not received any communication alleging that State Bank
is not in such compliance and there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
(b) State Bank 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
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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) State Bank, (ii) any person or
entity whose liability for any Environmental Claim State Bank has or may have
retained either contractually or by operation of law, (iii) any real or personal
property owned or leased by State Bank, or any real or personal property which
State Bank 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 State Bank holds a security interest securing a loan recorded on the books
of State Bank. State Bank 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
State Bank, or all real and personal property which State Bank has been, or is,
judged to have managed or to have supervised or to have participated in the
management of, State Bank 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). State Bank is in compliance in all material respects with all
recommendations contained in any such environmental audits, analyses and
surveys.
(d) To the Knowledge of State Bank, 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 State Bank or against any person or
entity whose liability for any Environmental Claim State Bank 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.
(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
State Bank has taken all action necessary to exempt this Agreement and
the transactions contemplated hereby 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 State Bank'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.
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2.16 Brokers
Other than the financial advisory services performed for State Bank by
Baxter Fentriss and Company (on terms disclosed to F&M), neither State Bank 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
State Bank 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"). State Bank's
Annual Report on Form 10-KSB for the year ended December 31, 1998, and all other
reports, definitive proxy statements or documents filed or to be filed by it
subsequent to December 31, 1998 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 Securities and Exchange Commission (the
"SEC") shall become effective, and at all times subsequent thereto up to and
including the State Bank shareholders' meeting called to vote upon the
Affiliation, such Registration Statement and all amendments or supplements
thereto, with respect to all information set forth therein furnished by State
Bank relating to State Bank, (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.
2.19 Year 2000
Except as Previously Disclosed in its Disclosure Schedule, State Bank
has reviewed the areas within its business and operation which could be
adversely affected by, and has developed a program to address and remedy on a
timely basis, "Year 2000" issues such as risks that computer applications,
vendors, customers, equipment and operating systems will not be "Year 2000
Compliant" (as hereinafter defined), and has made appropriate related inquiries
of its vendors and customers. "Year 2000 Compliant," with respect to any person,
means that the hardware and software systems and components (including without
limitation imbedded microchips) owned, licensed or used by such person in
connection with its business operations will (without any additional cost or the
need for human intervention) (i) accurately process information involving any
and all dates before, during and/or after January 1, 2000, including without
limitation recognizing and processing input, providing output, storing
information and performing date-related calculations, all without creating any
ambiguity as to the century and without any other material and adverse error or
malfunction, (ii) operate accurately without material and adverse interruption
or malfunction on and in respect of any and all dates before, during and/or
after January 1, 2000 and (iii) where applicable, respond to and process two
digit year input without creating any ambiguity as to the century.
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ARTICLE 3
Representations and Warranties of F&M
F&M represents and warrants to State Bank 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 Share Exchange 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 Share Exchange 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
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) 30,900,000 shares of common stock,
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par value $2.00 per share, of which 22,327,134 shares were issued and
outstanding on August 31, 1999. 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 State Bank
Common Stock upon consummation of the Affiliation 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, 1998
and 1997 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years ended December 31, 1998, 1997 and
1996 (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, 1998.
3.6 Absence of Material Changes or Events
Since June 30, 1999, 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
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
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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, 1999 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.
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
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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, 1998, and all other reports, definitive proxy statements or
documents filed or to be filed by it subsequent to December 31, 1998 under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed, or to
be filed, with 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
State Bank shareholders' meeting called to consider and vote on the approval of
the Affiliation, 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.
3.16 Year 2000
Except as Previously Disclosed in its Disclosure Schedule, F&M has
reviewed the areas within its business and operation which could be adversely
affected by, and has developed a program to address and remedy on a timely
basis, "Year 2000" issues such as risks that computer applications, vendors,
customers, equipment and operating systems will not be "Year 2000 Compliant",
and has made appropriate related inquiries of its vendors and customers.
ARTICLE 4
Covenants and Agreements
4.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, F&M and State
Bank 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 Affiliation 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 State Bank 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 State Bank each may make or cause to be made such
further investigation of the operational, financial and legal
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condition of the other as such party reasonably deems necessary or advisable in
connection with the Affiliation, provided, however, that such investigation
shall not interfere unnecessarily with normal operations. F&M and State Bank
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
Affiliation of, such party hereto.
(b) F&M and State Bank 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 State Bank 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 Affiliation (including the proxy statement
and prospectus and other proxy solicitation materials of F&M and State Bank
constituting a part thereof (the "Proxy Statement") and all related documents).
F&M and State Bank 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 Affiliation.
(b) State Bank shall submit this Agreement and the Plan of Share
Exchange 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 Affiliation. The Board of Directors of State Bank shall
recommend such approval, and State Bank shall take all reasonable lawful action
to solicit such approval by its shareholders; provided, however, that if the
Board of Directors of State Bank concludes in good faith (after consultation
with and based upon the written advice of outside counsel) that such
recommendation would likely constitute a breach of its fiduciary duties to
shareholders under applicable law, then the Board of Directors of State Bank
shall not be obligated to recommend the approval of this Agreement and Plan of
Share Exchange.
4.4 Operation of the Business of State Bank
State Bank 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) State Bank 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
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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.
(b) State Bank 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 State Bank 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) State Bank 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: (i) normal individual increases in compensation
to employees and normal bonuses awarded to senior officers in the
ordinary course of business consistent with past practice, and (ii)
normal contributions to The State Bank of the Alleghenies 401(k) Profit
Sharing Plan 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, except with respect to the funding of the
Director Emeritus Program for those eligible directors who retire from
the Board of Directors on or about the Effective Date;
(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) Change its methods of accounting in effect at December 31,
1998, except as required by changes in generally accepted accounting
principles concurred in by F&M, which concurrence shall not be
unreasonably withheld or change any of its methods of reporting income
and deductions for federal income tax purposes from those employed in
the preparation of its
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federal income tax returns for the year ended December 31, 1998, except
as required by changes in law or regulation;
(8) Take any action which would or could reasonably be
expected to (i) to cause the Affiliation not to constitute a
reorganization under Section 368 of the Code as determined by F&M, (ii)
result in any inaccuracy of a representation or warranty herein that
would allow for a termination of this Agreement, or (iii) cause any of
the conditions precedent to the transactions contemplated by this
Agreement to fail to be satisfied;
(9) 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 State Bank, during the period
from the date hereof to the Effective Date:
(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
State Bank 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 Dividends
F&M agrees that prior to the Effective Date State Bank may declare and
pay its regular fourth quarter cash dividend in an amount not to exceed $0.16
per share.
4.7 No Solicitation of Other Offers
Without the prior written consent of F&M, State Bank 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 State Bank 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 State Bank concludes
in good faith, after consultation with and based upon the written advice of
outside counsel, that the failure to furnish such information or enter into such
discussions or negotiations would likely constitute a breach of its fiduciary
duties to shareholders under applicable law, (B) prior to taking such action,
State Bank receives from such person or entity an executed confidentiality
agreement, and (C) the Board of Directors of State Bank 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. State Bank
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.
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For purposes of this Agreement, "Acquisition Transaction" means any merger,
consolidation, share exchange, joint venture, business combination or similar
transaction involving State Bank or any purchase of all or any material portion
of the assets of State Bank.
4.8 Regulatory Filings
F&M and State Bank 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 Affiliation. F&M shall use its best efforts to
obtain prompt approval of each required application.
4.9 Public Announcements
Each party will consult with the other before issuing any press release
or otherwise making any public statements with respect to the Affiliation 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 State Bank shall each use their best efforts to ensure that the
Affiliation qualifies for pooling-of-interests accounting treatment under
generally accepted accounting principles and, as of the date hereof, neither F&M
nor State Bank is aware of any reason why the Affiliation may not be accounted
for as a pooling-of-interests.
4.11 Affiliate Agreements; Noncompetition Agreements
State Bank has identified to F&M all persons who are, as of the date
hereof, directors or executive officers of State Bank (the "Affiliates"). State
Bank has delivered a written letter agreement in the form of Exhibit B hereto
from each Affiliate. In addition, State Bank shall cause each member of its
Board of Directors to enter into an agreement with F&M on or before the
Effective Date providing that such member will not engage in activities
competitive with F&M for three years following the Effective Date.
4.12 Benefit Plans
Upon consummation of the Affiliation, as soon as administratively
practicable but in no event later than January 1, 2001, employees of State Bank
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 (but not for benefit accrual)
with State Bank as if such service were with F&M. Prior to the consummation of
the Affiliation, The State Bank of the Alleghenies 401(k) Profit Sharing Plan
will be terminated. Prior to the participation by employees of State Bank in the
F&M employee benefit plans and programs, such employees shall continue to be
provided with employee benefit plans and programs which in the aggregate are not
less favorable to them than those provided by State Bank immediately prior to
the consummation of the Affiliation.
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 Affiliation.
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4.14 Indemnification
Following the Effective Date, F&M shall indemnify, defend and hold
harmless any person who has rights to indemnification from State Bank, to the
same extent and on the same conditions as such person is entitled to
indemnification pursuant to applicable law and State Bank'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 State Bank 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 State
Bank'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 State Bank for a
period of three years after the Effective Date on terms no less favorable than
those in effect on the date hereof.
ARTICLE 5
Conditions to the Affiliation
5.1 General Conditions
The respective obligations of each of F&M and State Bank to effect the
Affiliation 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 State Bank.
(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 Affiliation, 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 Affiliation shall have been approved for listing on the New
York Stock Exchange.
(c) Regulatory Approvals. F&M and State Bank 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 State Bank, would so materially adversely impact the
economic or business benefits of the transactions contemplated by this Agreement
as to render consummation of the Affiliation inadvisable or unduly burdensome.
(d) Tax Opinion. F&M and State Bank shall have received the opinion of
LeClair Ryan, A Professional Corporation, counsel to F&M, in form and substance
satisfactory to F&M and State Bank and dated as of the Effective Date to the
effect that the Affiliation will constitute a reorganization within the
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meaning of Section 368 of the Code and that no gain or loss will be recognized
by the shareholders of State Bank to the extent they receive F&M Common Stock
solely in exchange for their State Bank Common Stock in the Affiliation. In
rendering its opinions, such counsel may rely upon representations contained in
certificates of officers of F&M, State Bank and others.
(e) Opinions of Counsel. State Bank shall have delivered to F&M and F&M
shall have delivered to State Bank 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 State Bank shall be subject to
any order, decree or injunction of a court or agency of competent jurisdiction
that enjoins or prohibits the consummation of the Affiliation.
5.2 Conditions to Obligations of F&M
The obligations of F&M to effect the Affiliation 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 State Bank 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 Affiliation and the other
transactions contemplated by this Agreement.
(b) Performance of Obligations. State Bank 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. State Bank 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 Affiliation will qualify for pooling-of-interests
accounting treatment; provided, however, that such letter shall not be a
condition to the consummation of the Affiliation if F&M takes any action which
would prevent the Affiliation from qualifying for pooling-of-interests
accounting treatment.
5.3 Conditions to Obligations of State Bank
The obligations of State Bank to effect the Affiliation 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
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(iii) for representations and warranties the inaccuracies of which relate to
matters that, individually or in the aggregate, do not materially adversely
affect the Affiliation 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 State Bank 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. State Bank shall have received an
updated fairness opinion from Baxter Fentriss and Company, financial advisor to
State Bank, addressed to State Bank and dated on or about the date the Proxy
Statement is mailed to shareholders of State Bank, to the effect that the terms
of the Affiliation are fair to the shareholders of State Bank from a financial
point of view.
ARTICLE 6
Termination
6.1 Termination
This Agreement and the Plan of Share Exchange may be terminated at any
time before the Effective Date, whether before or after approval thereof by the
shareholders of State Bank at the State Bank Meeting, as provided below:
(a) Mutual Consent. By the mutual consent in writing of F&M and State
Bank.
(b) Closing Delay. At the election of either party, evidenced by
written notice, if the Effective Date shall not have occurred on or before June
30, 2000, 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 State Bank 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 Affiliation set forth in
Sections 5.1 and 5.2, and such noncompliance is not waived by F&M.
(d) Conditions to State Bank Performance Not Met. By State Bank 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 State Bank to effect the Affiliation set
forth in Sections 5.1 and 5.3, and such noncompliance is not waived by State
Bank.
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 Share Exchange shall become void and
have no effect, except that (i) the provisions hereof relating to
confidentiality, press releases and fees 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
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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 Share Exchange 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.
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 State Bank.
(b) In the event F&M terminates this Agreement based on the occurrence
of a Termination Event (as defined below), State Bank shall pay to F&M a
termination fee of Two Million Dollars ($2,000,000) in cash within five business
days after written notice of such termination. For the purposes of this
Agreement, a "Termination Event" shall mean any of the following events or
transactions occurring after the date hereof:
(i) State Bank, without having received F&M's prior written
consent, shall have entered into an agreement with any person to (A)
acquire, merge or consolidate, or enter into any similar transaction,
with State Bank, (B) purchase, lease or otherwise acquire all or
substantially all of the assets of State Bank, or (C) purchase or
otherwise acquire directly from State Bank securities representing 10%
or more of the voting power of State Bank;
(ii) any person shall have acquired beneficial ownership or
the right to acquire beneficial ownership of 20% or more of the
outstanding shares of State Bank Common Stock after the date hereof
(the term "beneficial ownership" for purposes of this Agreement having
the meaning assigned thereto in Section 13(d) of the Exchange Act, and
the regulations promulgated thereunder); or
(iii) any person shall have made a bona fide proposal to State
Bank by public announcement or written communication that is or becomes
the subject of public disclosure to acquire State Bank 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 State Bank vote not to approve the
Agreement.
Notwithstanding the foregoing, State Bank shall not be obligated to pay to F&M
the termination fee described in this Section 6.4(b) in the event that at or
prior to such time as such fee becomes payable (i) F&M and State Bank validly
terminate this Agreement pursuant to Section 6.1(a), (ii) F&M or State Bank
validly terminates this Agreement pursuant to Sections 6.1(c) or 6.1(d), or
(iii) State Bank validly terminates this Agreement pursuant to Section 6.1(b).
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(c) Notwithstanding any provision in this Agreement to the contrary, if
for any reason other than as a result of a Termination Event the Affiliation is
not approved by State Bank's shareholders at the State Bank Meeting or any
adjournment thereof, then State Bank 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 State Bank shall be responsible to F&M
under this Section 6.4(c) shall be limited to $50,000.
(d) Any payment required to be made pursuant to Section 6.4 shall be
made by wire transfer of immediately available funds to an account designated,
by the party entitled to receive payment, in the notice of demand for payment
delivered pursuant to this Section 6.4.
ARTICLE 7
General Provisions
7.1 Entire Agreement
This Agreement contains the entire agreement among F&M and State Bank
with respect to the Affiliation 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 State Bank 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.
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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 State Bank Meeting, except statutory
requirements and requisite approvals of shareholders and regulatory authorities.
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
9 Court Square
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282
Copy to:
George P. Whitley, Esq.
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003
If to State Bank:
Don E. Stone, Jr.
The State Bank of the Alleghenies
116 West Riverside Avenue
Post Office Box 860
Covington, Virginia 24426
Tele: (540) 965-1100
Copy to:
Fred W. Palmore, Esq.
Mays & Valentine, L.L.P.
1111 East Main Street
Post Office Box 1122
Richmond, Virginia 23208
Tele: (804) 697-1200
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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.
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
THE STATE BANK OF THE ALLEGHENIES
Covington, Virginia
By: /s/ Don E. Stone, Jr.
----------------------------------------
Don E. Stone, Jr.
President and Chief Executive Officer
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EXHIBIT A
To the Agreement and
Plan of Reorganization
PLAN OF SHARE EXCHANGE
BETWEEN
THE STATE BANK OF THE ALLEGHENIES
AND
F&M NATIONAL CORPORATION
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"), The
State Bank of the Alleghenies, a Virginia banking corporation ("State Bank"),
shall become a wholly-owned subsidiary of F&M National Corporation, a Virginia
corporation and registered financial institution holding company ("F&M"),
pursuant to a statutory share exchange under Section 13.1-717 of the Virginia
Stock Corporation Act.
ARTICLE I
Terms of the Share Exchange
1.1 The Share Exchange
Subject to the terms and conditions of the Agreement and Plan of
Reorganization, dated as of October 5, 1999, by and between F&M and State Bank
(the "Agreement"), at the Effective Date State Bank shall become a wholly-owned
subsidiary of F&M through the exchange of each outstanding share of common stock
of State Bank for shares of the common stock of F&M in accordance with Section
2.1 of this Plan of Share Exchange and the Agreement and pursuant to a statutory
share exchange under Section 13.1-717 of the Virginia Stock Corporation Act (the
"Share Exchange"). At the Effective Date, the Share Exchange shall have the
effect specified in Section 13.1-721 of the Virginia Stock Corporation Act. The
Share Exchange shall become effective on such date and time as may be determined
in accordance with Section 1.4 of the Agreement (the "Effective Date").
1.2 Articles of Incorporation and Bylaws; Name
(a) The Articles of Incorporation and Bylaws of State Bank in effect
immediately prior to the consummation of the Share Exchange shall remain in
effect following the Effective Date until otherwise amended or repealed.
(b) From and after the Effective Date, the name of State Bank shall be
changed to F&M Bank - Highlands.
ARTICLE II
Manner of Converting Shares
2.1 Conversion of Shares
Upon and by reason of the Share Exchange becoming effective and except
as set forth in Section 2.3 below, no cash shall be allocated to the
shareholders of State Bank and stock shall be issued and allocated as follows:
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(a) Each share of common stock, par value $0.25 per share, of State
Bank ("State Bank 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 $18.00, provided, that in no event
shall F&M issue more than 0.651 shares or less than 0.554 shares for each such
share of State Bank. The market value of F&M Common Stock will be the average of
the daily closing sales prices per share of F&M Common Stock as reported on the
New York Stock Exchange Composite Transactions tape (as reported in The Wall
Street Journal or, if not reported thereby, another authoritative source as
chosen by F&M) for the ten consecutive full trading days in which such shares
are traded on the NYSE ending at the close of trading on the day before the
fifth day before the Effective Date (the "Average Closing Price"). The ratio of
shares of F&M Common Stock that will be exchanged for each outstanding share of
State Bank Common Stock shall be referred to herein as the "Exchange Ratio,"
which shall be rounded to the nearest third decimal point.
(b) Each holder of a certificate representing shares of State Bank
Common Stock upon the surrender of his State Bank 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 State Bank 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.
(c) 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 before
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 either (i) the maximum
and minimum number of shares of F&M Common Stock that may be issued for each
share of State Bank Common Stock in accordance with Section 1.2(a) of the
Agreement or (ii) the Exchange Ratio 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 after the Exchange Ratio has been established and before the
Effective Date. Notwithstanding the foregoing, the parties agree that no
adjustments to the maximum and minimum number of shares of F&M Common Stock
issuable in accordance with Section 2.1(a) will be made as a result of the 3%
stock dividend announced by F&M on August 11, 1999.
(d) Each share of common stock of State Bank issued and outstanding
immediately prior to the Effective Date shall, by virtue of the Share Exchange,
continue to be issued and outstanding shares held by F&M.
2.2 Manner of Exchange of State Bank 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 State Bank Common Stock
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of State Bank 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 State Bank 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
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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 State Bank 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 Share Exchange, promptly after which time all such dividends or distributions
shall be paid (without interest).
2.5 Rights of Dissenting Shareholders
Shareholders of State Bank who object to the Share Exchange will be
entitled to the rights and remedies set forth in Sections 13.1-729 through
13.1-741 of the Virginia Stock Corporation Act.
ARTICLE III
Conditions Precedent
The obligations of F&M and State Bank to effect the Share Exchange as
herein provided shall be subject to satisfaction, unless duly waived, of the
conditions set forth in the Agreement.
ARTICLE IV
Termination
The parties may terminate this Plan of Share Exchange at any time prior
to the Effective Date as provided in Article 6 of the Agreement.
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Appendix II
=================
Opinion of Baxter Fentriss and Company
=================
<PAGE>
[Baxter Fentriss and Company letterhead]
November 19, 1999
The Board of Directors
The State Bank of the Alleghenies
116 W. Riverside Avenue
Covington, Virginia 25661
Dear Members of the Board:
The State Bank of the Alleghenies, Covington, Virginia, ("State Bank") and F&M
National Corporation, Winchester, Virginia, ("F&M") have entered into an
agreement providing for the affiliation of their companies through a share
exchange that will cause State Bank to become a wholly-owned subsidiary of F&M
("Affiliation"). The terms of the Affiliation are set forth in the Agreement and
Plan of Reorganization ("Agreement") dated October 5, 1999.
The terms of the Affiliation provide that, with the possible exception of those
shares as to which dissenter's rights may be perfected, each share of State Bank
common stock, $.25 par value per share, will be converted into shares having an
aggregate market value of $18.00 in F&M common stock, $2.00 par value per share,
provided, that in no event shall F&M issue more than .651 shares or less than
.554 shares for each share of State Bank common stock ("Exchange Ratio").
You have asked our opinion as to whether the Exchange Ratio is fair to the
respective shareholders of State Bank from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of State Bank and F&M available to us from published sources. In
addition, we have, among other things: (a) to the extent deemed relevant,
analyzed selected public information of certain other financial institutions and
compared State Bank and F&M from a financial point of view to the other
financial institutions; (b) compared the terms of the Affiliation with the terms
of certain other comparable transactions to the extent information concerning
such acquisitions was publicly available; (c) reviewed the Agreement and related
documents; (d) reviewed the historical market price of State Bank's common stock
and F&M's common stock; and (e) made such other analyses and examinations as we
deemed necessary. We also met with various senior officers of State Bank and F&M
to discuss the foregoing as well as other matters that may be relevant.
We have not independently verified the financial and other information
concerning State Bank and F&M, or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such information;
however, we have no reason to believe that such information is not accurate and
complete. Our conclusion is rendered on the basis of securities market
conditions prevailing as of the date hereof and on the conditions and prospects,
financial and otherwise, of State Bank and F&M as they exist and are known to us
as of June 30, 1999.
II-1
<PAGE>
We have acted as financial advisor to State Bank in connection with the
Affiliation and will receive from State Bank a fee for our services, a
significant portion of which is contingent upon the consummation of the
Affiliation.
It is understood that this opinion may be included in its entirety in any
communication by State Bank or the Board of Directors to the stockholders of
State Bank. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we are
of the opinion that the Exchange Ratio is fair to the shareholders of State Bank
from a financial point of view.
Sincerely,
/s/ Baxter Fentriss and Company
Baxter Fentriss and Company
II-2
<PAGE>
Appendix III
=================
The State Bank of the Alleghenies
Form 10-K
for the year ended December 31, 1998
=================
<PAGE>
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, DC 20551
FORM 10-K
Annual Report Under Section 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
The State Bank of the Alleghenies
---------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1034229
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
116 Riverside Street or PO Drawer 860
Covington, VA 24426
-------------------
(Address of Principal Executive Office and Zip Code)
Registrant's Telephone Number, including Area Code: (540) 965-1100
Securities registered pursuant to Sec. 12(b) of the Act: None
----
Securities registered pursuant to Sec. 12(g) of the Act: None
----
Securities issued pursuant to a registrant statement which became effective
under the Securities Act of 1933:
Common Stock, par value $.25 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by section 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
--- ---
The aggregate market value of the outstanding voting common stock held by the
registrant, computed by reference to the price at which said stock was actually
sold in transactions known to management on January 31, 1998 ($23.00 per share)
was $68,080.000. This price was determined from transaction known to management
of the registrant since its stock is not extensively traded, listed on any
exchange or quoted by NASDAQ.
The total number of shares of the registrant's common stock outstanding as of
January 31, 1998 was 2,960,000.
<PAGE>
The State Bank of the Alleghenies
Form 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Part I
- ------
Item 1 - Business
Organizational History 3
General 3
Competition 3
Employees 3
Item 2 - Properties 4
Item 3 - Legal Proceedings 4
Item 4 - Submission of Matters to a Vote of Security Holders 4
Part II
- -------
Item 5 - Market for the Registrant's Common Stock & Related Stockholder Matters 4
Item 6 - Selected Financial Data 4
Item 7 - Management's Discussion & Analysis of Financial Condition & Results
of Operation 5
Item 8 - Financial Statements & Supplementary Data 9
Item 9 - Changes in & Disagreements with Accountants on Accounting &
Financial Disclosure 36
Part III
- --------
Item 10 - Directors of the Registrant 36
Item 11 - Executive Officers of the Registrant 37
Item 12 - Idemnification of Directors & Officers 37
Item 13 - Options Granted to Management to Purchase Securities 37
Item 14 - Interest of Management & Others in Certain Transactions 37
Part IV
- -------
Item 15 - Exhibits, Financial Statement Schedules & Reports on Form 8-K 38
</TABLE>
-2-
<PAGE>
Part 1
Item 1 - Business Description
State Bank is an independent bank which operates its Main Office in the City of
Covington (population of about 5,000), County of Alleghany, (population of about
14,000), Commonwealth of Virginia, and conducts and transacts general business
as a commercial bank as authorized by The Code of Virginia and the rules and
regulations of The Federal Reserve System. The present area and scope of the
Bank's activities include receiving demand, savings and time deposits, lending
money on a secured and unsecured basis to individuals, partnerships,
corporations and others, and offering other such services as are generally
connected with commercial banking. Trust services are not currently offered.
The bank operates from its Main office in Covington with ten officers,
twenty-one full and two part-time staff members, from its Clifton Forge Office
with four full and one part-time staff members and from its Bath County Office
with three full and two part-time members serving a primary trade area which
includes Alleghany and Bath counties. The trade area total includes a population
of approximately 24,000 people. This same trade area is served by branch offices
of four bank holding companies. In all, these financial institutions operate a
total of six offices in the two-county primary trade area.
Bank deposits in the trade area, based upon called report figures', increased
approximately $3.4 Million during 1998. State Bank's share of the market grew
from 37.9 percent by year end 1994; 38.0 percent by year end 1995; 38.9 percent
by year end 1996; and 39.8 percent by year end 1997; and 43.2 percent by year
end 1998. Bank deposits have no concentration and the Bank had $4,515,192 in
public funds as of December 31, 1998.
The Bank's competitive position, when reviewed in relationship to the service
offered by the other banks in its trade areas, is comparable except that it does
not offer trust services, as do four of its direct competitors. The main lending
thrust is toward all segments of the consumer and small business community. At
year end 1998, the make-up of State Bank's loan portfolio was 29 percent
consumer loans, 64 percent residential real estate loans, and 7 percent
commercial and single payment loans to businesses and individuals, as compared
to year end 1997 of 33 percent, 60 percent and 7 percent respectively. The
commercial loans are rate sensitive and the loans to individuals were at the
limit allowed by The Code of Virginia. At year end 1998, approximately 1 percent
of State Bank's net loans are retail sales contracts discounted, with full
recourse, by a local General Motors Subaru dealer, a local Ford products dealer
and a Chrysler dealer as compared to year end 1997 of 1 percent. The Bank has
had excellent experience with this discounted consumer paper.
At year end 1998, there were unused lines of credit committed by State Bank
totaling approximately $3,752,078 compared to $2,886,389 for year end 1997.
These were to small businesses for short-term seasonal needs and to individuals
for short-term investment purposes. All of these lines are rate sensitive and it
is anticipated that less than 50 percent will be called upon at one time in
1999.
The two major industries located in Covington are seasoned and matured. This
accounts for the many strong deposit and loan accounts the Bank appreciates.
State Bank saw a continuous increase in its growth rates during 1998 and the
Bank is optimistic that progress will continue in its trade area.
Emphasis on growth and profit continue to be the major goal of State Bank.
During 1998, an increase in loans and deposits was evident. Competitive loan
rates and positive economic attitudes account for this continued growth.
In this mountainous area of Virginia, with its independently-mined population,
it is expected that local ownership will continue to be a major selling factor
for State Bank's services to consumers. This will have a positive effect upon
its continued growth/profit goals.
-3-
<PAGE>
ITEM 2 - BANK PREMISES AND OTHER REAL ESTATE
The Bank owns in fee, the land and building, which serve as its main office and
branch locations. Initially, the Bank utilized a trailer as a temporary office.
Permanent quarters were completed in February 1980 at a total cost of $237,348.
As of September 21, 1987, a 2500 square feet expansion of the permanent quarters
was placed in service at a total cost of approximately $400,000 including
building, equipment and furnishings. As of September 8, 1992, an 1800 square
feet branch office was placed in service in Clifton Forge at a total cost of
approximately $400,000 including building, equipment and furnishings. As of
October 12, 1993, a 1500 square feet branch office was placed in service in Bath
County at a total cost of approximately $400,000 including buildings, equipment
and furnishings. The Bank had no Other Real Estate (ORE) as of December 31,
1998.
ITEM 3 - LEGAL PROCEEDINGS
State Bank of the Alleghenies is not currently involved in any material legal
proceedings, other than routine litigation incidental to the businesses, which
involve them or any of their properties.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of State Bank, through
the solicitation of proxies or otherwise, during the fourth quarter of 1998.
Part II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
There is no active or organized trading market for the common stock of State
Bank. The stock is traded on a limited basis in privately negotiated
transactions. Accordingly, the prices shown below may not be indicative of
prices which would prevail if the stock were more actively traded. Bid and ask
prices are not available for the stock of State Bank.
The prices set forth below are based upon information known to State Bank's
management regarding prices paid for the common stock. Based upon such
information, management believes that the following high and low prices
represent actual amounts paid for the common stock of State Bank during the
periods indicated:
1996 HIGH LOW
- ---- ---- ---
First quarter $45.00 $43.00
Second quarter 50.00 48.00
Third quarter* 12.50 12.50
Fourth quarter 14.00 12.50
1997
- ----
First quarter $15.00 $12.00
Second quarter 15.00 14.00
Third quarter 20.00 15.00
Fourth quarter 27.00 20.00
1998
- ----
First quarter $25.00 $18.00
Second quarter 24.00 19.00
Third quarter 23.00 18.00
Fourth quarter 23.00 18.50
*Stock split 5 for 1 as of July 10, 1996
ITEM 6 - SELECTED FINANCIAL DATA
The Selected Financial Data for the five years ended December 31, 1994 thru 1998
appears as Table I to the Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-4-
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS
OF OPERATIONS
Management Analysis of Results of Operations
In Nineteen Hundred and Ninety-Seven, State Bank continued to experience
sustained growth and increased profits. Total assets as of December 31, 1997
were $141.1 Million compared to $134.0 Million on December 31, 1996 representing
an increase of 5.3%. Deposits at year end 1997 were $125.8 Million which
represents growth of $5.4 Million, or 4.4% above year end deposits of $120.5
Million in 1996. The growth in deposits partially funded an increase in loans of
$8.2 Million.
Total interest income for 1997 increased by $679,232, or 6.8%, compared to 1996
and total interest income for 1996 increased by $669,102 or 7.5% compared to
1995. Total interest expense for 1997 increased by $329,658 or 6.6%, over 1996
and increased $247,409 or 5.2%, 1996 over 1995. The increase in interest income
accounted for 98.7% of the increase in total operating revenue for 1997 and
98.9% for 1996; whereas, interest expense accounted for 69.8% of total expenses
for 1997 and 68.4% of total expenses for 1996. All other operating expenses
decreased by .6% in 1997 as compared to 1996 and 5.1% in 1996 as compared to
1995. The change in net interest income is one of the factors affecting the
performance of State Bank. The components which made up net income are detailed
in the following table.
Year to date (000 omitted) 1998 1997 1996
---- ---- ----
Interest Income.................... $11,312 $10,705 $10,026
Interest Expense................... 5,745 5,292 4,962
Net Interest Income................ $ 5,567 $ 5,413 $ 5,064
------- ------- -------
Net interest income increased $349,574 or 6.9% for 1997 compared to 1996 and
$451,693 or 9.8% for 1996 compared to 1995.
Net interest rate margin is shown in the following summary.
Net Interest Margin 1998 1997 1996
---- ---- ----
Yeild on Earning Assets............ 8.23% 8.42% 8.41%
Cost of Interest .................. 4.41% 4.31% 4.25%
------- ------- -------
Net Interest Rate Margin........... 3.82% 4.11% 4.16%
Non-interest expense was down $12,658 or .6% as compared to 1996 and up $110,927
or 5.1% as compared to 1995. The following schedule details the components of
the increase.
Increase/Decrease Increase/Decrease
Over 1997 Over 1996
--------- ---------
Personnel Cost.................... $132,880 $101,443
Occupancy Expenses................ (15,577) 14,319
Furniture & Equipment Expenses.... 25,436 15,844
Other Miscellaneous............... 67,395 (144,264)
------ --------
Total............................. $210,134 $(12,658)
-5-
<PAGE>
Management Analysis, Cont'd
Personnel cost increased by $132,880 or 10.5% for 1998 as compared to 1997 and
$101,443, or 8.7% for 1997 as compared to 1996. Part-time help was employed to
maintain customer service level desired and cover the increased activity brought
about by our continued growth. The Board of Directors funded a non-contributory
profit sharing plan for full-time employees.
The provision for loan losses charged against income was zero for 1998, $65,000
for 1997, 100,000 for 1996, and maintained State Bank's reserve for loan losses
at .89% of net loans at year end 1998, 1.08% at year end 1997 and 1.18% at year
end 1996. Management feels the reserve balance is adequate to cover any
foreseeable loan losses.
As a result of the above factors, the net profit for the year 1998 was
$2,473,033, $2,444,199 for 1997 and $2,220,767 for 1996 representing increases
of 1.8% and 10.1% respectively. Profit per share increased to $0.84 per share in
1998 as compared to $0.83 per share in 1997 as compared to $0.75 per share in
1996.
-6-
<PAGE>
Table I
<TABLE>
<CAPTION>
Five Year Summary of Operations:
Statements of Income
YEAR ENDED DECEMBER 31
INTEREST INCOME: 1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $8,559,032 $8,172,040 $7,362,904 $6,926,331 $6,182,809
Interest on Federal Funds Sold 401,552 254,457 260,318 267,604 108,948
Interest on Balances with
Depository Institutions
Interest on Investments:
United States Treasury Securities 149,176 151,678 216,559 238,274 278,026
United States Government Agencies 1,838,180 1,651,606 1,580,076 1,226,648 1,198,287
States and Political Subdivisions 358,311 470,223 601,067 663,338 685,297
Other Securities 5,421 5,421 5,269 5,196 5,196
-----------------------------------------------------------------------
Total Interest Income 11,311,672 10,705,425 10,026,193 9,327,091 8,458,563
-----------------------------------------------------------------------
Interest Expense:
Interest on time certificates of deposit
of $100,000 or more 925,348 878,136 705,734 659,246 342,305
Interest on other deposits 4,819,423 4,413,493 4,256,237 4,055,316 3,622,214
Total Interest Expense 5,744,771 5,291,629 4,961,971 4,714,562 3,964,519
-----------------------------------------------------------------------
Net Interest Income 5,566,901 5,413,796 5,064,222 4,612,529 4,494,044
Provision for possible loan losses -- 65,000 100,000 80,000 180,000
-----------------------------------------------------------------------
Net interest income after provision
for possible loan losses 5,566,901 5,348,796 4,964,222 4,532,529 4,314,044
-----------------------------------------------------------------------
OTHER INCOME:
Service fees 513,324 441,440 434,489 379,402 314,857
Securities gains (losses) -- 4,382 2,237 49,341 6,509
Other 225 202 375 300 150
-----------------------------------------------------------------------
513,549 446,024 437,101 429,043 321,516
-----------------------------------------------------------------------
OTHER EXPENSES:
Salaries 1,125,316 1,006,869 931,270 870,659 806,848
Employee Benefits (Note 8) 272,538 258,105 232,261 213,702 217,589
Occupancy Expenses 87,902 103,479 89,160 89,072 85,906
Furniture and Equipment Expenses 240,094 214,658 198,814 170,873 179,296
Other Operating Expenses 769,208 701,813 846,077 842,349 786,646
-----------------------------------------------------------------------
2,495,058 2,284,924 2,297,582 2,186,655 2,076,285
-----------------------------------------------------------------------
Income Before Applicable Income Taxes 3,585,392 3,509,896 3,103,741 2,774,917 2,559,275
Federal Income Taxes (Note 9) 1,112,359 1,065,697 882,974 773,481 673,647
-----------------------------------------------------------------------
NET INCOME $2,473,033 $2,444,199 $2,220,767 $2,001,436 $1,885,628
=======================================================================
EARNING PER COMMON SHARE
(Note 10) $0.84 $0.83 $0.75 $0.68 $0.64
</TABLE>
-7-
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The balance of the allowance for loan losses reflects an amount which in
management's opinion is adequate to provide for potential loan losses.
Management's determination of the proper level of the allowance for loan losses
is based on existing credit policies and commitments, actual loan loss
experience relative to the size and characteristics of the loan portfolio,
changes in composition and inherent risk of the loan portfolio, anticipated
impacts of economic policies and conditions and review of specific problem
loans.
The allowance for loan losses on December 31, 1998, was $862,913 a decrease of
$117,196 from the 1997 level.
Table II reflects the activity in the allowance for loan losses during 1998.
LOANS
Total loans, net of unearned income, increased $6,282,064 in 1998 compared to
1997. The largest portion of the increase occurred in the family residential
mortgage category registering a $4,974,727 rise.
Table III reflects loans by type.
INVESTMENTS
Investments securities increased $3,825,249 at December 31, 1997 or 10.6% as
compared to the previous year end. The strategy in 1998 was to invest excess
funds in callable U.S. Government Agencies and tax-free municipals. Maturing
issues have been partially reinvested into U.S. Government Agencies for an
attractive investment yield. Because of this, taxable investments increased
$3,050,161 and tax-free issues increased $1,252.276.
Table IV shows categories and other significant data on investment securities.
DEPOSITS
Deposits at December 31, 1998 increased $7,157,814 or 5.7% over 1997.
Significantly, growth in 1998 was predominantly in demand deposits, with an
increase of $8,029,013.
Table V shows significant data on all categories of Deposits.
CAPITAL RESOURCES
Stockholder's equity reached $16,929,201 during 1998, an increase of 10.7% above
the previous year-end. The increase resulted from earnings retained after the
payment of dividends to stockholders and the unrealized gain on securities
available for sale.
Because the growth in stockholders' equity, expressed as a percentage did exceed
that of total assets, the ratio of stockholders' equity to total assets was
11.29% at year-end 1998 and 10.84% on December 31, 1997. The bank regulatory
authorities use the primary capital ratio, where the allowance for loan losses
is added to both assets and equity, as a guideline to determine capital
adequacy. At year-end 1998 the primary capital ratio was 11.79% compared to
11.53% at the preceding year-end.
There were no material commitment for capital expenditure at December 31, 1998.
Table VI reflects the changes in Equity Capital during 1998.
-8-
<PAGE>
LIQUIDITY AND INTEREST SENSITIVITY
The concept of liquidity involves the ability of an enterprise to maintain
sufficient cash resources to meet its needs and obligations on a timely basis.
For banks, liquidity requires the maintenance of an ability to meet day-to-day
demands of deposit customers. At the same time, banks must be prepared to
fulfill the needs of credit customers for loans of all types. Bank liquidity
should also be considered in terms of the nature and mix of the institutions's
sources and uses of funds. Also related is the concept of interest rate
sensitivity, which is the degree to which earning assets and interest-bearing
liabilities are responsive to changes in interest rates.
Almost the entire deposit base is made up of what management considers to be
core deposits with only $13,966,699 or 10.6% of total deposits comprise of
certificates of deposit larger than $100,000 in size.
However, only the past several years, the deposit base has become somewhat more
sensitive and volatile. Accordingly, State Bank has made changes in its strategy
in order to maintain adequate liquidity and repricing opportunities, such as
requiring real estate mortgage rates to be adjusted every 3 to 5 years. At
December 31, 1998, federal funds and investments securities maturing within one
year amount to $10,630,506 or 8.1% of deposits. In addition, $18,271,357 of
investment securities, or 13.8% of deposits, mature in the 1-5 year range.
The policy of State Bank is to maintain the relationship between rate sensitive
assets and sensitive liabilities which will best maximize profits and maintain
future profit levels in keeping with the trend and expectation of interest
rates.
INFLATION
The majority of the assets and liabilities of the financial institution are
monetary in nature and, therefore, differ greatly from those of companies that
have significant investments in fixed assets or inventory. Management believes
that the most significant impact of its financial results is State Bank's
ability to react to changes in interest rates rather than changes in the general
level of prices.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pursuant to Staff Accounting bulletin 50, the financial statements of State Bank
of the Alleghenies which follow have been audited for the fiscal years ended
December 31, 1998 and December 31, 1997.
-9-
<PAGE>
<TABLE>
<CAPTION>
TABLE II
THE STATE BANK OF THE ALLEGHENIES Call Date: 12/31/1998 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RI-4
COVINGTON, VA 24426 Transit #: 51404338
[6]
SCHEDULE RI-B - CHARGE-OFFS AND RECOVERIES ON LOANS AND LEASES
AND CHANGES IN ALLOWANCE FOR CREDIT LOSSES
Part I. Charge-offs and Recoveries on Loans and Leases (1)
Part I excludes charge-offs and recoveries through the
allocated transfer risk reserve. I286 <-
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
--Calendar year-to-date--
(Column A) (Column B)
RIAD Charge-offs RIAD Recoveries
---- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
1. Real estate loans________________________________________________________________ 4256 24 4257 0 1.
2. Installment loans________________________________________________________________ 4258 118 4259 28 2.
3. Credit cards and related plans___________________________________________________ 4262 0 4263 0 3.
4. Commercial (time and demand) and all other loans_________________________________ 4264 3 4265 0 4.
5. Lease financing receivables______________________________________________________ 4266 0 4267 0 5.
6. Total (sum of items 1 through 5)_________________________________________________ 4635 145 4605 28 6.
MEMORANDA
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
RIAD RIAD
---- ----
1. Loans to foreign governments and official institutions included in part I,
items 1 through 4 above__________________________________________________________ 4643 0 4627 0 M.1
2. To be completed by banks with loans to finance agricultural production and
other loans to farmers (Schedule RC-C, part I, item 3) exceeding five percent
of total loans.
Agricultural loans included in part I, items through 4, above_____________________ 4268 N/A 4269 N/A M.2
3. Not applicable.
4. Loans to finance commercial real estate, construction, and land development
activities (not secured by real estate) included in Schedule RI-B, part I,
items 2 through 4, above_________________________________________________________ 5443 0 5444 0 M.4
5. Real estate loans (sum of items 5.a through 5.e must equal
Schedule RI-B, part I, item 1, above):
a. Construction and land development_____________________________________________ 5445 0 5446 0 M.5.a
b. Secured by farmland___________________________________________________________ 5447 0 5448 0 M.5.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties
and extended under lines of credit______________________________________ 5449 0 5450 0 M.5.c1
(2) All other loans secured by 1-4 family residential properties____________ 5451 8 5452 0 M.5.c2
d. Secured by multifamily (5 or more) residential properties_____________________ 5453 0 5454 0 M.5.d
e. Secured by nonfarm nonresidential properties__________________________________ 5455 16 5456 0 M.5.e
</TABLE>
(1) See instructions for loan classifications used in this schedule.
-10-
<PAGE>
<TABLE>
<CAPTION>
TABLE III
THE STATE BANK OF THE ALLEGHENIES Call Date: 12/31/1998 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-6
COVINGTON, VA 24426 Transit #: 51404338
[14]
SCHEDULE RC-C - LOANS AND LEASE FINANCING RECEIVABLES
PART I. LOANS AND LEASES
Do not deduct the allowance for loan and lease losses from amounts
reported in this schedule. Report total loans and leases, net of unearned
income. Exclude assets held for trading and commercial paper.
C215<-
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------
1. Loans secured by real estate: RCON
----
<S> <C> <C> <C>
a. Construction and land development_____________________________________________________________ 1415 315 1.a
b. Secured by farmland (including farm residential and other improvements)_______________________ 1420 0 1.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties and extended
under lines of credit_____________________________________________________________________ 1797 5,435 1.c.1
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens________________________________________________________________ 5367 56,548 1.c.2a
(b) Secured by junior liens_______________________________________________________________ 5368 25 1.c.2b
d. Secured by multifamily (5 or more) residential properties_____________________________________ 1460 0 1.d
e. Secured by nonfarm nonresidential properties__________________________________________________ 1480 0 1.e
2. Loans to depository institutions:
a. To commercial banks in the U.S.:
(1) To U.S. branches and agencies of foreign banks____________________________________________ 1506 0 2.a1
(2) To other commercial banks in the U.S._____________________________________________________ 1507 0 2.a2
b. To other depository institutions in the U.S.__________________________________________________ 1517 0 2.b
c. To banks in foreign countries:
(1) To foreign branches of other U.S. banks___________________________________________________ 1513 0 2.c1
(2) To other banks in foreign countries_______________________________________________________ 1516 0 2.c2
3. Loans to finance agricultural production and other loans to farmers______________________________ 1590 0 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile)_________________________________________________________________ 1763 10,038 4.a
b. To non-U.S. addressees (domicile)_____________________________________________________________ 1764 0 4.b
5. Acceptances of other banks_______________________________________________________________________ 1755 0 5.
6. Loans to individuals for household, family, and other personal expenditures (i.e., consumer
loans) (includes purchased paper):
a. Credit cards and related plans (includes check credit and other revolving credit plans)_______ 2008 0 6.a
b. Other (includes single payment, installment, and all student loans)___________________________ 2011 28,195 6.b
7. Loans to foreign government and official institutions (including foreign central banks)__________ 2081 0 7.
8. Obligations (other than securities and leases) of states and political subdivisions in the U.S.__ 2107 0 8.
9. Other Loans:
a. Loans for purchasing or carrying securities (secured and unsecured)___________________________ 1545 0 9.a
b. All other loans (exclude consumer loans)______________________________________________________ 1564 272 9.b
10. Lease financing receivables (net of unearned income)____________________________________________ 2165 0 10.
11. LESS: Any unearned income on loans reflected in items 1-9 above_________________________________ 2123 2,728 11.
12. Total loans and leases, net of unearned income (sum of items 1 through 10 minus item 11)
(must equal Schedule RC, item 4.a)______________________________________________________________ 2122 98,100 12.
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
TABLE IV
- --------
THE STATE BANK OF THE ALLEGHENIES Call Date: 12/31/1998 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-4
COVINGTON, VA 24426 Transit #: 51404338
[12]
SCHEDULE RC-B - SECURITIES
Exclude assets held for trading.
C210 <-
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
-----Held-to-maturity----- -----Available-for-sale-----
(Column A) (Column B) (Column C) (Column D)
Amortized Fair Amortized Fair
RCON Cost RCON Value RCON Cost RCON Value (1)
---- --------- ---- ----- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. U.S. Treasury securities_____________________________ 0211 0 0213 0 1286 1,986 1287 2,032 1.
2. U.S. Government agency obligations
(exclude mortgage-backed securities):
a. Issued by U.S. Government agencies (2)____________ 1289 0 1290 0 1291 0 1293 0 2.a
b. Issued by U.S. Government-sponsored
agencies (3)______________________________________ 1294 0 1295 0 1297 28,776 1298 29,299 2.b
3. Securities issued by states and political
subdivisions in the U.S.:
a. General obligations_______________________________ 1676 0 1677 0 1678 7,213 1679 7,283 3.a
b. Revenue obligations_______________________________ 1681 0 1686 0 1690 978 1691 982 3.b
c. Industrial development and similar obligations____ 1694 0 1695 0 1696 250 1697 256 3.c
4. Mortgage-backed securities (MBS):
a. Pass-through securities:
(1) Guaranteed by GNMA_____________________________ 1698 0 1699 0 1701 0 1702 0 4.a.(1)
(2) Issued by FNMA and FHLMC_______________________ 1703 0 1705 0 1706 0 1707 0 4.a.(2)
(3) Other pass-through securities__________________ 1709 0 1710 0 1711 0 1713 0 4.a.(3)
b. Other mortgage-backed securities (include
(CMOs, REMICs and stripped MBS):
(1) Issued or guaranteed by FNMA,
FHLMC, OR GNMA_________________________________ 1714 0 1715 0 1716 0 1717 0 4.b.(1)
(2) Collaterized by MBS issued or guaranteed
by FNMA, FHLMC, or GNMA________________________ 1718 0 1719 0 1731 0 1732 0 4.b.(2)
(3) All other mortgage-backed securities___________ 1733 0 1734 0 1735 0 1736 0 4.b.(3)
5. Other debt securities:
a. Other domestic debt securities____________________ 1737 0 1738 0 1739 0 1741 0 5.a
b. Foreign debt securities___________________________ 1742 0 1743 0 1744 0 1746 0 5.b
6. Equity securities:
a. Investments in mutual funds and
other equity securities with
readily determinable fair values_________________________________________________ A510 0 A511 0 6.a
b. All other equity securities(1)___________________________________________________ 1752 90 1753 90 6.b
7.Total (sum of items 1 through 6) (total of
Column A must equal Schedule RC item 2.a)
(total of column D must equal Schedule RC,
item 2.b)_____________________________________________ 1754 0 1771 0 1772 39,293 1773 39,942 7.
(1) Includes equity securities without readily determinable fair values at historical cost in item 6.b, column D.
(2) Includes Small Business Administration 'Guaranteed Loan Pool Certificates,' U.S. Maritime Administration obligations, and
Export-Import Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities) issued by the Farm Credit System, the Federal
Home Loan Bank System, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the
Financing Corporation, Resolution Funding Corporation, the Student Loan Marketing Association, and the Tennessee Valley
Authority.
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
TABLE V
- --------
THE STATE BANK OF THE ALLEGHENIES Call Date: 12/31/1998 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-8
COVINGTON, VA 24426 Transit #: 51404338
[16]
SCHEDULE RC-E - DEPOSIT LIABILITIES
C225 <-
--Transaction Accounts-- -Nontransaction-
Accounts
(Column A) (Column B) (Column C)
Total Memo: Total Total
Transaction Demand nontransaction
accounts Deposits Accounts
(including total (included in (including
Dollar Amounts in Thousands demand deposits) column A) MMDAs)
- ------------------------------------------------------------
Deposits of: RCON RCON RCON
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Individuals, partnerships and corporations_______________ 2201 47,164 2240 7,495 2346 81,974 1.
2. U.S. Government__________________________________________ 2202 0 2280 0 2520 0 2.
3. States and political subdivisions in the U.S.____________ 2203 731 2290 0 2530 1,091 3.
4. Commercial banks in the U.S._____________________________ 2206 0 2310 0 2550 0 4.
5. Other depository institutions in the U.S.________________ 2207 781 2312 781 2349 0 5.
6. Banks in foreign countries_______________________________ 2213 0 2320 0 2236 0 6.
7. Foreign governments, and official institutions (including
foreign central banks)___________________________________ 2216 0 2300 0 2377 0 7.
8. Certified and official checks____________________________ 2330 256 2330 256 8.
9. Total (sum of items 1 through 8) (sum of columns A and C
must equal Schedule RC, item 13.a)_______________________ 2215 48,932 2210 8,532 2385 83,065 9.
Memoranda Dollar Amounts in Thousands
- ---------------------------------------------------------------------------------------------------------------------------------
1. Selected components of total deposits (i.e., sum of item 9, columns A and C): RCON
---------------------------
a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts___________________________ 6835 11,795 M.1.a
b. Total brokered deposits_______________________________________________________________________ 2365 0 M.1.b
c. Fully insured brokered deposits (included in Memorandum item 1.b above):
(1) Issued in denominations of less than $100,000_____________________________________________ 2343 0 M.1.c1
(2) Issued either in denominations of $100,000 or in denominations greater than
$100,000 and participated out by the broker in shares of $100,000 or less_________________ 2344 0 M.1.c2
d. Maturity data for brokered deposits:
(1) Brokered deposits issued in denominations of less than $100,000 with a remaining
maturity of one year or less (included in Memorandum item 1.c.(1) above)__________________ A243 0 M.1.d1
(2) Brokered deposits issued in denominations of $100,000 or more with a remaining
maturity of one year or less (included in Memorandum item 1.b above)______________________ A244 0 M.1.d2
e. Preferred deposits (uninsured deposits of states and political subdivisions in the U.S.
reported in item 3 above which are secured or collateralized as required under state law)
(to be completed for the December report only)________________________________________________ 5590 1,522 M.1.e
2. Components of total nontransaction accounts (sum of Memorandum items 2.a through 2.c
must equal item 9, column C, above):
a. Savings deposits: RCON
---------------------------
(1) Money market deposit accounts (MMDAs)_____________________________________________________ 6810 4,996 M.2.a1
(2) Other savings deposits (excludes MMDAs)___________________________________________________ 0352 11,006 M.2.a2
b. Total time deposits of less than $100,000_____________________________________________________ 6648 53,096 M.2.b
c. Total time deposits of $100,000 or more_______________________________________________________ 2604 13,967 M.2.c
3. All NOW accounts (included in column A above)____________________________________________________ 2398 40,395 M.3
4. Not applicable
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
TABLE VI
- --------
SCHEDULE RI-A - CHANGES IN EQUITY CAPITAL
Indicate decreases and losses in parentheses. I283 <-
Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------------
RIAD
----
<S> <C> <C> <C> <C>
1. Total equity capital originally reported in the December 31, 1997, Reports of Condition and Income______ 3215 15,296 1.
2. Equity capital adjustments from amended Reports of Income, net*_________________________________________ 3216 0 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2)____________________________________ 3217 15,296 3.
4. Net income (loss) (must equal Schedule RI, item 12)_____________________________________________________ 4340 2,473 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net______________________________________ 4346 0 5.
6. Changes incident to business combinations, net__________________________________________________________ 4356 0 6.
7. LESS: Cash dividends declared on preferred stock________________________________________________________ 4470 0 7.
8. LESS: Cash dividends declared on common stock___________________________________________________________ 4460 1,035 8.
9. Cumulative effect of changes in accounting principles from prior years* (see instructions for
this schedule)__________________________________________________________________________________________ 4411 0 9.
10. Corrections of material accounting errors from prior years* (see instructions for this schedule)________ 4412 0 10.
11. Change in net unrealized holding gains (losses) on available-for-sale securities________________________ 8433 195 11.
12. Other transactions with parent holding company* (not included in item 5, 7, or 8 above)_________________ 4415 0 12.
13. Total equity capital end of current period (sum of items 3 through 12) (must equal
Schedule RC, item 28)___________________________________________________________________________________ 3210 16,929 13.
*Describe on Schedule RI-E-Explanations.
</TABLE>
-14-
<PAGE>
[LOGO] PERSINGER & COMPANY, L.L.C.
Certified Public Accountants
- --------------------------------------------------------------------------------
501 E. Dolly Ann Drive Telephone (540) 962-2248
P.O. Box 60 FAX (540) 962-8827
Covington, Virginia 24426
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The State Bank of the Alleghenies
Covington, Virginia
We have audited the accompanying balance sheets of The State Bank of the
Alleghenies as of December 31, 1998 and 1997 and the related statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 The State Bank of the
Alleghenies as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Persinger & Company, L.L.C.
-------------------------------
Covington, Virginia
January 4, 1999
-15-
A Virginia Limited Liability Company o Members American Institute of Certified
Public Accountants
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
-------------- --------------
ASSETS
Cash and due from banks (Note 2) $ 4,974,226 $ 4,251,833
Federal funds sold 5,000,000 6,700,000
Securities available for sale (Note 3) 39,941,979 36,116,730
Loans, net (Note 4) 97,237,398 90,955,334
Bank premises and equipment, net (Note 5) 1,547,506 1,633,876
Accrued income receivable 993,928 933,772
Deferred tax asset (Note 9) - 135,047
Other assets 287,305 417,948
------------ ------------
$149,982,342 $141,144,540
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6):
Interest bearing $123,449,868 $110,794,909
Noninterest bearing 8,537,004 14,034,149
------------ ------------
$131,986,872 $124,829,058
Deferred income taxes (Note 9) 25,872 -
Accrued interest payable 531,892 493,458
Other liabilities 508,505 525,382
------------ ------------
$133,053,141 $125,847,898
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Capital stock:
Common, $.25 par value; authorized
3,000,000 shares; issued 2,960,000
shares (Note 10) $ 740,000 $ 740,000
Surplus 2,271,156 2,271,156
Retained earnings (Note 7) 13,496,599 12,059,566
Accumulated other comprehensive
income 421,446 225,920
------------ ------------
$ 16,929,201 $ 15,296,642
------------ ------------
$149,982,342 $141,144,540
============ ============
See Notes to Financial Statements.
-16-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Interest income on:
Loans $ 8,559,032 $ 8,172,040 $ 7,362,904
Securities available for sale 2,351,088 2,278,928 2,402,971
Federal funds sold 401,552 254,457 260,318
----------- ----------- -----------
$11,311,672 $10,705,425 $ 10,026,193
----------- ----------- -----------
Interest on deposits 5,744,771 5,291,629 4,961,971
--------- --------- -----------
Net interest income $ 5,566,901 $ 5,413,796 $ 5,064,222
Provision for loan losses (Note 4) - 65,000 100,000
----------- ----------- -----------
Net interest income after
provision for loan losses $ 5,566,901 $ 5,348,796 $ 4,964,222
----------- ----------- -----------
Other income:
Service fees $ 513,324 $ 441,440 $ 434,489
Securities gains (losses) - 4,382 2,237
Other 225 202 375
----------- ----------- -----------
$ 513,549 $ 446,024 $ 437,101
----------- ----------- -----------
Other expenses:
Salaries $ 1,125,316 $ 1,006,869 $ 931,270
Employee benefits (Note 8) 272,538 258,105 232,261
Occupancy expenses 87,902 103,479 89,160
Equipment rentals, depreciation
and maintenance 240,094 214,658 198,814
Other operating expenses 769,208 701,813 846,077
----------- ----------- -----------
$ 2,495,058 $ 2,284,924 $ 2,297,582
----------- ----------- -----------
Income before income taxes $ 3,585,392 $ 3,509,896 $ 3,103,741
Federal income taxes (Note 9) 1,112,359 1,065,697 882,974
----------- ----------- -----------
Net income $ 2,473,033 $ 2,444,199 $ 2,220,767
=========== =========== ===========
Earnings per common share (Note 10) $ .84 $ .83 $ .75
=========== =========== ===========
See Notes to Financial Statements.
-17-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Capital Retained Comprehensive
Stock Surplus Earnings Income Total
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $ 737,500 $2,148,656 $ 9,021,600 $ 381,588 $12,289,344
Comprehensive income:
Net income - - 2,220,767 - 2,220,767
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities
available for
sale, net of
deferred income
tax benefit of
$120,147 - - - (353,373) (353,373)
Less reclassification
adjustment - - - (1,476) (1,476)
---------- ---------- ---------- ---------- -----------
(354,849)
-----------
Total comprehensive
income $ 1,865,918
Issuance of
10,000 shares
of common stock 2,500 122,500 - - 125,000
Cash dividends
declared
($ .25 per share) - - (739,000) - (739,000)
---------- --------- ---------- ---------- ----------
Balance,
December 31, 1996 $ 740,000 $2,271,156 $10,503,367 $ 26,739 $13,541,262
Comprehensive income:
Net income - - 2,444,199 - 2,444,199
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities
available for
sale, net of
deferred income
tax expense of
$ 68,705 - - - 202,073 202,073
Less reclassification
adjustment - - - (2,892) (2,892)
-------- --------- --------- ---------- ----------
199,181
----------
Total comprehensive
income $ 2,643,380
</TABLE>
See Notes to Financial Statements.
-18a-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Capital Retained Comprehensive
Stock Surplus Earnings Income Total
--------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Cash dividends
declared
($ .30 per share) - - (888,000) - (888,000)
--------- --------- ----------- ------------ --------------
Balance,
December 31, 1997 $740,000 $2,271,156 $12,059,566 $225,920 $15,296,642
Comprehensive income:
Net income - - 2,473,033 - 2,473,033
Other comprehensive
income, net of tax:
Change in unrealized
gain (loss) on
securities
available for
sale, net of
deferred income
tax expense of
$66,479 - - - 195,526 195,526
Less reclassification
adjustment - - - - -
-------- --------- ---------- ------------ --------------
195,526
--------------
Total comprehensive
income $2,668,559
Cash dividends
declared
($ .35 per share) - - (1,036,000) - (1,036,000)
-------- --------- ----------- ------------ --------------
Balance,
December 31, 1998 $740,000 $2,271,156 $ 13,496,599 $421,446 $16,929,201
======== ========== ============ ============ ==============
</TABLE>
See Notes to Financial Statements.
-18b-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 2,473,003 $ 2,444,199 $ 2,220,767
----------- ------------ -------------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation $ 167,906 $ 151,785 $ 144,238
Depreciation of computer software 5,362 2,922 -
Amortization of deposit premium 12,000 12,000 12,000
Amortization (accretion)
of securities (69,598) (50,951) (25,330)
Provision for loan losses - 65,000 100,000
Deferred income taxes 55,636 (4,617) (25,927)
Securities (gains) losses - (4,382) (2,237)
(Increase) decrease in:
Accrued income receivable (60,156) (15,250) (45,840)
Other assets 128,362 67,007 (86,011)
Increase (decrease) in:
Accrued interest payable 38,434 40,816 2,420
Other liabilities (16,877) 162,958 97,558
---------- ---------- ------------
Total adjustments $ 261,069 $ 427,288 $ 170,871
---------- ---------- ------------
Net cash provided (used) by
operating activities $2,734,102 $ 2,871,487 $ 2,391,638
---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of securities
available for sale $ 500,000 $ 8,065,849 $ -
Maturities of securities
available for sale 14,715,152 6,499,544 11,447,908
Purchase of securities available
for sale (18,669,994) (10,693,326) (15,010,985)
Net change in customer loans (6,282,064) (8,474,552) (6,844,888)
Capital expenditures (81,536) (277,452) (171,352)
Computer software expenditures (15,081) (19,272) -
--------- ----------- ------------
Net cash provided (used) by
investing activities $(9,833,523) $ (4,899,209) $(10,579,317)
---------- ----------- ------------
</TABLE>
See Notes to Financial Statements
-19-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in interest bearing deposits $ 12,654,959 $ (296,523) $ 7,224,226
Net change in noninterest bearing deposits (5,497,145) 5,446,466 2,975,451
Issuance of common stock -- -- 125,000
Dividends paid (1,036,000) (888,000) (739,000)
------------ ------------ -----------
Net cash provided (used) by financing activities $ 6,121,814 $ 4,261,943 $ 9,585,677
============ ============ ===========
Increase (decrease) in cash and cash equivalents $ (977,607) $ 2,234,221 $ 1,397,998
Cash and cash equivalents:
Beginning 10,951,833 8,717,612 7,319,614
------------ ------------ -----------
Ending $ 9,974,226 $ 10,951,833 $ 8,717,612
============ ============ ===========
Cash and cash equivalents, ending:
Cash and due from banks $ 4,974,226 $ 4,251,833 $ 4,317,612
Federal funds sold 5,000,000 6,700,000 4,400,000
------------ ------------ -----------
$ 9,974,226 $ 10,951,833 $ 8,717,612
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid depositors $ 5,706,337 $ 5,250,856 $ 4,959,551
Income taxes $ 1,078,800 $ 1,010,100 $ 1,035,314
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Net change in unrealized holding gains on
available for sale securities $ (195,526) $ (199,181) $ 354,849
Property acquired in settlement of loan $ -- $ 198,905 $ --
</TABLE>
See Notes to Financial Statements.
-20-
<PAGE>
THE STATE BANK OF THE ALLEGHENIES
NOTES TO FINANCIAL STATEMENTS
Note 1: Nature of business and significant accounting policies
Organization:
The State Bank of the Alleghenies was incorporated in 1976 in the
state of Virginia as a state banking institution. The Bank
operates under the federal reserve banking regulations.
Nature of business:
The State Bank of the Alleghenies grants commercial, residential
and consumer loans to customers located primarily in Alleghany
and Bath Counties, Virginia. The loan portfolio is
well-diversified and does not depend on any one sector of the
economy.
A summary of significant accounting policies follows:
Cash and cash equivalents:
For purposes of reporting cash flows, cash and due from banks
includes cash on hand, amounts due from banks (including cash
items in the process of clearing) and federal funds sold. Cash
flows from loans originated by the Bank and deposits are reported
net.
The Bank maintains amounts due from banks which, at times, may
exceed federally insured limits. The Bank has not experienced any
losses in such accounts.
Investment in debt and marketable securities:
The Bank has investments in debt and marketable equity
securities. Debt securities consist primarily of obligations of
the U.S. government, state governments and domestic corporations.
Marketable equity securities consist primarily of Federal Reserve
Bank stock.
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.
-21-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of business and significant accounting policies (continued)
Securities classified as available for sale are those debt
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, net of the
related deferred tax effect.
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.
Premiums and discounts on investments in debt securities are
amortized over their contractual lives. The method of
amortization results in a constant effective yield on those
securities (the interest method). Interest on debt securities is
recognized in income as accrued, and dividends on marketable
equity securities are recognized in income when declared.
Realized gains and losses, including losses from declines in
value of specific securities determined by management to be
other-than-temporary, are included in income. Realized gains and
losses are determined on the basis of specific securities sold.
Loans:
Loans are stated at amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses.
Unearned interest on discounted loans is amortized to income over
the life of the loans, using the sum-of-the-months-digits
(78ths) method. For all other loans, interest is accrued daily on
the outstanding balances. Loan origination and commitment fees
are recognized as income at loan inception. These methods do not
produce a result that is materially different from the interest
method. Accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and
other factors, that the borrower's financial condition is such
that collection of interest is doubtful. Upon such
discontinuance, all unpaid accrued interest is reversed.
-22-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of business and significant accounting policies (continued)
The allowance for loan losses is increased through a provision
for loan losses charged to income, and decreased by charge-offs,
net of recoveries, when management determines that collection of
all amounts when due is unlikely. The allowance is based on
management's estimate of the amount necessary to absorb losses on
existing loans. Management's estimate is based on a review of
specific loans and, for smaller balance homogeneous loans, on the
Bank's past loan loss experience, known and inherent risks in the
entire loan portfolio, overall portfolio quality, estimated fair
value of any underlying collateral, and current economic
conditions that may affect the borrower's ability to repay. For
those loans that are separately evaluated for collectibility,
when management determines that it is probable that principal and
interest on those loans will not be collected according to their
contractual terms, the impairment of those loans is recognized in
the allowance account based on the present value of expected
future cash flows discounted at the loans' effective rate, except
for those loans where foreclosure is probable, on which
impairment is based on the fair value of the collateral. Cash
collections on loans that are impaired are credited to the loan
receivable balance, and no interest income is recognized on those
loans until the principal balance has been collected.
A loan is considered impaired at the time it is probable that the
Bank will be unable to collect all amounts due, both principal
and interest, in accordance with the contractual terms of the
loan agreement. The fair value of any collateral is used to
determine the value of secured impaired loans. The discounted
cash flow method is used to determine the value of unsecured
impaired loans.
In making judgments about the probability that a loan is
impaired, a delay or shortfall in payments received does not
require the application of these standards if the Bank expects to
collect all amounts due, including accrued interest at the
contractual interest rate, for the period of delay. All loans
classified as "doubtful" by internal or external examiners are
considered impaired. All impaired loans will be on nonaccrual as
they no longer meet the definition of being well secured and in
the process of collection. (A loan may be on nonaccrual due to
delays in collection caused by bankruptcy, etc., but no loss is
expected on the account due to collateral or guarantor support
and therefore the loan is not considered impaired.) The
"doubtful" classification implies that all collateral will not be
liquidated and any deficit loan balance charged off.
-23-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of business and significant accounting policies (continued)
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the following estimated useful lives:
Years
-----
Buildings and improvements 10-50
Furniture and equipment 5-10
Acquired properties:
Real estate acquired through foreclosure and personal property
acquired through repossession are held for sale and are recorded
at the lower of the recorded amount of the loan or fair value of
the properties less estimated costs of disposal. Any write-down
to fair value at the time of transfer to acquired properties is
charged to the allowance for loan losses. Property is evaluated
regularly to ensure the recorded amount is supported by its
current fair value. Valuation allowances to reduce the carrying
amount to fair value less estimated costs to dispose are recorded
as necessary. Depreciation is recorded based on the recorded
amount of depreciable assets after they have been owned for one
year. Depreciation and additions to or reductions from valuation
allowances are recorded in income.
Intangible assets:
Intangible assets, consisting of premiums on acquired deposits,
are included in other assets. These premiums are being amortized
over a period of seven and one-half years.
Employment benefit plan:
A noncontributory trusteed profit-sharing plan covers all
employees who meet the eligibility requirements. To be eligible,
an employee must be 18 years of age. Full vesting occurs after
five years of service. Contributions are determined annually by
the Board of Directors.
-24-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of business and significant accounting policies (continued)
Income taxes:
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and
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.
Fair value of financial instruments:
The following methods and assumptions were used by the Bank in
estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate
their fair values.
Investment securities (including mortgage-backed securities):
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are
based on carrying values. The fair values for fixed-rate loans
are determined using estimated future cash flows, discounted at
the interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. The carrying
amount of accrued interest receivable approximates its fair
value.
Off-balance-sheet instruments: Fair values of the Bank's
off-balance-sheet instruments (commitments to extend credit and
standby letters of credit) are based on fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing.
For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the
committed rates.
-25-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of business and significant accounting policies (continued)
Deposit liabilities: The fair values of demand deposits equal
their carrying amounts which represent the amount payable on
demand. The carrying amounts for variable-rate, fixed-term money
market accounts approximate their fair values at the reporting
date. Fair values for certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregate monthly maturities on time deposits.
Estimates:
Certain estimates and assumptions are required by management in
the preparation of the financial statements. Actual results could
differ significantly from those estimates. The more significant
estimates and assumptions that affect the reporting amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period are those required in the determination of the allowance
for loan losses.
Reclassification:
Certain reclassifications have been made to prior years'
financial statements for comparability with the current year. Net
income and stockholders' equity previously reported were not
affected by these reclassifications.
Current accounting developments:
In 1998 the Bank adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. This Statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner
sources. Statement 130 amends FASB Statements 52, 80, 87, and 115
to require that changes in the balances of items that under those
Statements are reported directly in a separate component of
equity in a statement of financial position be reported in a
financial statement that is displayed as prominently as other
financial statements. Under this Statement, the Bank has revised
its method of reporting unrealized gains and losses on
investments as covered by Statement 115. The adoption of this
Statement does not have a material effect on the financial
statements as presented.
-26-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 2. Restrictions on cash and due from banks
The Bank is required to maintain reserve balances in cash or on
deposit with Federal Reserve Banks. The total of those reserve
balances was approximately $1,516,000 and $1,210,000 at December
31, 1998 and 1997.
Note 3. Securities
Carrying amounts and approximate fair values of securities
available for sale as of December 31, 1998 are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ --------- -------- ------------
1998
--------------------------------------------------
U.S. Treasury securities $ 1,985,620 $ 46,412 $ -- $ 2,032,032
U.S. Government agencies
and corporations 28,776,265 572,609 50,174 29,298,700
State and political
subdivisions 8,441,365 96,552 17,020 8,520,897
Other 90,350 -- -- 90,350
------------ --------- -------- ------------
$ 39,293,600 $ 715,573 $ 67,194 $ 39,941,979
============ ========= ======== ============
The amortized cost and fair value of securities available for sale as of
December 31, 1998 by contractual maturity are shown below.
1998
---------------------------
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 5,630,506 $ 5,677,936
Due after one year through five years 18,271,357 18,765,444
Due after five years through ten years 15,301,387 15,408,249
Due after ten years 90,350 90,350
------------ ------------
$ 39,293,600 $ 39,941,979
============ ============
-27-
<PAGE>
NOTE TO FINANCIAL STATEMENTS
Note 3. Securities (continued)
Carrying amounts and approximate fair values of securities
available for sale as of December 31, 1997 are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ --------- -------- ------------
1997
--------------------------------------------------
U.S. Treasury securities $ 2,480,060 $ 29,160 $ -- $ 2,509,220
U.S. Government agencies
and corporations 26,017,531 272,624 41,616 26,248,539
State and political
subdivisions 7,181,219 91,741 4,339 7,268,621
Other 90,350 -- -- 90,305
------------ --------- -------- ------------
$ 35,769,160 $ 393,525 $ 45,955 $ 36,116,730
============ ========= ======== ============
The amortized cost and fair value of securities available for sale as of
December 31, 1997 by contractual maturity are shown below.
1997
---------------------------
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 3,332,683 $ 3,363,662
Due after one year through five years 22,028,913 22,161,524
Due after five years through ten years 10,317,214 10,501,194
Due after ten years 90,350 90,350
------------ ------------
$ 35,769,160 $ 36,116,730
============ ============
Gross realized gains and losses on securities available for sale
for the years ended December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
---- ---- ----
Realized gains $ -- $ 39,393 $ 28,685
Realized losses -- (35,011) (26,448)
Securities available for sale with a carrying amount of
$5,305,014 and $4,645,127 at December 31, 1998 and 1997 were
pledged as collateral on public deposits and for other purposes
as required or permitted by law.
-28-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 4. Loans
The composition of net loans is as follows:
December 31,
---------------------------
1998 1997
------------ ------------
Commercial $ 6,929,109 $ 6,681,128
Real Estate 62,008,178 57,033,451
Installment 31,891,340 31,115,710
------------ ------------
$100,828,627 $ 94,830,289
------------ ------------
Deduct:
Unearned discount $ 2,728,316 $ 2,894,846
Allowance for loan losses 862,913 980,109
------------ ------------
$ 3,591,229 $ 3,874,955
------------ ------------
$ 97,237,398 $ 90,955,334
============ ============
There were no nonaccrual loans at December 31, 1998 and 1997.
Nonperforming assets consisting of acquired properties totaled
$198,905 at December 31, 1997. There were no nonperforming assets
consisting of acquired properties at December 31, 1998.
Changes in the allowance for loan losses are as follows:
Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Balance, beginning $ 980,109 $ 976,614 $ 833,474
Provision charged to
operating expenses -- 65,000 100,000
Recoveries of amounts
charged off 27,612 33,520 115,181
---------- ---------- ----------
$1,007,721 $1,075,134 $1,048,655
Amounts charged off 144,808 95,025 72,041
---------- ---------- ----------
Balance, ending $ 862,913 $ 980,109 $ 976,614
========== ========== ==========
Note 5. Bank premises and equipment
The major classes of bank premises and equipment and the total
accumulated depreciation are as follows:
December 31,
-------------------------
1998 1997
----------- -----------
Land $ 316,293 $ 316,293
Buildings and improvements 1,084,519 1,084,519
Furniture and equipment 1,556,194 1,474,658
----------- -----------
$ 2,957,006 $ 2,875,470
Less accumulated depreciation 1,409,500 1,241,594
----------- -----------
$ 1,547,506 $ 1,633,876
=========== ===========
-29-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 6. Deposits
The composition of deposits is as follows:
December 31,
--------------------------------
1998 1997
------------ ------------
Demand $ 8,537,004 $ 14,034,149
NOW accounts 45,380,012 37,350,999
Savings 11,006,520 9,795,495
Time certificates, $100,000 or more 13,966,699 12,924,086
Other time certificates 53,096,637 50,724,329
------------ ------------
$131,986,872 $124,829,058
============ ============
At December 31, 1998, the scheduled maturities of time certificates are
as follows:
Year ending December 31, Amount
------------------------ ------
1999 $ 28,706,886
2000 23,267,711
2001 6,582,462
2002 3,968,784
2003 4,537,493
------------
$ 67,063,336
============
Note 7. Retained earnings
Under applicable Virginia law, $13,496,599 of retained earnings at
December 31, 1998, were free of dividend restrictions. However,
Virginia regulatory authorities may limit payment of dividends by any
state bank when it is determined such limitation is in the public
interest and is necessary to insure the financial soundness of the
bank.
Banking regulations require the Bank to maintain certain minimum
capital levels in relation to Bank assets. Capital is measured using a
leverage ratio as well as based on risk-weighting assets according to
regulatory guidelines. The Bank's regulatory capital is as follows:
Minimum Requirements
--------------------
1998 Well Adequately
Actual Capitalized Capitalized
------ ----------- -----------
Tier I risk-based capital 12.82% 6.00% 4.00%
Total risk-based capital 13.49% 10.00% 8.00%
Leverage ratio 11.33% 5.00% 3.00%
Note 8. Employee benefit plan
Plan contributions were $135,000 for 1998 and 1997, and $120,000 for
1996.
-30-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 9. Income tax matters
Net deferred tax assets (liabilities) consist of the following
components:
Years Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
Deferred tax assets:
Loan allowance $ 251,117 $ 290,963 $ 277,200
Director fees 28,369 28,592 18,811
--------- --------- ---------
$ 279,486 $ 319,555 $ 296,011
--------- --------- ---------
Deferred tax liabilities:
Unrealized gain on securities $ 226,932 $ 121,649 $ 14,398
Accretion on securities 36,015 26,383 20,580
Premises and equipment 42,411 36,476 23,352
--------- --------- ---------
$ 305,358 $ 184,508 $ 58,330
--------- --------- ---------
$ (25,872) $ 135,047 $ 237,681
========= ========= =========
The Federal income tax provision charged to operations consists of the
following:
Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- -----------
Current $ 1,056,723 $ 1,070,314 $ 908,901
Deferred 55,636 (4,617) (25,927)
----------- ----------- -----------
$ 1,112,359 $ 1,065,697 $ 882,974
=========== =========== ===========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income due to the following:
Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- -----------
Computed "expected" tax
expense $ 1,219,033 $ 1,193,365 $ 1,055,272
Tax exempt interest (126,283) (162,153) (173,640)
Other - Net 19,609 34,485 1,342
----------- ----------- -----------
$ 1,112,359 $ 1,065,697 $ 882,974
=========== =========== ===========
-31-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 10. Capital stock and earnings per share
On July 10, 1996, the Bank reduced the par value of its common stock
from $1.25 per share to $.25 per share and issued the 2,400,000
additional shares necessary to effect a 5-for-1 common stock split.
Earnings per common share are based on weighted average shares
outstanding during the period. Shares used in the computation were
2,960,000 for 1998 and 1997, and 2,954,782 for 1996.
Note 11. Commitments and contingencies
Financial instruments with off-balance-sheet risk:
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as they do for
on-balance-sheet instruments. A summary of the Bank's commitments
follows:
December 31,
-------------------------
1998 1997
----------- -----------
Commitments to extend credit $ 3,752,078 $ 2,886,389
Standby letters of credit 358,477 345,856
----------- -----------
$ 4,110,555 $ 3,232,245
=========== ===========
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 and represent the undrawn portion of the total commitment. The
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies,
but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing
commercial properties.
-32-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 11. Commitments and contingencies (continued)
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies as specified above and is required in
instances which the Bank deems necessary.
Concentrations of credit risk:
All of the Bank's loans, commitments to extend credit and standby
letters of credit have been granted to customers in the Bank's market
area. Investments in securities issued by state and political
subdivisions (see Note 3) include some governmental entities within the
Bank's market area. The concentrations of credit by type of loan are
set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters of
credit were granted primarily to commercial borrowers.
The Bank, as a matter of policy, does not extend credit to any single
borrower or group of related borrowers in excess of its legal lending
limit. The loan portfolio is well diversified and is not concentrated
in any one business sector or industry.
Contingencies:
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the Bank's
financial statements.
Note 12. Transactions with related parties
The Bank has executed, and may be expected to do so 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), all of which have been, in the opinion of management,
on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others.
-33-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 12. Transactions with related parties (continued)
Aggregate loan transactions with related parties were as follows:
Years Ended December 31,
------------------------
1998 1997
--------- ---------
Balance, beginning $ 606,332 $ 718,573
New loans 294,768 31,062
Repayments (368,852) (143,303)
--------- ---------
Balance, ending $ 532,248 $ 606,332
========= =========
Note 13. Deferred compensation
The Bank has approved a lifetime compensation plan for organizing
members of the Board of Directors who are granted Director Emeritus
status. Two directors attained this status during 1995 and one director
attained this status during 1997. Included in other liabilities at
December 31, 1998 and 1997 is the present value of future cash payments
in the amount of $83,438 and $84,093, respectively. In 1998, the credit
to income, net of tax expense, was $432, and in 1997, the charge to
income, net of tax benefits, was $18,897.
Note 14. Fair value of financial instruments
The estimated fair values of the Bank's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,974,226 $ 9,974,226 $ 10,951,833 $ 10,951,833
Securities available for sale 39,941,979 39,941,979 36,116,730 36,116,730
Loans, net 97,237,398 99,073,177 90,955,334 90,948,173
Accrued income receivable 993,929 993,929 933,772 933,772
Financial liabilities:
Deposits 131,986,872 133,048,069 124,829,058 125,260,485
Off-balance-sheet assets:
Commitments to extend credit -- 3,752,078 -- 2,886,389
Standby letters of credit -- 358,477 -- 345,856
</TABLE>
-34-
<PAGE>
STATE BANK MANAGEMENT ANALYSIS OF RESULTS OF OPERATIONS
In Nineteen Hundred and Ninety-eight, State Bank continued to experience
sustained growth and increased profits. Total assets as of December 31, 1998
were $150.0 million compared to $141.1 million on December 31, 1997 representing
an increase of 6.3%. Deposits at year end 1998 were $133.1 million which
represents growth of $7.2 million, or 5.7% above year end deposits of $125.8
million in 1997. The growth in deposits funded an increase in loans of $6.3
million.
Total interest income for 1998 increased by $606,247, or 5.7%, compared to 1997
and total interest income for 1997 increased by $679,232 or 6.8% compared to
1996. Total interest expense for 1998 increased by $453,142 or 8.6%, over 1997
and increased $329,658 or 6.6%, 1997 over 1996. The increase in interest income
accounted for 90.0% of the increase in total operating revenue for 1998 and
98.7% for 1997; whereas, interest expense accounted for 68.3% of total expenses
for 1998 and 69.8% of total expenses for 1997. All other operating expenses
increased by 9.2% in 1998 as compared to 1997 and decreased .6% in 1997 as
compared to 1996. The change in net interest income is one of the factors
affecting the performance of State Bank. The components which made up net income
are detailed in the following table.
YEAR TO DATE (000 OMITTED)
1998 1997 1996
------ ----- -----
Interest Income...................$11,312 $10,705 $10,026
Interest Expense....................5,745 5,292 4,962
------ ----- -----
Net Interest Income............... $5,567 5,413 $ 5,064
====== ===== =======
Net interest income increased $153,105 or 2.8% for 1998 compared to 1997 and
$349,574 or 6.9% for 1997 compared to 1996.
Net interest rate margin is shown in the following summary.
NET INTEREST MARGIN
1998 1997 1996
---- ---- ----
Yield on Earning assets..............8.23 8.42 8.41
Cost of Interest.....................4.41 4.31 4.25
---- ---- ----
Net Interest Rate Margin.............3,82 4.11 4.16
==== ==== ====
Non-interest expense increased $210,134 or 9.2% for 1998 as compared to 1997 and
decreased $12,658 or .6% for 1997 as compared to 1996. The following schedule
details the components of the increase.
INCREASE/DECREASE INCREASE/DECREASE
OVER 1997 Over 1996
--------- ---------
Personnel Cost....................... $132,880 $101,443
Occupancy Expenses................... (15,577) 14,319
Furniture & Equipment Expenses....... 25,436 15,844
Other Miscellaneous.................. 67,395 (144,264)
-------- --------
Total................................ $210,134 ($12,658)
======== ========
Personnel cost increased by $132,880 or 10.5% for 1998 as compared to 1997 and
$101,443 or 8.7% for 1997 as compared to 1996. Part-time help was employed to
maintain customer service levels desired and cover the increased activity
brought about by our continued growth. The Board of Directors funded a
non-contributory profit sharing plan for full-time employees.
The provision for loan losses charged against income was zero for 1998, $65,000
for 1997, $100,000 for 1996 and maintained State Bank's reserve for loan losses
at .89% of net loans at year end 1998, 1.08% at year end 1997 and 1.18% at year
end 1996. Management feels the reserve balance is adequate to cover any
foreseeable loan losses.
As a result of the above factors, the net profit for the year 1998 was
$2,473,033, $2,444,199 for 1997 and $2,220,767 for 1996 representing increases
of 1.8% and 10.1% respectively. Profit per share increased to $0.84 per share in
1998 as compared to $0.83 per share in 1997 as compared to $0.75 per share in
1996.
-35-
<PAGE>
ITEM 9 - CHANGES IN & DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NONE
PART III
ITEM 10 - DIRECTORS OF THE REGISTRANT
THERE ARE CURRENTLY 8 DIRECTORS OF STATE BANK. ADDITIONAL INFORMATION
ABOUT THE DIRECTORS, INCLUDING THEIR PRINCIPAL OCCUPATION, AGE, &
SHARES OWNED IS SET FORTH IN THE FOLLOWING TABLE.
The following information, including the principal occupation during the past
five years is given in respect of the nominees for election to the Board at the
1999 Annual Meeting.
<TABLE>
<CAPTION>
NAME, AGE AND YEAR PRINCIPAL OCCUPATION SHARES OWNED PERCENT OF CLASS
FIRST BECAME DIRECTOR
<S> <C> <C> <C>
Dr. William J. Ellis Chairman of Board 95,265* 3.2
Age 93 State Bank
Director since 2/79 Covington, Virginia
Don E. Stone, Jr. President and Chief Executive Officer 35,000* 1.2
Age 53 State Bank
Director since 1/85 Covington, Virginia
Benny A. Williams, Jr. Executive Vice President 29,830* 1.0
Age 51 State Bank
Director since 8/94 Covington, Virginia
R. Glenn Baily Co-Owner 45,735* 1.5
Age 51 Covington Motor Company
Director since 9/94 Covington, Virginia
Michael McHale Collins Attorney at Law, Partner 50,215* 1.7
Age 55 Collins & Workowski
Director since 2/79 Covington, Virginia
Burdette A. Rupert Realtor 41,110* 1.4
Age 71 Covington, Virginia
Director since 2/79
William T. Wilson Attorney at Law, Partner 83,440* 2.8
Age 61 Wilson & Updike
Director since 12/86 Covington, Virginia
Calvin P. Wright Investments 40,500* 1.4
Age 70 Covington, Virginia
Director since 2/79
10 Directors & Officers As A Group Including Those Names Above 429,390* 14.5
*Includes shares individually, jointly and/or separately owned by household members
</TABLE>
-36-
<PAGE>
ITEM 11 - EXECUTIVE OFFICERS OF THE REGISTRANT
DON E. STONE, JR., 53., President and Chief Executive Officer of the Bank, a
Covington native, was employed by the Bank effective January 2, 1985. From
October 1982 through December 1984, Stone was Senior Vice President of The
National Bank of Logan, a unit Bank in West Virginia of approximately $130
Million in assets until October 1984 when it became an affiliate of Key
Bankshares of West Virginia, Incorporated headquarters in Huntington, West
Virginia. While in that capacity, Stone was second in authority and responsible
to the President and managed all administrative, operation and personnel
functions of the Bank as well as serving as a voting member of the Bank's Loan
Discount Committee. From February 1981 to October 1982, Stone was Cashier of
Beckley National Bank, Beckley, West Virginia, a $175 Million unit Bank. From
December 1973 through January 1981, Stone held various management position with
The Bank of Virginia headquartered in Richmond, Virginia. Prior to this, Stone
was an Assistant National Bank Examiner with the Comptroller of the Currency and
Staff Accountant with Peat, Marwick, Mitchell and Company, certified public
accountants. Stone attended Covington schools, Dabney S. Lancaster Community
College, Covington, Virginia; Marshall University, Huntington, West Virginia;
University of Richmond Graduate School, Richmond, Virginia; The University of
Oklahoma National Commercial Lending School, Norman, Oklahoma and East Carolina
University Commercial Lending Workshop, Greenville, North Carolina.
BENNY A. WILLIAMS, JR., 51, Executive Vice President, was employed by the Bank
in September 1983, as Vice President, Security Officer and Secretary to the
Board. His primary responsibility is in the lending area of the Bank and in
compliance. From February 1968 to September 1983, Williams was employed by First
Virginia Bank-Highlands (formerly Covington National Bank). During that time, he
has held positions as Branch Manager; Marketing Director; Assistant Cashier and
Assistant Vice President in lending. Williams attended Covington schools; Dabney
S. Lancaster Community College, Covington, Virginia and Virginia Banking School
at The University of Virginia.
H.C. RHODES, JR., 49, Senior Vice President, was employed by the Bank in January
1985, as Cashier. His responsibilities are in the lending area of the Bank. From
October 1972 to January 1985, Rhodes was employed by First Virginia
Bank-Highlands (formerly Covington National Bank). His two most recent
assignments were Branch Manager of the Mallow Mall Office and Assistant
Cashier-Loan Officer at the Main Street Office. Rhodes attended Covington
schools, Dabney S. Lancaster Community College, Covington, Virginia and Virginia
Banking School at The University of Virginia.
JEAN C. GILLILAN, 51, Vice President and Cashier, was employed by the Bank in
October, 1983, as Teller. Her responsibilities are primarily in the operations
area of the Bank and Human Resources. From September, 1982 to September 1983,
Gillilan was employed by Central Fidelity as a Teller and loan processor. From
August of 1973 to August of 1977, Gillilan was employed by Ronceverte National
in West Virginia as a bookkeeper and proof operator. Gillilan has taken banking
and management classes at Dabney S. Lancaster Community College, Thomas Nelson
Community College and seminars presented by V.B.A. and V.A.C.B. She has also
attended two computer training schools presented by NCR, one in Chicago and one
in Winston Salem.
ITEM 12 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors and Officers Liability Insurance Policy was renewed on February 26,
1998, under a twelve month policy with a renewal date of February 26, 1999.
ITEM 13 - OPTIONS GRANTED TO MANAGEMENT TO PURCHASE SECURITIES
There were no options granted to management to purchase securities as of
December 31, 1998.
ITEM 14 - INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Reference is made to Note 12 of Notes to Financial Statement on page 34.
-37-
<PAGE>
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Accountants' Report for the Audited Financial Statements of State Bank of the
Alleghenies for the years ended December 31, 1998 and 1997.
The following consolidated financial statements of State Bank are included in
this Form 10-K:
Audited Balance Sheets December 31, 1998 & 1997 (Audited)
Audited Statement of Income Years ended December 31, 1998, 1997, &
1996 (Audited)
Audited Statements of Changes in Years ended December 31, 1998, 1997, &
Stockholders' Equity 1996 (Audited)
Audited Statements of Cash Flows Years ended December 31, 1998, 1997, &
1996 (Audited)
Notes to Audited Financial Statements Year ended December 31, 1998
REPORTS ON FORMS 8-K
State Bank did not file any reports on Form 8-K during the last quarter of 1998.
SCHEDULES PRESCRIBED BY REGULATIONS S-X
All Schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements or related
notes.
-38-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
State Bank of the Alleghenies
(Registrant)
By: /s/ Don E. Stone, Jr.
----------------------------------
Don E. Stone, Jr., President
Chief Executive Officer & Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Dr. William J. Ellis 2/9/99 /s/ Michael M. Collins 2/9/99
- ------------------------------ ----------------------------
Dr. William J. Ellis, Director Michael M. Collins, Director
/s/ R. Glenn Bailey 2/9/99 /s/ Burdette A. Rupert 2/9/99
- ------------------------------ ----------------------------
R. Glenn Bailey, Director Burdette A. Rupert, Director
/s/ Calvin P. Wright 2/9/99 /s/ William T. Wilson 2/9/99
- ------------------------------ ----------------------------
Calvin P. Wright, Director William T. Wilson, Director
/s/ Benny A. Williams, Jr. 2/9/99 /s/ Don E. Stone, Jr. 2/9/99
- ------------------------------ ----------------------------
Benny A. Williams, Jr., Director Don E. Stone, Jr., President
Chief Executive Officer & Director
(Principal Executive Officer)
-39-
<PAGE>
Appendix IV
=====================
The State Bank of the Alleghenies
Form 10-Q
for the quarter ended September 30, 1999
=====================
<PAGE>
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Washington, D.C. 20551
FORM 10-Q
Quarterly Report Under Section 12b or 12g
of The Securities Exchange Act of 1934
For the Quarter Ended
September 30, 1999
STATE BANK OF THE ALLEGHENIES
-----------------------------
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1034229
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
116 West Riverside Street
Covington, VA 24426
------------- -----
(Address of Principal Zip Code
Executive Offices)
Registrant's Telephone Number 540-965-1100
Including Area Code ------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
NOT APPLICABLE
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 and 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 XX NO
-- --
The number of shares outstanding of registrants' common stock, par value of $.25
per share, as of September 30, 1999, was 2,960,000 shares.
<PAGE>
INDEX
Part I Financial Information Page
----
Schedule RC - Balance Sheet (unaudited) 3-4
FFIEC 033 - September 30, 1999
Schedule RI - Income Statement (unaudited) 5-6
FFIEC 033 - September 30, 1999
Schedule RI-A - Change in Equity Capital 7
(Unaudited) FFIEC 033 - September 30, 1999
Schedule RC-B - Securities (unaudited) 8-9
FFIEC 033 - September 30, 1999
Schedule RC-C - Loans and Lease Financing 10-11
Receivable (unaudited) FFIEC 033 -
September 30, 1999
Schedule RC-N - Past Due and Non-accrual 12
Loans and Leases (unaudited) FFIEC 033 -
September 30, 1999
Schedule RI-B - Charge-Offs and Recoveries 13
and Changes in allowance for Loan and Lease
Losses (unaudited) FFIEC 033 - September 30, 1999
Statements of Cash Flows (unaudited) 14
Three Months ended September 30, 1999, 1998,
and 1997
Management's Discussion and Analysis of 15-16
Financial Condition and Results of Operations
Part II Other Information
Exhibits and Reports on Form 8-K 17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-1
COVINGTON, VA 24426 Transit #: 51404338
[9]
Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for September 30, 1999
All schedules are to be reported in thousands of dollars. Unless otherwise indicated,
report the amount outstanding as of the last business day of the quarter.
Schedule RC - Balance Sheet
C200 <-
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A): RCON
a. Noninterest-bearing balances and currency and coin (1)_______________________________ 0081 6,555 1.a
b. Interest-bearing balances (2)________________________________________________________ 0071 0 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)___________________________ 1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D)_________________________ 1773 43,099 2.b
3. Federal funds sold and securities purchased under agreements to resell__________________ 1350 3,100 3
4. Loans and lease financing receivables: RCON
a. Loans and leases, net of unearned income (from Schedule RC-C)________ 2122 101,166 4.a
b. LESS: Allowance for loan and lease losses____________________________ 3123 812 4.b
c. LESS: Allocated transfer risk reserve________________________________ 3128 0 4.c
d. Loans and leases, net of unearned income, allowance, and reserve RCON
(item 4.a minus 4.b and 4.c)_________________________________________________________ 2125 100,354 4.d
5. Trading assets__________________________________________________________________________ 3545 0 5.
6. Premises and fixed assets (including capitalized leases)________________________________ 2145 1,446 6.
7. Other real estate owned (from Schedule RC-M)____________________________________________ 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)____________________________________________________________________ 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding____________________________ 2155 0 9.
10. Intangible assets (from Schedule RC-M)__________________________________________________ 2143 3 10.
11. Other assets (from Schedule RC-F)_______________________________________________________ 2160 1,824 11.
12. Total assets (sum of items 1 through 11)________________________________________________ 2170 156,381 12
</TABLE>
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-2
COVINGTON, VA 24426 Transit #: 51404338
[10]
Schedule RC - Continued
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C RCON
from Schedule RC-E)__________________________________________________ RCON 2200 138,117 13.a
(1) Noninterest-bearing (1)__________________________________________ 6631 9,372 13.a.1
(2) Interest-bearing_________________________________________________ 6636 128,745 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing____________________________________________________
(2) Interest-bearing_______________________________________________________ RCON
14. Federal funds purchased and securities sold under agreements to repurchase______________ 2800 0 14
15. a. Demand notes issued to the U.S. Treasury_____________________________________________ 2840 0 15.a
b. Trading liabilities__________________________________________________________________ 3548 0 15.b
16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized
leases):
a. With a remaining maturity of one year or less________________________________________ 2332 0 16.a
b. With a remaining maturity of more than one year through three years__________________ A547 0 16.b
c. With a remaining maturity of more than three years___________________________________ A548 0 16.c
17. Not applicable
18. Bank's liability on acceptances executed and outstanding________________________________ 2920 0 18.
19. Subordinated notes and debentures (2)___________________________________________________ 3200 0 19.
20. Other liabilities (from Schedule RC-G)__________________________________________________ 2930 915 20.
21. Total liabilities (sum of items 13 through 20)__________________________________________ 2948 139,032 21.
22. Not applicable
EQUITY CAPITAL RCON
23. Perpetual preferred stock and related surplus___________________________________________ 3838 0 23.
24. Common stock____________________________________________________________________________ 3230 740 24.
25. Surplus (exclude all surplus related to preferred stock)________________________________ 3839 2,271 25.
25. a. Undivided profits and capital reserves_______________________________________________ 3632 14,928 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities_______________ 8434 (590) 26.b
c. Accumulated net gains (losses) on cash flow hedges___________________________________ 4336 0 26.c
27. Cumulative foreign currency translation adjustments_____________________________________
28. Total equity capital (sum of items 23 through 27)_______________________________________ 3210 17,349 28
29. Total liabilities and equity capital (sum of items 21 and 28)___________________________ 3300 156,381 29
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the
most comprehensive level of auditing work performed for the bank by independent external Number
auditors as of any date during 1998_______________________________________________________ 6724 N/A M.1
</TABLE>
1=Independent audit of the bank conducted in accordance with generally accepted
auditing standards by a certified public accounting firm which submits a
report on the bank
2=Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3=Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4=Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5=Review of the bank's financial statements by external auditors
6=Compilation of the bank's financial statements by external auditors
7=Other audit procedures (excluding tax preparation work)
8=No external audit work
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
-4-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RI-1
COVINGTON, VA 24426 Transit #: 51404338
[3]
Consolidated Report of Income
for the period January 1, 1999 - September 30, 1999
All Report of Income schedules are to be reported on a calendar year-to-date basis in thousands of dollars.
Schedule RI - Income Statement
I280<-
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------
1. Interest income:
a. Interest and fee income on loans (1): RAID
----
(1) Real estate loans_______________________________________________________________ 4246 3,982 1.a.1
(2) Installment loans_______________________________________________________________ 4247 1,760 1.a.2
(3) Credit cards and related plans__________________________________________________ 4248 0 1.a.3
(4) Commercial (time and demand) and all other loans________________________________ 4249 795 1.a.4
b. Income from lease financing receivable:
(1) Taxable leases__________________________________________________________________ 4505 0 1.b.1
(2) Tax-exempt leases_______________________________________________________________ 4307 0 1.b.2
c. Interest income on balances due from depository institutions (2)______________________ 4115 0 1.c
d. Interest and dividend income on securities:
(1) U.S. Treasury securities and U.S. Government agency obligations
(including mortgage-backed securities issued
or guaranteed by FNMA, FHLMC, or GNMA)__________________________________________ 4027 1,490 1.d.1
(2) Securities issued by states and political subdivisions in the U.S.:
(a) Taxable securities_________________________________________________________ 4506 0 1.d.2a
(b) Tax-exempt securities______________________________________________________ 4507 304 1.d.2b
(3) Other domestic debt securities
(including mortgage-backed securities not issued
or guaranteed by FNMA, FHLMC, or GNMA)__________________________________________ 3657 0 1.d.3
(4) Foreign debt securities_________________________________________________________ 3657 0 1.d.4
(5) Equity securities (including investments in mutual funds________________________ 3658 3 1.d.5
e. Interest income from trading assets___________________________________________________ 4069 0 1.e
f. Interest income of federal funds sold and securities purchased under
agreements to resell__________________________________________________________________ 4020 277 1.f
g. Total interest income (sum of items 1.a through 1.f)__________________________________ 4107 8,611 1.g
</TABLE>
(1) See instructions for loan classifications used in this schedule.
(2) Includes interest income on time certificates of deposit not held for
trading.
-5-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RI-2
COVINGTON, VA 24426 Transit #: 51404338
[4]
Schedule RI - Continued
Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------
2. Interest expense:
a. Interest on deposits:
(1) Transaction accounts (NOW accounts, ATS accounts, and telephone PAID Year-to-Date
and preauthorized transfer accounts)________________________________ 4508 855 2.a.1
(2) Nontransaction accounts:
(a) Money market deposit accounts (MMDAs)___________________________ 4509 83 2.a.2a
(b) Other savings deposits__________________________________________ 4511 254 2.a.2b
(c) Time deposits of $100,000 or more_______________________________ A517 715 2a.2c
(d) Time deposits of less than $100,000_____________________________ A518 2,304 2a.2d
b. Expense of federal funds purchased and securities sold under agreements
to repurchase___________________________________________________________ 4180 0 2.b
c. Interest on demand notes issued to the U.S. Treasury, trading
liabilities, and on other borrowed money________________________________ 4185 0 2.c
d. Not applicable
e. Interest on subordinated notes and debentures___________________________ 4200 0 2.e
f. Total interest expense (sum of items 2.a through 2.e)___________________ 4073 4,211 RIAD 2.f
3. Net interest income (item 1.g minus 2.f)____________________________________________________________ 4074 4,400 3.
4. Provisions:
a. Provision for credit losses______________________________________________________________________ 4230 0 4.a
b. Provision for allocated transfer risk____________________________________________________________ 4243 0 4.b
5. Noninterest income:
a. Income from fiduciary activities________________________________________ 4070 0 5.a
b. Service charges on deposit accounts_____________________________________ 4080 282 5.b
c. Trading revenue (must equal Schedule RI, sum of Memorandum
items 8.a through 8.d)__________________________________________________ A220 0 5.c
d.-e. Not applicable
f. Other noninterest income:
(1) Other fee income____________________________________________________ 5407 71 5.f.1
(2) All other noninterest income*_______________________________________ 5408 0 5.f.2
g. Total noninterest income (sum of Items 5.a through 5.f)__________________________________________ 4079 353 5.g
6.a. Realized gains (losses) on held-to-maturity securities____________________________________________ 3521 0 6.a
b. Realized gains (losses) on available-for-sale securities__________________________________________ 3196 6 6.b
7. Noninterest expense:
a. Salaries and employee benefits__________________________________________ 4135 877 7.a
b. Expenses of premises and fixed assets (net of rental income)
(excluding salaries and employee benefits and mortgage interest)________ 4217 240 7.b
c. Other noninterest expense*______________________________________________ 4092 557 7.c
d. Total noninterest expense (sum of items 7.a through 7.c)_________________________________________ 4093 1,674 7.d
8. Income (loss) before income taxes and extraordinary items and other
adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and 7.d)___________________________ 4301 3,085 8.
9. Applicable income taxes (on item 8)_________________________________________________________________ 4302 944 9.
10. Income (loss before extraordinary items and other adjustments (item 8 minus 9)______________________ 4300 2,141 10.
11. Extraordinary items and other adjustments, net of income taxes*_____________________________________ 4320 0 11
12. Net income (loss) (sum of items 10 and 11)__________________________________________________________ 4340 2,141 12.
</TABLE>
* Describe on Schedule RI-E Explanations.
-6-
<PAGE>
Schedule RI-A- Changes in Equity Capital
Indicate decreases and losses in parentheses.
<TABLE>
<CAPTION>
<S> <C> <C>
I283
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------
RIAD
1. Total equity capital originally reported in the December 31, 1998, Reports of
Condition and Income__________________________________________________________________ 3215 16,929 1.
2. Equity capital adjustments from amended Reports of Income, net*_______________________ 3216 0 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2)__________________ 3217 16,929 3.
4. Net income (loss) (must equal Schedule RI, item 12)___________________________________ 4340 2,141 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net____________________ 4346 0 5.
6. Changes incident to business combinations, net________________________________________ 4356 0 6.
7. LESS: Cash dividends declared on preferred stock______________________________________ 4470 0 7.
8. LESS: Cash dividends declared on common stock_________________________________________ 4460 711 8.
9. Cumulative effect of changes in accounting principles from prior years* (see
instructions for this schedule)_______________________________________________________ 4411 0 9.
10. Corrections of material accounting errors from prior years* (see instructions
for this schedule)____________________________________________________________________ 4412 0 10.
11.a Change in net unrealized holding gains (losses) on available-for-sale securities_____ 8433 (1,010) 11.a
11.b Change in accumulated net gains (losses) on cash flow hedges_________________________ 4574 0 11.b
12. Other transactions with parent holding company* (not included
in items 5,7, or 8 above)_____________________________________________________________ 4415 0 12.
13. Total equity capital end of current period (sum of items 3 through 12)(must
equal Schedule RC, item 28)___________________________________________________________ 3210 17,349 13.
</TABLE>
*Describe on Schedule RI-E Explanations.
-7-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 06/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-4
COVINGTON, VA 24426 Transit #: 51404338
[12]
C210<
Schedule RC-B- Securities
Exclude assets held for trading.
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
------Held-to-maturity------ ------Available-for-sale------
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
RCON RCON RCON RCON
1. U.S. Treasury securities_____________________________ 0211 0 0213 0 1286 500 1287 501 1.
2. U.S. Government agency obligations
(exclude mortgage-backed securities:
a. Issued by U.S. Government agencies (2)____________ 1289 0 1290 0 1291 0 1293 0 2.a
b. Issued by U.S. Government-sponsored
agencies (3)______________________________________ 1294 0 1295 0 1297 33,244 1298 32,530 2.b
3. Securities issued by states and political
subdivisions in the U.S.:
a. General obligations_______________________________ 1676 0 1677 0 1678 9,410 1679 9,251 3.a
b. Revenue obligations_______________________________ 1681 0 1686 0 1690 748 1691 727 3.b
c. Industrial development and similar obligations____ 1694 0 1695 0 1696 0 1697 0 3.c
4. Mortgage-backed securities (MBS):
a. Pass-through securities:
(1) Guaranteed by GNMA____________________________ 1698 0 1699 0 1701 0 1702 0 4.a.(1)
(2) Issued by FNMA and FHLMC______________________ 1703 0 1705 0 1706 0 1707 0 4.a.(2)
(3) Other pass-through securities_________________ 1709 0 1710 0 1711 0 1713 0 4.a.(3)
b. Other mortgage-backed securities (include
(CMCs, REMICs and stripped MBS):
(1) Issued or guaranteed by FNMA,
FHLMC, or GNMA________________________________ 1714 0 1715 0 1716 0 1717 0 4.b(1)
(2) Collateralized by MBS issued or guaranteed
by FNMA, FHLMC, or GNMA_______________________ 1718 0 1719 0 1731 0 1732 0 4.b.(2)
(3) All other mortgage-backed securities__________ 1733 0 1734 0 1735 0 1736 0 4.b.(3)
5. Other debt securities:
a. Other domestic debt securities____________________ 1737 0 1738 0 1739 0 1741 0 5.a
b. Foreign debt securities___________________________ 1742 0 1743 0 1744 0 1746 0 5.b
6. Equity securities:
a. Investments in mutual funds and
other equity securities with
readily determinable fair values____________________________________________________A510 0 A511 0 6.a
b. All other equity securities(1)______________________________________________________1752 90 1753 90 6.b
7. Total (sum of items 1 through 6) (total of
column A must equal Schedule RC, item 2.a)
(total of column D must equal Schedule RC,
item 2.b)____________________________________________ 1754 0 1771 0 1772 43,992 1773 43,099 7
</TABLE>
(1) Includes equity securities without readily determinable fair values at
historical cost in item 6.b, column D.
(2) Includes Small Business Administration 'Guaranteed Loan Pool
Certificates,' U.S. Maritime Administration obligations, and Export-Import
Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities) issued by the
Farm Credit System, the Federal Home Loan Bank System, the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association, the
Financing Corporation, Resolution Funding Corporation, the Student Loan
Marketing Association, and the Tennessee Valley Authority.
-8-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert #: 22817 RC-5
COVINGTON, VA 24426 Transit #: 51404338
[13]
C212<-
Schedule RC-B- Continued
Memoranda Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
RCON
1. Pledged securities(1)______________________________________________________________________________ 0416 4,587 M.1
2. Maturity and repricing data for debt securities (1)(2) (excluding those in nonaccrual status):
a. Securities issued by the U.S. Treasury, U.S. Government agencies, and states
and political subdivisions in the U.S.: other non-mortgage debt securities; and
mortgage-pass through securities other than those backed by closed-end
first lien 1-4 family residential mortgages with a remaining maturity or repricing
frequency of: (3,4)
(1) Three months or less________________________________________________________________________ A549 1,128 M.2.a1
(2) Over three months through 12 months_________________________________________________________ A550 622 M.2.a2
(3) Over one year through three years___________________________________________________________ A551 7,203 M.2.a3
(4) Over three years through five years_________________________________________________________ A552 13,753 M.2.a4
(5) Over five years through 15 years____________________________________________________________ A553 20,303 M.2.a5
(6) Over 15 years_______________________________________________________________________________ A554 0 M.2.a6
b. Mortgage pass-through securities backed by closed-end first lien 1-4 family
residential mortgages with a remaining maturity or repricing frequency of: (3,5)
(1) Three months or less________________________________________________________________________ A555 0 M.2.b1
(2) Over three months through 12 months_________________________________________________________ A556 0 M.2.b2
(3) Over one year through three years___________________________________________________________ A557 0 M.2.b3
(4) Over three years through five years_________________________________________________________ A558 0 M.2.b4
(5) Over five years through 15 years____________________________________________________________ A559 0 M.2.b5
(6) Over 15 years_______________________________________________________________________________ A560 0 M.2.b6
c. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS;
exclude mortgage pass-through securities) with an expected average life of: (6)
(1) Three years or less_________________________________________________________________________ A561 0 M.2.c1
(2) Over three years____________________________________________________________________________ A562 0 M.2.c2
d. Debt securities with a REMAINING MATURITY of one
year or less (included in Memorandum items 2.a through 2.c above)_______________________________ A248 1,749 M.2.d
3.-6. Not applicable.
7. Amortized cost of held-to-maturity securities sold or transferred to available-for-sale or
trading securities during the calendar year-to-date (report the amortized cost at date of sale
or transfer)_______________________________________________________________________________________ 1778 0 M.7
8. Not applicable
9. Structured notes (included in the held-to-maturity and available-for-sale accounts in
accounts in Schedule RC-B, items 2,3, and 5):
a. Amortized cost__________________________________________________________________________________ 8782 0 M.9.a
b. Fair value______________________________________________________________________________________ 8783 0 M.9.b
</TABLE>
(1) Includes held-to-maturity securities at amortized cost and
available-for-sale securities at fair value.
(2) Exclude equity securities, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(3) Report fixed rate debt securities by remaining maturing and floating rate
debt securities by repricing frequency.
(4) Sum of Memorandum items 2.a.(1) through 2.a.(6) plus any nonaccrual debt
securities in the categories of debt securities reported in Memorandum
item 2.a that are included in Schedule RC-N, item 6, column C, must equal
Schedule RC-B, sum of items 1, 2, 3 and 5, columns A and D, plus mortgage
pass-through securities other than those backed by closed-end first lien
1-4 family residential mortgages included in Schedule RC-B, item 4.a,
columns A and D.
(5) Sum of Memorandum items 2.b.(1) through 2.b.(6) plus any nonaccrual
mortgage pass-through securities backed by closed-end first lien 1-4
family residential mortgages included in Schedule RC-N, item 6, column C,
must equal Schedule RC-B, item 4.a, sum of columns A and D, less the
amount of mortgage pass-through securities other than those backed by
closed-end first lien 1-4 family residential mortgages included in
Schedule RC-B, item 4.a, columns A and D.
(6) Sum of Memorandum items 2.c.(1) and 2.c.(2) plus any nonaccrual "Other
mortgage-backed securities" included in Schedule RC-N, item 6, column C,
must equal Schedule RC-B,l item 4.b, sum of columns A and D.
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RC-6
COVINGTON, VA 24426 Transit #: 51404338
[14]
Schedule RC-C - Loans and Lease Financing Receivables
Part I. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts
reported in this schedule. Report total loans and leases, net of unearned
income. Exclude assets held for trading and commercial paper. C215 <-
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------
1. Loans secured by real estate: RCON
a. Construction and land development_____________________________________________________________ 1415 294 1.a
b. Secured by farmland (including farm residential and other improvements)_______________________ 1420 0 1.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties and extended
under lines of credit_____________________________________________________________________ 1797 4,734 1.c.1
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens________________________________________________________________ 5367 59,573 1.c.2a
(b) Secured by junior liens_______________________________________________________________ 5368 143 1.c.2b
d. Secured by multifamily (5 or more) residential properties_____________________________________ 1460 0 1.d
e. Secured by nonfarm nonresidential properties__________________________________________________ 1480 0 1.e
2. Loans to depository institutions:
a. To commercial banks in the U.S.:
(1) To U.S. branches and agencies of foreign banks____________________________________________ 1506 0 2.a1
(2) To other commercial banks in the U.S._____________________________________________________ 1507 0 2.a2
b. To other depository institutions in the U.S.__________________________________________________ 1517 0 2.b
c. To banks in foreign countries:
(1) To foreign branches of other U.S. banks___________________________________________________ 1513 0 2.c1
(2) To other banks in foreign countries_______________________________________________________ 1516 0 2.c2
3. Loans to finance agricultural production and other loans to farmers______________________________ 1590 0 3.
4. Commercial and industrial loans:
a. To U.S. addresses (domicile)__________________________________________________________________ 1763 11,400 4.a
b. To non-U.S. addressees (domicile)_____________________________________________________________ 1764 0 4.b
5. Acceptances of other banks_______________________________________________________________________ 1755 0 5.
6. Loans to individuals for household, family, and other personal expenditures (i.e., consumer
loans)(includes purchased paper):
a. Credit cards and related plans (includes check credit and other revolving credit plans)_______ 2008 0 6.a
b. Other (includes single payment, installment, and all student loans)___________________________ 2011 27,795 6.b
7. Loans to foreign government and official institutions (including foreign central banks)__________ 2081 0 7.
8. Obligations (other than securities and leases) of states and political subdivisions in the U.S.__ 2107 0 8.
9. Other Loans:
a. Loans for purchasing or carrying securities (secured and unsecured)___________________________ 1545 0 9.a
b. All other loans (excludes consumer loans)_____________________________________________________ 1564 19 9.b
10. Lease financing receivables (net of unearned income)_____________________________________________ 2165 0 10.
11. LESS: Any unearned income on loans reflected in items 1-9 above__________________________________ 2123 2,792 11.
12. Total loans and leases, net of unearned income (sum of items 1 through 10 minus item 11)
(must equal Schedule RC, item 4.a)_______________________________________________________________ 2122 101,166 12.
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RC-7
COVINGTON, VA 24426 Transit #: 51404338
[15]
Schedule RC-C - Continued
Part I. Continued
Memoranda Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------------
1. Not applicable
2. Loan (1) and leases restructured and in compliance with modified terms (included in
Schedule RC-C. part I. above and not reported as past due or nonaccrual in
Schedule RC-N, Memorandum item 1): RCN
a. Real estate loans________________________________________________________________________________________ 1617 0 M.2.a
b. All other loans and lease financing receivables (exclude loans to individuals for
household, family, and other personal expenditures)______________________________________________________ 8691 0 M.2.b
3. Maturity and repricing data for loans and leases (excluding those in nonaccrual status):
a. Closed-end loans secured by first liens on 1-4 family residential properties(reported in Schedule RC-C,
part I, item 1.c.(2).(a)) with a remaining maturity or repricing frequency of: (2,3)
(1) Three months or less_________________________________________________________________________________ A564 1,340 M.3.a1
(2) Over three months through 12 months__________________________________________________________________ A565 4,174 M.3.a2
(3) Over one year through three years____________________________________________________________________ A566 19,796 M.3.a3
(4) Over three years to through five years_______________________________________________________________ A567 30,117 M.3.a4
(5) Over five years through 15 years_____________________________________________________________________ A568 4,042 M.3.a5
(6) Over 15 years________________________________________________________________________________________ A569 104 M.3.a6
b. All loans and leases (reported in Schedule RC-C, part I, items 1 through 10) EXCLUDING closed-end
loans secured by first liens on 1-4 family residential properties (reported in Schedule RC-C, part I,
item 1.c.(2).(a)) with a remaining maturity or repricing frequency of: (2,4)
(1) Three months or less_________________________________________________________________________________ A570 8,929 M.3.b1
(2) Over three months through 12 months__________________________________________________________________ A571 3,853 M.3.b2
(3) Over one year through three years____________________________________________________________________ A572 13,987 M.3.b3
(4) Over three years through five years__________________________________________________________________ A573 14,572 M.3.b4
(5) Over five years through 15 years_____________________________________________________________________ A574 3,044 M.3.b5
(6) Over 15 years________________________________________________________________________________________ A575 0 M.3.b6
c. Loans and leases (reported in Schedule RC-C, part I, items 1 through 10)
with a REMAINING MATURITY of one year or less____________________________________________________________ A247 8,048 M.3.c
d. Loans secured by nonfarm nonresidential properties (reported in Schedule RC-C, part I, items 1.e)
with a REMAINING MATURITY of over five years_____________________________________________________________ A577 0 M.3.d
e. Commercial and industrial loans (reported in Schedule RC-C, part I, item 4)
with a REMAINING MATURITY of over three years____________________________________________________________ A578 1,512 M.3.e
4. Loans to finance commercial real estate, construction, and land development activities
(not secured by real estate) included in Schedule RC-C, part I, items 4 and 9.b, page RC-6(5)_______________ 2746 0 M.4
5. Loans and leases held for sale (included in Schedule RC-C, part I, above)___________________________________ 5369 0 M.5
6. Adjustable rate closed-end loans secured by first liens on 1-4 family residential properties
(included in Schedule RC-C, part I, item 1.c(2)(a), page RC-6)______________________________________________ 5370 56,023 M.6
</TABLE>
(1) See instructions for loan classifications used in Memorandum item 2.
(2) Report fixed rate loans and leases by remaining maturity and floating rate
loans by repricing frequency.
(3) Sum of Memorandum items 3.a.(1)through 3.a.(6) plus total nonaccrual
closed-end loans secured by first liens on 1-4 family residential properties
included in Schedule RC-N, Memorandum item 4.c.(2), column C, must equal
total closed-end loans secured by first liens on 1-4 family residential
properties from Schedule RC-C, part I, item 1.c.(2)(a).
(4) Sum of Memorandum items 3.b.(1) through 3.b.(6), plus total nonaccrual loans
and leases from Schedule RC-N, sum of items 1 through 5, column C, minus
nonaccrual closed-end loans secured by first liens on 1-4 family residential
properties included in Schedule RC-N, Memorandum item 4.c.(2), column C,
must equal total loans and leases from Schedule RC-C , Part 1, sum of items
1 through 10, minus total closed-end loans secured by first liens on 1-4
family residential properties in domestic offices from Schedule RC-C, part
I, item 1.c.(2)(a).
(5) Exclude loans secured by real estate that are included in Schedule RC-C,
part I, items 1.a through 1.e.
-11-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RC-16
COVINGTON, VA 24426 Transit #: 51404338
[24]
Schedule RC-N - Past Due and Nonaccrual Loans(1), Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, in items 1 through 7,
column A, and in Memorandum items 2 through 4, column A, as confidential.
C270 <-
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
--(Column A)-- --(Column B)-- --(Column C)--
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
RCON RCON RCON
---- ---- ----
1. Real estate loans____________________________________________________ 1210 1,254 1211 0 1212 0 1.
2. Installment loans____________________________________________________ 1214 931 1215 0 1216 0 2.
3. Credit cards and related plans_______________________________________ 1218 0 1219 0 1220 0 3.
4. Commercial (time and demand) and all other loans_____________________ 1222 27 1223 0 1224 0 4.
5. Lease financial receivables__________________________________________ 1226 0 1227 0 1228 0 5.
6. Debt securities and other assets (exclude other real estate owned
and other repossessed assets)________________________________________ 3505 0 3506 0 3507 0 6.
====================================================================================================================================
Amounts reported in items 1 through 5 above include guaranteed and unguaranteed portions of past due and
nonaccrual loans and leases. Report in item 7 below certain guaranteed loans and leases that have already
been included in the amounts reported in items 1 through 5.
RCON RCON RCON
---- ---- ----
7. Loans and leases reported in items 1 through 5 above which
are wholly or partially guaranteed by the U.S. Government____________ 5612 0 5613 0 5614 0 7.
a. Guaranteed portion of loans and leases included in item 7
above_____________________________________________________________ 5615 0 5616 0 5617 0 7.a
C273 <-
Memoranda Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
1. Restructed loans and leases included in Schedule RC-N,
items 1 through 5, above (and not reported in Schedule RC-C, RCON RCON RCON
Part I, Memoradum item 2) 1658 0 1659 0 1661 0 M.1
2. To be completed by banks with loans to finance agricultural
production and other loans to farmers (Schedule RC-C, part I,
item 3) exceeding five percent of total loans:
Agricultural loans included in Schedule RC-N, items 1
through 4, above_____________________________________________________ 1230 N/A 1231 N/A 1232 N/A M.2
3. Loans to finance commercial real estate, construction, and
land development activities (not secured by real estate)
included in Schedule RC-N, items 2 through 4, above__________________ 5421 0 5422 0 5423 0 M.3
4. Real estate loans (sum of Memorandum items 4.a through 4.e
must equal Schedule RC-N, item 1, above):
a. Construction and land development_________________________________ 5424 0 5425 0 5426 0 M.4a
b. Secured by farmland_______________________________________________ 5427 0 5428 0 5429 0 M.4b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family
residential properties and extended under lines of credit_____ 5430 0 5431 0 5432 0 M.4c(1)
(2) All other loans secured by 1-4 family residential
properties____________________________________________________ 5433 1,254 5434 0 5435 0 M.4c(2)
d. Secured by multifamily (5 or more) residential properties_________ 5436 0 5437 0 5438 0 M.4d
e. Secured by nonfarm nonresidential properties______________________ 5439 0 5440 0 5441 0 M.4e
</TABLE>
(1) See instructions for loan classifications used in this schedule.
-12-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
THE STATE BANK OF THE ALLEGHENIES Call Date: 09/30/1999 State #: FFIEC 033
116 WEST RIVERSIDE DRIVE Vendor ID: D Cert#: 22817 RI-4
COVINGTON, VA 24426 Transit #: 51404338
[6]
Schedule RI-B - Charge-offs and Recoveries on Loans and Leases
and Changes in Allowance for Credit Losses
Part I. Charge-offs and Recoveries on Loans and Leases (1)
Part I excludes charge-offs and recoveries through the
allocated transfer risk reserve.
I286 <-
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------
--Calendar year-to-date--
(Column A) (Column B)
RIAD Charge-offs RIAD Recoveries
---- ----------- ---- ----------
1. Real estate loans______________________________________________________________ 4256 0 4257 0 1.
2. Installment loans______________________________________________________________ 4258 68 4259 17 2.
3. Credit cards and related plans_________________________________________________ 4262 0 4263 0 3.
4. Commercial (time and demand) and all other loans_______________________________ 4264 0 4265 0 4.
5. Lease financial receivables____________________________________________________ 4266 0 4267 0 5.
6. Total (sum of items 1 through 5)_______________________________________________ 4635 68 4605 17 6.
Memoranda
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------
1. Loans to foreign governments and official institutions include in part I,
items 1 through 4 above________________________________________________________ 4643 0 4627 0 M.1
2. To be completed by banks with loans to finance agricultural production and
other loans to farmers (Schedule RC-C, part I, item 3) exceeding five percent
of total loans.
Agricultural loans included in part I, items through 4, above__________________ 4268 N/A 4269 N/A M.2
3. Not applicable.
4. Loans to finance commercial real estate, construction, and land development
activities (not secured by real estate) included in Schedule RI-B, part I,
items 2 through 4, above_______________________________________________________ 5443 0 5444 0 M.4
5. Real estate loans (sum of memorandum items 5.a through 5.e must equal
Schedule RI-B, part I, item 1, above):
a. Construction and land development___________________________________________ 5445 0 5446 0 M.5.a
b. Secured by farmland_________________________________________________________ 5447 0 5448 0 M.5.b
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties
and extended under lines of credit______________________________________ 5449 0 5450 0 M.5.c1
(2) All other loans secured by 1-4 family residential properties____________ 5451 0 5452 0 M.5.c2
d. Secured by multifamily (5 and more) residential properties__________________ 5453 0 5454 0 M.5.d
e. Secured by nonfarm nonresidential properties________________________________ 5455 0 5456 0 M.5.e
</TABLE>
(1) See instructions for loan classification used in this schedule.
-13-
<PAGE>
STATEMENT OF CASH FLOWS
(unaudited)
State Bank of Alleghenies
Covington, Virginia 24426
(in Thousands of Dollars)
Fiscal Year to Date Nine Months Ending September 30
1999 1998 1997
------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $2,141 $ 2,018 $2,034
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 113 122 113
Amortization on securities, net of accretion 54 42 34
Loss Sale of securities 0 0 0
Provision for deferred taxes 0 0 0
Provision for possible loan losses 0 0 0
NET CHANGE IN:
Accrued interest receivable
and other assets 345 121 18
Accrued interest payable and
other liabilities (342) (52) (27)
------------------------------
Net cash provided by operating activities $ 2,251 $2,172
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investment securities 9,574 $ 8,218 11,522
Purchase of investment securities (14,486) (11,978) (8,197)
Net change in customer loans (3,117) (5,691) (9,080)
Capital expenditures (11) (61) (195)
------------------------------
Net cash used in investing activities (8,040) (9,512) (5,950)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 6,120 6,413 3,428
Issuance of common stock 0 0 0
Dividends paid (710) (622) (532)
------------------------------
Net cash provided by financing activities 5,410 5,791 2,896
------------------------------
Increase in cash & due from banks (319) (1,470) (882)
Cash & due from banks-beginning 9,974 10,952 8,718
------------------------------
Cash & due from banks-ending $ 9,655 $ 9,482 $7,836
==============================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash payments for:
Interest paid to depositors $ 4,211 $ 4,312 $3,905
Income taxes $ 944 $ 867 $ 859
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING & FINANCING ACTIVITIES
Other real estate acquired in the
settlement of loan $ 0 $ 0 $ 0
-14-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Earnings Performance
- --------------------
Net income for the first nine months of 1999 was $2,141,000 or $0.72 per share
up from $2,018,000 or $0.68 per share for the first nine months of 1998. This
decrease was attributable to the fluctuation of net interest income as described
below.
Net income for the third quarter of 1999 was $723,000 as compared to $640,000
for the same period of 1998.
Earnings per share are computed on the weighted average common shares
outstanding of 2,960,00 for 1999 and for 1998
Net Interest Income
- -------------------
Net interest income for the nine months ended September 30, 1999 amounted to
$4,440,000 up 6.05% from the $4,149,000 level recorded for the same period for
1998. The net interest differential for this period (the difference between the
tax equivalent yield on interest-bearing assets and the rate paid on
interest-bearing liabilities) increased by 9 basis points from 3.81% in 1998 to
3.90% in 1999 due to market conditions.
The difference in the net interest income for the three months ended September
30, 1999, compared to the same period in 1998 was attributable to similar
factors as mentioned above.
Non-Interest Income and Expenses
- --------------------------------
Non-interest income and non-interest expenses were relatively stable during the
three and nine month periods ended September 30, 1999 and 1998.
Loans, Investments and Deposits
- -------------------------------
Loans, investments and deposits registered changing levels of 3.21%, (7.90%) and
4.64% respectively as of September 30, 1999, compared to December 31, 1998. The
increase in loans and investments was predominately funded by the increase in
deposits of $6,120,000.
Allowance for Loan Losses
- -------------------------
The balance of the allowance for loan losses reflects an amount which in
management's opinion is adequate to provide for potential loan losses.
Management's determination of the proper level of the allowance for loan losses
is based on existing credit policies and commitments, actual loan loss
experience relative to the size and characteristics of the loan portfolio,
changes in composition and inherent risk of the loan portfolio, anticipated
impacts of economic policies and conditions and review of specific problem
loans.
The allowance for loan losses on September 30, 1999 was $812,000, a decrease
from the $863,000 on December 31, 1998. This decrease is due to recovery of
previously charged-off loans and current periods' provision being less than
loans charged-off during the same period. The ratio of allowance for loan losses
to net loans was .81% on September 30, 1999, as compared to .90% on September
30, 1998. The ratio of loans past due 90 days or more to net loans on September
30, 1999 was zero as compared to zero as of September 30, 1998. The ratio of net
charge-offs year to date to net loans was .05% on September 30, 1999, as
compared to .11% net charge-off as of September 30, 1998.
Capital Resources
- -----------------
Total Stockholder's equity or capital, including allowance for loan losses of
$812,000 amounted to $18,161,000 on September 30, 1999. This reflects an
increase of $369,000 over the December 31, 1998 level. The equity to asset ratio
as of September 30, 1999 of 11.61% represents what management believes to be an
adequate level to support asset growth over the next two to three years.
There were no material commitments for capital expenditures as of
September 30, 1999.
-15-
<PAGE>
Liquidity and Interest Sensitivity
- ----------------------------------
The concept of liquidity involves the ability of an enterprise to maintain
sufficient cash resources to meet its needs and obligations on a timely basis.
For banks, liquidity requires the maintenance of an ability to meet the
day-to-day demands of deposit customers. At the same time, banks must be
prepared to fulfill the needs of credit customers for loans of all types. Banks
liquidity should also be considered in terms of the nature and mix of the
institution's sources and uses of funds. Also related is the concept of
interest rate sensitivity, which is the degree to which earning assets and
interest-bearing liabilities are responsive to changes in interest rates.
The deposit base is made up of core deposits with $16,192,000 or $11.72% of
total deposits composed of certificates of deposit larger than $100,000 in size.
However, over the past several years, the deposit base has become somewhat more
rate sensitive and volatile. Accordingly, State Bank has made changes in its
strategy in order to maintain adequate liquidity and repricing opportunities
such as requiring real estate mortgage rates to be adjusted every 3 to 5 years.
As of September 30, 1999, federal funds and investment securities maturing
within one year amounted to $4,850,000 or 3.51% of deposits. In addition,
$20,956,000 of investment securities or 15.17% of deposits, mature in the 1-5
year range.
The policy of State Bank of the Alleghenies is to maintain the relationship
between rate sensitive assets and rate sensitive liabilities which will best
maximize profits and maintain future profit levels in keeping with the trend and
expectation of interest rates.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 6 Exhibits and reports on form 8-K
a) Exhibits -None
b) There were no reports on Form 8-K filed for the three
months ended September 30, 1999.
-17-
<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.
STATE BANK OF THE ALLEGHENIES
(registrant)
Date: October 19, 1999 /s/ Don E. Stone, Jr.
----------------------
Don E. Stone, Jr.
(President & CEO)
<PAGE>
Appendix V
=========================
Article 15 of the Virginia Stock Corporation Act
Relating to Dissenters' Rights
=========================
<PAGE>
APPENDIX V
ARTICLE 15.
DISSENTERS' RIGHTS
ss.13.1-729. Definitions.--In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 13.1-730 and who exercises that right when and in the
manner required by ss.13.1-732 through ss.13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
ss.13.1-730. Right to Dissent.--A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by ss.13.1-718 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
ss.13.1-719;
2. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
V-1
<PAGE>
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on the
sale or exchange or if the sale or exchange was in furtherance of a dissolution
on which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to
a plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Securities System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date
fixed to determine the shareholders entitled to receive notice of and
to vote at the meeting at which the plan of merger or share exchange is
to be acted on, were either listed subject to notice of issuance on a
national securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as
set forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in ss.13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
V-2
<PAGE>
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
ss.13.1-731. Dissent by Nominees and Beneficial Owners.--A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
ss.13.1-732. Notice of Dissenters' Rights.--A. If proposed corporate
action creating dissenters' rights under ss. 13.1-730 is submitted to a vote at
a shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under ss.13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in ss.13.1-734.
ss.13.1-733. Notice of Intent to Demand Payment.--A. If proposed
corporate action creating dissenters' rights under ss.13.1-730 is submitted to a
vote at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights (i) shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated and (ii) shall not vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for his shares under this article.
ss.13.1-734. Dissenters' Notice.--A. If proposed corporate action
creating dissenters' rights under ss.13.1-730 is authorized at a shareholders'
meeting, the corporation, during the ten-day period after the effectuation of
such corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of ss.13.1-733.
V-3
<PAGE>
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
ss.13.1-735. Duty to Demand Payment.--A. A shareholder sent a
dissenters' notice described in ss.13.1-734 shall demand payment, certify that
he acquired beneficial-ownership of the shares before or after the date required
to be set forth in the dissenters' notice pursuant to paragraph 3 of subsection
B of ss. 13.1-734, and, in the case of certificated shares, deposit his
certificates in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
ss.13.1-736. Share Restrictions.--A. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss.13.1-737. Payment.--A. Except as provided in ss.13.1-738, within
thirty days after receipt of a payment demand made pursuant to ss.13.1-735, the
corporation shall pay the dissenter the amount the corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in the
city or county where the corporation's principal office is located, or, if none
in this Commonwealth, where its registered office is located or (ii) at the
election of any dissenter residing or having its principal office in the
Commonwealth, by the circuit court in the city or county where the dissenter
resides or has its principal office. The court shall dispose of the complaint on
an expedited basis.
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B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
ss.13.1-739; and
4. A copy of this article.
ss.13.1-738. After-Acquired Shares.--A. A corporation may elect to
withhold payment required by ss. 13.1-737 from a dissenter unless he was the
beneficial owner of the shares on the date of the first publication by news
media or the first announcement to shareholders generally, whichever is earlier,
of the terms of the proposed corporate action, as set forth in the dissenters'
notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount of each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss.13.1-739.
ss.13.1-739. Procedure if Shareholder Dissatisfied with Payment or
Offer.--A. A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and the amount of interest due, and demand
payment of his estimate (less any payment under ss. 13.1-737), or reject the
corporation's offer under ss. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under ss.13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
ss.13.1-740. Court Action.--A. If a demand for payment under
ss.13.1-739 remains unsettled, the corporation shall commence a proceeding
within sixty days after receiving the payment demand and petition the circuit
court in the city or county described in subsection B of this section to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
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B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth were the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under ss.13.1-738.
ss.13.1-741. Court Costs and Counsel Fees.--A. The court in an
appraisal proceeding commenced under ss.13.1-740 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under ss.13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of ss. 13.1-732 through ss. 1 3.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed did not act in good faith with respect to the rights provided by this
article.
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
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D. In a proceeding commenced under subsection A of ss. 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceedings, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
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