Filed Pursuant to Rule 424(B)3
File Number 333-00345
[LOGO]
Community Bankshares Incorporated
May 13, 1996
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Community Bankshares Incorporated ("CBI") to be held at The Community Bank, 200
N. Sycamore Street, Petersburg, Virginia on June 18, 1996 at 3:30 p.m., local
time.
At the Meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated December 12, 1995 (the "Agreement"), between CBI
and Commerce Bank of Virginia ("CBOV"), pursuant to which, among other things,
CBOV will engage in a Share Exchange with CBI (the "Reorganization"). Under the
terms of the Agreement, each share of common stock of CBOV outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.4044 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, CBOV will continue to carry on
its banking business as a wholly-owned subsidiary of CBI in substantially the
same manner as before the Reorganization.
The exchange of shares (other than for cash in lieu of any fractional
shares) will be a tax-free transaction for federal income tax purposes. Details
of the proposed Reorganization are set forth in the accompanying Joint Proxy
Statement, which you are urged to read carefully in its entirety. Approval of
the Reorganization by holders of CBI Common Stock requires that more votes be
cast for it than are cast against it.
Your Board of Directors unanimously approved the Reorganization and
believes that it is in the best interests of CBI and its shareholders.
Accordingly, the Board unanimously recommends that you VOTE FOR the
Reorganization.
At the meeting, you also will vote on the election of three (3) Directors
for a term of three year(s) each and on a proposed amendment to the Articles of
Incorporation that will permit the size of the Board of Directors to be
increased to include the present directors of CBOV. Your Board of Directors
unanimously supports these individuals and the proposed amendment to the
Articles of Incorporation and recommends that you VOTE FOR them as directors and
for the proposed amendment.
We hope you can attend the Meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. Your vote is important regardless of the number of shares
you own. We look forward to seeing you at the Meeting.
Sincerely,
Nathan S. Jones, 3rd
President and Chief Executive Officer
200 N. Sycamore Street, Petersburg, Virginia 23804
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 18, 1996 AT 3:30 P.M., LOCAL TIME
The Annual Meeting of Shareholders of Community Bankshares Incorporated
("CBI") will be held on June 18, 1996 at 3:30 p.m., local time, at The Community
Bank, 200 N. Sycamore Street, Petersburg, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated December 12,
1995, between CBI and Commerce Bank of Virginia ("CBOV") and a related Plan of
Share Exchange (collectively, the "Reorganization Agreement"), providing for a
Share Exchange between CBOV and CBI (the "Reorganization") upon the terms and
conditions therein, including among other things that each issued and
outstanding share of CBOV Common Stock will be exchanged for 1.4044 shares of
CBI Common Stock, with cash being paid in lieu of issuing fractional shares. The
Reorganization Agreement is enclosed with the accompanying Joint Proxy Statement
as Appendix A.
2. To elect three directors to serve for a three year term and until their
successors are elected and qualified.
3. To amend Article 8 of the Articles of Incorporation to permit an
increase in the size of the Board of Directors by more than two in a twelve
month period, if the increase is in connection with a merger or share exchange
to which CBI or a wholly owned subsidiary of CBI is a party, provided the 85%
vote requirement of Article 9 does not apply to such merger or share exchange.
4. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed April 26, 1996 as the record date for the
Meeting, and only holders of record of CBI Common Stock at the close of business
on that date are entitled to receive notice of and to vote at the Meeting or any
adjournments or postponements thereof.
By Order of the Board of Directors
Nathan S. Jones, 3rd
President and Chief Executive Officer
May 13, 1996
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF COMMUNITY BANKSHARES INCORPORATED
RECOMMENDS THE
SHAREHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT.
<PAGE>
[LOGO]
Commerce Bank of Virginia
May 13, 1996
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Commerce Bank of Virginia ("CBOV") to be held at the Dominion Country Club, 6000
Dominion Club Drive, Glen Allen, Virginia on June 18, 1996 at 10:00 a.m., local
time.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated December 12, 1995 (the "Agreement"), between CBOV
and Community Bankshares Incorporated ("CBI") pursuant to which, among other
things, CBOV will engage in a Share Exchange with CBI (the "Reorganization").
Under the terms of the Agreement, each share of common stock of CBOV outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.4044 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, CBOV will continue to carry on
its banking business as a wholly-owned subsidiary of CBI in substantially the
same manner as before the Reorganization.
The exchange of shares (other than for cash in lieu of any fractional
shares) will be a tax-free transaction for federal income tax purposes. Details
of the proposed Reorganization are set forth in the accompanying Joint Proxy
Statement, which you are urged to read carefully in its entirety. Approval of
the Reorganization requires the affirmative vote of more than two-thirds of the
outstanding shares of CBOV common stock.
Your Board of Directors unanimously approved the Reorganization and
believes that it is in the best interests of CBOV and its shareholders.
Accordingly, the Board unanimously recommends that you VOTE FOR the
Reorganization.
At the meeting, you also will vote on the election of nine (9) Directors
for a term of one year each. Your Board of Directors unanimously supports these
individuals and recommends that you VOTE FOR them as directors.
We hope you can attend the Meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. Your vote is important regardless of the number of shares
you own. We look forward to seeing you at the Meeting.
Sincerely,
Richard C. Huffman
President and Chief Executive Officer
P.O. Box 29569, Richmond, Virginia 23242-0569
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 18, 1996 AT 10:00 A.M., LOCAL TIME
The Annual Meeting of Shareholders of Commerce Bank of Virginia ("CBOV")
will be held on June 18, 1996 at 10:00 a.m., local time, at the Dominion Country
Club, 6000 Dominion Club Drive, Glen Allen, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated December 12,
1995, between CBOV and Community Bankshares Incorporated. ("CBI") and a related
Plan of Share Exchange (collectively, the "Reorganization Agreement"), providing
for a Share Exchange between CBOV and CBI (the "Reorganization") upon the terms
and conditions therein, including among other things that each issued and
outstanding share of CBOV common stock will be exchanged for 1.4044 shares of
CBI Common Stock, with cash being paid in lieu of issuing fractional shares. The
Reorganization Agreement is enclosed with the accompanying Joint Proxy Statement
as Appendix A.
2. To elect nine directors to serve for a one year term and until their
successors are elected and qualified.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed April 26, 1996 as the record date for the
Meeting, and only holders of record of CBOV Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
Richard C. Huffman
President and Chief Executive Officer
May 13, 1996
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF COMMERCE BANK OF VIRGINIA
RECOMMENDS THE
SHAREHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT.
<PAGE>
COMMERCE BANK OF VIRGINIA
AND
COMMUNITY BANKSHARES INCORPORATED
JOINT PROXY STATEMENT
PROSPECTUS
OF
COMMUNITY BANKSHARES INCORPORATED
INTRODUCTION
This Joint Proxy Statement is being furnished to shareholders of Community
Bankshares Incorporated ("CBI") and shareholders of Commerce Bank of Virginia
("CBOV") in connection with the solicitation of proxies by the Board of
Directors of CBI for use at the Annual Meeting of Shareholders (the "CBI
Meeting") and by the Board of Directors of CBOV for use at the Annual Meeting of
Shareholders (the "CBOV Meeting"), and any postponements or adjournments of
either meeting.
CBI. At the CBI Meeting, shareholders of CBI will be asked to approve an
Agreement and Plan of Reorganization, dated as of December 12, 1995 between CBI
and CBOV and a related Plan of Share Exchange (collectively, the "Reorganization
Agreement") providing for the exchange of common stock of CBOV ("CBOV Common
Stock") for CBI Common Stock (the "Reorganization"). Upon consummation of the
Reorganization, each outstanding share of CBOV Common Stock, other than shares
as to which dissenters' rights have been duly exercised, will be exchanged for
1.4044 shares of CBI Common Stock and cash in lieu of fractional shares (the
"Exchange Ratio"). See "The Reorganization" for a more complete description of
the transaction. A copy of the Reorganization Agreement is enclosed as Appendix
A.
At the CBI Meeting shareholders also will vote to elect three (3) Directors
of CBI for a three year term and vote on a proposed amendment to Article 8 of
the Articles of Incorporation that will permit an increase in the size of the
Board of Directors by more than two in a twelve month period, if the increase is
in connection with a merger or share exchange to which CBI or a wholly owned
subsidiary of CBI is a party, provided the 85% vote requirement of Article 9
does not apply to such merger or share exchange. Approval of the proposed
amendment to the CBI Articles of Incorporation is a condition to the obligation
of CBOV to consummate the Reorganization. If the Reorganization is approved by
the shareholders, the directors of CBOV will serve on the CBI Board as well.
CBOV. At the CBOV Meeting, shareholders of CBOV will be asked to approve
the Reorganization Agreement. Upon consummation of the Reorganization, each
outstanding share of CBOV Common Stock, other than shares as to which
dissenters' rights have been duly exercised, will be exchanged for 1.4044 shares
of CBI Common Stock, with cash being paid in lieu of issuing fractional shares.
On April 8, 1996, CBI Common Stock closed at $15.50 per share on the OTC
Bulletin Board. See "The Reorganization" for a more complete description of the
Reorganization. A copy of the Reorganization Agreement is enclosed as Appendix
A.
At the CBOV Meeting shareholders also will vote to elect nine (9) Directors
of CBOV for a one year term. If the Reorganization is approved by the
shareholders, the directors of CBOV will serve on the
<PAGE>
CBI Board as well. See "Commerce Bank of Virginia Election of Directors;
Management" for additional information.
This Joint Proxy Statement also serves as the prospectus of CBI relating to
approximately 741,473 shares of CBI Common Stock issuable to the shareholders of
CBOV upon consummation of the Reorganization.
This Joint Proxy Statement is first being mailed to shareholders of CBI and
CBOV on or about May 13, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF CBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
THE DATE OF THIS JOINT PROXY STATEMENT IS MAY 13, 1996.
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<PAGE>
AVAILABLE INFORMATION
CBI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission, at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its regional
offices at the following locations: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and 75 Park Place, Room 1228,
New York, New York 10007. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
CBI has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933 relating to the
shares of CBI Common Stock issuable in the Reorganization. As permitted by the
rules and regulations of the Commission, this Joint Proxy Statement omits
certain information contained in the Registration Statement. For further
information, reference is made to the Registration Statement and to the exhibits
thereto, which may be inspected without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies may be obtained from the Commission at prescribed rates.
This Joint Proxy Statement is accompanied by CBI's 1995 Audited Financial
Statements. Copies of CBI's Annual Report on Form 10-K for the year ended
December 31, 1995 (not including appendices thereto) are available to any person
receiving a copy of this Joint Proxy Statement, without charge, upon written or
oral request directed to: Lillian M. Umphlett, Community Bankshares
Incorporated, 200 N. Sycamore Street, Petersburg, Virginia 23804; telephone
number (804) 861-2320. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
RELATING TO CBI, ANY REQUEST SHOULD BE MADE BY JUNE 1, 1996.
-------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT IN ANY JURISDICTION TO OR FROM
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES BEING OFFERED PURSUANT TO THIS JOINT PROXY
STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF CBI OR CBOV OR THE INFORMATION SET FORTH HEREIN
SINCE THE DATE OF THIS JOINT PROXY STATEMENT.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction...................................................................... 1
Available Information............................................................. 3
Summary........................................................................... 6
The Companies................................................................... 6
The Shareholder Meetings........................................................ 6
The Reorganization.............................................................. 6
Comparative Per Share Information................................................. 12
Selected Financial Information.................................................... 14
CBI Selected Historical Financial Information................................... 15
CBOV Selected Historical Financial Information.................................. 16
CBI and CBOV Selected Historical Pro Forma Financial Information................ 17
The Shareholder Meetings.......................................................... 18
The Reorganization................................................................ 22
Investment Advisor Opinions....................................................... 37
Commerce Bank of Virginia......................................................... 46
Commerce Bank of Virginia Election of Directors; Management....................... 53
Commerce Bank of Virginia Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 59
Independent Accountants........................................................... 87
Other Business.................................................................... 87
Community Bankshares Incorporated ................................................ 88
Community Bankshares Incorporated Election of Directors; Management............... 94
Community Bankshares Incorporated Proposal to Amend Articles of Incorporation..... 101
Community Bankshares Incorporated Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 102
Relationship With Independent Certified Public Accountants........................ 123
Description of CBI Capital Stock.................................................. 124
Comparative Rights of Security Holders............................................ 126
Supervision and Regulation........................................................ 131
Pro Forma Condensed Financial Information (Unaudited)............................. 137
Pro Forma Condensed Balance Sheets.............................................. 137
Pro Forma Condensed Statements of Income ....................................... 140
Notes to Pro Forma Condensed Financial Information.............................. 144
Cost and Means of Proxy Solicitation.............................................. 144
Annual Report and Financial Statements............................................ 144
Other Matters..................................................................... 145
Experts........................................................................... 145
Legal Opinion..................................................................... 145
Shareholder Nominations and Proposals............................................. 145
APPENDICES
General
A Agreement and Plan of Reorganization........................................... A-1
B Amendment to CBI Articles of Incorporation..................................... B-1
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<PAGE>
Commerce Bank of Virginia
C Commerce Bank of Virginia Financial Statements (including the
audited December 31, 1995 Financial Statements).............................. C-1
D Opinion of McKinnon & Company, Inc............................................. D-1
E Excerpts from the Virginia Stock Corporation Act Relating
to Dissenting Shareholders................................................... E-1
Community Bankshares Incorporated
F Community Bankshares Incorporated Financial Statements (including the
audited December 31, 1995 Financial Statements).............................. F-1
G Opinion of McKinnon & Company, Inc............................................. G-1
</TABLE>
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<PAGE>
SUMMARY
The following summary is not intended to be complete and is qualified
in its entirety by the more detailed information and financial statements
contained elsewhere in this Joint Proxy Statement, including the Appendices
hereto and the documents incorporated herein by reference.
THE COMPANIES
CBI. CBI is a bank holding company headquartered in Petersburg,
Virginia. CBI has one subsidiary, The Community Bank, a Virginia-chartered bank
that operates four banking offices which offer a full range of banking services
principally to individuals and to small and medium sized businesses in
Petersburg, Virginia and neighboring communities. CBI was formed in 1984 to
serve as the parent holding company for The Community Bank. The Community Bank
opened in 1974 as a Virginia- chartered bank. At December 31, 1995, CBI had
total assets of $88.1 million, deposits of $77.2 million, and total
stockholders' equity of $9.8 million. CBI's principal executive offices are
located at 200 N. Sycamore Street, Petersburg, Virginia 23804 and its telephone
number is (804) 861-2320. See "Community Bankshares Incorporated," "Pro Forma
Condensed Financial Information" and the documents relating to CBI accompanying
this Joint Proxy Statement.
CBOV. CBOV, which opened in 1986, is a Virginia-chartered bank and
member of the Federal Reserve System providing commercial and consumer banking
services to customers in and around Richmond, Virginia, through its five banking
offices. At December 31, 1995, CBOV had total assets of $72.9 million, deposits
of $66.4 million, and stockholders' equity of $6.1 million. The principal
executive offices of CBOV are located at P.O. Box 29569, Richmond, Virginia
23242-0569, and its telephone number is (804) 360-2222. See "Commerce Bank of
Virginia" and "Commerce Bank of Virginia Management's Discussion and Analysis of
Financial Condition and Results of Operation."
THE SHAREHOLDER MEETINGS
CBI. The CBI Meeting will be held at The Community Bank, 200 N.
Sycamore Street, Petersburg, Virginia, on June 18, 1996 at 3:30 p.m., local
time. Only holders of record of CBI Common Stock at the close of business on
April 26, 1996, will be entitled to vote at the CBI Meeting. See "The
Shareholder Meetings - The CBI Meeting."
CBOV. The CBOV Meeting will be held at the Dominion Country Club, 6000
Dominion Club Drive, Glen Allen, Virginia on June 18, 1996 at 10:00 a.m., local
time. Only holders of record of CBOV Common Stock at the close of business on
April 26, 1996, will be entitled to vote at the CBOV Meeting. See "The
Shareholder Meetings - The CBOV Meeting."
THE REORGANIZATION
The Reorganization provides for the exchange of each outstanding share
of CBOV Common Stock for 1.4044 shares CBI Common Stock. CBI will then serve as
the parent bank holding company for CBOV, which will continue to carry on its
banking business in substantially the same manner as before the Reorganization.
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<PAGE>
At the effective date of the Reorganization, each outstanding share of
CBOV Common Stock, except for shares as to which dissenters' rights have been
duly exercised, shall be exchanged for 1.4044 shares of CBI Common Stock and
cash in lieu of any fractional share (the "Exchange Ratio"). Thus, the lower the
price of CBI Common Stock at the effective date of the Reorganization, the lower
the dollar value of CBI Common Stock CBOV shareholders will receive as a result
of the Reorganization. Conversely, the higher the price of CBI Common Stock at
the effective date of the Reorganization, the higher the dollar value of CBI
Common Stock CBOV shareholders will receive as a result of the Reorganization.
As of April 8, 1996, CBI's closing price on the OTC Bulletin Board was
$14.50, which calculates to a price for CBOV Shareholders of $21.77 per share of
CBOV Common Stock. See "The Reorganization - Terms of the Reorganization - CBOV
Common Stock."
CBOV has granted options to purchase 24,000 shares of CBOV Common Stock
(the "CBOV Options"). The CBOV Options, which were granted in 1986, 1989, 1992
and 1993, were exercised before their April 8, 1996 expiration date. The
exercise prices of the various CBOV Options ranged from $5.33 to $8.63 per
share. Based on the price of CBI Common Stock as of April 8, 1996 set forth in
the preceding paragraph, the CBOV Options were in the money on such date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
CBOV. The Board of Directors of CBOV has unanimously approved the
Reorganization, including the Reorganization Agreement. The Board of Directors
believes that the Reorganization is fair to and in the best interests of
shareholders of CBOV and recommends a VOTE FOR the Reorganization.
CBI. The Board of Directors of CBI has unanimously approved the
Reorganization, including the Reorganization Agreement. The Board of Directors
believes that the Reorganization is fair to and in the best interests of
shareholders of CBI and recommends a VOTE FOR the Reorganization. See "The
Reorganization."
INTERESTS OF CBOV DIRECTORS AND OFFICERS
Holders of voting stock of CBOV should be aware that certain members of
CBOV's Board of Directors and senior management have certain interests in the
Reorganization that are in addition to the interests of stockholders of CBOV
generally. The Board of Directors of CBOV was aware of these interests and
considered them, among other factors, in approving the Reorganization. See "The
Reorganization - Interests of Certain Persons in the Reorganization". The
potential shares of CBI Common Stock which CBOV Directors and executive officers
may receive in the aggregate pursuant to the Reorganization, after the exercise
of all options, are 274,675 shares, which would have had a value of
approximately $4.2 million as of April 8, 1996. All of the Directors of CBOV
will become Directors of CBI on the Effective Date. Such individuals will
continue to receive fees for serving as Directors of CBOV. However, Directors of
CBI receive no additional compensation for serving as Directors of CBI.
All options to purchase CBOV Common Stock held by Directors and
executive officers of CBOV were exercised before their April 8, 1996 expiration
date and none of the Directors or executive officers of CBOV will receive
options to purchase CBI Common Stock in connection with the Reorganization.
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<PAGE>
In the past, CBI has granted stock options to its Directors and executive
officers, but there is no present agreement or understanding concerning stock
option grants to Directors of CBOV after the Effective Date.
Richard C. Huffman, Thomas H. Caffrey, Jr., and John M. Wiatt, Jr.,
executive officers of CBOV have employment contracts with CBOV. Such contracts
will be assumed by CBI in connection with the Reorganization without any change
to the terms of such contracts. Mr. Huffman's contract expires on December 31,
1997, while the employment contracts of Messrs. Caffrey and Wiatt expire on
December 31, 1996. All three contracts provide for automatic renewals for
successive terms of one year at a time, unless the contract is terminated by
CBOV or the employee. Mr. Huffman's contract provides for annual base
compensation of $95,000, while the contracts of Messrs. Caffrey and Wiatt
provide for annual base compensation of $61,168 and $76,995, respectively. All
contracts provide for enhanced severance benefits if the officer's employment
terminates within one year after a change of control. As of January 1, 1996, the
cash amounts payable to Messrs. Huffman, Caffrey and Wiatt, in the event of a
termination of employment after a change of control, would have been $325,910,
$69,168 and $84,995, respectively. See "Commerce Bank of Virginia Election of
Directors; Management - Employment Contracts".
OPINION OF FINANCIAL ADVISOR
CBOV. McKinnon & Company, Inc., Norfolk, Virginia, has served as
financial advisor to CBOV in connection with the Reorganization and has rendered
its opinion to the Board of Directors of CBOV that, as of the date of this Joint
Proxy Statement and on the basis of the matters referred to herein, the
consideration to be received pursuant to the Reorganization Agreement is fair,
from a financial point of view, to the CBOV shareholders. A copy of the opinion
of McKinnon & Company, Inc. is attached as Appendix D to this Joint Proxy
Statement and should be read in its entirety for information with respect to the
assumptions made and other matters considered by McKinnon & Company, Inc. in
rendering its opinion. See "Investment Advisor Opinions - CBOV - Opinion of
Financial Advisor."
CBI. McKinnon & Company, Inc. also has served as financial advisor to
CBI in connection with the Reorganization and has rendered its opinion to the
Board of Directors of CBI that, as of the date of this Joint Proxy Statement and
on the basis of the matters referred to therein, the consideration to be
received pursuant to the Reorganization Agreement is fair, from a financial
point of view, to the CBI shareholders. A copy of the opinion of McKinnon &
Company, Inc. is attached as Appendix G to this Joint Proxy Statement and should
be read in its entirety for information with respect to the assumptions made and
other matters considered by McKinnon & Company, Inc. in rendering its opinion.
See "Investment Advisor Opinions - CBI - Opinion of Financial Advisor."
VOTE REQUIRED
CBOV. Approval of the Reorganization requires the affirmative vote of
the holders of more than two-thirds of the outstanding shares of CBOV Common
Stock. As of the record date for the CBOV Meeting, directors and executive
officers of CBOV and their affiliates owned beneficially an aggregate of 195,582
shares of CBOV Common Stock, or approximately 37.1% of the shares of CBOV Common
Stock outstanding on such date. The directors and executive officers of CBOV
have indicated their intention to vote their shares of CBOV Common Stock in
favor of the Reorganization. See "The Shareholder Meetings - The CBOV Meeting -
Vote Required."
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<PAGE>
CBI. Approval of the Reorganization requires that more votes be cast
for the Reorganization by holders of CBI Common Stock than are cast against it.
Approval of the proposed amendment to Article 8 of the CBI Articles of
Incorporation requires the affirmative vote of a majority of the shares of CBI
Common Stock issued and outstanding. Approval of the proposed amendment to the
CBI Articles of Incorporation is a condition to the obligation of CBOV to
consummate the Reorganization. As of the record date for the CBI Meeting,
directors and executive officers of CBI and their affiliates owned beneficially
an aggregate of 357,393 shares of CBI Common Stock, or approximately 30.8% of
the shares of CBI Common Stock outstanding on such date. The directors and
executive officers of CBI have indicated their intention to vote their shares of
CBI Common Stock in favor of the Reorganization and in favor of the proposed
amendment to Article 8 of the CBI Articles of Incorporation. See "The
Shareholder Meetings - The CBI Meeting - Vote Required."
EFFECTIVE DATE
If the Reorganization is approved by the requisite vote of the
shareholders of CBOV and CBI, and the applications of CBI to acquire CBOV
pursuant to the Reorganization are approved by the Federal Reserve and the
Virginia State Corporation Commission (the "SCC"), and other conditions to the
Reorganization are satisfied (or waived to the extent permitted by applicable
law), the Reorganization will be consummated and effected after a certificate of
Share Exchange is issued by the SCC pursuant to the Virginia Stock Corporation
Act (the "Effective Date"). If the Reorganization is approved by the
shareholders, the Federal Reserve and the SCC, it is anticipated that the
Effective Date will be on or about June 30, 1996, or as soon thereafter as
practicable.
DISTRIBUTION OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
As soon as practicable after the Effective Date, The Community Bank, as
the exchange agent, will mail to each CBOV shareholder (other than dissenting
shareholders) a letter of transmittal and instructions for use in order to
surrender the certificates which immediately prior to the Effective Date
represented shares of CBOV Common Stock in exchange for certificates
representing shares of CBI Common Stock. Cash (without interest) will be paid to
CBOV shareholders in lieu of the issuance of any fractional shares in an amount
equal to the fraction of a share of CBI Common Stock to which such shareholder
would otherwise be entitled multiplied by the book value per share of CBI Common
Stock at the end of the calendar quarter that immediately precedes the Effective
Date. Under the Reorganization Agreement, either party may terminate the
agreement if the transaction is not consummated by August 31, 1996. See "The
Reorganization - Surrender of Stock Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Williams, Mullen, Christian & Dobbins, counsel for CBI, has delivered
an opinion that, among other things, (i) no gain or loss will be recognized by
CBOV shareholders who receive solely shares of CBI Common Stock pursuant to the
Reorganization, (ii) the aggregate tax basis of CBI Common Stock received by a
CBOV shareholder will equal the aggregate tax basis of the CBOV Common Stock
surrendered in exchange therefor by such shareholder (reduced by any amount
allocable to fractional share interests for which cash is received), and (iii)
the holding period of the CBI Common Stock received will generally include the
holding period of the CBOV stock surrendered if the CBOV Common Stock is held as
a capital asset at the Effective Date. Any cash received by shareholders as a
result of an exercise of their dissenters' rights will be treated as a sale or
exchange of the stock resulting in capital
-9-
<PAGE>
gain or loss. For a more complete description of the federal income tax
consequences of the Reorganization, see "The Reorganization - Federal Income Tax
Matters." It is recommended that each CBOV shareholder also consult his or her
own tax advisor to determine whether or not there are any tax consequences of
the Reorganization that might be of particular concern due to a shareholder's
individual tax situation.
CONDITIONS TO CONSUMMATION OF THE REORGANIZATION
Consummation of the Reorganization is subject to various conditions,
including among other matters: (i) receipt of the approval of the shareholders
of CBOV and CBI solicited hereby; (ii) receipt of an opinion of counsel as to
the tax-free nature of the Reorganization for shareholders (except for cash
received in lieu of fractional shares or upon the exercise of dissenters'
rights); (iii) approval of the Federal Reserve under the Bank Holding Company
Act of 1956, as amended ("BHC Act"), and the SCC; and (iv) approval of the
proposed amendment to the CBI Articles of Incorporation by the holders of CBI
Common Stock. Substantially all of the conditions to consummation of the
Reorganization may be waived, in whole or in part, to the extent permissible
under applicable law by the party for whose benefit the condition has been
imposed, without the approval of the shareholders of that party. Shareholder and
regulatory approvals, however, may not be waived. See "The Reorganization -
Representations and Warranties; Conditions to the Reorganization" and "The
Reorganization - Regulatory Approvals."
The Reorganization Agreement may be terminated and the Reorganization
abandoned notwithstanding shareholder approval (i) by mutual agreement of the
Boards of Directors of CBI and CBOV or (ii) by either CBI or CBOV if the
Effective Date has not occurred by August 31, 1996 or if certain specified
events occur. See "The Reorganization - Waiver, Amendment and Termination."
EFFECTS OF THE REORGANIZATION ON THE RIGHTS OF CBOV SHAREHOLDERS
Upon consummation of the Reorganization, CBOV shareholders shall become
shareholders of CBI. The rights of the former shareholders of CBOV, now governed
by the Virginia Stock Corporation Act (the "Virginia SCA"), will continue to be
governed by the Virginia SCA after the Effective Date and the rights of CBOV
shareholders will also be as provided for under the Articles of Incorporation
and Bylaws of CBI. The provisions of the Articles of Incorporation and Bylaws of
CBI differ in certain material respects from the Articles of Incorporation and
Bylaws of CBOV. See "Comparative Rights of Security Holders."
ACCOUNTING TREATMENT
It is intended that the Reorganization will be accounted for as a
pooling of interests. It is intended that CBI will receive an opinion from its
independent accountants that the Reorganization will be accounted for as a
pooling of interests, which is a condition to the consummation of that
transaction. CBI does not expect to receive such opinion until after the
respective shareholder meetings of CBI and CBOV. Although pooling of interests
accounting, like other terms in the Agreement, can be waived, CBI has indicated
that it is unlikely to waive that requirement. If independent accountants
determine that pooling of interests accounting treatment is not available and
both parties agree to waive that term, the Reorganization would have to be
resubmitted to shareholders of CBI and CBOV for their approval. See "The
Reorganization - Accounting Treatment."
-10-
<PAGE>
RIGHTS OF DISSENT AND APPRAISAL
Each holder of CBOV shares may dissent from the Reorganization and is
entitled to the rights and remedies of dissenting shareholders provided in
Article 15 of the Virginia SCA, subject to compliance with the procedures set
forth therein, including the right to appraisal of his or her stock. A copy of
Article 15 is attached as Appendix E to this Joint Proxy Statement and a summary
thereof is included under "The Reorganization - Rights of Dissenting
Shareholders."
MARKETS AND MARKET PRICES
CBI Common Stock has traded on the OTC Bulletin Board since May 1994
under the symbol "CBIV". There is no established public trading market for CBOV
Common Stock. CBOV Common Stock is traded largely through Scott & Stringfellow,
Inc. which attempts to match buyers and sellers on a first-come, first-served
basis. CBOV Common Stock is not listed on any stock exchange, and trades are
infrequent.
The information below provides the price per share of CBI Common Stock
and CBOV Common Stock prior to the public announcement of the Reorganization on
December 13, 1995 and as of a recent date. The historical price of CBI Common
Stock, $11.25, is based on the reported closing price on December 12, 1995, the
last trading day preceding the announcement of the Reorganization, as reported
on the OTC Bulletin Board. CBOV Common Stock is traded thinly, and therefore the
market value for CBOV Common Stock on that date is unknown. A trade involving
500 shares did occur on October 7, 1995 at $15.50 per share. That price
represents the last known independent selling price preceding public
announcement of the Reorganization on December 13, 1995. The only trade
involving CBOV Common Stock since October 7, 1995 for which CBOV knows the price
was a trade involving 400 shares on March 31, 1996 at a price of $15.75 per
share.
<TABLE>
<CAPTION>
=============================================================================================================================
TRADING PRICE CBI CBOV EQUIVALENT
PER SHARE AT COMMON STOCK COMMON STOCK PER SHARE PRICE*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 12, 1995 $ 11.25 $ 15.50 $15.80
- -----------------------------------------------------------------------------------------------------------------------------
April 8, 1996 $ 15.50 $ 15.75 $21.77
=============================================================================================================================
</TABLE>
- -------------------------
* CBOV Shareholders will receive 1.4044 shares of CBI Common Stock for each
share of CBOV Common Stock outstanding. This table merely indicates the
historical value of the exchange projected back to the last trading date
before the Reorganization Agreement was announced and on a recent trading
date for CBI Common Stock. The last known trade of CBOV Common Stock
occurred on March 31, 1996.
SHAREHOLDERS ARE ADVISED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR CBI COMMON STOCK. No assurance can be given
as to the market price of CBI Common Stock at or after the Effective Date.
-11-
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following unaudited consolidated financial information reflects
certain comparative per share data relating to the Reorganization. The
information shown below should be read in conjunction with the historical
financial statements of CBI and CBOV, including the respective notes thereto,
which are included elsewhere in this Joint Proxy Statement or in documents
delivered herewith, and in conjunction with the unaudited pro forma consolidated
financial information appearing elsewhere in this Joint Proxy Statement. See
"Pro Forma Condensed Financial Information."
The following information is not necessarily indicative of the results
of operations or combined financial position that would have resulted had the
Reorganization been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the results of operations in future periods.
The following table presents selected comparative consolidated
unaudited per share information (i) for CBI on a historical basis and on a pro
forma combined basis assuming the Reorganization had been effective during the
periods presented and accounted for as a pooling of interests and (ii) for CBOV
on a historical basis and on a pro forma equivalent basis.
-12-
<PAGE>
CBI AND CBOV
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE:
NET INCOME:
CBI-historical (3).......................... $1.34 $1.10 $ .95 $ .74 $ .65
CBOV-historical............................. 1.60 1.13 .68 .83 .42
Pro forma combined ......................... 1.27 1.00 .79 .69 .53
CBOV pro forma equivalent (1) .............. 1.78 1.40 1.11 .97 .74
CASH DIVIDENDS DECLARED:
CBI-historical (3) ...................... .175 $ .15 $ .10 $ .08 $ .075
CBOV-historical ......................... - - - - -
Pro forma combined (2) .................. .11 .10 .07 .05 .05
CBOV pro forma equivalent (1)(2)......... .15 .14 .10 .07 .07
BOOK VALUE AT DECEMBER 31,
1995:
CBI-historical (3) ...................... $ 8.51
CBOV-historical ......................... 12.19
Pro forma combined ...................... 8.57
CBOV pro forma equivalent................ 12.04
</TABLE>
- -------------------------
(1) CBOV pro forma equivalent amounts represent pro forma combined
information multiplied by the Exchange Ratio of 1.4044 shares of CBI
Common Stock for each share of CBOV Common Stock.
(2) Pro forma combined dividends per share represent historical dividends
per share paid by CBI. See "The Reorganization - CBI and CBOV Market
Prices and Dividends" for additional information.
(3) All information has been restated to reflect a CBI two-for-one stock
split effected in the form of a 100% stock dividend paid August 31,
1995.
-13-
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain selected historical financial
information for CBI and CBOV and certain unaudited consolidated pro forma
financial information giving effect to the Reorganization using the pooling of
interests method of accounting. See "The Reorganization - Accounting Treatment."
The selected historical financial information is based on, derived from and
should be read in conjunction with the historical consolidated financial
statements of CBI and the historical financial statements of CBOV and the
respective notes thereto included elsewhere in this Joint Proxy Statement. See
"Available Information". All of the following selected financial information
should be read in conjunction with the unaudited pro forma consolidated
financial information, including the notes thereto, appearing elsewhere in this
Joint Proxy Statement. See "Pro Forma Condensed Financial Information." The pro
forma financial information is not necessarily indicative of the results that
actually would have occurred had the Reorganization been consummated on the
dates indicated or that may be obtained in the future.
-14-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income................. $ 4,472 $ 3,784 $ 3,187 $ 2,924 $ 2,681
Provision for loan losses $ 247 $ 66 $ 120 $ 372 $ 260
-------------------------------------------------------------
Net interest income after
provision for loan losses $ 4,225 $ 3,718 $ 3,067 $ 2,552 $ 2,421
Noninterest income.................. $ 753 $ 801 $ 859 $ 794 $ 681
Noninterest expense................. $ 2,499 $ 2,547 $ 2,281 $ 2,058 $ 2,011
-------------------------------------------------------------
Income before income taxes $ 2,479 $ 1,972 $ 1,645 $ 1,288 $ 1,091
Income taxes........................ $ 856 $ 660 $ 566 $ 442 $ 348
-------------------------------------------------------------
Net income.......................... $ 1,623 $ 1,312 $ 1,079 $ 846 $ 743
=============================================================
PER SHARE DATA (1):
Net income.......................... $ 1.34 $ 1.10 $ 0.95 $ 0.74 $ 0.65
Cash dividends...................... $ 0.175 $ 0.15 $ 0.10 $ 0.08 $ 0.075
Book value at period end $ 8.51 $ 7.54 $ 6.55 $ 5.71 $ 5.01
BALANCE SHEET DATA:
Total assets........................ $88,137 $77,363 $76,921 $68,686 $60,252
Loans, net.......................... $65,256 $61,488 $57,162 $52,074 $43,667
Securities.......................... $14,111 $ 8,568 $10,437 $ 8,801 $ 9,447
Deposits............................ $77,214 $68,081 $68,915 $60,524 $53,519
Stockholder's equity (1) $ 9,784 $ 8,596 $ 7,470 $ 6,515 $ 5,761
Shares outstanding (1) 1,150,000 1,140,000 1,140,000 1,142,000 1,150,000
PERFORMANCE RATIOS:
Return on average assets 1.91% 1.69% 1.48% 1.28% 1.29%
Return on average equity 17.77% 16.25% 15.49% 13.86% 13.71%
Net interest margin (2) 5.64% 5.29% 4.80% 4.92% 5.22%
Average loans to deposits 85.94% 87.88% 85.38% 82.67% 81.77%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans................. 1.15% 1.17% 1.05% 1.09% 1.13%
Allowance for loan losses to
nonaccrual loans.................. 3.46X 41.20X 64.77X 11.47X 3.75X
Nonperforming assets to period end
loans and other real estate owned 2.36% 1.32% 1.24% 0.98% 2.77%
Net charge-offs (recoveries)
to average loans.................. 0.33% -0.08% 0.15% 0.62% 0.40%
</TABLE>
- ------------
(1) All per share information has been restated to reflect a 2 for 1 stock
split effected in the form of a 100% stock dividend paid August 31, 1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents CBI's net yield on its
earning assets.
-15-
<PAGE>
COMMERCE BANK OF VIRGINIA
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income................. $ 3,113 $ 2,705 $ 2,186 $ 1,871 $ 1,453
Provision for loan losses $ 195 $ 200 $ 75 $ 127 $ 250
---------------------------------------------------------------
Net interest income after
provision for loan losses $ 2,918 $ 2,505 $ 2,111 $ 1,744 $ 1,203
Noninterest income.................. $ 382 $ 430 $ 264 $ 241 $ 311
Noninterest expense................. $ 2,200 $ 2,223 $ 1,994 $ 1,524 $ 1,296
---------------------------------------------------------------
Income before income taxes $ 1,100 $ 712 $ 381 $ 461 $ 218
Income taxes........................ $ 368 $ 226 $ 103 $ 141 $ 55
-------------------------------------------------------------
Net income.......................... $ 732 $ 486 $ 278 $ 320 $ 163
=============================================================
PER SHARE DATA:
Net income (1)...................... $ 1.60 $ 1.13 $ 0.68 $ 0.83 $ 0.42
Cash dividends...................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value at period end $ 12.19 $ 9.88 $ 8.76 $ 8.92 $ 8.11
BALANCE SHEET DATA:
Total assets........................ $72,940 $61,086 $57,208 $41,754 $38,023
Loans, net.......................... $42,149 $38,802 $30,778 $25,070 $21,586
Securities (2)...................... $20,146 $15,165 $13,380 $ 7,995 $ 6,194
Deposits............................ $66,358 $55,812 $53,298 $38,006 $34,697
Stockholder's equity (2)(3) $ 6,109 $ 4,259 $ 3,760 $ 3,470 $ 3,116
Shares outstanding (3) 501,264 431,223 429,023 388,845 384,385
PERFORMANCE RATIOS:
Return on average assets 1.09% 0.80% 0.49% 0.79% 0.46%
Return on average equity 14.12% 12.04% 7.62% 9.58% 5.38%
Net interest margin (4) 4.98% 5.02% 4.75% 4.77% 4.50%
Average loans to deposits 66.26% 63.77% 61.17% 64.17% 65.85%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans................. 1.11% 0.95% 1.06% 1.16% 1.32%
Allowance for loan losses to
nonaccrual loans.................. N/A 7.48X 3.33X 3.38X N/A
Nonperforming assets to period end
loans and other real estate owned N/A 0.13% 0.07% 0.33% 0.23%
Net charge-offs (recoveries)
to average loans.................. 0.24% 0.44% 0.15% 0.45% 0.98%
</TABLE>
- ------------
(1) Based on average shares outstanding in 1995 of 459,239.
(2) Includes $102,193 of net unrealized gains on securities available for
sale as of December 31, 1995.
(3) In August 1995, CBOV completed an offering of 70,041 shares of common
stock to existing shareholders resulting in the addition of $1,050,615 to
stockholder's equity.
(4) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents CBOV's net yield on its
earning assets.
-16-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
AND COMMERCE BANK OF VIRGINIA
SELECTED HISTORICAL PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income................. $ 7,585 $ 6,489 $ 5,373 $ 4,795 $ 4,134
Provision for loan losses $ 442 $ 266 $ 195 $ 499 $ 510
-------------------------------------------------------------
Net interest income after
provision for loan losses $ 7,143 $ 6,223 $ 5,178 $ 4,296 $ 3,624
Noninterest income.................. $ 1,135 $ 1,231 $ 1,123 $ 1,035 $ 992
Noninterest expense................. $ 4,699 $ 4,770 $ 4,275 $ 3,582 $ 3,307
-------------------------------------------------------------
Income before income taxes $ 3,579 $ 2,684 $ 2,026 $ 1,749 $ 1,309
Income taxes........................ $ 1,224 $ 886 $ 669 $ 583 $ 403
-------------------------------------------------------------
Net income.......................... $ 2,355 $ 1,798 $ 1,357 $ 1,166 $ 906
=============================================================
PER SHARE DATA (1):
Net income.......................... $ 1.27 $ 1.00 $ 0.79 $ 0.69 $ 0.53
Cash dividends...................... $ 0.11 $ 0.10 $ 0.07 $ 0.05 $ 0.05
Book value at period end $ 8.57 $ 7.36 $ 6.44 $ 5.91 $ 5.25
BALANCE SHEET DATA
Total assets........................ $161,077 $138,449 $134,129 $110,440 $ 98,275
Loans, net.......................... $107,405 $100,290 $ 87,940 $ 77,144 $ 65,253
Securities.......................... $ 34,257 $ 23,733 $ 23,817 $ 16,796 $ 15,641
Deposits............................ $143,572 $123,893 $122,213 $ 98,530 $ 88,216
Stockholder's equity (1) $ 15,893 $ 12,855 $ 11,230 $ 9,985 $ 8,877
Shares outstanding (1) 1,853,975 1,745,610 1,742,520 1,688,094 1,689,830
PERFORMANCE RATIOS:
Return on average assets 1.53% 1.31% 1.10% 1.09% 0.97%
Return on average equity 16.38% 14.85% 12.78% 12.34% 10.71%
Net interest margin (2) 5.35% 5.20% 4.80% 4.98% 5.01%
Average loans to deposits 78.07% 78.77% 75.86% 75.70% 75.91%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans................. 1.14% 1.09% 1.04% 1.10% 1.17%
Allowance for loan losses to
nonaccrual loans.................. 5.61X 20.35X 42.64X 6.26X 4.12X
Nonperforming assets to period end
loans and other real estate owned 1.46% 0.88% 0.92% 1.04% 1.42%
Net charge-offs (recoveries)
to average loans.................. 0.29% 0.11% 0.15% 0.56% 0.58%
</TABLE>
- ------------
(1) All per share information has been restated to reflect a 2 for 1 stock
split effected by CBI in the form of a 100% stock dividend paid August
31, 1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents CBI's and CBOV's
combined net yield on its earning assets.
-17-
<PAGE>
THE SHAREHOLDER MEETINGS
THE CBOV MEETING
DATE, PLACE AND TIME. The CBOV Meeting will be held at the Dominion
Country Club, 6000 Dominion Club Drive, Glen Allen, Virginia on June 18, 1996 at
10:00 a.m., local time.
RECORD DATE. The Board of Directors of CBOV has fixed the close of
business on April 26, 1996 as the record date (the "CBOV Record Date") for the
determination of the holders of CBOV Common Stock entitled to receive notice of
and to vote at the CBOV Meeting. At the close of business on the CBOV Record
Date, there were 527,850 shares of CBOV Common Stock outstanding held by 375
shareholders of record.
VOTE REQUIRED. Each share of CBOV Common Stock outstanding on the CBOV
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the CBOV Meeting. The affirmative vote of the holders of more than
two-thirds of the shares of CBOV Common Stock outstanding, as of the CBOV Record
Date, in person or by proxy, is required to approve the Reorganization
Agreement. In the election of directors, those receiving the greatest number of
votes will be elected even if they do not receive a majority. Abstentions and
broker non-votes will not be considered a vote for, or a vote against, a
director.
As of the CBOV Record Date, directors and executive officers of CBOV and
their affiliates, persons and entities as a group, owned of record and
beneficially a total of 195,582 shares of the Common Stock or approximately
37.1% of the shares of CBOV Common Stock outstanding, on such date. Directors
and executive officers of CBOV have indicated an intention to vote their shares
of CBOV Common Stock FOR the Reorganization and FOR the election of the nominees
set forth on the enclosed proxy.
A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
APPROVAL OF THE REORGANIZATION AGREEMENT.
A stockholder may abstain or (only with respect to the election of CBOV
directors) withhold his vote (collectively, "abstentions") with respect to each
item submitted for stockholder approval. Abstentions will be counted for
purposes of determining the existence of a quorum. Abstentions will be counted
as not voting in favor of the relevant item. Since the election of CBOV
directors is determined by a plurality vote, abstentions will not affect such
election. Since approval of the Reorganization Agreement requires an affirmative
vote of a specified number of shares outstanding, abstentions will have the
effect of a negative vote with respect thereto.
A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to stockholders without
instructions from the beneficial owner. Where brokers do not have or do not
exercise such discretion, the inability or failure to vote is referred to as a
broker nonvote. Under the circumstances where the broker is not permitted to or
does not exercise its discretion, assuming proper disclosure to CBOV of such
inability to vote, broker nonvotes will be counted for purposes of determining
the
-18-
<PAGE>
existence of a quorum, but also will be counted as not voting in favor of the
particular matter. Since the CBOV election of directors is determined by a
plurality vote, broker nonvotes, if any, will not have any effect on the outcome
of any matter submitted for stockholder approval. Since the approval of the
Reorganization Agreement requires an affirmative vote of a specified number of
shares outstanding, broker nonvotes, if any, and abstentions will have the
effect of a negative vote with respect thereto.
VOTING AND REVOCATION OF PROXIES. Shareholders of CBOV are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
CBOV in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by CBOV will be voted for approval of
the Reorganization Agreement and for approval of the directors slated for
election on the proxy. With respect to the election of directors, each
shareholder entitled to vote at the CBOV Meeting has one vote per share owned at
the CBOV Record Date. CBOV shareholders have no cumulative voting rights. The
directors will be elected by plurality of the votes cast assuming that at least
a majority of the total number of outstanding shares of CBOV Common Stock is
present in person or by proxy at the meeting to constitute a quorum.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to CBOV, by executing and delivering a substitute proxy to
CBOV or by attending the CBOV Meeting and voting in person. If a CBOV
shareholder desires to revoke a proxy by written notice, such notice should be
mailed or delivered on or prior to the meeting date to Richard C. Huffman,
President, Commerce Bank of Virginia, P.O. Box 29569, Richmond, Virginia
23242-0569. IF A PROXY IS SIGNED AND RETURNED WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, SHARES OF CBOV COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED
FOR THE REORGANIZATION AGREEMENT AND FOR THOSE NOMINATED BY THE BOARD OF
DIRECTORS.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by CBOV by the
time scheduled for the CBOV Meeting, the persons named as proxies may propose
one or more adjournments of the meeting to permit continued solicitation of
proxies with respect to such approval. If an adjournment is proposed, the
persons named as proxies will vote in favor of such adjournment those proxies
which are entitled to be voted in favor of the Reorganization Agreement and
against such adjournment those proxies containing instructions to vote against
approval of the Reorganization Agreement, unless the shareholder clearly writes
on the face of that proxy specific instructions stating how that proxy should be
voted in the case of an adjournment proposed prior to a vote on the
Reorganization. Adjournment of the CBOV Meeting will be proposed only if the
Board of Directors of CBOV believes that additional time to solicit proxies
might permit the receipt of sufficient votes to approve the Reorganization
Agreement, or at the request of CBI. It is anticipated that any such adjournment
would be for a relatively short period of time, but in no event for more than
120 days. Any shareholder may revoke such shareholder's proxy during any period
of adjournment in the manner described above.
SOLICITATION OF PROXIES. CBOV will bear the cost of the solicitation of
proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or
personally by directors, officers and employees at CBOV, none of whom will
receive additional compensation for performing such services. CBOV shall pay all
of its expenses incurred in preparation and delivery of the Joint Proxy
Statement.
THE BOARD OF DIRECTORS OF CBOV RECOMMENDS A VOTE FOR THE REORGANIZATION
AND FOR THE ELECTION OF THE NOMINEES NAMED ON THE ENCLOSED PROXY.
-19-
<PAGE>
THE CBI MEETING
DATE, PLACE AND TIME. The CBI Meeting will be held at The Community Bank,
200 N. Sycamore Street, Petersburg, Virginia on June 18, 1996 at 3:30 p.m.,
local time.
RECORD DATE. Only shareholders of record at the close of business on
April 26, 1996, (the "CBI Record Date") are entitled to notice of and to vote at
the CBI Meeting or any adjournment thereof. At the close of business on the CBI
Record Date, CBI had outstanding 1,160,000 shares of CBI Common Stock
outstanding held by 735 shareholders of record.
VOTE REQUIRED. Each share of CBI Common Stock outstanding on the CBI
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the CBI Meeting. Approval of the Reorganization requires that more
votes be cast for the Reorganization by holders of CBI Common Stock than are
cast against it. The affirmative vote of a majority of the outstanding shares of
CBI Common Stock is required to approve the proposed amendment to the CBI
Articles of Incorporation. In the election of directors, those receiving the
greatest number of votes will be elected even if they do not receive a majority.
Abstentions and broker non-votes will not be considered a vote for, or a vote
against, a director.
As of the CBI Record Date, directors and executive officers of CBI and
their affiliates, persons and entities as a group owned of record and
beneficially a total of 357,393 shares of CBI Common Stock or approximately
30.8% of the shares of CBI Common Stock outstanding on such date. Directors and
executive officers of CBI have indicated an intention to vote their shares of
CBI Common Stock FOR the Reorganization, FOR the proposed amendment to the CBI
Articles of Incorporation and FOR the election of the nominees set forth on the
enclosed proxy.
A stockholder may abstain or (only with respect to the election of CBI
directors) withhold his vote (collectively, "abstentions") with respect to each
item submitted for stockholder approval. Abstentions will be counted for
purposes of determining the existence of a quorum. Abstentions will be counted
as not voting in favor of the relevant item. Since the election of CBI directors
is determined by a plurality vote, abstentions will not affect such election.
Since approval of the Reorganization Agreement requires that the votes cast for
it exceed the votes cast against it, abstentions will not have any effect. Since
approval of the proposed amendment to the CBI Articles of Incorporation requires
an affirmative vote of a specified number of shares outstanding, abstentions
will have the effect of a negative vote with respect thereto.
VOTING AND REVOCATION OF PROXIES. Shareholders of CBI are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
CBI in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by CBI will be voted for approval of
the Reorganization Agreement; for the proposed amendment to the CBI Articles of
Incorporation; and for the nominees for the Board of Directors identified on the
enclosed proxy card. A stockholder may abstain with respect to each item
submitted for stockholder approval.
A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to stockholders
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without instructions from the beneficial owner. Where brokers do not have or do
not exercise such discretion, the inability or failure to vote is referred to as
a broker nonvote. Under the circumstances where the broker is not permitted to
or does not exercise its discretion, assuming proper disclosure to CBI of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to CBI, by executing and delivering a substitute proxy to
CBI or by attending the CBI Meeting and voting in person. If a CBI shareholder
desires to revoke a proxy by written notice, such notice should be mailed or
delivered on or prior to the meeting date to Lillian Umphlett, Cashier,
Community Bankshares Incorporated, 200 N. Sycamore Street, Petersburg, Virginia
23804. If a proxy is signed and returned without indicating any voting
instructions, shares of CBI Common Stock represented by the proxy will be voted
FOR the Reorganization Agreement.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by CBI by the
time scheduled for the CBI Meeting, the persons named as proxies may propose one
or more adjournments of a meeting to permit continued solicitation of proxies
with respect to such approval. If an adjournment is proposed, the persons named
as proxies will vote in favor of such adjournment those proxies which are
entitled to be voted in favor of the Reorganization Agreement and against such
adjournment those proxies containing instructions to vote against approval of
the Reorganization Agreement, unless the shareholder clearly writes on the face
of that proxy specific instructions stating how that proxy should be voted in
the case of an adjournment proposed prior to a vote on the Reorganization.
Adjournment of the meetings will be proposed only if the Board of Directors of
CBI believes that additional time to solicit proxies might permit the receipt of
sufficient votes to approve the Reorganization, or at the request of CBOV. It is
anticipated that any such adjournment would be for a relatively short period of
time, but in no event for more than 120 days. Any shareholder may revoke such
shareholder's proxy during any period of adjournment in the manner described
above.
SOLICITATION OF PROXIES. CBI will bear the costs of its solicitation of
proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or
personally by directors, officers and employees at CBI, none of whom will
receive additional compensation for performing such services. CBI shall pay all
of its expenses incurred in the preparation and delivery of the Joint Proxy
Statement.
THE BOARD OF DIRECTORS OF CBI RECOMMENDS A VOTE FOR THE REORGANIZATION,
FOR THE PROPOSED AMENDMENT TO THE CBI ARTICLES OF INCORPORATION AND FOR THE
ELECTION OF THE NOMINEES NAMED ON THE ENCLOSED PROXY.
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THE REORGANIZATION
The following is a summary description of the material terms of the
Reorganization, and is qualified in its entirety by reference to the
Reorganization Agreement which is attached as Appendix A hereto. All holders of
CBOV or CBI Common Stock are urged to read the Reorganization Agreement in its
entirety.
BACKGROUND AND REASONS FOR THE REORGANIZATION
As community banks operating in contiguous markets, CBI and CBOV each has
generally been aware of the other's operations and performance since CBOV opened
for business in 1986. The Presidents of CBI and CBOV have been in the banking
business in the Richmond/Petersburg, Virginia area for many years and have known
each other for over 15 years. The boards of directors of CBI and CBOV each have
believed for several years that the trend in Virginia and nationally is toward
greater consolidation in the banking industry and that the best interests of
their respective shareholders ultimately might be best served by combining with,
or creating, a larger banking organization. Before the parties negotiated the
terms of the Reorganization, the Presidents of CBI and CBOV each had held
informal talks with other community banks in the Richmond/Petersburg, Virginia
area, but none of those discussions ever ripened into a definitive agreement.
The Board of Directors of CBOV first considered alternatives to remaining
independent in 1994. The informal talks that CBOV had with other community banks
took place in 1994. CBI's informal talks with other community banks also took
place in 1994. Neither CBI nor CBOV has sought to be acquired or held any
acquisition negotiations with any state-wide or regional banking organization.
CBOV did not seek to be acquired by a large banking organization for several
reasons. First, CBOV has a relatively small market share. At June 30, 1994, CBOV
held only 0.6% of the total bank deposits in the City of Richmond and Counties
of Henrico, Hanover and Goochland. All of the state-wide banking organizations
have substantially larger market shares and CBOV did not believe that its
relatively small share of deposits and customer base, consisting of individuals
and small to medium sized businesses, would be highly valued by a large
organization already operating in CBOV's market area. CBOV also believed that a
large banking organization, not already operating in its market, would not
highly value its operations because CBOV has a small market share and its
customer base consists primarily of individuals and small to medium size
businesses. Additionally, CBOV believed that by combining with another community
banking organization, it could continue to operate with a high degree of
autonomy in its market area, allowing CBOV to continue to expand, while avoiding
disruption of its relationships with depositors and borrowers. Finally, as
discussed below, CBOV believed that after combining with another community bank,
the combined entity would be more attractive to a large potential acquiror than
CBOV would be in its present condition. In late 1994, the Presidents of CBI and
CBOV held intermittent, informal discussions about a possible affiliation. These
discussions were inconclusive and terminated in March 1995 because the President
of CBI took the position that CBI directors would have to constitute a majority
of the Board of the combined institutions, while the President of CBOV took the
position that Board representation must be equal. Other possible transaction
terms were not addressed during these discussions.
In September 1995 the parties entered into serious negotiations about
an affiliation. These discussions occurred after CBOV advised CBI that equal
Board representation after a merger was not essential and members of the Boards
of Directors of both companies became involved in the negotiations. On October
11, 1995, Messrs. Shell, Holden and Jones, representing CBI, met with Messrs.
Huffman, Beale and Hudgins, representing CBOV. At that meeting, the potential
advantages of an affiliation were reviewed and the representatives of CBOV and
CBI each indicated their support of a transaction in which CBI Common Stock
would be issued to CBOV shareholders, with an Exchange Ratio based on the book
values of CBI Common Stock and CBOV Common Stock at September 30, 1995. The
representatives of CBOV also indicated their agreement with the proposal that
the Board of CBI would consist of the ten current directors of CBI and the nine
current directors of CBOV.
At meetings of their Boards of Directors on October 14, 1995 and October
17, 1995, the directors of CBI and CBOV, respectively, each voted to proceed.
CBI and CBOV each decided to engage McKinnon & Company, Inc. to calculate the
Exchange Ratio and to render advice on the fairness of the Reorganization. The
Boards of CBI and CBOV each met on November 21, 1995. At those meetings, a draft
of the Reorganization Agreement was distributed to the directors of CBI and
CBOV. A representative of McKinnon & Company, Inc. was present at each meeting
to review the financial aspects of the Reorganization and respond to directors'
questions. The Boards of CBI and CBOV met again on December 12, 1995. At those
meetings, the respective counsel for CBI and CBOV reviewed the Reorganization
Agreement and responded to questions. A representative of McKinnon & Company,
Inc. was present at each meeting. He advised each Board that, in the opinion of
McKinnon &
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Company, Inc., the Reorganization was fair to the shareholders of CBI and CBOV
from a financial point of view.
The Reorganization Agreement was approved by the CBI Board and the CBOV
Board and executed on December 12, 1995.
In deciding to enter into the Reorganization Agreement, the CBI Board and
the CBOV Board each considered a number of factors, but did not assign any
relative or specific weights to the factors considered. Two principal factors
were considered by the directors of CBI and CBOV. CBI, whose subsidiary bank
opened for business in 1973, is headquartered in Petersburg, Virginia. Its
market area consists of Petersburg, the neighboring community of Colonial
Heights, Virginia and the adjacent counties of Prince George, Dinwiddie and
Chesterfield, including the Village of Chester. CBOV operates five banking
offices. Its principal office is in Henrico County, Virginia, west of Richmond,
Virginia. CBOV operates two branch offices in Goochland County, Virginia, west
of its principal office, and one branch each in Hanover County and downtown
Richmond. CBI, though it has been more profitable than CBOV, operates in a
market area that is generally less affluent and presents limited opportunities
for growth. In contrast, CBOV operates primarily in areas of the suburban
Richmond, Virginia market that are experiencing more rapid growth and are more
affluent than the markets that CBI serves. Although CBOV, which opened for
business in 1986, has shown increasing earnings, its earnings have not been as
high as those of CBI. The parties believe that the Reorganization will benefit
CBI and CBOV. The CBI Board believes that holders of CBI Common Stock will
benefit from the growth potential of CBOV's market area through the CBOV branch
system and the contacts already established in those markets by the directors,
officers and employees of CBOV. The CBOV Board believes that holders of CBOV
Common Stock will benefit from the higher current earnings of CBI.
CBI and CBOV also each recognize that the banking industry is
experiencing a consolidation trend. The directors of CBI and CBOV have
considered the trend toward consolidation and believe that, because of its
enhanced size and market area, CBI would be more attractive to a potential
acquiror after the Reorganization than either CBI or CBOV in its present
condition. There are no plans to seek a purchaser of CBI in the immediate future
and there can be no assurance that a larger banking organization would want to
purchase CBI after the Reorganization.
Other material factors considered were: the exchange ratio offered for
CBOV Common Stock; the dividend paid on the CBI Common Stock; the financial
condition and history of performance of CBI and CBOV; diversification of risk
associated with ownership of an institution with a broader geographic area; the
well capitalized position and earnings of CBI and CBOV; the operational benefits
of a combination, including the management resources and greater economic
resources available to CBOV and CBI which should enable the parties to share the
expense of state and federal bank regulation; higher effective legal lending
limits through the ability of CBOV and The Community Bank to participate in
loans originated by each other; the compatibility of the managements of the two
organizations; and the ability of CBOV to remain a separate entity with the same
Board managing its affairs. The CBOV Board and the CBI Board each believes that
the addition of resources resulting from the Reorganization will enable CBOV and
CBI to provide a wider and improved array of financial services to consumers and
businesses and to achieve added flexibility in dealing with the changing
competitive environment in their market areas. There were 724 record holders of
CBI Common Stock and 421 record holders of CBOV Common Stock on December 31,
1995. CBI had 1,150,000 shares of common stock outstanding on that date. If the
Reorganization had been consummated on December 31, 1995, CBI would have had
1,891,473 shares
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of common stock outstanding and 1,145 record holders. Because CBI will have more
shareholders and more shares outstanding after the Reorganization, CBI and CBOV
believe that the market for CBI common stock after the Reorganization will be
more liquid than the market for either CBI Common Stock or CBOV Common Stock is
today. After the Reorganization, CBI intends to apply to have its common stock
traded on the NASDAQ National Market. However, there is no guarantee that CBI
will be accepted for listing on the NASDAQ National Market and, even if CBI is
accepted for such listing, there is no assurance that an active trading market
will develop or be sustained.
Following the Effective Date, all of the directors of CBOV will be
directors of CBI. However, pursuant to the Reorganization Agreement, the
directors, officers and employees of CBOV will not change as a result of the
Reorganization. CBI will have the power after the Effective Date to elect the
entire Board of Directors of CBOV and The Community Bank.
The Board of Directors of CBOV believes that the Reorganization is in the
best interests of CBOV and its shareholders. The CBOV directors have all
committed to vote shares under their control in favor of the Reorganization to
the extent of their fiduciary ability. The CBOV directors unanimously recommend
that CBOV shareholders vote FOR the approval of the Reorganization Agreement.
The Board of Directors of CBI believes that the Reorganization is in the
best interests of CBI and its shareholders. The CBI directors have all committed
to vote shares under their control in favor of the Reorganization to the extent
of their fiduciary ability. The CBI directors unanimously recommend that CBI
shareholders vote FOR the approval of the Reorganization Agreement.
TERMS OF THE REORGANIZATION
CBOV Common Stock. At the Effective Date, each outstanding share of CBOV
Common Stock (other than shares held by shareholders who perfect their
dissenters' rights) will be exchanged for 1.4044 shares of CBI Common Stock and
cash in lieu of any fractional shares. CBOV shareholders will thereby become
shareholders of CBI. The amount of cash which may be paid to a CBOV shareholder
in lieu of issuing any fractional shares will be equal to the fraction of a
share of CBI Common Stock to which such shareholder would otherwise be entitled
multiplied by the book value per share of CBI Common Stock at the end of the
calendar quarter that immediately precedes the Effective Date.
Shareholders of CBOV are entitled to exercise their dissenters' rights
with respect to the Reorganization. See "The Reorganization - Rights of
Dissenting Shareholders."
EFFECTIVE DATE
If the Reorganization is approved by the requisite vote of the
shareholders of CBOV and CBI and by the Federal Reserve and the SCC (See "The
Reorganization - Regulatory Approvals") and other conditions to the
Reorganization are satisfied (or waived to the extent permitted by the
Reorganization Agreement and applicable law), the Reorganization will be
consummated and effected at the time a certificate of Share Exchange is issued
by the SCC pursuant to the Virginia SCA. See "The Reorganization -
Representations and Warranties; Conditions to the Reorganization."
It is anticipated that the Effective Date will be on or about June 30,
1996, but there can be no assurance as to whether or when the Reorganization
will occur.
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SURRENDER OF STOCK CERTIFICATES
Promptly after the Effective Date, The Community Bank as the exchange
agent, will mail to the former holders of CBOV Common Stock a letter of
transmittal and instructions relating to the exchange of their CBOV share
certificates for share certificates representing the number of shares of CBI
Common Stock to which they are entitled as a result of the Reorganization.
CBOV SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for CBOV Common
Stock, together with a properly completed letter of transmittal, the holder of
such certificates will receive a certificate or certificates representing the
number of shares of CBI Common Stock to which he or she is entitled and, where
applicable, a check for the amount payable in cash in lieu of issuing a
fractional share. Lost, stolen, mutilated or destroyed certificates will be
treated in accordance with the existing procedures of CBI.
All CBI Common Stock issued as a result of the conversion of CBOV Stock
pursuant to the Reorganization will be deemed issued as of the Effective Date.
After the Effective Date, CBOV shareholders will be entitled to vote the number
of shares of CBI Common Stock for which their CBOV Common Stock has been
exchanged, regardless of whether they have surrendered their CBOV certificates.
The Reorganization Agreement provides, however, that no dividend or distribution
payable to the holders of record of CBI Common Stock at or as of any time after
the Effective Date will be paid to the holder of any CBOV certificate, until
such holder physically surrenders such certificate, or completes CBI procedures
for lost, mutilated or destroyed certificates, promptly after which time all
such dividends or distributions will be paid (without interest).
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE REORGANIZATION
The Reorganization Agreement contains representations and warranties by
CBI and CBOV, including representations and warranties with respect to their
respective organizations, authorizations to enter into the Reorganization
Agreement, capitalization, financial statements and pending and threatened
litigation. These representations and warranties (except as otherwise provided
in the Reorganization Agreement) will not survive the Effective Date.
The obligations of CBI and CBOV to consummate the Reorganization are
subject to the following conditions: approval and adoption of the Reorganization
Agreement and Plan of Share Exchange by the requisite shareholder votes; receipt
of all regulatory approvals necessary to consummate the Reorganization, not
conditioned or restricted in a manner that, in the judgment of the Boards of
Directors of CBI and CBOV, materially adversely affects the economic or business
benefits of the Reorganization so as to render inadvisable consummation thereof;
the absence of certain actual or threatened proceedings before a court or other
governmental body relating to the Reorganization; receipt of current fairness
opinions from the investment advisor for CBI and CBOV; approval of the proposed
amendment to the CBI Articles of Incorporation by holders of CBI Common Stock;
and the receipt of an opinion of counsel as to certain Federal income tax
consequences of the Reorganization. Also, under the terms of the Reorganization
Agreement, CBI agreed that, following the Effective Date, it will indemnify any
person,
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including any director or officer of CBOV, who may be entitled to
indemnification from CBOV as of the Effective Date of the Reorganization.
In addition, each party's obligation to effect the Reorganization, unless
waived, is subject to performance by the other party of its obligations under
the Reorganization Agreement, the accuracy, in all material respects, of the
representations and warranties of the other party contained therein, and the
receipt of certain opinions and certificates from the other party.
REGULATORY APPROVALS
CBI's acquisition of CBOV pursuant to the Reorganization is subject to
approval by the Federal Reserve under the BHC Act, which requires that the
Federal Reserve take into consideration the financial and managerial resources
and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. The BHC Act prohibits the
Federal Reserve from approving the Reorganization if it would result in a
monopoly or if it would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect may be substantially to lessen competition
or to tend to create a monopoly, or if it would be in any other manner a
restraint of trade, unless the Federal Reserve finds that the anti-competitive
effects of the Reorganization are clearly outweighed in the public interest by
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. The Reorganization may not be consummated for 15
days after such approval, pursuant to federal law, in order to provide a period
for the Reorganization to be challenged under the antitrust laws.
The BHC Act provides for the publication of notice and the opportunity
for administrative hearings relating to the applications, and it authorizes the
regulatory agency to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could
substantially delay the regulatory approvals required for consummation of the
Reorganization.
The Reorganization is further subject to the approval of the SCC. To
obtain such approval, the SCC must conclude that the Reorganization will not
affect detrimentally the safety or soundness of a Virginia bank.
Applications for approval of the Reorganization have been filed with the
Federal Reserve and the SCC. None of the agencies has yet approved the
applications. CBI and CBOV are not aware of any other governmental approvals or
actions that are required for consummation of the Reorganization, except as
described above. Should any such approval or action be required, it is currently
contemplated that such approval or action would be sought. There can be no
assurance that any such approval or action, if needed, could be obtained.
BUSINESS PENDING THE REORGANIZATION
Until consummation of the Reorganization (or termination of the
Reorganization Agreement), each of CBOV and CBI is obligated to operate its
businesses only in the ordinary and usual course, consistent with past practice,
and to use its best efforts to maintain its business organization, employees and
business relationships and to retain the services of its officers and key
employees. Until consummation of the Reorganization (or termination of the
Reorganization Agreement) CBOV may not, without the consent of CBI, and CBI may
not, without the consent of CBOV, among other things: (a) declare or pay
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dividends on its capital stock, except in the regular course of business
consistent with past practice; (b) enter into any merger, consolidation or
business combination (other than the Reorganization) or any acquisition or
disposition of a material amount of assets or securities or solicit proposals in
respect thereof; (c) amend its charter or bylaws (except as may be required by
the Reorganization Agreement); (d) issue any capital stock, except upon exercise
of rights, warrants or options issued pursuant to existing employee benefits
plans, programs or arrangements or effect any stock split or otherwise change
its capitalization; or (e) purchase or redeem any of its capital stock.
WAIVER, AMENDMENT AND TERMINATION
At any time on or prior to the Effective Date, any term or condition of
the Reorganization may be waived by the party which is entitled to the benefits
thereof, without shareholder approval, to the extent permitted under applicable
law. The Reorganization Agreement may be amended at any time prior to the
Effective Date by agreement of the parties whether before or after the CBOV and
CBI Meetings (except that the Exchange Ratio shall not be changed after approval
of the Reorganization Agreement by the CBOV and CBI shareholders). Any material
change in a material term of the Reorganization Agreement after this Joint Proxy
Statement is mailed to shareholders of CBOV and CBI would require a
resolicitation of CBOV's and CBI's shareholders. Such a material change would
include, but not be limited to, a change in the tax consequences to CBOV's
shareholders.
The Reorganization Agreement may be terminated by CBI or CBOV, whether
before or after the approval of the Reorganization Agreement by the
shareholders: (a) if the other party materially breaches any representation,
warranty or agreement which is not properly cured by such breaching party; (b)
if the Reorganization is not consummated by August 31, 1996; or (c) if the
Federal Reserve or the SCC have denied approval of the Reorganization. The
Reorganization Agreement also may be terminated at any time by the mutual
consent of CBI and CBOV. In the event of termination, the Reorganization
Agreement shall become null and void, except that certain provisions thereof
relating to expenses and confidentiality of information exchanged between the
parties shall survive any such termination.
RESALES OF CBI COMMON STOCK
All shares of CBI Common Stock received by CBOV shareholders in
connection with the Reorganization will be freely transferable, except that CBI
Common Stock received by persons who are deemed to be "affiliates" (as such term
is defined in Rule 144 under the Securities Act of 1933 (the "1933 Act")) of
CBOV may be resold by them only in transactions permitted by the resale
provisions of Rule 144 under the 1933 Act. For purposes of Rule 144 as applied
to CBOV, the directors and executive officers of CBOV are the only affiliates
who will be subject to the resale limitations.
INTEREST OF CERTAIN PERSONS IN THE REORGANIZATION
In considering the recommendations of the Board of Directors of CBOV with
respect to the Reorganization, holders of voting stock should be aware that
certain members of CBOV's Board of Directors and senior management have certain
interests in the Reorganization that are in addition to the interest of
stockholders of CBOV generally. The Board of Directors of CBOV was aware of
these interests and considered them, among other factors, in approving the
Reorganization. These interests are as follows:
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Board of Directors. The Board of Directors of CBI after the Effective
Date will include all members of CBOV's Board of Directors. After the Effective
Date, the parties anticipate that Sam T. Beale, Chairman of the Board of CBOV,
will become the Chairman of the Board of CBI. Nathan S. Jones, 3rd will remain
the President and Chief Executive Officer of CBI. At this time all of the
directors of CBI also are directors of The Community Bank. Such individuals are
compensated for serving as directors of The Community Bank, but they receive no
additional compensation for serving as directors of CBI. Likewise, after the
Effective Date, the present directors of CBOV will receive no additional
compensation for serving as directors of CBI. See "Community Bankshares
Incorporated Election of Directors; Management - Attendance and Compensation."
The Reorganization Agreement provides that when the CBOV directors become
directors of CBI, three members of the CBOV Board will become members of each of
the three classes of CBI Directors, as determined by the CBOV Board. The CBOV
Board has determined that the CBOV directors will become members of the classes
of CBI directors as follows:
CLASS III (To serve until the 1997 Annual Meeting of Shareholders)
Richard C. Huffman
David E Hudgins
Sam T. Beale
CLASS I (To serve until the 1998 Annual Meeting of Shareholders)
John D. Seal, III
Ralph Fields
Lawrence B. Nuckols
CLASS II (To serve until the 1999 Annual Meeting of Shareholders)
Barry M. Kornblau
James R. V. Daniel
James E. Bloom
Options. All options to purchase CBOV Common Stock held by Directors and
executive officers of CBOV were exercised before their April 8, 1996 expiration
date and none of the Directors or executive officers of CBOV will receive
options to purchase CBI Common Stock in connection with the Reorganization. In
the past, CBI has granted stock options to its Directors and executive officers,
but there is no present agreement or understanding concerning stock option
grants to Directors of CBOV after the Effective Date.
Projected CBI Common Stock Ownership. The potential shares of CBI Common
Stock which CBOV Directors and executive officers may receive in the aggregate
pursuant to the Reorganization, after the exercise of all options, are 274,675
shares, which would have had a value of approximately $4.2 million as of April
8, 1996. The table below sets forth (i) the projected holdings of CBI Common
Stock by all CBOV Directors and executive officers, both individually and in the
aggregate, upon the Reorganization and assuming the immediate exercise of all
options and warrants; (ii) the percentage of ownership in CBI such shares would
represent; and (iii) the estimated value of such shares.
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<TABLE>
<CAPTION>
NO. OF PROJECTED POST-SHARE
CBI EXCHANGE PERCENT OF
SHARES(1) CBI COMMON STOCK(2) VALUE($)(3)
<S> <C> <C> <C>
Sam T. Beale 83,776 4.41% 1,298,528
James E. Bloom 12,204 0.64 189,162
James R.V. Daniel 15,588 0.82 241,614
Ralph Fields 27,882 1.47 432,171
David E. Hudgins 29,383 1.55 455,436
Richard C. Huffman 48,109 2.53 745,689
Barry M. Kornblau 34,924 1.84 541,322
Lawrence B. Nuckols 44,475 2.34 689,362
John D. Seal, III 18,774 0.99 290,997
All present executive officers and
directors as a group (11 persons) 321,363 16.90 4,981,126
</TABLE>
(1) Includes shares of CBI Common Stock currently owned by CBOV Directors
and executive officers.
(2) Based on 527,850 shares of CBOV Common Stock outstanding on April 26,
1996 and 1,160,000 shares of CBI Common Stock outstanding on April 26,
1996.
(3) Based on the closing price of $15.50 per share of CBI Common Stock on
the OTC Bulletin Board on April 8, 1996, without adjustment for any
holder's investment basis in CBOV Common Stock.
Employment Agreements. Richard C. Huffman, Thomas H. Caffrey, Jr., and
John M. Wiatt, Jr., executive officers of CBOV have employment contracts with
CBOV. Such contracts will be assumed by CBI in connection with the
Reorganization without any change to the terms of such contracts. Mr. Huffman's
contract expires on December 31, 1997, while the employment contracts of Messrs.
Caffrey and Wiatt expire on December 31, 1996. All three contracts provide for
automatic renewals for successive terms of one year at a time, unless the
contract is terminated by CBOV or the employee. Mr. Huffman's contract provides
for annual base compensation of $95,000, while the contracts of Messrs. Caffrey
and Wiatt provide for annual base compensation of $61,168 and $76,995,
respectively. All contracts provide for enhanced severance benefits if the
officer's employment terminates within one year after a change of control. As of
January 1, 1996, the cash amounts payable to Messrs. Huffman, Caffrey and Wiatt,
in the event of a termination of employment after a change of control, would
have been $325,910, $69,168 and $84,995, respectively. See "Commerce Bank of
Virginia Election of Directors; Management - Employment Contracts".
ACCOUNTING TREATMENT
It is anticipated that the Reorganization will be accounted for as a
pooling of interests for accounting and financial reporting purposes. Under this
method of accounting, recorded assets and liabilities of CBI and CBOV are
carried forward at their previously recorded amounts; income of the combined
corporations will include income of CBI and CBOV for the entire fiscal year in
which the
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Reorganization occurs; and the reported income of the separate corporations for
prior periods will be combined. No recognition of goodwill in the combination is
required of any party to the Reorganization.
For the Reorganization to qualify as a pooling of interests, it must
satisfy certain conditions, including the condition that the total cash paid by
CBI pursuant to the Reorganization Agreement for (a) fractional shares and (b)
all the CBOV Common Stock held by dissenting stockholders, may not exceed 10% of
the value of the CBOV Common Stock at the Effective Date. Affiliates of CBI and
CBOV have agreed that, among other things, they will not sell any CBI Common
Stock or CBOV Common Stock within 30 days prior to the Effective Date, nor sell
any CBI Common Stock until such time as CBI has published financial results
covering at least 30 days of the combined operations of CBI and CBOV after the
Reorganization. Although pooling of interests accounting, like other terms in
the Agreement, is waivable, CBI has indicated that it is unlikely to waive that
requirement. If outside auditors determine that pooling of interests accounting
treatment is not available and both parties agree to waive that term, the
Reorganization would have to be resubmitted to shareholders of CBI and CBOV for
their approval. See "Summary" and "Pro Forma Condensed Financial Information."
FEDERAL INCOME TAX MATTERS
Set forth below is a discussion of federal income tax consequences
under the Internal Revenue Code of 1986, as amended (the "Code") to CBOV
shareholders who receive CBI Common Stock solely in exchange for CBOV Common
Stock as a result of the Reorganization and CBOV shareholders who receive cash
in lieu of fractional shares or who receive cash for their shares upon exercise
of dissenters' rights. The discussion does not deal with all aspects of federal
taxation that may be relevant to particular CBOV shareholders. In view of the
individual nature of tax consequences, CBOV shareholders are urged to consult
their own tax advisors as to the specific tax consequences to them of the
Reorganization, including the applicability of federal, state, local and foreign
tax laws.
Neither CBI nor CBOV has requested a ruling from the Internal Revenue
Service ("IRS") in connection with the Reorganization. To meet a condition to
consummation of the Reorganization, CBI and CBOV has received from Williams,
Mullen, Christian & Dobbins, counsel to CBI, an opinion as to certain of the
federal income tax consequences of the Reorganization. Such opinion is neither
binding on the IRS nor precludes it from adopting a contrary position.
In the opinion of counsel, the Reorganization will constitute a
tax-free reorganization under Section 368 of the Code if consummated in the
manner set forth in the Reorganization Agreement. Accordingly, among other
things, in the opinion of such counsel:
1. No gain or loss will be recognized by CBI or CBOV as a result of
the Reorganization;
2. No gain or loss will be recognized by the CBOV shareholders who
receive solely shares of CBI Common Stock pursuant to the
Reorganization;
3. The aggregate basis of the CBI Common Stock received by each CBOV
shareholder will be the same as the aggregate basis of the CBOV
stock surrendered in exchange therefor (reduced by any amount
allocable to fractional share interests for which a shareholder
receives cash); and
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4. The holding period for each share of CBI Common Stock received by
each CBOV shareholder in exchange for CBOV Common Stock will
generally include the period for which such shareholder held the
CBOV Common Stock exchanged therefor, provided such CBOV Common
Stock is a capital asset in the hands of such holder at the
Effective Date.
Any cash received by shareholders, whether as a result of an exercise
of their dissenters' rights or in lieu of the issuance of fractional shares,
would result in taxable income to the shareholders. The receipt of such cash by
a dissenting shareholder generally will be treated as a sale or exchange of the
stock resulting in capital gain or loss measured by the difference between the
cash received and an allocable portion of the basis of the stock relinquished.
However, the receipt of such cash may be treated as a dividend and taxed as
ordinary income in certain limited situations. Such situations are generally
instances when there is not a complete termination of the dissenting
shareholder's interest after considering shares retained by a shareholder
related to the dissenting shareholder or shares otherwise constructively owned
by the dissenting shareholder.
The receipt of cash in lieu of fractional shares will be treated as a
sale or exchange of the stock, resulting in capital gain or loss. In the case of
cash payments in lieu of fractional shares, however, such payments will be small
in amount and not a material concern to CBOV shareholders.
It is recommended that each CBOV shareholder also consult his or her
own tax advisor to determine whether or not there are any tax consequences of
the Reorganization that might be of particular concern due to a shareholder's
individual tax situation.
No gain or loss will be recognized by the holders of options to
purchase CBOV Common Stock solely as a result of the conversion of such options
into options to acquire CBI Common Stock.
RIGHTS OF DISSENTING SHAREHOLDERS
A shareholder of CBOV Common Stock who objects to the Reorganization (a
"Dissenting Shareholder") and who complies with provisions of Article 15 of
Title 13.1 of the Virginia SCA ("Article 15") may demand the right to receive a
cash payment, if the Reorganization is consummated, for the fair value of his or
her stock immediately before the Reorganization Effective Date, exclusive of any
appreciation or depreciation in anticipation of the Reorganization unless such
exclusion would be inequitable. Shareholders of CBI Common Stock do not have
similar rights to dissent to the transaction under the Virginia SCA. In order to
receive payment, a Dissenting Shareholder must deliver to CBOV prior to the CBOV
Meeting a written notice of intent to demand payment for his or her shares if
the Reorganization is consummated (an "Intent to Demand Payment") and must not
vote his or her shares in favor of the Reorganization. The Intent to Demand
Payment should be addressed to Richard C. Huffman, President, Commerce Bank of
Virginia, P.O. Box 29569, Richmond, Virginia 23242-0569. A VOTE AGAINST THE
REORGANIZATION WILL NOT ITSELF CONSTITUTE SUCH WRITTEN NOTICE AND A FAILURE TO
VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT.
A shareholder of record of CBOV 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 CBOV 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
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as if the shares to which he dissents and his other shares were registered in
the names of different shareholders. A beneficial shareholder of CBOV Common
Stock may assert dissenters' rights as to shares held on his behalf by a
shareholder of record only if (i) he submits to CBOV the record shareholder's
written consent to the dissent not later than the time when the beneficial
shareholder asserts dissenters' rights, and (ii) he dissents with respect to all
shares of which he is the beneficial shareholder or over which he has power to
direct the vote.
Within 10 days after the Effective Date, CBOV is required to deliver a
notice in writing (a "Dissenter's Notice") to each Dissenting Shareholder who
has filed an Intent to Demand Payment and who has not voted such shares in favor
of the Reorganization. The Dissenter's Notice shall (i) state where the demand
for payment (the "Payment Demand") shall be sent and where and when stock
certificates shall be deposited; (ii) supply a form for demanding payment; (iii)
set a date by which CBOV must receive the Payment Demand; and (iv) be
accompanied by a copy of Article 15. A Dissenting Shareholder who is sent a
Dissenter's Notice must submit the Payment Demand and deposit his or her stock
certificates in accordance with the terms of, and within the time frames set
forth in, the Dissenter's Notice. As a part of the Payment Demand, the
Dissenting Shareholder must certify whether he or she acquired beneficial
ownership of the shares before or after the date of the first public
announcement of the terms of the proposed Reorganization (the "Announcement
Date"), which was December 13, 1995. CBOV will specify the Announcement Date in
the Dissenter's Notice.
Except with respect to shares acquired after the Announcement Date,
CBOV shall pay a Dissenting Shareholder the amount CBOV estimates to be the fair
value of his or her shares, plus accrued interest. Such payment shall be made
within 30 days of receipt of the Dissenting Shareholder's Payment Demand. As to
shares acquired after the Announcement Date, CBOV 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
CBOV is less than the fair value of his or her shares, or that the interest due
is incorrectly calculated, that Dissenting Shareholder may notify CBOV 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 CBOV of the Estimate and Demand within 30 days after the date CBOV
makes or offers to make payment to the Dissenting Shareholder.
Within 60 days after receiving the Estimate and Demand, CBOV 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 CBOV
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 CBOV, except that the court
may assess costs against all or some of the Dissenting Shareholders to the
extent the court finds that the Dissenting Shareholders did not act in good
faith in demanding payment of the Dissenting Shareholder's Estimates.
The foregoing discussion is a summary of the material provisions of
Article 15. Shareholders are strongly encouraged to review carefully the full
text of Article 15, which is included as Appendix D to this Joint Proxy
Statement. The provisions of Article 15 are technical and complex, and a
shareholder
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failing to comply strictly with them may forfeit his Dissenting Shareholder's
rights. Any shareholder who intends to dissent from the Reorganization should
review the text of those provisions carefully and also should consult with his
or her attorney. NO FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTERS'
RIGHTS OR ANY STEPS ASSOCIATED THEREWITH WILL BE FURNISHED TO CBOV SHAREHOLDERS,
EXCEPT AS INDICATED ABOVE OR OTHERWISE REQUIRED BY LAW.
Any Dissenting Shareholder who perfects his or her right to be paid the
fair value of his shares will recognize gain or loss, if any, for federal income
tax purposes upon the receipt of cash for his shares. The amount of gain or loss
and its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code. See "The
Reorganization - Federal Income Tax Matters."
CERTAIN DIFFERENCES IN RIGHTS OF SECURITY HOLDERS
CBI is a corporation subject to the provisions of the Virginia SCA, and
CBOV also is a corporation subject to the provisions of the Virginia SCA.
Shareholders of CBOV, whose rights are governed by CBOV's Articles of
Incorporation and Bylaws, will, upon consummation of the Reorganization, become
shareholders of CBI. The rights of the former CBOV shareholders will then be
governed by the Articles of Incorporation and Bylaws of CBI and the Virginia
SCA.
There are no material differences between the rights of a CBOV
shareholder under CBOV's Articles of Incorporation and Bylaws and the Virginia
SCA, on the one hand, and the rights of a CBI shareholder under the Articles of
Incorporation and Bylaws of CBI and the Virginia SCA, on the other hand, except
as disclosed in the section "Comparative Rights of Shareholders."
EXPENSES OF THE REORGANIZATION
Whether or not the Reorganization is consummated, CBOV and CBI will pay
their own expenses incident to preparing, entering into and carrying out the
Reorganization Agreement, preparing and filing the Registration Statement of
which this Joint Proxy Statement is a part, except under circumstances involving
willful breaches of certain provisions of the Reorganization Agreement.
If either party materially breaches the Reorganization Agreement, that
party must pay the costs associated with this transaction incurred by the
non-breaching party. If the Reorganization Agreement is terminated by either
party in the event that the other receives a subsequent acquisition offer and
the Board of Directors does not confirm its unanimous support of the
Reorganization, the party that receives the offer must pay the other's costs. In
addition, if the Reorganization is not approved by either party's shareholders,
that party must pay 50% of the other party's costs in this transaction. In no
event, however, can the liability for such costs incurred by either party exceed
a total of $50,000.
CBOV and CBI have incurred and will continue to incur expenses related
to the Reorganization, which expenses include, among other things, legal fees,
filing fees, accounting fees, investment banking fees, printing charges and
costs of mailing.
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CBI AND CBOV MARKET PRICES AND DIVIDENDS
CBOV. There is no established public trading market for CBOV Common
Stock. CBOV Common Stock is traded largely through Scott & Stringfellow, Inc.,
which attempts to match buyers and sellers in privately negotiated transactions
on a local basis. The high and low sale prices of CBOV Common Stock over the
past twelve months, to the best of CBOV's knowledge, were $15.75 and $14.00,
respectively, as set forth below.
CBOV MARKET PRICE
Sales Price (a)
High Low
1994:
1st quarter $13.25 $12.25
2nd quarter 13.25 12.25
3rd quarter 15.00 10.50
4th quarter 15.50 14.50
1995:
1st quarter 15.50 14.50
2nd quarter 15.00 14.00
3rd quarter 15.50 14.13
4th quarter 15.50 15.00
1996:
1st quarter
(through April 22, 1996) 15.75 15.75
(a) The prices are as reported by Scott & Stringfellow, Inc., which
attempts to match buyers and sellers of CBOV Common Stock. Quotations
do not necessarily reflect the price that would be paid in an active
and liquid market.
CBOV has not declared any cash dividends (CBOV previously declared a
two-for-one stock split in 1989 and a 10% stock dividend in 1993). Any future
payment of dividends is solely in the discretion of the Board of Directors of
CBOV and is dependent upon certain legal and regulatory considerations and upon
the earnings and financial condition of CBOV and such other factors as CBOV's
Board of Directors may, from time to time, deem relevant.
CBOV is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay stockholders, and will be subject to the same
restrictions upon consummation of the Reorganization. Dividends are generally
restricted to net profits, as defined by Federal Reserve regulations, for the
current year plus retained net profits for the preceding two years. At December
31, 1995, dividends were so limited to approximately $1.496 million.
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CBI. CBI Common Stock is traded on the OTC Bulletin Board under the
symbol of "CBIV". On December 12, 1995, the last day on which CBI Common Stock
traded prior to the announcement of the Reorganization, the closing price for
CBI Common Stock was $11.25 per share. In the year preceding the date of these
materials, the closing price for CBI Common Stock has varied from a low of
$10.00 per share to a high of $15.50 per share.
The following table sets forth, for the quarters indicated, the high
and low sale prices for CBI Common Stock on the OTC Bulletin Board since May
1994 and the high and low bid prices of trades known to CBI on the
over-the-counter market for stock prices reported locally through the regional
quotation system before May 1994 and per share dividends paid during the
respective periods. The actual stock value and dividend payout to CBOV
shareholders over time as a result of the Reorganization could vary depending on
fluctuations of the market price of CBI Common Stock and changes in CBI's
dividend payment practice.
CBI MARKET PRICE AND DIVIDENDS
<TABLE>
<CAPTION>
Sales Price(1) Dividends(1)
<S> <C> <C> <C>
1993: High Low
---- ---
1st quarter..................... 5.75 4.50 .10
2nd quarter..................... 6.75 5.75
3rd quarter..................... 7.375 6.625
4th quarter..................... 8.00 7.25
1994:
1st quarter..................... 8.625 8.00 .15
2nd quarter..................... 9.125 8.50
3rd quarter..................... 9.72 9.00
4th quarter..................... 10.50 9.50
1995:
1st quarter..................... 10.625 10.50 .175
2nd quarter..................... 11.50 10.50
3rd quarter..................... 11.25 10.50
4th quarter..................... 13.25 10.50
1996:
1st quarter.....................
(through April 22, 1996) 15.50 12.50
</TABLE>
(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
On April 8, 1996, the closing price of CBI Common Stock on the OTC
Bulletin Board was $15.50. As of April 26, 1996, there were 735 record holders
of CBI Common Stock and 375 record holders of CBOV Common Stock.
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CBI historically has paid cash dividends on an annual basis. The final
determination of the timing, amount and payment of dividends on CBI Common Stock
is at the discretion of CBI's Board of Directors and will depend upon the
earnings of CBI and its subsidiaries, the financial condition of CBI and other
factors, including general economic conditions and applicable governmental
regulations and policies. CBI or The Community Bank has paid regular cash
dividends for 15 consecutive years.
CBI is a legal entity separate and distinct from its subsidiary, and
its revenues depend primarily on the payment of dividends from its subsidiary
bank. The Community Bank is subject to certain legal restrictions on the amount
of dividends it is permitted to pay to CBI. At December 31, 1995, The Community
Bank had available for distribution as dividends to CBI approximately $3.576
million.
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INVESTMENT ADVISOR OPINIONS
Both CBI and CBOV management relied upon the advice of a qualified
investment advisor in analyzing the Reorganization and Share Exchange and
recommending it to CBI's and CBOV's respective shareholders. CBI and CBOV relied
on the advice of McKinnon & Company, Inc., an investment banking firm
headquartered in Norfolk, Virginia. McKinnon determined that the Share Exchange
and Reorganization is in the best interests of CBI and CBOV shareholders from a
financial point of view. A more detailed analysis of the Reorganization and
Share Exchange, from the point of view of CBI and CBOV's financial advisor,
follows.
CBI - OPINION OF FINANCIAL ADVISOR
McKinnon & Company, Inc., an investment banking firm ("McKinnon"), has
been engaged by CBI as its financial advisor with respect to the Reorganization
contemplated by the Reorganization Agreement dated December 12, 1995 and the
Plan of Share Exchange attached thereto as Exhibit A whereby, each share of CBOV
Common Stock shall be converted into and become 1.4044 shares of CBI Common
Stock, at the Effective Date. McKinnon has rendered its opinion to the
shareholders of CBI that the Reorganization and Share Exchange is fair, from a
financial point of view, to the shareholders of CBI. A copy of its opinion is
set forth as part of Exhibit G to this Joint Proxy Statement and Prospectus and
should be read in its entirety with respect to the assumptions made, matters
considered and limitation on the review undertaken. CBI has paid McKinnon a fee
of $15,000 plus $500 in expenses for its services, including the fairness
opinion. CBI has agreed to indemnify McKinnon against liabilities that it might
incur as a result of any inaccurate information provided to McKinnon, or filed
or disseminated to the public, by CBI.
Financial Advisor Background. McKinnon is an investment banking firm
that specializes in Virginia community banks. In eight years McKinnon has been
lead managing underwriter in approximately twenty public stock offerings for
Virginia community banks and has served as financial advisor, including
providing fairness opinions, to numerous Virginia community banks. McKinnon, as
part of its investment banking business, is engaged in the evaluation of
businesses, particularly banks, and their securities, in connection with mergers
and acquisitions, initial public offerings, private placements and evaluations
for estates and corporate recapitalizations. McKinnon is also a market maker in
Virginia community bank stocks listed on NASDAQ and the NNOTC Bulletin Board.
McKinnon believes it has a thorough working knowledge of the banking industry
throughout Virginia.
CBI Fairness Opinion. McKinnon did not assist CBI in its negotiations
with CBOV or any other party; it did not contact any other party regarding this
or any other related merger nor was it requested to do so; and it did not
recommend the form or structure of the proposed merger. No limitations were
imposed by CBI's or CBOV's Boards of Directors or Managements on the
investigations made or procedures followed by it in rendering its opinion.
McKinnon was aware of informal discussions CBI's management had had with another
financial institution regarding a merger of equals affiliation which did not
materialize, and, in prior years, McKinnon had been made aware of informal
discussions between CBOV and another financial institution regarding a potential
merger of equals.
McKinnon was engaged by CBI and CBOV in November 1995 to serve as
their financial advisor, including the fairness opinions included herein, and to
determine a fair exchange ratio of shares of CBI
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for each share of CBOV common stock and each option of CBOV outstanding. After
several meetings with managements of CBI and CBOV in November 1995, and a
review of relevant public and private information, McKinnon determined a fair
exchange ratio, from a financial point of view. On November 21, 1995 McKinnon
met with the Boards of Directors of CBI and CBOV respectively to present its
analysis and evaluation of a fair exchange ratio. On December 12, 1995 McKinnon
met with the Boards of Directors of CBI and CBOV, along with their respective
legal and accounting representatives, and gave its verbal opinion that the Share
Exchange, as specified in the Agreement and Plan of Reorganization dated
December 12, 1995, whereby each share of CBOV would be exchanged for 1.4044
shares of CBI Common Stock, was fair to the shareholders of CBI and CBOV, from a
financial point of view, as of such date.
The full text of McKinnon's opinion, updated to the date hereof, which
sets forth assumptions made, matters considered and limits on the review
undertaken, is attached hereto as part of Exhibit G and is incorporated herein
by reference. CBI shareholders are urged to read the opinion of McKinnon in its
entirety by reference to the full text of opinion.
McKinnon's opinion is directed solely to the CBI Board and does not
constitute a recommendation to any shareholder of CBI as to how such
shareholders should vote with respect to the proposed Reorganization at the CBI
Annual Meeting. McKinnon was not requested to give an opinion to, and its
opinion does not in any manner address, CBI's underlying business decision to
proceed with or affect the Reorganization.
The summary set forth below does not purport to be a complete
description of the analysis performed by McKinnon in this regard. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant method of financial analysis and the application of
those methods to the particular circumstances, and therefore such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors discussed below, McKinnon believes that its analysis must be
considered as a whole and that selecting portions of its analysis of the factors
considered by it, without considering all analysis and factors, could create an
incomplete view of the evaluation process underlying its opinion. In performing
its analysis, McKinnon made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond CBI's control. The analyses performed by McKinnon are not necessarily
indicators of actual values or future results, which may be significantly more
or less than suggested by each analysis. Additionally, analyses relating to the
values of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold.
McKinnon relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to the financial
forecasts reviewed by McKinnon in rendering its opinion, McKinnon assumed that
such forecasts were reasonably prepared on bases reflecting the best current
available estimate and judgments of the managements of CBI and CBOV as to the
future financial performance. McKinnon did not make an independent evaluation or
appraisal of the assets or liabilities of CBI and CBOV nor was it furnished any
such appraisals.
In rendering its opinion, McKinnon (i) reviewed the Reorganization
Agreement, dated as of December 12, 1995 among CBI and CBOV, including the Plan
of Share Exchange attached thereto as Exhibit A, certain publicly available
business and financial information concerning CBI and CBOV and
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certain internal financial analyses and forecasts for CBI and CBOV prepared by
CBI's and CBOV's managements; (ii) held discussions with members of executive
management of CBI and CBOV regarding past and current business operations,
financial condition and future prospects of CBI and CBOV; (iii) reviewed the
reported price and trading activity of CBI and CBOV Common Stock and compared
financial and stock market information (when available) for CBI and CBOV with
similar information for certain other companies, the securities of which are
publicly traded; (iv) reviewed the financial terms of certain recent business
combinations which McKinnon deemed comparable in whole or in part; and (v)
performed such other studies and analyses as McKinnon considered appropriate,
including an analysis of the pro forma financial impact of the Reorganization on
CBI and CBOV.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, McKinnon, using publicly available information, compared selected
financial information, including book value, tangible book value, recent
earnings, estimated earnings, asset quality ratios and loan loss reserve levels,
compared growth rates in assets, loans and deposits in recent periods, returns
and performance ratios and market capitalization to total assets for CBI, CBOV
and CBI and CBOV on a pro forma basis, and two groups of selected comparable
financial institutions. The larger bank group was composed of fifteen selected
banking institutions located in the states of Virginia, Maryland, North Carolina
and the District of Columbia and included: larger regional bank holding
companies - NationsBank Corporation; First Union Corporation; and Wachovia
Corporation; larger regional bank holding companies in Virginia and contiguous
states - Crestar Financial Corporation; Signet Banking Corporation; Central
Fidelity Bank, Inc.; First Virginia Bank, Inc.; Mercantile Bankshares, Inc.; and
smaller regional holding companies and community banks primarily located in
Virginia - Jefferson Bankshares; Citizens Bancorp; F&M National Corporation;
Piedmont Bank Group; Premier Bankshares Corp.; George Mason Bankshares; Fairfax
Bank and Trust Corp. and First Patriot Bankshares. The second group of
comparables consisted of eight peer banks located in Virginia, including: Bank
of Tidewater (Virginia Beach); Benchmark Bankshares (Kenbridge); Salem Bank &
Trust; Commonwealth Bankshares (Norfolk); Resource Bank (Virginia Beach); County
Bank of Chesterfield (Midlothian); Bank of Alexandria; and Heritage Bankshares
(Norfolk). Using the last reported and recent trading prices of CBI and CBOV as
of November 14, 1995 McKinnon compared the multiples of CBI, CBOV and the
average of each of the two comparable bank groups to such selected September 30,
1995 financial data for: estimated 1995 earnings per share; stated book value;
and total assets.
The multiple of price to estimated 1995 earnings per share, stated book
value and total assets was: 12.1 times, 155.0% and 14.3%, respectively, for the
twenty-eight larger Virginia, Maryland and North Carolina banks; 11.4 times,
133.8% and 12.3%, respectively, for the eight Virginia community banks; 8.4
times, 142.5% and 15.5%, respectively, for CBI; and 9.0 times, 128.2% and 11.0%,
respectively, for CBOV.
McKinnon concluded that both CBI and CBOV were "quoted" or "trading" at
a discount to both the larger bank group and smaller community bank peer groups
regarding relative multiples of earnings and that, if anything, the proposed
Reorganization would likely improve its relative comparable trading levels to
both groups of banks.
Analysis of Comparable Acquisition Transactions. In preparing its
opinion, McKinnon analyzed certain comparable merger and acquisition
transactions for bank institutions based upon the acquisition price relative to
stated book value, latest twelve months earnings, total assets and premium to
deposits. The analysis included a review and comparison of the mean multiples
represented by all known completed
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and pending bank mergers and acquisitions in Virginia and North Carolina since
1989 with particular emphasis on all transactions known to have occurred or
pending in 1994 and 1995 with the Exchange Ratio. McKinnon also did the same
comparable analysis with a group of all completed and pending "merger of equals"
transactions nationally in the last four years and concluded that the proposed
transaction is consistent with other merger of equals transactions of various
sizes and locations.
The multiple of price to stated book value and total assets was: 182.0%
and 15.9%, respectively, for all bank mergers and acquisitions since 1989 in
Virginia and North Carolina; 203.4% and 18.3%, respectively, for the same group
in 1994 and 1995; and 139.0% and 12.0%, respectively, for all merger of equals
transactions nationally in the period 1992 through 1995.
Contribution Analysis. McKinnon analyzed the historical (December 31,
1994 and June 30, 1995) contribution of each of CBI and CBOV to, among other
things, the total assets, total equity and net income of the pro forma combined
company. This analysis did not include any merger synergies.
In terms of contribution of CBI and CBOV to total assets, total equity
and net income at September 30, 1995 it was: 56.6% and 43.4% for assets; 62.3%
and 37.7% for equity; and 68.1% and 31.9% for net income. Among all merger of
equals transactions nationally since 1992 as reference under "Analysis of
Comparable Acquisition Transactions", the contribution of the two institutions
to total assets, total equity and net income at the time the transaction was
announced was: 57.0% and 43.0% for assets; 57.0% and 43.0% for equity; and 56.0%
and 44.0% for net income, respectively.
McKinnon concluded that the proposed transaction regarding relative
contribution analysis was consistent with merger of equals transactions
nationally since 1992 for assets and equity and that the relative contribution
of CBI for net income was slightly higher than typical for merger of equals
transactions.
Discounted Cash Flow Analysis. Using discounted cash flow analysis
McKinnon estimated the present value of the future stream of earnings and
dividends that CBI and CBOV could generate through 1999. McKinnon concluded
that, based on the relative present values per share of each, the Exchange Ratio
is fair from a financial point of view to the CBI shareholders.
McKinnon analyzed the present value of the future stream of earnings
that CBI and CBOV could generate through 1999 under different assumptions as to
required equity levels, if CBI and CBOV performed in accordance with management
forecasts and certain variants thereof. Among other things McKinnon considered a
range of asset and earnings growth of between 3% and 5% for CBI and between 8%
and 12% for CBOV. McKinnon estimated the terminal values for CBI and CBOV at the
end of the period by applying multiples of earnings ranging from 10.0 to 13.0
times. A range of discount rates of 10.0% to 14.0% were applied to these
scenarios and terminal values chosen to reflect different assumptions regarding
the required rates of return of holders or prospective buyers of CBI and CBOV
Common Stocks and the inherent risks surrounding the underlying projections.
Based upon these analyses, McKinnon developed, for purposes of its opinion, a
reference range for the value of CBI Common Stock of $11.63 to $14.79 per share
and a reference range for the value of CBOV Common Stock of $15.74 to $21.50 per
share.
Dilution Analysis. Based upon publicly available information, McKinnon
considered the effect of the transaction on the book value, earnings and market
value of CBI, CBOV and pro forma figures.
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McKinnon concluded from this that the Share Exchange based on the Exchange Ratio
would not materially dilute the earnings of CBI shareholders, would not dilute
the book value of CBI Common Stock and would not materially dilute the market
value of CBI. McKinnon considered the pro forma impact of the Reorganization and
concluded the Reorganization should have a positive long-term impact on CBI.
Using estimated earnings for 1995 and 1996 for CBI and CBOV, without
consideration of any merger synergies or cost savings, and based upon the Share
Exchange from the Exchange Ratio, McKinnon determined that CBI would have
dilution to earnings per share of 8.39% in 1995 and 4.55% in 1996, and that CBOV
would have earnings accretion of 10.84% in 1995 and 8.42% in 1996.
Compensation of Financial Advisor. Pursuant to terms of its engagement
letter, CBI has paid McKinnon a fee of $15,000 for its services, including the
fairness opinion, plus $500.00 for out-of-pocket expenses.
Certain Relationships. In the normal course of business McKinnon is a
market maker in the common stock of CBI listed on the OTC Bulletin Board. In
1988 McKinnon was the managing underwriter of a public offering of 400,000
shares of CBI common stock at $4.375 per share, adjusted for subsequent stock
splits and stock dividends. In 1994 McKinnon served as the investment advisor to
CBOV in its contemplated formation of a holding company and merger with such
holding company along with another Virginia community bank. This contemplated
merger was canceled and McKinnon was paid $2500 by both CBOV and the other
community bank. McKinnon is not a market maker in CBOV common stock. McKinnon
intends to be a market maker in CBI common stock if it is listed for trading on
the NASDAQ National Market at the Effective Date. A principal of McKinnon
beneficially owns shares of CBI Common Stock.
CBOV - OPINION OF FINANCIAL ADVISOR
McKinnon & Company, Inc., an investment banking firm ("McKinnon"), has
been engaged by CBOV as its financial advisor with respect to the Reorganization
contemplated by the Reorganization Agreement dated December 12, 1995 and the
Plan of Share Exchange attached thereto as Exhibit A whereby, each share of CBOV
Common Stock shall be converted into and become 1.4044 shares of CBI Common
Stock, at the Effective Date. McKinnon has rendered its opinion to the
shareholders of CBOV that the Reorganization and Share Exchange is fair, from a
financial point of view, to the shareholders of CBOV. A copy of its opinion is
set forth as part of Exhibit D to this Joint Proxy Statement and Prospectus and
should be read in its entirety with respect to the assumptions made, matters
considered and limitation on the review undertaken. CBOV has paid McKinnon a fee
of $15,000 plus $500 in expenses for its services, including the fairness
opinion. CBOV has agreed to indemnify McKinnon against liabilities that it might
incur as a result of any inaccurate information provided to McKinnon, or filed
or disseminated to the public, by CBOV.
Financial Advisor Background. McKinnon is an investment banking firm
that specializes in Virginia community banks. In eight years McKinnon has been
lead managing underwriter in approximately twenty public stock offerings for
Virginia community banks and has served as financial advisor, including
providing fairness opinions, to numerous Virginia community banks. McKinnon, as
part of its investment banking business, is engaged in the evaluation of
businesses, particularly banks, and their securities, in connection with mergers
and acquisitions, initial public offerings, private
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placements and evaluations for estates and corporate recapitalizations. McKinnon
is also a market maker in Virginia community bank stocks listed on NASDAQ and
the OTC Bulletin Board. McKinnon believes it has a thorough working knowledge of
the banking industry throughout Virginia.
CBOV Fairness Opinion. McKinnon did not assist CBOV in its negotiations
with CBI or any other party; it did not contact any other party regarding this
or any other related merger nor was it requested to do so; and it did not
recommend the form or structure of the proposed merger. No limitations were
imposed by CBI's or CBOV's Boards of Directors or Managements on the
investigations made or procedures followed by it in rendering its opinion.
McKinnon was aware of certain discussions CBOV's management had had with another
financial institution regarding a merger of equals affiliation which did not
materialize, and, in prior years, McKinnon had been made aware of discussions
between CBOV and another financial institution regarding a potential merger of
equals.
McKinnon was engaged by CBI and CBOV in November 1995 to serve as
their financial advisor, including the fairness opinions included herein, and to
determine a fair exchange ratio of shares of CBI for each share of CBOV common
stock and each option of CBOV outstanding. After several meetings with
managements of CBI and CBOV in November 1995, and a review of relevant public
and private information, McKinnon determined a fair exchange ratio, from a
financial point of view. On November 21, 1995 McKinnon met with the Boards of
Directors of CBI and CBOV respectively to present its analysis and evaluation of
a fair exchange ratio. On December 12, 1995 McKinnon met with the Boards of
Directors of CBI and CBOV, along with their respective legal and accounting
representatives, and gave its verbal opinion that the Share Exchange, as
specified in the Agreement and Plan of Reorganization dated December 12, 1995,
whereby each share of CBOV would be exchanged for 1.4044 shares of CBI Common
Stock, was fair to the shareholders of CBI and CBOV, from a financial point of
view, as of such date.
The full text of McKinnon's opinion, updated to the date hereof, which
sets forth assumptions made, matters considered and limits on the review
undertaken, is attached hereto as part of Exhibit D and is incorporated herein
by reference. CBI shareholders are urged to read the opinion of McKinnon in its
entirety by reference to the full text of opinion.
McKinnon's opinion is directed solely to the CBOV Board and does not
constitute a recommendation to any shareholder of CBI as to how such
shareholders should vote with respect to the proposed Reorganization at the CBOV
Annual Meeting. McKinnon was not requested to give an opinion to, and its
opinion does not in any manner, address CBOV's underlying business decision to
proceed with or affect the Reorganization.
The summary set forth below does not purport to be a complete
description of the analysis performed by McKinnon in this regard. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant method of financial analysis and the application of
those methods to the particular circumstances, and therefore such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors discussed below, McKinnon believes that its analysis must be
considered as a whole and that selecting portions of its analysis of the factors
considered by it, without considering all analysis and factors, could create an
incomplete view of the evaluation process underlying its opinion. In performing
it analysis, McKinnon made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond CBI's control. The analyses performed by McKinnon are not necessarily
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indicators of actual values or future results, which may be significantly more
or less than suggested by each analysis. Additionally, analyses relating to the
values of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold.
McKinnon relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to the financial
forecasts reviewed by McKinnon in rendering its opinion, McKinnon assumed that
such forecasts were reasonably prepared on bases reflecting the best current
available estimate and judgments of the managements of CBI and CBOV as to the
future financial performance. McKinnon did not make an independent evaluation or
appraisal of the assets or liabilities of CBI and CBOV nor was it furnished any
such appraisals.
In rendering its opinion, McKinnon (i) reviewed the Reorganization
Agreement, dated as of December 12, 1995 among CBI and CBOV, including the Plan
of Share Exchange attached thereto as Exhibit A, certain publicly available
business and financial information concerning CBI and CBOV and certain internal
financial analyses and forecasts for CBI and CBOV prepared by CBI's and CBOV's
managements; (ii) held discussions with members of executive management of CBI
and CBOV regarding past and current business operations, financial condition and
future prospects of CBI and CBOV; (iii) reviewed the reported price and trading
activity of CBI and CBOV Common Stock and compared financial and stock market
information (when available) for CBI and CBOV with similar information for
certain other companies, the securities of which are publicly traded; (iv)
reviewed the financial terms of certain recent business combinations which
McKinnon deemed comparable in whole or in part; and (v) performed such other
studies and analyses as McKinnon considered appropriate, including an analysis
of the pro forma financial impact of the Reorganization on CBI and CBOV.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, McKinnon, using publicly available information, compared selected
financial information, including book value, tangible book value, recent
earnings, estimated earnings, asset quality ratios and loan loss reserve levels,
compared growth rates in assets, loans and deposits in recent periods, returns
and performance ratios and market capitalization to total assets for CBI, CBOV
and CBI and CBOV on a pro forma basis, and two groups of selected comparable
financial institutions. The larger bank group was composed of fifteen selected
banking institutions located in the states of Virginia, Maryland, North Carolina
and the District of Columbia and included: larger regional bank holding
companies - NationsBank Corporation; First Union Corporation; and Wachovia
Corporation; larger regional bank holding companies in Virginia and contiguous
states - Crestar Financial Corporation; Signet Banking Corporation; Central
Fidelity Bank, Inc.; First Virginia Bank, Inc.; Mercantile Bankshares, Inc.; and
smaller regional holding companies and community banks primarily located in
Virginia Jefferson Bankshares; Citizens Bancorp; F&M National Corporation;
Piedmont Bank Group; Premier Bankshares Corp.; George Mason Bankshares; Fairfax
Bank and Trust Corp. and First Patriot Bankshares. The second group of
comparables consisted of eight peer banks located in Virginia, including: Bank
of Tidewater (Virginia Beach); Benchmark Bankshares (Kenbridge); Salem Bank &
Trust; Commonwealth Bankshares (Norfolk); Resource Bank (Virginia Beach); County
Bank of Chesterfield (Midlothian); Bank of Alexandria; and Heritage Bankshares
(Norfolk). Using the last reported and recent trading prices of CBI and CBOV as
of November 14, 1995 McKinnon compared the multiples of CBI, CBOV and the
average of each of the two comparable bank groups to such selected September 30,
1995 financial data for: estimated 1995 earnings per share; stated book value;
and total assets.
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The multiple of price to estimated 1995 earnings per share, stated book
value and total assets was: 12.1 times, 155.0% and 14.3%, respectively, for the
twenty-eight larger Virginia, Maryland and North Carolina banks; 11.4 times,
133.8% and 12.3%, respectively, for the eight Virginia community banks; 8.4
times, 142.5% and 15.5%, respectively, for CBI; and 9.0 times, 128.2% and 11.0%,
respectively, for CBOV.
McKinnon concluded that both CBI and CBOV were "quoted" or "trading" at
a discount to both the larger bank group and smaller community bank peer groups
regarding relative multiples of earnings and that, if anything, the proposed
Reorganization would likely improve its relative comparable trading levels to
both groups of banks.
Analysis of Comparable Acquisition Transactions. In preparing its
opinion, McKinnon analyzed certain comparable merger and acquisition
transactions for bank institutions based upon the acquisition price relative to
stated book value, latest twelve months earnings, total assets and premium to
deposits. The analysis included a review and comparison of the mean multiples
represented by all known completed and pending bank mergers and acquisitions in
Virginia and North Carolina since 1989 with particular emphasis on all
transactions known to have occurred or pending in 1994 and 1995 with the
Exchange Ratio. McKinnon also did the same comparable analysis with a group of
all completed and pending "merger of equals" transactions nationally in the last
four years and concluded that the proposed transaction is consistent with other
merger of equals transactions of various sizes and locations.
The multiple of price to stated book value and total assets was: 182.0%
and 15.9%, respectively, for all bank mergers and acquisitions since 1989 in
Virginia and North Carolina; 203.4% and 18.3%, respectively, for the same group
in 1994 and 1995; and 139.0% and 12.0%, respectively, for all merger of equals
transactions nationally in the period 1992 through 1995.
Contribution Analysis. McKinnon analyzed the historical (December 31,
1994 and June 30, 1995) contribution of each of CBI and CBOV to, among other
things, the total assets, total equity and net income of the pro forma combined
company. This analysis did not include any merger synergies.
In terms of contribution of CBI and CBOV to total assets, total equity
and net income at September 30, 1995 it was: 56.6% and 43.4% for assets; 62.3%
and 37.7% for equity; and 68.1% and 31.9% for net income. Among all merger of
equals transactions nationally since 1992 as reference under "Analysis of
Comparable Acquisition Transactions", the contribution of the two institutions
to total assets, total equity and net income at the time the transaction was
announced was: 57.0% and 43.0% for assets; 57.0% and 43.0% for equity; and 56.0%
and 44.0% for net income, respectively.
McKinnon concluded that the proposed transaction regarding relative
contribution analysis was consistent with merger of equals transactions
nationally since 1992 for assets and equity and that the relative contribution
of CBI for net income was slightly higher than typical for merger of equals
transactions.
Discounted Cash Flow Analysis. Using discounted cash flow analysis
McKinnon estimated the present value of the future stream of earnings and
dividends that CBI and CBOV could generate through 1999. McKinnon concluded
that, based on the relative present values per share of each, the Exchange Ratio
is fair from a financial point of view to the CBOV shareholders.
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McKinnon analyzed the present value of the future stream of earnings
that CBI and CBOV could generate through 1999 under different assumptions as to
required equity levels, if CBI and CBOV performed in accordance with management
forecasts and certain variants thereof. Among other things McKinnon considered a
range of asset and earnings growth of between 3% and 5% for CBI and between 8%
and 12% for CBOV. McKinnon estimated the terminal values for CBI and CBOV at the
end of the period by applying multiples of earnings ranging from 10.0 to 13.0
times. A range of discount rates of 10.0% to 14.0% were applied to these
scenarios and terminal values chosen to reflect different assumptions regarding
the required rates of return of holders or prospective buyers of CBI and CBOV
Common Stocks and the inherent risks surrounding the underlying projections.
Based upon these analyses, McKinnon developed, for purposes of its opinion, a
reference range for the value of CBI Common Stock of $11.63 to $14.79 per share
and a reference range for the value of CBOV Common Stock of $15.74 to $21.50 per
share.
Dilution Analysis. Based upon publicly available information, McKinnon
considered the effect of the transaction on the book value, earnings and market
value of CBI, CBOV and pro forma figures. McKinnon concluded from this that the
Share Exchange based on the Exchange Ratio would not materially dilute the
earnings of CBI shareholders, would not dilute the book value of CBI Common
Stock and would not materially dilute the market value of CBI. McKinnon
considered the pro forma impact of the Reorganization and concluded the
Reorganization should have a positive long-term impact on CBOV.
Using estimated earnings for 1995 and 1996 for CBI and CBOV, without
consideration of any merger synergies or cost savings, and based upon the Share
Exchange from the Exchange Ratio, McKinnon determined that CBI would have
dilution to earnings per share of 8.39% in 1995 and 4.55% in 1996, and that CBOV
would have earnings accretion of 10.84% in 1995 and 8.42% in 1996.
Compensation of Financial Advisor. Pursuant to terms of its engagement
letter, CBOV has paid McKinnon a fee of $15,000 for its services, including the
fairness opinion, plus $500.00 for out-of-pocket expenses.
Certain Relationships. In the normal course of business McKinnon is a
market maker in the common stock of CBI listed on the OTC Bulletin Board. In
1988 McKinnon was the managing underwriter of a public offering of 400,000
shares of CBI common stock at $4.375 per share, adjusted for subsequent stock
splits and stock dividends. In 1994 McKinnon served as the investment advisor to
CBOV in its contemplated formation of a holding company and merger with such
holding company along with another Virginia community bank. This contemplated
merger was canceled and McKinnon was paid $2,500 by both CBOV and the other
community bank. McKinnon is not a market maker in CBOV common stock. McKinnon
intends to be a market maker in CBI common stock when it is listed for trading
on the NASDAQ National Market at the Effective Date. A principal of McKinnon
beneficially owns shares of CBI Common Stock.
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COMMERCE BANK OF VIRGINIA
BUSINESS
CBOV is a community oriented financial institution headquartered in
Henrico County, Virginia. CBOV was incorporated under the laws of the
Commonwealth of Virginia on August 28, 1984, and commenced business as a
commercial bank on April 8, 1986.
CBOV conducts a general commercial, and a full service retail, banking
business. CBOV is a local bank with a local, personal focus. It seeks to address
the problems and serve the opportunities of people and businesses within its
limited service area. CBOV provides banking services to individuals,
corporations, and others as well as services through correspondent banks and
other special services. CBOV offers a variety of transaction accounts, time and
savings accounts, as well as Individual Retirement Accounts. In the loan
division, CBOV offers commercial, residential, personal, construction and real
estate loans. In addition to the services listed above, CBOV offers other
related services such as bank by mail, VISA, U.S. Savings Bonds, and the rental
of safe deposit facilities. CBOV does not provide trust services.
CBOV is engaged in offering a broad range of deposit and loan services
to individual and commercial customers. As of December 31, 1995 CBOV had net
loans of $42.1 million and held $66.4 million in deposits.
CBOV is a community bank that seeks to provide a wide variety of
banking services to individuals and small to medium sized businesses in an
environment that allows CBOV to respond to and meet the needs of its customers
in a rapid and efficient manner that differentiates it from larger banking
organizations. CBOV prides itself on delivering enhanced customer service that
clients are not able to obtain elsewhere. CBOV's hours of operation are,
generally, 9:00 a.m. to 2:00 p.m. Monday through Friday and additional hours
from 4:00 p.m. to 6:00 p.m. on Friday. Saturday banking hours are also available
from 9:00 a.m. until noon. In addition, CBOV operates two full service Automated
Teller Machines (ATM's) at its Main Office location and at the Hanover Branch
location.
CBOV's three Executive Officers each have over 25 years of banking
experience, primarily in the local market and in community banking. CBOV has
hired and retained experienced people whose banking backgrounds have helped CBOV
develop and deliver excellent service.
CBOV is organized under the Virginia Banking Act, as amended. It is
subject to regulation and examination by the Virginia State Corporation
Commission, the Federal Reserve, and the Federal Deposit Insurance Corporation.
Various requirements and restrictions under the laws of the United States and
the Commonwealth of Virginia affect the operations of CBOV, including the
requirement to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest that may be charged
thereon, and restrictions relating to investments and other activities of CBOV.
The accounts of CBOV's depositors are insured up to $100,000 for each
account holder by the Federal Deposit Insurance Corporation, an instrumentality
of the United States Government. Insurance of CBOV's accounts is subject to the
statutes and regulations governing insured banks, to examination
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by the Federal Deposit Insurance Corporation, and to certain limitations and
restrictions imposed by that agency.
As of April 26, 1996, there were 527,850 shares of Common Stock
outstanding held by 375 holders of record.
PROPERTIES
CBOV's principal office is located in Henrico County at 11500 West
Broad Street, Richmond, Virginia 23233. The mailing address is Commerce Bank of
Virginia, P. O. Box 29569, Richmond, Virginia 23242. In addition to its
principal office in Henrico County, CBOV currently operates four branch offices
in Hanover County, Goochland County (2) and in the City of Richmond. Branch
designations and address are provided below:
Hanover Branch Riverfront Tower Branch
10035 Sliding Hill Road 901 East Byrd Street
Suite 101 Suite 1150
Ashland, Virginia 23005 Richmond, Virginia 23219
(Hanover County) (City of Richmond)
Opened October 1988 Opened November 1992
Goochland Courthouse Branch Centerville Branch
3018 River Road West 27 Broad Street Road
Goochland, Virginia 23063 Manakin, Virginia 23103
(Goochland County) (Goochland County)
Opened June 1993 Opened June 1993
The Goochland Courthouse Branch opened for business in a temporary banking
facility in 1993, and moved to a newly constructed permanent facility in
December 1995.
CBOV holds the real property at its principal office pursuant to a
ground lease and owns the improvements that have been constructed thereon.
CBOV's Hanover County branch is owned by the Atlee Station Co., of which Sam T.
Beale, a Director of CBOV, is the principal shareholder. See "Commerce Bank of
Virginia - Election of Directors; Management - Interest of Directors and
Officers in Certain Transactions." CBOV also leases the space where the
Riverfront Tower branch is located. CBOV owns the property for its two other
branches.
The primary service area of CBOV consists of the city of Richmond,
Virginia and the counties of Goochland, Hanover, and Henrico.
EMPLOYEES
CBOV employed 42 persons at December 31, 1995. Of these, 35 were full
time employees and 7 were part time employees. The relationship between CBOV and
its employees is good.
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COMPETITION
CBOV has enjoyed considerable growth in the past few years even though
it competes directly with many of the larger regional and national banking
franchises. CBOV's growth has been internally generated and management believes
that there are still significant growth opportunities in each of its local
branch markets.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, or any such proceedings known to
be contemplated by governmental authorities, to which CBOV is a party or of
which any of its property is the subject.
LENDING ACTIVITIES
LOAN PORTFOLIOS. CBOV is a residential mortgage and residential
construction lender and also extends commercial loans to small and medium-sized
businesses within its primary service area. Its lending activity extends across
its primary service area of the metropolitan area of Richmond, Virginia.
Consistent with its focus on providing community-based financial services, CBOV
does not attempt to diversify its loan portfolio geographically by making
significant amounts of loans to borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in CBOV's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage the risk, CBOV's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and installment loans to
individuals varies based upon employment levels, consumer confidence,
fluctuations and value of residential real estate and other conditions that
affect the ability of consumers to repay indebtedness. The risk associated with
commercial loans varies based upon the strength and activity of the local
economy of CBOV's market area. The risk associated with real estate construction
loans varies based upon the supply and demand for the type of real estate under
construction. Most of CBOV's residential real estate construction loans are for
pre-sold and contract homes.
While CBOV does not monitor or track specific economic data from any
particular source, it does rely on information contained in local, regional and
national publications dealing with economic activity, consumer confidence,
employment trends, residential and commercial real estate sales and
construction, and business relocations. In addition to this, CBOV's Directors,
Officers and staff members are involved in a wide variety of local business,
civic and charitable organizations which provides the overall monitoring of the
general direction and developing trends that effect the business climate of the
region.
PRIMARY MARKET AREA
The following table sets forth certain economic data on the localities
in which CBOV maintains branch offices. The data generally reflect that the
suburban counties of Henrico, Goochland and Hanover are more affluent than the
City of Richmond. All three counties have experienced population growth, while
the population of the City of Richmond has declined.
<TABLE>
<CAPTION>
City of Henrico Goochland Hanover
Richmond County County County
<S> <C> <C> <C> <C>
Per Capita Income ($) (1)
1980 11,122 11,512 10,180 10,735
1990 23,217 23,884 23,701 21,395
1993 25,875 25,223 26,279 21,177
Median Household Income ($) (2) 23,551 35,604 36,239 40,683
1980 Population (3) 219,214 180,735 11,761 50,398
1990 Population (3) 202,798 217,849 14,163 63,306
1993 Population (4) 201,100 229,500 15,300 70,000
Unemployment Rate (5) 6.0% 3.5% 4.0% 3.0%
Owner Occupied Housing
Units: (6)
Number 39,515 56,848 4,108 18,892
Median Value ($) 51,600 91,900 115,000 122,000
</TABLE>
(1) 1980 and 1990 U.S. Census; 1993, Virginia Department of Economic
Development
(2) 1990 U.S. Census
(3) 1980 and 1990 U.S. Census
(4) Virginia Department of Economic Development
(5) 1994, Virginia Employment Commission
(6) 1990 U.S. Census
RESIDENTIAL MORTGAGE LENDING. CBOV's mortgage operation originates both
conventional and government fixed rate and adjustable rate residential mortgage
loans primarily for resale in the secondary market. CBOV is an approved
seller/servicer for the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal National Mortgage Association ("FNMA").
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RESIDENTIAL CONSTRUCTION LENDING. Because of the attractive adjustable
rates available, CBOV makes construction loans for residential purposes. These
include both construction loans to experienced builders and loans to consumers
for owner occupied residences. Construction lending entails significant
additional risk as compared with residential mortgage lending. Construction
loans to builders can involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Also, with construction loans, funds
are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. Residential construction loans to
consumers, for which a permanent loan commitment from another lender approved
prior to loan closing is required, are subject to the additional risk of the
permanent lender failing to provide the necessary funds at closing, either due
to the borrower's inability to fulfill the terms of his commitment or due to the
permanent lender's inability to meet its funding commitments. In addition to its
usual credit analysis of the borrowers, CBOV seeks to obtain a first lien on the
property as security for its construction loans.
COMMERCIAL REAL ESTATE LENDING. CBOV provides permanent mortgage
financing for a variety of commercial projects but attempts to concentrate its
effort on owner-occupied projects. From time to time, in the normal course of
business, CBOV will provide a limited amount of financing for income producing,
non-owner occupied projects which meet all the guidelines established by loan
policy. These loans, generally, do not exceed 80% of current appraised or market
value, whichever is lower, and are written on terms which provide for a maturity
provision or interest rate adjustment available from three to five years from
the note date.
CONSUMER LENDING. CBOV currently offers most types of consumer demand,
time and installment loans, including automobile loans and home equity loans.
COMMERCIAL BUSINESS LENDING. As a full-service community bank, CBOV
makes commercial loans to qualified small businesses in CBOV's market area.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans but have commensurately higher yields. To manage
these risks, CBOV generally secures appropriate collateral and carefully
monitors the financial condition of its business borrowers and the concentration
of such loans in CBOV's portfolio. Residential mortgage loans generally are made
on the basis of the borrower's ability to make repayment from his employment and
other income and are secured by real estate whose value tends to be easily
ascertainable. In contrast, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from cash flow from its
business and are either unsecured or secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability of
funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the collateral for
secured commercial business loans may depreciate over time and cannot be
appraised with as much precision as residential real estate.
CREDIT EVALUATION AND LOAN UNDERWRITING. CBOV places priority on
meeting the borrowing requirements of its credit-worthy depositors. Non-deposit,
credit-worthy customers will also be granted loans when their requests meet the
established requirements, and there are sufficient funds available to satisfy
the demand. General economic conditions in the trade area, loan demand and yield
opportunities will be the principal determinants of loan levels within the
categories previously noted. CBOV's underwriting practices, which are
consistently applied without regard to the type of loan, involve investigation
of sources of income, employment history, details of existing debt, obtaining a
credit report
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(or industry trade report in the case of corporate borrows) and compiling a
history of the borrower relative to all of these areas. On unsecured credit in
excess of $5,000.00 and all loans in excess of $5,000.00 where the collateral is
not subject to immediate liquidation at a readily determined value, a current
financial statement is required. If a business applicant has no prior borrowing
relationship with CBOV, three years of fiscal year end balance sheets and profit
and loss statements are required. If application income data is not consistent
to capital or net worth positions, tax returns are required for up to three
prior years. From the data collected the applicant's ability to repay will be
determined. Primary and secondary sources of repayment will be evaluated. The
maximum debt service to gross income ratio acceptable for consumer loans is 40%.
Business loans and commercial mortgage loans require minimum cash flow coverage
of 1.25 times debt service. Credit card and other revolving credit standards
also consider the level of existing revolving credit accounts and underwriting
assumes payment requirements on existing accounts to be at maximum limits.
CBOV will consider collateral that is readily marketable with a value
easily recognized by either appraisal or publication. Collateral subject to
rapid and substantial changes in value will not be acceptable. CBOV will not
accept the assignment of furniture, musical or stereo equipment, jewelry, art
collections, and similar collateral for which a ready market and resale value
cannot be determined, or is difficult to determine. Automobiles and trucks older
than three years will be acceptable collateral provided there is a listed
N.A.D.A. value. Motorcycles are not desirable collateral. They are acceptable
for financing with strong owner equity or additional collateral. Loan to value
requirements vary according to the type of collateral, its liquidity and value.
The maximum loan to value for loans secured by residential real estate is 80%,
and commercial real estate is 75%. A full appraisal for all real estate loans in
excess of $100,000.00 will be engaged by CBOV from a licensed appraiser that has
been previously approved. Generally, listed securities are subject to a maximum
loan to value ratio of 75%, bank deposits to a 95% ratio, commercial inventory
and receivables are limited to a 50% ratio, personal property and vehicles over
three years old are subject to a 59% ratio, and commercial equipment is limited
to its wholesale or loan value.
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<PAGE>
CBOV APPOINTEES
The following table lists the names, ages and principal occupations of
the CBOV Appointees, who will be appointed to the CBI Board of Directors by such
Board in accordance with Section 1.2(c) of the Reorganization Agreement.
Principal Occupation at Present
Name and for Past Five Years; Directorships Age
Sam T. Beale Attorney - Beale, Balfour, Davidson & Etherington, 58
P.C.
James E. Bloom Communications Consultant 53
James R. V. Daniel Consultant; formerly President and CEO - 62
RP Industries, Inc.
Ralph Fields Consultant; retired from Reynolds Metals 76
David E. Hudgins David E. Hudgins and Associates, Inc. - 63
Insurance and Real Estate Appraiser
R. C. Huffman President and Chief Executive Officer - 56
Commerce Bank of Virginia
Barry M. Kornblau Sr. Vice President and Director - United 46
Dominion Real Estate Investment Trust
Lawrence B. Nuckols Real Estate Developer and Investor 55
John D. Seal, III President and Chairman - Virginia 57
Reproduction & Supply, Inc.
The CBOV Board currently consists of nine (9) directors.
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COMMERCE BANK OF VIRGINIA
ELECTION OF DIRECTORS; MANAGEMENT
GENERAL
At the CBOV Meeting, nine directors will be elected to hold office
until the next annual meeting of shareholders and until their successors are
duly elected and have qualified. Each of the nominees for Director named below
is presently a member of the Board of Directors of CBOV. The current term of
each expires at the CBOV Meeting. The proxy will be voted for the nominees
unless voting authority is withheld. If any nominee is not available for
election, the proxy will be voted by the individuals named in the proxy for such
substitute nominee as the Board of Directors may designate. The Board of
Directors has no reason to believe that any nominee will be unavailable.
In the election of directors, those nominees receiving the greater
number of votes will be elected even if they do not receive a majority.
Abstentions and broker non-votes will not be considered a vote for, or a vote
against, a nominee.
NOMINEES FOR ELECTION AS DIRECTORS
The following table sets forth certain information with respect to each
nominee for director. Except as otherwise indicated, each nominee has engaged in
his present principal occupation or has occupied the offices indicated or
similar positions with CBOV with substantially similar responsibilities for at
least the last five years.
Nominee and Age Director Principal Amount and Nature
Since Occupations of Beneficial
During Past Ownership as of
Five Years April 23, 1996
(Percent of
Class) (1)
- --------------------------------------------------------------------------------
Sam T. Beale (58) 1986 Attorney - Beale, Balfour, 36,346
Davidson & Etherington, P.C. (6.89%)
James E. Bloom (53) 1986 Communications Consultant 8,690
(1.65%)
James R.V. Daniel (62) 1986 Consultant; formerly President 11,100
and CEO - RP Industries, Inc. (2.10%)
Ralph Fields (76) 1986 Consultant 19,854
(3.76%)
David E. Hudgins (63) 1986 David E. Hudgins and Associates, 17,126
Inc. - Insurance and Real Estate (3.24%)
Appraiser
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<PAGE>
R.C. Huffman (56) 1986 President and Chief Executive 28,111
Officer - Commerce Bank of (5.35%)
Virginia
Barry M. Kornblau (46) 1986 Sr. Vice President and Director - 24,868
United Dominion Real Estate (4.71%)
Investment Trust
Lawrence B. Nuckols 1986 Real Estate Developer and 31,669
(55) Investor (6.00%)
John D. Seal, III (57) 1986 President and Chairman - Virginia 13,368
Reproduction & Supply, Inc. (2.53%)
(1) For the purposes of this table, beneficial ownership has been
determined in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934 under which, with the provisions of
Rule 13d-3 of the Securities Exchange Act of 1934 under which, in
general, a person is deemed to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting of the security
or the power to dispose of or direct the disposition of the security,
or if he has the right to acquire beneficial ownership of the security
within sixty days.
The Board of Directors has no reason to believe that any of the above
nominees will be unable to serve as a director. However, if any should be unable
for any reason to accept the nomination or election, it is the intention of the
person named in the enclosed form of proxy to vote those proxies authorizing
them to vote for election of directors for the election of such other person or
persons as the Board of Directors may in its discretion recommend.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE NOMINEES BE ELECTED AS
DIRECTORS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as set forth below, management of CBOV knows of no person who
has beneficial ownership of 5% or more of CBOV Common Stock.
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<PAGE>
NAME AND ADDRESS COMMON STOCK PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
Sam T. Beale 36,346 6.89%
6457 Barksdale Road
Richmond, VA 23231
R. C. Huffman 28,111 5.35%
11494 Otter Run Drive
Ashland, VA 23005
Lawrence B. Nuckols 31,669 6.00%
Route 621
Manakin-Sabot, VA 23103
BOARD OF DIRECTORS AND CERTAIN COMMITTEES
There were 12 meetings of the Board of Directors in 1995. Each director
attended greater than 75% of the aggregate number of meetings of the Board of
Directors and its committees of which he was a member in 1995.
CBOV has a standing Audit Committee, consisting of Messrs. Fields,
Nuckols and Seal. The Audit Committee retains an independent auditor to perform
internal audits of CBOV's financial affairs on an ongoing basis. The independent
auditor reports to the committee, which, in turn, reports to the Board of
Directors. The Audit Committee held 4 meetings during the year ended December
31, 1995. CBOV does not have a standing Nominating Committee. The Board of
Directors, acting as a committee of the whole, nominated the individuals
proposed herein for election as directors. CBOV has a standing Compensation
Committee, consisting of Messrs. Bloom, Daniel and Kornblau, which in addition
to other duties, performs the functions of a compensation committee in that it
reviews salaries and benefits of all officers and employees. CBOV has a standing
Executive Committee, consisting of Messrs. Beale, Huffman and Hudgins.
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<PAGE>
EXECUTIVE OFFICERS
Set forth below is certain information with respect to each executive
officer of CBOV. Mr. Huffman has held his present position for more than five
years. Messrs. Caffrey and Wiatt have held their positions with CBOV for less
than five years, as indicated below.
NAME AND POSITION AGE EXPERIENCE
Richard C. Huffman 56 President and CEO,
President and Chief Executive Officer CBOV, 1986 to
present
Thomas H. Caffrey, Jr. 47 Senior Vice-President
Senior Vice President and Chief Financial Officer and CFO, CBOV,
November 1993 to
present; Executive
Vice President,
New East Bancorp,
1991-1993; President,
County Bank of
Chesterfield, 1985-
1990
John M. Wiatt, Jr. 53 Senior Vice-President
Senior Vice President and Chief Credit Officer and Chief Credit
Officer, June 1992
to present; before
June 1992, Senior
Vice-President, Head
of Commercial
Lending, Dominion
Bank of Richmond,
for over 20 years
EXECUTIVE COMPENSATION
There is shown below information concerning the annual and other
compensation for services in all capacities to CBOV for the years ended December
31, 1995, 1994, and 1993 for the chief executive officer of CBOV.
NAME AND PRINCIPAL YEAR ANNUAL COMPENSATION
POSITION
SALARY BONUS ALL OTHER
COMPENSATION
Richard C. Huffman 1995 $95,000 $14,000 $13,834(1)
President/CEO
1994 $85,000 $10,000 $ 9,530
1993 $85,000 -0- $ 7,568
(1) The amounts presented include CBOV's contribution for the benefit of
Mr. Huffman under CBOV's employee stock ownership plan ($4,984,
$3,720 and $4,272 in 1995, 1994 and 1993, respectively) and under
CBOV's employee 401(k) plan ($8,850, $5,790 and $3,296 in 1995, 1994
and 1993, respectively).
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<PAGE>
DIRECTORS' FEES
As compensation for their services, each member of the Board of
Directors receives a monthly director fee of $150 and $150 for each meeting of
the Board attended. In addition, directors receive $50 for each Audit Committee
and Compensation Committee meeting attended. Board members who are also officers
do not receive any additional compensation above their regular salary for any
Board or committee meetings. In 1995, Directors received $29,328 in the
aggregate as compensation for their services as directors.
INTEREST OF DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
The directors and officers of CBOV are at present, as in the past,
customers of CBOV and CBOV has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, officers,
principal shareholders and their affiliates, on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others. These transactions do not
involve more than the normal risk of collectibility or present other unfavorable
features.
In addition, the real property at the location of CBOV's Hanover County
branch is owned by the Atlee Station Co., of which Sam T. Beale, a Director of
CBOV, is the principal shareholder. This lease has a term of ten years and
expires on December 31, 1998, at which time the lease is automatically renewed
with a renegotiated rent term. The lease provides for rent in the amount of
$3,000 per month beginning January 1, 1994, with an annual increase of 3%
through the end of the term. CBOV owns the improvements to the real property at
that location.
RELATIONSHIP BETWEEN DIRECTORS AND OFFICERS
There are no family relationships among any of the nominees for
director or among any such nominee and any officer, nor is there any arrangement
or understanding between any nominee or any other person pursuant to which the
nominee was selected.
EMPLOYMENT AGREEMENTS
CBOV and Mr. Huffman are parties to an employment contract for a term
beginning January 1, 1995, and ending December 31, 1997, with automatic renewals
at the ending date for successive terms of one year, which provides for his
employment as President and Chief Executive Officer. Under the contract, Mr.
Huffman is entitled to annual base compensation of $95,000.00. Any increases in
base compensation are at the discretion of the Board of Directors. The contract
will continue to renew for successive terms of one year each if it is not
expressly terminated by Mr. Huffman or CBOV. If, during the term of the
contract, CBOV terminates Mr. Huffman's employment without cause, CBOV must
continue Mr. Huffman's salary and benefits for six months. The contract provides
for increased severance pay if Mr. Huffman's employment terminates within one
year after a change of control of CBOV. In that case, Mr. Huffman is entitled to
a payment equal to 2.99 times his cash compensation for the twelve months that
precede the termination of his employment and a continuation of fringe benefits.
As of January 1, 1996, the cash amount payable to Mr. Huffman if his employment
terminated after a change of control would be $325,910.00. Mr. Huffman and CBOV
have agreed that the
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<PAGE>
Reorganization will not be considered a change of control for purposes of
interpreting or applying his employment contract.
CBOV and Mr. Caffrey are parties to an employment contract for a term
beginning January 1, 1995, and ending December 31, 1996, with automatic renewals
at the ending date for successive terms of one year, which provides for his
employment as Senior Vice President. Under the contract, Mr. Caffrey is entitled
to annual base compensation of $61,168.00. Any increases in base compensation
are at the discretion of the Board of Directors. The contract will continue to
renew for successive terms of one year each if it is not expressly terminated by
Mr. Caffrey or CBOV. If, during the term of the contract, CBOV terminates Mr.
Caffrey's employment without cause, CBOV must continue Mr. Caffrey's salary and
benefits for six months. The contract provides for increased severance pay if
Mr. Caffrey's employment terminates within one year after a change of control of
CBOV. In that case, Mr. Caffrey is entitled to a payment equal to his cash
compensation for the twelve months that precede the termination of his
employment and a continuation of fringe benefits. As of January 1, 1996, the
cash amount payable to Mr. Caffrey if his employment terminated after a change
of control would be $69,168.00. Mr. Caffrey and CBOV have agreed that the
Reorganization will not be considered a change of control for purposes of
interpreting or applying his employment contract.
CBOV and Mr. Wiatt are parties to an employment contract for a term
beginning January 1, 1995, and ending December 31, 1996, with automatic renewals
at the ending date for successive terms of one year, which provides for his
employment as Senior Vice President. Under the contract, Mr. Wiatt is entitled
to annual base compensation of $76,995.00. Any increases in base compensation
are at the discretion of the Board of Directors. The contract will continue to
renew for successive terms of one year each if it is not expressly terminated by
Mr. Wiatt or CBOV. If, during the term of the contract, CBOV terminates Mr.
Wiatt's employment without cause, CBOV must continue Mr. Wiatt's salary and
benefits for six months. The contract provides for increased severance pay if
Mr. Wiatt's employment terminates within one year after a change of control of
CBOV. In that case, Mr. Wiatt is entitled to a payment equal to his cash
compensation for the twelve months that precede the termination of his
employment and a continuation of fringe benefits. As of January 1, 1996, the
cash amount payable to Mr. Wiatt if his employment terminated after a change of
control would be $84,995.00. Mr. Wiatt and CBOV have agreed that the
Reorganization will not be considered a change of control for purposes of
interpreting or applying his employment contract.
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COMMERCE BANK OF VIRGINIA
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations of CBOV. This
review should be read in conjunction with CBOV's financial statements and
accompanying notes included elsewhere herein. This analysis provides an overview
of significant changes that have occurred during the periods presented.
OVERVIEW
CBOV's performance for the year ended December 31, 1995 showed
improvement over the prior year. Net income increased to $731,666 as compared to
$486,829 for last year. The increase was primarily due to an increased volume of
loans and to increased operating efficiencies at the two Goochland County
offices. CBOV also benefited from an improved cost containment program that was
initiated in 1994 and resulted in non-interest expenses declining by $22,377 for
the year ended December 31, 1995 as compared to the same period one year
earlier, representing an expense reduction of approximately 1% in this one area.
Return on average equity for the year increased to 14.12%, up from
12.04% for the prior year. Return on average assets improved to 1.09%, up from
0.80% for last year.
CBOV has enjoyed steady growth over the past five years, seeing total
assets increase to $72.9 million at December 31, 1995, up from $61.1 million at
December 31, 1994, and $57.2 million at December 31, 1993. Over the past five
years (December 1990 through December 1995) total loans increased to $42.6
million from $20.4 million, up 108.8%, and total deposits increased to $66.4
million from $29.1 million, up 128.2%.
In 1993 CBOV had the opportunity to move into two areas in Goochland
County that had offices of a major regional bank that were being closed. For a
small bank this represented a major opportunity and a significant challenge and
the Board of Directors decided to open two branch offices in the same year. The
costs associated with this undertaking were substantial and had a major impact
on expenses and net income in 1993. Non-interest expenses for 1993 were up
$470,000 over the prior year and net income dropped to $278,000 from $320,000
for the periods ending December 31, 1993 and 1992, respectively. Since opening
these two offices in Goochland County, the offices have developed over $17
million in deposits.
CBOV is not aware of any current recommendations by the bank regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between CBOV and either the Federal Reserve or the SCC, nor has either
regulatory agency made any recommendations concerning the operations of CBOV
that could have a material effect on its liquidity, capital resources or results
of operations.
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<PAGE>
INTEREST INCOME, INTEREST EXPENSE, AND NET INTEREST INCOME
YEAR ENDED DECEMBER 31, 1995
Interest Income. Interest income was $5.320 million in the year ended
December 31, 1995, up $1.115 million, or 26.5% from $4.205 million in the year
ended December 31, 1994. Volume increases in earning assets, particularly loans,
and an increase in the rates earned were the primary reasons for the increase.
Net loans increased 8.6% to $42.149 million and investment securities increased
32.8% to $20.146 million at December 31, 1995. CBOV's ratio of earning assets to
total assets increased to 90.12% at December 31, 1995, up 300 basis points from
87.12%, at December 31, 1994. This increase resulted in CBOV having $12.5
million more in earning assets at December 31, 1995 than in the same period one
year earlier. The average yield on the loan portfolio increased to 9.79%, up 71
basis points from 9.08%, while the tax equivalent yield earned on investment
securities increased 25 basis points, to 5.85%, from 5.60%.
Interest Expense. Interest rates, on average, were higher for 1995
compared to 1994. During this period CBOV was experiencing the maturity of older
time deposits that carried lower rates and with market rates being generally
higher the deposits were renewed at higher rates. Total interest-bearing
deposits increased $8.7 million to $55.509 million from $46.792 million for the
prior period. Because of these two factors, interest expense increased $707,669,
to $2.2 million. The average interest rate paid for 1995 was 4.23%, as compared
to 3.28% for 1994, an increase of 95 basis points.
Net Interest Income. Net interest income is the major component of
CBOV's earnings and is equal to the amount by which interest income exceeds
interest expense. Earning assets are composed primarily of loans and securities,
while deposits and short-term borrowings represent the major portion of
interest-bearing liabilities. Changes in the volume and mix of these assets and
liabilities, as well as changes in the yields earned and rates paid, determine
changes in net interest income. Net interest margin is calculated by dividing
tax equivalent net interest income by average earning assets and represents
CBOV's net yield on its earning assets. Net interest income was $3.113 million
for 1995, 15.1% greater than the $2.705 million reported during the comparable
period of 1994. The average total yield on earning assets for the period was
8.55% compared to the average expense on interest-bearing liabilities of 4.23%.
This produced a net interest spread of 4.32% or $3.113 million for the year
compared to 4.58% or $2.705 million one year earlier. Net income for 1995 was
$731,666 compared to $486,829 for 1994.
YEAR ENDED DECEMBER 31, 1994
Interest Income. Interest income increased $695,000 in 1994 from 1993,
or 19.8% to $4.2 million from $3.5 million. This increase was the result of an
increase of $8.0 million or 26.1% in net loans outstanding to $38.8 million from
$30.8 million one year earlier. Also, investment securities increased $1.8
million or 13.3% to $15.2 million from $13.4 million one year earlier. Earning
assets to total assets were up to 87.12% or $53.2 million compared to 84.56% or
$48.4 million, this produced $4.8 million of additional assets at work for CBOV
on December 31, 1993 compared to December 31, 1994.
Interest Expense. Interest expense rose to $1.5 million as of December
31, 1994 from $1.3 million for the same period of the prior year. This
represented an increase of $176,000 or 13.3%. Total
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<PAGE>
interest-bearing liabilities stood at $56.6 million up $3.3 million or 6.19%
from $53.3 million on December 31, 1993.
Net Interest Income. Net interest income was $2.7 million for the year
ending on December 31, 1994, 22.7% greater than the $2.2 million reported for
the year ended December 31, 1993. The total yield on average earning assets for
the year was 7.86% compared to the total interest expense on average
interest-earning liabilities of 3.28%. This produced a net interest spread of
4.58%. In the same period of the prior year the net interest spread was 4.32%.
Total net income for CBOV for 1994 was $486,000 compared to $278,000 for 1993.
CBOV's strong growth and the positive changes in the interest spread
have delivered improving results over the past few years as net income has
steadily increased. Although there was a drop in net income from 1992 to 1993
(mainly due to increased expenses associated with two new branches mentioned
earlier) the overall trend has been to show improved profits for CBOV's
shareholders.
YEAR ENDED DECEMBER 31, 1993
Interest Income. Interest income increased $294,750 in 1993 from 1992,
or 9.2% to $3.5 million from $3.2 million. This increase was primarily due to
the increase of $5.7 million or 22.8% in net loans outstanding to $30.8 million
from $25.1 million one year earlier. Also, investment securities increased $5.4
million or 67.5% to $13.4 million from $8.0 million one year earlier. Earning
assets to total assets stood at 89.7% or $51.3 million compared to 89.2% or
$37.8 million one year earlier.
Interest Expense. Interest expense was down $20,000 to $1.3 million or
1.5% as of December 31, 1993 even though total deposits at year end increased to
$53.3 million from $38.0 million. This decrease is attributed to generally lower
rates on deposits accounts for 1993 as compared to 1992.
Net Interest Income. The favorable changes in loan volumes and deposit
rates combined to increase net interest income to $2.2 million as of December
31, 1993, up $315,000 or 16.8% from the $1.9 million reported at December 31,
1992.
The year ended at December 31, 1993 also reflected a decrease in CBOV's
provision for loan losses of $52,000 due to the high quality of the loan
portfolio. Additionally, noninterest income was up by $22,747, due mainly to
increased service charge income.
Conversely, noninterest expenses were up substantially, increasing by
$470,000 or 30.8% to $2.0 million at December 31, 1993 from $1.5 million one
year earlier. This increase was attributed to the fact that CBOV was able to
open two new branch locations in Goochland County which directly impacted
salary, occupancy and depreciation expenses.
Net Income. The combined effect of all of these changes caused income
before taxes to decrease to $380,591 at December 31, 1993 down $80,685 or 17.5%
from $461,276 reported one year earlier, and even though income taxes decreased
to $103,000, down $38,000 or 27% from $141,000 for the prior year,net income was
$277,591 down $42,685 or 13.3% from $320,276 in 1992.
The following information on Average Balance Sheets and Interest Rates
Earned and Paid help to illustrate this improvement in overall results for CBOV.
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<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Year ended Year ended
December 31, 1995 December 31, 1994
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate(2) Balance Interest Rate(2)
(Dollars in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $42,986 $4,208 9.79% $35,994 $3,267 9.08%
Securities (3) 17,708 1,037 5.85% 15,152 848 5.60%
Federal funds sold 1,806 100 5.54% 2,740 119 4.34%
---------------------------- ---------------------------
Total interest-earning assets $62,500 $5,345 8.55% $53,885 $4,234 7.86%
------ ------
Noninterest-earning assets:
Cash and due from banks 3,979 3,661
Other real estate owned 0 0
Premises and equipment, net 1,616 1,521
Other assets 978 670
Less provision for loan losses (439) (345)
----- ------
Total $68,625 $59,393
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and NOW accounts $15,571 $ 521 3.35% $11,064 $ 306 2.77%
Savings deposits 20,269 648 3.20% 22,803 607 2.66%
Time deposits 11,187 810 7.24% 8,828 494 5.60%
Large denomination deposits 4,722 218 4.62% 2,584 89 3.44%
Federal funds purchased
and repo 424 10 2.36% 402 4 0.99%
------------------ ------------------
Total interest-bearing liabilities $52,173 $2,207 4.23% $45,681 $1,500 3.28%
------ -------
Noninterest-bearing liabilities:
Demand deposits 10,859 9,464
Other liabilities 349 211
-------- --------
$11,209 $ 9,675
Stockholders' equity 5,243 4,036
-------- --------
Total $68,625 $59,393
======== ========
Net interest earnings 3,138 2,734
Less tax equivalent adjustment 25 29
----- -------
Net interest income 3,113 2,705
===== =======
Net margin (4) 4.98% 5.02%
Interest spread (5) 4.32% 4.58%
</TABLE>
(1) For the purpose of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
(2) Tax equivalent adjustment (using 34% federal income tax rates) have been
made in the calculation of yields on tax-free loans and nontaxable
investment securities.
(3) The average balance of securities classified as available for sale does
not materially differ from amortized cost.
(4) Represents the ratio of net interest earnings to the average balance of
interest-earning assets.
(5) Interest spread is the difference between the average interest rate
received on interests-earning assets and the average interest rate paid on
interest-bearing liabilities.
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Year ended
December 31, 1993
Average Yield/
Balance Interest Rate(2)
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans (1) $30,046 $2,786 9.27%
Securities (3) 9,877 557 5.64%
Federal funds sold 6,115 196 3.21%
---------------------------
Total interest-earning assets $46,038 $3,539 7.69%
-------
Noninterest-earning assets:
Cash and due from banks 3,293
Other real estate owned 0
Premises and equipment, net 1,514
Other assets 558
Less provision for loan losses (327)
--------
Total $51,074
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market and NOW accounts $ 8,499 $ 226 2.66%
Savings deposits 16,603 478 2.88%
Time deposits 11,376 490 4.31%
Large denomination deposits 2,782 130 4.67%
Federal funds purchased
and repo 0 0 0.00%
----------------
Total interest-bearing liabilities $39,260 $1,324 3.37%
-------
Noninterest-bearing liabilities:
Demand deposits 7,976
Other liabilities 188
--------
$8,164
Stockholders' equity 3,650
--------
Total $51,074
========
Net interest earnings 2,215
Less tax equivalent adjustment 29
-------
Net interest income $2,186
=======
Net margin (4) 4.75%
Interest spread (5) 4.32%
(1) For the purpose of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
(2) Tax equivalent adjustment (using 34% federal income tax rates) have been
made in the calculation of yields on tax-free loans and nontaxable
investment securities.
(3) The average balance of securities classified as available for sale does not
materially differ from amortized cost.
(4) Represents the ratio of net interest earnings to the average balance of
interest-earning assets.
(5) Interest spread is the difference between the average interest rate
received on interest-earning assets and the average interest rate paid on
interest-bearing liabilities.
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INTEREST SENSITIVITY
An important element of earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
liabilities in a specific time interval. The gap can be managed by repricing
assets or liabilities, which can be effected by replacing an asset or liability
at maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities maturing in the same
time interval helps to hedge the risk and minimize the impact on net interest
income in periods of rising or falling interest rates.
CBOV determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding sources
and pricing and off-balance sheet commitments. These decisions are based on
management's outlook regarding future interest rate movements, the state of the
local and national economy, and other financial and business risk factors.
Bank management does not participate in any use of investment portfolio
tools that may be used by larger, more sophisticated financial institutions in
the management of interest rate risk. These products may include such things as
rate hedges, swaps, options, futures contracts or complex derivatives. The
overall interest sensitivity of CBOV is monitored by the Chief Executive Officer
and the Chief Financial Officer and adjustments are made to deposit and loan
rates and the size of the loan and investment portfolios. CBOV does not engage
in trading securities in an attempt to take advantage of price movements in the
interest rate markets.
CBOV also monitors its liquidity position on a regular basis in
association with the management of rate sensitivity. Management seeks to ensure
the availability of funds to meet deposit withdrawals, fund firm loan
commitments, and maintain cash and liquid reserves in amounts sufficient to meet
any demands immediately requiring funds. This is done by the maintenance of a
portion of CBOV's assets in short term investments whose conversion to cash
would not bear any significant penalties.
The two following tables present CBOV's interest sensitivity positions
on the dates indicated. This is a one-day position which is continually changing
and is not necessarily indicative of CBOV's position at any other time.
As of December 31, 1995, CBOV had $14.339 million more in liabilities
than assets that were subject to repricing within three months and therefore was
in a liability-sensitive position. At twelve months the cumulative negative gap
position narrows slightly to $11.370 million. Such a negative gap generally
adversely impacts earnings in a period of rising interest rates. A positive gap
position can adversely affect earnings in a period of declining interest rates.
To reduce the impact of changing interest rates as much as possible, CBOV
attempts to keep a large portion of its interest sensitive assets and
liabilities in generally shorter maturities, usually under five years. This
allows CBOV the opportunity to adjust interest rates as needed to react to the
loan and deposit market conditions.
The following table summarizes the contractual maturities or repricing
characteristics of CBOV's interest-earning assets and interest-bearing
liabilities at December 31, 1995. The principal balance of adjustable rate
assets are included in the period in which they are first scheduled to adjust
rather than in the period in which they mature. CBOV's position is that regular
passbook savings and NOW accounts
-63-
<PAGE>
are subject to immediate withdrawal and are, therefore, considered as repricing
in the earliest period presented (0 - 3 months).
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
December 31, 1995
Maturing or Repricing In:
0 - 3 4 - 12 1 - 5 Over
months months years 5 years Total
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 3,763 $ 0 $ 0 $ 0 $ 3,763
Investment securities 1,201 5,706 5,073 8,064 20,044
(amortized cost)
Loans 19,762 5,424 16,121 1,316 42,623
------------------------------------------------
Total interest-earning assets $24,726 $11,130 $21,194 $ 9,380 $66,430
=================================================
INTEREST-BEARING LIABILITIES
Deposits $39,065 $ 8,161 $ 8,199 $ 84 $55,509
Federal funds purchased 0 0 0 0 0
Other liabilities 0 0 0 0 0
-------------------------------------------------
Total interest-bearing liabilities $39,065 $ 8,161 $ 8,199 $ 84 $55,509
-------------------------------------------------
Period gap ($14,339) $ 2,969 $12,995 $ 9,296 $10,921
=================================================
Cumulative gap ($14,339) ($11,370) $ 1,625 $10,921
========================================
Ratio cumulative gap to total assets -19.66% -15.59% 2.23% 14.97%
========================================
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
December 31, 1994
Maturing or Repricing In:
-------------------------
0 - 3 4 - 12 1 - 5 Over
months months years 5 years Total
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 0 $ 0 $ 0 $ 0 $ 0
Investment securities 885 3,682 8,434 2,164 15,165
Loans 20,747 3,171 14,396 862 39,176
--------------------------------------------------
Total interest-earning assets $21,632 $ 6,853 $22,830 $ 3,026 $54,341
==================================================
INTEREST-BEARING LIABILITIES
Deposits $36,633 $ 6,682 $ 3,477 $ 0 $46,792
Federal funds purchased 793 0 0 0 793
Other liabilities 0 0 0 0 0
--------------------------------------------------
Total interest-bearing liabilities $37,426 $ 6,682 $ 3,477 $ 0 $47,585
==================================================
Period gap ($15,794) $ 171 $19,353 $ 3,026 $ 6,756
==================================================
Cumulative gap ($15,794) ($15,623) $ 3,730 $ 6,756
========================================
Ratio cumulative gap to total assets -25.86% -25.58% 6.11% 11.06%
========================================
</TABLE>
-65-
<PAGE>
INVESTMENT SECURITIES
CBOV maintains its investment securities portfolio with the intent to
ensure liquidity for cash flow requirements; serve as a backup to fund loan
demand; manage interest rate risk; maximize CBOV's overall return; ensure that
collateral is available for pledging; and manage asset quality and
diversification.
As a general practice, CBOV invests in securities with the intent of
holding such investments to maturity and does not utilize a Trading Account.
Effective January 1, 1994, CBOV adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In accordance with SFAS No. 115,
when securities are purchased, they are classified as investment securities when
management has the positive intent and CBOV has the ability at the time of
purchase to hold them until maturity. Investment securities are carried at cost
adjusted for amortization of premium and accretion of discount. Unrealized gains
or losses in the portfolio are not recognized unless management believes that
other than a temporary change has occurred. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale at the time of purchase. Securities available for sale are
recorded at fair value, based on quoted market prices. The net unrealized
holding gain or loss on securities available for sale, net of deferred income
taxes, is included as a separate component of stockholders' equity. A decline in
the fair value of any securities available for sale below cost, that is deemed
other than temporary, is charged to earnings resulting in a new cost basis for
the security. Cost of securities sold are determined on the basis of specific
identification.
The amortized cost of the investment portfolio as of December 31, 1995
was $20.044 million compared to $15.165 million at the same date one year ago.
The following tables show the amortized cost and fair market value of
the investment securities portfolio at December 31, 1995, and December 31, 1994
and information showing the book value at December 31, 1995, 1994 and 1993. The
following tables also show maturity distribution, book value, market value and
yield for the years ended on December 31, 1995, and December 31, 1994.
As of December 31, 1994 CBOV maintained its entire securities portfolio
of $15.165 million in the held-to-maturity category under the guidelines of SFAS
No. 115. At December 31, 1995 CBOV maintained $10.923 million of
held-to-maturity securities and $9.120 million (at book value) in the
available-for-sale category. The increase in available-for-sale securities was
due to management's decision to designate all new securities purchased as
available-for-sale. Total portfolio growth of $4.878 million and all
reinvestments of maturing securities in 1995 being designated as
available-for-sale resulted in the portfolio category changes as noted in the
following tables. There were no transfers of securities from the
held-to-maturity designation to the available-for-sale category in 1995.
-66-
<PAGE>
INVESTMENT SECURITIES
The following table shows the amortized cost and fair market value of
CBOV's investment securities at December 31, 1995 and December 31, 1994.
DECEMBER 31, 1995 Held to maturity Available-for-sale
(Dollars in thousands) Cost Value Cost Value
U.S. Treasury securities $ 4,997 $ 5,019 $1,142 $1,158
U.S. Government agencies 2,993 3,010 4,111 4,143
Securities issued by states
and political subdivisions:
General obligations 510 518 0 0
Revenue obligations 326 358 0 0
Industrial development and
similar obligations 300 299 0 0
Mortgage-backed securities:
Issued or guaranteed by
FNMA, FHLMC, or GNMA 541 550 3,735 3,790
Other debt securities 1,256 1,270 0 0
Equity securities 0 0 132 132
------------ -------------
Total securities $10,923 $11,024 $9,120 $9,223
================= ================
DECEMBER 31, 1994 Held to maturity Available-for-sale
(Dollars in thousands) Cost Value Cost Value
U.S. Treasury securities $ 7,398 $ 7,167 $ 0 $ 0
U.S. Government agencies 3,644 3,530 0 0
Securities issued by states
and political subdivisions:
General obligations 743 739 0 0
Revenue obligations 324 317 0 0
Industrial development and
similar obligations 200 191 0 0
Mortgage-backed securities:
Issued or guaranteed by
FNMA, FHLMC, or GNMA 1,147 1,050 0 0
Other debt securities 1,577 1,540 0 0
Equity securities 132 132 0 0
--------------- ----------
Total securities $15,165 $14,666 $ 0 $ 0
=================== ================
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<PAGE>
The period ending total securities portfolio is presented as follows:
December 31,
(Dollars in thousands) 1995 1994 1993
------------------------------
Investment securities $20,043 $15,165 $13,380
==================================
The maturity distribution, book value, market value, and yield of the
investment securities portfolio at December 31, 1995 and December 31, 1994 is
presented as follows:
Tax
DECEMBER 31, 1995 Held to maturity Available for sale Equivalent
- ----------------- Book Market Book Market Yield
Within 12 months $ 5,455 $ 5,457 $ 499 $ 500 5.16%
Over 1 year through 5 years 3,691 3,730 2,451 2,472 6.12%
Over 5 years through 10 years 400 420 2,558 2,586 6.77%
Over 10 years 1,377 1,417 3,612 3,665 6.75%
------- ------- ------ ------ -----
$10,923 $11,024 $9,120 $9,223 6.13%
======= ======= ====== ====== =====
Tax
DECEMBER 31, 1994 Held to maturity Available for sale Equivalent
- ----------------- Book Market Book Market Yield
Within 12 months $ 3,779 $ 3,719 $ 0 $ 0 5.03%
Over 1 year through 5 years 9,173 8,879 0 0 5.73%
Over 5 years through 10 years 1,297 1,190 0 0 6.55%
Over 10 years 916 878 0 0 6.68%
------- ------- ------ ------ -----
$15,165 $14,666 $ 0 $ 0 5.68%
======= ======= ====== ====== =====
-68-
<PAGE>
LOAN PORTFOLIO
CBOV's loan portfolio is comprised of commercial loans, real estate
loans, home equity loans, consumer loans, participation loans with other
financial institutions, and other miscellaneous types of credit. The primary
markets in which CBOV makes loans are generally in areas contiguous to its
branch locations in Henrico County, Hanover County, Goochland County and the
City of Richmond.
CBOV places priority on meeting the borrowing needs of its
credit-worthy depositors. Non- deposit, credit-worthy customers will also be
granted loans when their requests meet CBOV's requirements, and there are
sufficient funds available to satisfy the deposit customers' needs. CBOV offers
credit to finance the purchase of consumer goods, home improvements, seasonal
business lines of credit, inventory and receivable loans, term loans for
business purposes, and commercial real estate loans. CBOV offers amortized
residential first mortgage loans which qualify for sale in the secondary
markets. CBOV also offers first mortgage loans which do not qualify for the
secondary market, which however, are considered to be credit-worthy and can be
booked in-house through the Mortgage Department. Other real estate secured loans
may be granted for construction and land development on a select basis. Loans
for investment or speculative purposes will only be considered for financially
sound customers. CBOV does not pre-establish percentage levels for categories of
loans in the loan portfolio. Economic conditions in CBOV's market area, loan
demand and yield opportunities are the principal determinants of loan levels
within each category.
Total loans outstanding on December 31, 1995 stood at $42.623 million,
up 8.8% or $3.447 million. Total loans outstanding on December 31, 1994 were
$39.176 million, up 25.9% or $8.067 million from $31.109 million at December 31,
1993.
As of December 31, 1995 the composition of CBOV's loan portfolio was
primarily in the real estate portion with 66.72% of total loans. All types of
consumer loans amounted to 14.05% and various types of commercial loans
represented 13.30%.
One year earlier the real estate portion of the portfolio was 66.18%,
all types of consumer loans amounted to 19.37%, and various types of commercial
loans were 9.40% of the portfolio. The shifts in commercial loans from 9.40% to
13.30%, and the change in real estate loans from 66.18% to 66.72%, were due to
changes in the demand for certain types of credit in the local economy. The real
estate market was slowing down while commercial loans were in higher demand.
Also, the Bank's management believes that it is serving a commercial loan market
that the larger regional and national banks have not pursued.
Over the three year period ending December 31, 1995 the loan portfolio
percentage distribution remained fairly constant with only minor fluctuations
between categories being the result of normal changes in the Bank's market area.
The following tables illustrate these changes.
In the normal course of business, CBOV makes various commitments and
incurs certain contingent liabilities which are disclosed but not reflected in
its financial statements, as noted elsewhere in this document (see Note 12 of
the Notes to the Financial Statements). These commitments and contingent
liabilities include commitments to extend credit and financial standby letters
of credit. CBOV does not, and has not had, any loans to foreign countries, or
any highly leveraged transactions.
-69-
<PAGE>
The loan portfolio is monitored by the Senior Credit Officer who has
overall responsibility for the quality of the loans extended by CBOV. The loan
policy is relatively conservative and is set out in detail for all Loan Officers
to follow and it is closely adhered to. The overall quality of the loan
portfolio is extremely high. Any loan delinquencies are closely monitored and
aggressively pursued. Because of these factors, CBOV enjoys a very low past due
ratio, and no nonaccrual loans, as seen in a following table dealing with
nonperforming loans. As of December 31, 1995 there were no loans past due over
ninety days.
-70-
<PAGE>
LOAN PORTFOLIO
A detailed analysis of the loan portfolio as of December 31, 1995, 1994
and 1993 is set forth in the following tables:
Loan Portfolio
December 31,
(In thousands) 1995 1994 1993
---------------------------
Commercial $ 5,667 $ 3,683 $ 3,646
Real estate - construction
and land development 2,960 4,113 1,715
Real estate - other 25,481 21,813 19,080
Consumer 5,986 7,589 6,535
Other 2,529 1,978 133
-----------------------------
Total loans $42,623 $39,176 $31,109
Allowance for loan losses (473) (374) (330)
----------------------------
Net loans $42,150 $38,802 $30,779
================================
Loan Portfolio by Percentage
(In thousands) December 31,
1995 1994 1993
----------------------------
Commercial 13.30% 9.40% 11.72%
Real estate - construction
and land development 6.94% 10.50% 5.51%
Real estate - other 59.78% 55.68% 61.33%
Consumer 14.05% 19.37% 21.01%
Other 5.93% 5.05% 0.43%
------------------------------
Total loans 100.00% 100.00% 100.00%
==============================
-71-
<PAGE>
MATURITY SCHEDULE OF LOANS
The following table shows the maturity of loans outstanding at December
31, 1995 and December 31, 1994. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest rates. Loans are
classified based upon the period in which the final payment is due. Actual
maturities may differ from those shown in the table as loans are refinanced
prior to maturity.
DECEMBER 31, 1995 After One
(Dollars in thousands) Within But Within After
One Year Five Years Five Years Total
Fixed rate loans $ 3,117 $16,121 $1,316 $20,554
Floating rate loans 22,069 0 0 22,069
-------------------------------------------
Total $25,186 $16,121 $1,316 $42,623
===========================================
DECEMBER 31, 1994 After One
(Dollars in thousands) Within But Within After
One Year Five Years Five Years Total
Fixed rate loans $ 4,175 $14,396 $ 812 $19,383
Floating rate loans 19,793 0 0 19,793
-------------------------------------------
Total $23,968 $14,396 $ 812 $39,176
===========================================
-72-
<PAGE>
NONPERFORMING LOANS
Each new loan made by a Loan Officer pursuant to his and her lending
authority is reported to the Board of Directors at the first regular meeting
following the granting of the loan. On a weekly basis all Loan Officers meet
with the Senior Loan Officer to review all loans made during the prior week. One
Loan Officer has been assigned the additional responsibility of randomly
reviewing loans in the portfolio and checking for proper risk rating, adherence
to covenants and conditions in the loan agreement, and proper management of the
loan account. Periodically, the reviewer meets with the President and Senior
Loan Officer to discuss any recommendations or findings.
All delinquent loans past due thirty days or more are reported to the
Board of Directors monthly. Collection efforts begin no later than ten days from
the due date of past due loans. Loans with interest or principal payments ninety
days or more past due will either be charged to the reserve for bad debts, or
placed on nonaccrual status.
There were no troubled debt restructurings as defined by SFAS No. 15
for any of the periods shown.
Any interest income on nonaccrual loans that would have been recorded,
had the loans been current in accordance with their original terms, would have
been under $2,000 in any one year period, and therefore would have had no
material effect on the financial statements of CBOV.
Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans which are contractually past due 90 days or more as to interest
and/or principal payments. The following table presents information concerning
nonperforming loans for the periods indicated:
As of December 31, 1995 there were no loans where information about
possible credit problems of borrowers causes management to have serious doubts
about the borrowers' ability to comply with the present repayment terms.
-73-
<PAGE>
(Dollars in thousands) December 31,
1995 1994 1993
--------------------------
Commercial loans
Past due 90 days or more $ 0 $ 0 $ 0
Nonaccrual 0 40 0
Installment loans
Past due 90 days or more 0 0 0
Nonaccrual 0 10 22
Real estate loans
Past due 90 days or more 0 0 77
Nonaccrual 0 0 0
--------------------------
Total $ 0 $ 50 $ 99
==========================
Nonperforming loans to total loans 0.00% 0.13% 0.30%
Interest income recorded on
nonaccrual loans during the period $ 0 $ 0 $ 0
The overall quality of the loan portfolio and management's attention to
credit underwriting procedures are clearly reflected in the 90 day past due and
nonperforming loan categories shown above.
ASSET QUALITY / ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents an amount management believes
is adequate to provide for potential loan losses inherent in the loan portfolio.
However, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans, Because these
risks are influenced by general economic trends as well as conditions affecting
individual borrowers, management's judgment of the allowance is only approximate
and imprecise. The allowance is also subject to regulatory examinations and
determinations as to adequacy, which take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer banks identified by regulatory agencies. In addition, advice
from CBOV's independent accountants is considered in reviewing and assessing the
adequacy of the allowance.
At December 31, 1995 the allowance for loan losses was $473,135
compared to $374,342 for the same period one year earlier. Net charge offs were
$96,207, down 38.3% for the year compared to $155,829 for the last year. The net
charge offs as a percentage of average loans outstanding was only 0.24% for the
period ending at December 31, 1995, down from 0.44% for the same period last
year.
On December 31, 1995 the allowance for loan losses as a percentage of
the total loans outstanding stood at 1.11%. Based on the overall quality of the
loan portfolio and the low delinquency levels, management feel that this is an
adequate level and expects to maintain it on an ongoing basis. Loan losses are
charged to the allowance for loan losses; recoveries are credited to the
allowance.
Effective January 1, 1995, CBOV adopted Statement of Financial
Accounting Standards (SAFS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SAFS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures). The effect of adopting this new
accounting standard was immaterial to the operating results of CBOV for the year
ended December 31, 1995. Prior financial statements have not been
restated to apply the provision of the new accounting standard.
-74-
<PAGE>
Under the new accounting standard, a loan is considered to be impaired
when it is probable that CBOV will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. The
allowance for loan losses related to loans identified as impaired is primarily
based on the excess of the loan's current outstanding principal balance over the
estimated fair market value of the related collateral. For a loan that is not
collateral-dependent, the allowance is recorded at the amount by which the
outstanding principal balance exceeds the current best estimate of the future
cash flows on the loan discounted at the loan's effective interest rate. Prior
to 1995, the allowance for loan losses for all loans which would have qualified
as impaired under the new accounting standard was primarily based upon the
estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments
received are generally applied to reduce the outstanding principal balance.
However, all or a portion of a cash payment received on a nonaccrual loan may be
recognized as interest income to the extent allowed by the loan contract,
assuming management expects to fully collect the remaining principal balance on
the loan.
As of December 31, 1995 CBOV had no loans that were considered as
impaired.
-75-
<PAGE>
ALLOWANCE FOR LOAN LOSSES
Loan losses have not been a significant negative factor for CBOV. The
following table presents CBOV's loan loss experience and selected loan ratios
for the years ending on December 31, 1995, 1994 and 1993.
December 31,
(In thousands) 1995 1994 1993
------------------------------
Allowance for loan loss at
beginning of year $ 374 $ 330 $ 301
Loans charged off:
Commercial 87 151 34
Installment 27 14 18
Real estate 0 25 0
--------------------------------
Total $ 114 $ 190 $ 52
--------------------------------
Recoveries of loans
previously charged off:
Commercial 4 28 4
Installment 14 6 2
Real estate 0 0 0
--------------------------------
Total $ 18 $ 34 $ 6
Net loans recovered (charged off) (96) (156) (46)
Provision for loan losses 195 200 75
--------------------------------
Allowance for loan losses at
end of period $ 473 $ 374 $ 330
===================================
Average total loans $42,986 $35,994 $30,046
Total loans $42,623 $39,176 $31,109
Selected Loan Loss Ratios:
Net charge offs to average loans 0.24% 0.44% 0.15%
Provision for loan losses to
average loans 0.48% 0.56% 0.25%
Provision for loan losses to
net charge offs 2.03X 1.28X 1.63X
Allowance for loan losses to
year end loans 1.11% 0.95% 1.06%
Loan loss coverage (1) 9.65X 5.85X 9.89X
(1) Income before income tax plus provision for loan losses, divided by net
chargeoffs.
-76-
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
A breakdown of the allowance for loan losses is provided in the
following tables; however, such a breakdown has not historically been maintained
by CBOV and management does not believe that the allowance can be fragmented by
category with a degree of precision that would be useful to investors. Due to
the relatively small amounts of net loan losses over the past three years, the
breakdown of the allowance for loan losses is based primarily upon those factors
discussed above in computing the allowance for loan losses as a whole. Because
all of these factors are subject to change, the breakdown is not necessarily
indicative of the category of future loan losses. The entire amount of the
allowance is available to absorb losses in any category. The allowance is
allocated below based on the relative percent of loan losses in each category,
which represents the expected and provided for inherent losses in the portfolio.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES IN DOLLARS
DECEMBER 31,
1995 1994 1993
---- ---- ----
(In thousands)
Commercial $407 $295 $215
Installment 66 19 115
Real estate -0- 60 -0-
Total Allowance $473 $374 $330
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES BY PERCENTAGE
DECEMBER 31,
1995 1994 1993
---- ---- ----
(In thousands)
Commercial 86% 79% 65%
Installment 14% 5% 35%
Real estate -0-% 16% -0-%
Total Allowance 100.00% 100.00% 100.00%
-77-
<PAGE>
PROVISION FOR LOAN LOSSES
The following chart presents the activity and period ending balances
for the Allowance for Loan Losses, the Provision for Loan Losses charged to
expense, the Loan Charge-offs (net of recoveries) for the years ended December
31, 1995, 1994 and 1993.
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Allowance for loan losses, beginning of year $374,342 $330,333 $300,692
Provision for loan losses, charged to expense 195,000 199,838 75,000
Charge-offs, net of recoveries (96,207) (155,829) (45,359)
-------- --------- ---------
Balance, end of year $473,135 $374,342 $330,333
======== ========= ========
In establishing its provision for loan losses, CBOV considers the size
and risk exposure of each segment of the loan portfolio, past loan experience,
present indicators such as delinquency rates and collateral values, and the
potential for losses in future periods. The provision is based on management's
estimates of the fair value of the collateral, considering the current and
currently anticipated future operating or sales conditions, thereby causing
these estimates to be susceptible to changes that could result in an adjustment
to future results of operations. Factors such as independent appraisals, current
economic conditions and the financial condition of borrower's are evaluated to
determine whether CBOV's investment in such assets does not exceed their
estimated values.
The increased provision for loan losses for the years ended December
31, 1995 and 1994 in relation to the year ended December 31, 1993 was due to
growth in the loan portfolio and the problems of a large borrower in late 1994.
CBOV increased its provision for loan losses for the year ended December 31,
1994 based on its best estimate of the available information to recognize the
deterioration in the financial condition of this loan customer. CBOV continued
to increase the provision in 1995 as the customer's condition worsened and
finally ended in bankruptcy. In the fourth quarter of 1994, CBOV realized a
small recovery.
For the year ended on December 31, 1995 the allowance for loan losses
was 1.11% of total loans outstanding, for December 31, 1994 it was 0.96%, and
for December 31, 1993 it was at 1.07%.
OTHER OPERATING INCOME
Non-interest income for the year ended on December 31, 1995 was
$382,044, decreasing $47,812 or 11.1% from the total of $429,856 reported for
the same period one year earlier. A significant portion of non-interest income
comes from the fees for originating mortgage loans that CBOV sells in the
secondary mortgage market. Due to changes in the local and national economy the
demand for primary mortgage financing decreased, causing a corresponding
reduction in the fees collected.
The largest component in this area is service charges on deposit
accounts. For the year ended December 31, 1995, this category represented
$305,346 or 79.9% of total other income.
For the year ended on December 31, 1994, non-interest income was
$429,856 up $166,020 or 62.9% from the $263,836 reported one year earlier.
Service charges for this period represented $289,406 or 67.3% of the total.
For the year ended on December 31, 1993, non-interest income was
$263,836 up $22,747 or 9.4% from the $241,089 reported one year earlier. Service
charges for this period represented $200,568 or 76.0% of the total.
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<PAGE>
Despite the continued competitive pricing of products and services of
other financial institutions, CBOV has been able to maintain slightly increased
levels of income from this source. Management intends to concentrate future
efforts towards maintaining increased income from this source.
OTHER OPERATING EXPENSES
For the year ended on December 31, 1995 other operating expenses
decreased slightly to $2.200 million, down 1.0% or $22,377 from $2.223 million
for the same period one year earlier. Although salary and benefit expenses were
up due to increased benefit costs and normal salary increases, this was more
than offset by a significant decline in the cost of providing FDIC coverage. Due
to an improved national economy and the improved overall earnings of the
financial industry, the FDIC lowered its premiums for deposit insurance,
starting in July 1995. For the year ended December 31, 1995 FDIC insurance
expenses were $65,123, down 44.5% from $117,340 for the prior year. An
additional reduction is expected in 1996.
Depreciation and amortization expense declined to $129,296 in 1995 from
$227,875 for 1994. This decline was due to CBOV having fully depreciated many
items in 1994 that were placed in service in the early years of operation. In
addition to this, other assets that had ended their useful operating life in
1994 were fully charged to depreciation expense.
For the year ended on December 31, 1994 other operating expenses
increased to $2.223 million, up $228,382 or 11.5% from the $1.994 million for
the prior year. The major component of this category is salary and benefit
expenses which represented 53.4% or $1.187 million up $184,458 or 18.4% from the
$1.003 million reported on December 31, 1993. This increase was due to increases
in staff which were necessary to continue to properly serve CBOV's customer
base.
Other operating expenses for the year ended on December 31, 1993
increased $470,000 or 30.8% to $1.994 million from the $1.524 million reported
for the prior year. Significant increases in several of the items that represent
this category were due to CBOV's opening of two branch locations in Goochland
County in June. Salary and benefit costs were up $240,749 or 31.6% to $1.003
million. Occupancy expenses increased by $62,143 or 57.8% to $169,688.
Depreciation and amortization costs were up $48,546 or 35.1% to $186,883. Bank
printing and supply expenses increased $30,038 or 53.5% to $86,201.
INCOME TAXES
Income tax expense was $367,800 for 1995, $225,600 for 1994 and
$103,000 for 1993. The increased amount each year is directly attributed to
improved net income in each of the three years. The tax expense amounts
represent 34%, 32% and 27% for the respective years. The primary reason for the
change in tax rates was related to the level of non-taxable municipal bond
interest earned each year.
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DEPOSITS
As of December 31, 1995 deposits totaled $66.358 million, an increase
of $10.546 million or 18.9% from the year earlier. CBOV primarily uses deposits
to fund its loan portfolio, with any excess funds utilized in the investment
securities portfolio.
For 1995 CBOV has seen its deposit base shift from lower cost savings
accounts to move to higher yields (for the customer) in certificates of deposit.
At December 31, 1995 CBOV had $16.978 million in savings accounts compared to
$20.803 million one year earlier, representing a decline of $3.825 million, or
18.4%. During the same period, certificates of deposit increased to $19.476
million compared to $14.004 million one year earlier, representing an increase
of $5.472 million, or 39.1%. While CBOV has enjoyed an overall growth in total
deposits in 1995, these changes have caused expenses to rise as noted earlier in
the discussion of the costs of funds.
At December 31, 1994 total deposits were $55.811 million up $2.513
million or 4.7% from December 31, 1993. From a depositor's standpoint 1994 was a
period of rising interest rates; consequently CBOV's interest-bearing
transaction accounts and savings deposits increased as depositors did not want
to commit dollars to longer maturity certificates of deposit. These shorter term
deposits increased $3.087 million from $29.701 million on December 31, 1993 to
$32.788 million on December 31, 1994, which represents an increase of 11.1%.
During the same period certificates of deposit dropped from $14.885 million on
December 31, 1993 to $14.004 million on December 31, 1994, a decline of
$881,000, or 5.9%. This was a logical change on the part of depositors as they
were trying to anticipate the peak in interest rates before committing funds to
longer maturity periods. As noted above, this trend reversed itself in 1995 as
interest rates on deposits peaked and started a small decline.
CBOV offers individuals and small-to-medium sized businesses a variety
of deposit accounts. These include checking, savings, money market, certificates
of deposit, and individual retirement accounts (IRA's). These funds are obtained
from the local communities served by CBOV and represent a stable core deposit
base.
DEPOSITS
The breakdown of deposits at December 31, 1995, 1994, and 1993 is
indicated as follows:
December 31,
(In thousands) 1995 1994 1993
------------------------------
Demand $10,849 $ 9,019 $ 8,712
Interest-bearing transaction accounts 19,055 11,985 10,595
Savings 16,978 20,803 19,106
Certificate of deposit 19,476 14,004 14,885
------------------------------
Total deposits $66,358 $55,811 $53,298
==============================
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Maturities of time certificates of deposit at December 31, 1995 and
December 31, 1994 are shown below:
Maturity
(In thousands) December 31, 1995 December 31, 1994
----------------- -----------------
$100,000 Less than $100,000 Less than
and over $100,000 and over $100,000
Three months or less $ 355 $ 2,661 $1,348 $ 1,658
Over three through twelve months 1,958 6,203 306 7,213
Over one year through five years 1,734 6,481 640 2,839
Over five years 0 84 0 0
------------------- ------------------
Total $4,047 $15,429 $2,294 $11,710
=================== ==================
SHORT TERM BORROWINGS
CBOV occasionally finds it necessary to purchase funds on a short-term
basis (generally, less than 30 days) due to fluctuations in loan and deposit
levels. CBOV has several arrangements whereby it may purchase federal funds from
other financial institutions in an aggregate amount of up to approximately
$5.000 million dollars as of December 31, 1995. CBOV had no purchased funds on
December 31, 1995, and the largest amount outstanding for any day was $2.7
million, with the average being $166,100. The maximum amount outstanding at any
month end during 1995 was $1.052 million.
LIQUIDITY
Liquidity represents an institution's ability to meet present and
future financial obligations through the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with other banks, federal funds sold,
investments and loans maturing within one year. CBOV's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of CBOV's management of liquid assets and the ability to
generate liquidity through increasing deposits, management believes that CBOV
maintains overall liquidity that is sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
CBOV's Liquidity Policy states that it is management's responsibility
to ensure the availability of funds to meet deposit withdrawals and fund loan
commitments by maintaining cash and liquid reserves in amounts sufficient to
meet the expected demands requiring immediately available funds. Management
believes that it is appropriate to maintain a portion of funds available to meet
these
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expected needs in earning assets whose conversion to cash would not bear
significant penalties. Liquidity levels are regularly monitored and adjustments
are made as needed.
The following information should be read in conjunction with the
statements of cash flows, which appear on page C-8 of CBOV's financial
statements.
Cash and cash equivalents increased $2,752,610 to $7,734,894 for the
year ended December 31, 1995, as the net cash provided by operating and
financing activities exceeded the net cash used in investing activities. The
$1,120,500 of net cash provided by operating activities primarily resulted from
$731,666 in net income and $195,000 in provisions for loan loss. The $10,803,860
of net cash provided by financing activities was the result of an increase in
deposits of $10,546,052 and the proceeds from a stock sale of $1,050,808,
federal funds purchased decreased $793,000. Within investing activities cash
outflows consisted of the net purchase of investment securities of $4,875,343
($12,230,655 of gross purchases less $7,355,312 of payments and maturities), the
net originations of new loans of $3,542,863, an increase in premises and
equipment and the purchase of other real estate of $316,855. Total funds
provided from all sources was $11,924,360 less total funds used of $9,171,750
produced the net increase of $2,752,610.
For the year ended December 31, 1994, cash and cash equivalents
decreased $3,890,475 to $4,982,284, as the net cash used in investing activities
exceeded the net cash provided by operating and financing activities. The
$2,852,396 of net funds provided by operating activities resulted mainly from a
$2,125,261 decrease in mortgage loans held for resale and $486,829 in net income
for the year. The $3,318,742 of net cash provided by financing activities was
attributed to an increase in deposits of $2,514,022 and an increase in federal
funds purchased of $793,000. Within investing activities cash outflows consisted
mainly of the net purchase of investment securities of $1,798,808 ($6,985,198
gross purchases less $5,186,390 in payments and maturities) and net originations
of new loans of $8,223,052. Total funds provided from all sources in 1994 were
$6,171,138 less total funds used of $10,061,613 produced the net decrease of
$3,890,475.
CAPITAL RESOURCES
Capital represents funds, earned or obtained, over which financial
institutions can exercise greater control in comparison with deposits and
borrowed funds. The adequacy of CBOV's capital is reviewed by management on an
ongoing basis with reference to size, composition, and quality of CBOV's
resources and consistent with regulatory requirements and industry standards.
Management seeks to maintain a capital structure that will support anticipated
asset growth and absorb any potential losses.
The federal regulatory agencies adopted new capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. The
minimum ratio of qualifying total capital to risk-weighted assets is now 8.0% of
which 4.0% must be Tier 1 capital. Tier 1 capital is defined as common equity,
retained earnings, and a limited amount of perpetual preferred stock, less
certain goodwill items. CBOV had a ratio of risk-weighted assets to total
capital of 13.70% on December 31, 1995 and a ratio of risk-weighted assets to
Tier 1 capital of 12.71%
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The following tables show an analysis of CBOV's capital account and the
breakdown of Tier 1 capital, Tier 2 capital, and risk-weighted assets as well as
the ratios discussed above. These tables cover the years ended on December 31,
1995, 1994 and 1993.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and result of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or the same magnitude as the prices of goods and services. In the
current interest rate environment, equity, maturity structure and quality of
CBOV's assets and liabilities are critical to the maintenance of acceptable
performance levels.
TRENDS AFFECTING OPERATIONS
The primary general economic trends which affect CBOV are general
economic conditions and interest rates.
The relative economic strength and stability of Richmond, Virginia
where CBOV is located is important in terms of loan demand, the ability of
borrowers to repay loans and availability of funds for deposit by customers.
Throughout 1995, general economic conditions have been favorable in Virginia.
Future economic conditions are difficult to predict.
Since most of CBOV's assets and liabilities are interest-bearing,
trends in interest rates can have a pervasive impact on operating results. In
recent periods, interest rates have been at relatively low levels. In periods of
lower interest rates, CBOV strives to emphasize variable rate loans and time
deposits to the extent possible in a competitive environment; however,
competitive influences often result in making fixed rate loans, although CBOV
seeks to limit the duration of such loans. Similarly, low interest rates
generally make competition more intense for deposits, since loan demand will
increase during periods of lower rates and, accordingly, result in higher
interest costs on deposits, adversely impacting interest margins.
CBOV's net interest income increased about 15% from 1994 to 1995 and
its net interest spread (the difference between asset yield and the composite
cost of interest-bearing liabilities) decreased approximately 6% for the same
period. Many factors impact the aggregate net interest spread. In 1995, yields
on earning assets increased primarily due to higher rates and fees on loans.
Interest rates on deposits in the aggregate were higher in 1995 compared to
1994, hence decreasing the net interest spread. With market interest rates
remaining at relatively low levels, depositors seek to maximize their interest
income through time accounts. CBOV experienced some movement from savings to
certificates of deposit. Accordingly, competition for depositors' funds has
resulted in higher rates on such time deposits.
Future interest rates and the impact on earnings are difficult to
predict.
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Financial institutions are subject to significant regulatory
requirements which impact current and future operations. Additionally, the
extent of regulation and the impact thereof are subject to a number of factors,
including legislative and political environments, to name a few. With 1996 being
a major election year, the future of financial institution regulation is
somewhat uncertain.
ANALYSIS OF CAPITAL
The following table sets forth CBOV's various capital ratios at the
dates indicated:
(Dollars in thousands) December 31,
1995 1994 1993
----------------------------------------
Tier 1 Capital:
Common stock $ 1,754 $ 1,509 $ 1,502
Capital surplus 2,046 1,241 1,236
Retained earnings 2,241 1,509 1,022
---------------------------------------
Total Tier 1 capital $ 6,041 $ 4,259 $ 3,760
=======================================
Tier 2 Capital:
Allowance for loan losses $ 473 $ 374 $ 330
Allowable long-term debt 0 0 0
---------------------------------------
Total Tier 2 capital $ 473 $ 374 $ 330
=======================================
Risk-weighted assets $47,541 $40,859 $33,338
Capital Ratios:
Tier 1 risk-based capital ratio 12.71% 10.42% 11.28%
Total risk-based capital ratio 13.70% 11.34% 12.27%
Tier 1 capital to average
total assets 8.80% 7.17% 7.36%
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RETURN ON EQUITY AND ASSETS
The following table highlights certain ratios for the periods
indicated:
December 31,
1995 1994 1993
-------------------------------------
Income before securities gains
and losses to:
Average total assets 1.11% 0.80% 0.49%
Average stockholders' equity 14.12% 12.04% 7.62%
Net income to:
Average total assets 1.09% 0.80% 0.49%
Average stockholders' equity 14.12% 12.04% 7.62%
Dividend payout ratio 0.00% 0.00% 0.00%
Average stockholders equity to
average total assets 7.74% 6.80% 7.15%
ADOPTION OF ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed
Of". SFAS 121 requires that long-lived assets and certain intangibles to be held
and used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of CBOV.
In May 1995, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for
Mortgage Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122
requires entities to allocate the cost of acquiring or originating mortgage
loans between the mortgage servicing rights and the loans, based on their
relative fair values, if the bank sells or securitizes the loans and retains the
mortgage servicing rights. In addition, SFAS 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of CBOV.
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INDEPENDENT ACCOUNTANTS
The Board of Directors of CBOV selected the accounting firm of BDO
Seidman, independent accountants, to be CBOV's independent accountants for the
year ended December 31, 1995. A representative of BDO Seidman is expected to be
present at the CBOV Meeting, will have the opportunity to make a statement at
the meeting if he or she desires to do so, and will be available to respond to
appropriate questions. The Board of Directors has not yet made a determination
regarding the selection of independent accountants for the year ending December
31, 1996. Under CBOV's Articles of Incorporation and Bylaws, stockholders are
not required to ratify or confirm the selection of independent accountants made
by the Board of Directors.
OTHER BUSINESS
If any other matters come before the meeting, not referred to in the
enclosed Proxy, including matters incident to the conduct of the meeting, the
Proxies will vote the shares represented by the proxies in accordance with their
best judgment. Management is not aware of any other business to come before the
meeting as of the date of the preparation of this Proxy Statement.
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COMMUNITY BANKSHARES INCORPORATED
GENERAL
CBI and The Community Bank. CBI's sole business is to serve as a
holding company for The Community Bank. CBI was incorporated as a Virginia
corporation on January 24, 1984, and on January 1, 1985, it acquired all of the
issued and outstanding shares of The Community Bank's capital stock.
The Community Bank was incorporated in 1973 under the laws of Virginia.
Since The Community Bank opened for business on June 10, 1974, its main banking
and administrative office has been located at 200 North Sycamore Street,
Petersburg, Virginia. The Community Bank's first branch was opened in 1979 in
Petersburg, Virginia. The Community Bank opened a branch office in Colonial
Heights, Virginia, during 1984. In 1985, the Community Bank opened its newest
branch in the village of Chester in Chesterfield County, Virginia.
Principal Market Area. The Community Bank concentrates its marketing
efforts in the cities of Petersburg and Colonial Heights, Virginia, and in the
adjacent counties of Prince George, Dinwiddie and Chesterfield, including the
village of Chester in Chesterfield County. As of December 31, 1995, The
Community Bank had approximately $43.2 million of deposits in the City of
Petersburg; $14.8 million of deposits in the City of Colonial Heights; and $19.3
million of deposits in the village of Chester. CBI's present intention is to
continue concentrating its banking activities in its current market.
The following table sets forth certain economic data on the localities
in which The Community Bank maintains branch offices. The data generally reflect
that Chesterfield County is more affluent than either of the cities of
Petersburg and Colonial Heights. Chesterfield County has experienced rapid
population growth, while the population of Petersburg has declined and that of
Colonial Heights has been generally stable.
<TABLE>
<CAPTION>
City of
City of Colonial Chesterfield
Petersburg Heights County
<S> <C> <C> <C>
Per Capita Income ($) (1)
1980 6,358 7,981 11,395
1990 10,547 15,639 19,920
1993 unavailable unavailable 23,231
Median Household Income ($) (2) 21,309 34,472 43,604
1980 Population (3) 41,055 16,509 141,372
1990 Population (3) 37,027 16,065 209,564
1993 Population (4) 38,900 16,600 231,400
Unemployment Rate (5) 9.4% 4.9% 3.9%
Owner Occupied Housing
Units: (6)
Number 7,491 4,591 58,385
Median Value ($) 48,300 67,500 85,800
</TABLE>
(1) 1980 and 1990 U.S. Census; 1993, Virginia Department of Economic
Development
(2) 1990 U.S. Census
(3) 1980 and 1990 U.S. Census
(4) Virginia Department of Economic Development
(5) 1994, Virginia Employment Commission
(6) 1990 U.S. Census
Banking Services. Through its network of banking facilities, The
Community Bank provides a wide range of commercial banking services to
individuals and small and medium-sized businesses. The Community Bank conducts
substantially all of the business operations of a typical independent,
commercial bank, including the acceptance of checking and savings deposits, and
the making of commercial real estate, personal, home improvement, automobile and
other installment and term loans. The Community Bank also offers other related
services, such as travelers' checks, safe deposit, lock box, depositor transfer,
customer note payment, collection, notary public, escrow, drive-in facility and
other customary banking services. Trust services are not offered by The
Community Bank.
The accounts of The Community Bank's depositors are insured up to
$100,000 for each account holder by the Federal Deposit Insurance Corporation,
an instrumentality of the United States Government. Insurance of The Community
Bank's accounts is subject to the statutes and regulations governing insured
banks, to examination by the Federal Deposit Insurance Corporation, and to
certain limitations and restrictions imposed by that agency.
COMPETITION
The Community Bank encounters strong competition for its banking
services within its primary market area. There are seven commercial banks
actively engaged in business in the cities of Petersburg and Colonial Heights,
Virginia, including approximately five major statewide banking organizations.
Finance companies, mortgage companies, credit unions and savings and loan
associations also compete with The Community Bank for loans and deposits. In
addition, in some
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instances, The Community Bank must compete for deposits with money market mutual
funds that are marketed nationally. Many of The Community Bank's competitors
have substantially greater resources than The Community Bank.
EMPLOYEES
As of December 31, 1995, The Community Bank had 35 full-time and 12
part-time employees. Management of The Community Bank considers its relations
with employees to be excellent. No employees are represented by a union or any
similar group, and The Community Bank has never experienced any strike or labor
dispute.
PROPERTIES
CBI's offices and The Community Bank's main office are located in two
3,500 square feet condominiums in a seven-story masonry building located at 200
North Sycamore Street, Petersburg, Virginia. The first floor includes a drive-in
facility, which is serviced by tellers located inside The Community Bank through
a closed circuit TV/pneumatic tube system. The Community Bank's branch office at
2618 South Crater Road in Petersburg was opened in 1979. The South Crater Road
office occupies a one and one-half story 2,100 square foot brick building of
Colonial design. In 1984, The Community Bank opened a branch in Colonial
Heights, located at 2000 Snead Avenue in a 640 square foot office of
contemporary design. In 1985, The Community Bank opened its newest branch in
Chester, located at 4203 West Hundred Road in a 1,600 square foot brick office
of contemporary design. The Community Bank owns the land and the building in
which the South Crater Road and Chester branches operate, and leases the
Colonial Heights facility.
CBI's facilities and equipment are considered adequate for its
immediate needs and for foreseeable expansion.
LENDING ACTIVITIES
LOAN PORTFOLIOS. CBI is a residential mortgage and residential
construction lender and also extends commercial loans to small and medium-sized
businesses within its primary service area. Consistent with its focus on
providing community-based financial services, CBI does not attempt to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in CBI's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage the risk, CBI's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and installment loans to
individuals varies based upon employment levels, consumer confidence,
fluctuations and value of residential real estate and other conditions that
affect the ability of consumers to repay indebtedness. The risk associated with
commercial loans varies based upon the strength and activity of the local
economy of CBI's market area. The risk associated with real estate construction
loans varies based upon the supply and demand for the type of real estate under
construction. Most of CBI's residential real estate construction loans are for
pre-sold and contract homes.
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RESIDENTIAL MORTGAGE LENDING. CBI originates conventional fixed rate
and adjustable rate residential mortgage loans. All fixed rate loans are for a
term of three years or less, unless the loan is to be fully amortized in 60
equal monthly payments. CBI does not originate residential mortgage loans for
resale in the secondary market. Many of CBI's residential mortgage loan
customers do not satisfy secondary mortgage market criteria. Such customers can
qualify for a loan by providing larger down payments or third party guarantors.
RESIDENTIAL CONSTRUCTION LENDING. Because of the attractive adjustable
rates available, CBI makes construction loans for residential purposes. These
include both construction loans to experienced builders and loans to consumers
for owner occupied residences. CBI does not actively solicit loans to builders
for homes that are not pre-sold. Construction lending entails significant
additional risk as compared with residential mortgage lending. Construction
loans to builders can involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Also, with construction loans, funds
are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. Residential construction loans to
consumers, for which a permanent loan commitment from another lender approved
prior to loan closing is required, are subject to the additional risk of the
permanent lender failing to provide the necessary funds at closing, either due
to the borrower's inability to fulfill the terms of his commitment or due to the
permanent lender's inability to meet its funding commitments. In addition to its
usual credit analysis of the borrowers, CBI seeks to obtain a first lien on the
property as security for its construction loans.
COMMERCIAL REAL ESTATE LENDING. CBI provides permanent mortgage
financing for a variety of commercial projects. In the normal course of
business, CBI will provide financing for owner-occupied properties and for
income producing, non-owner occupied projects which meet all the guidelines
established by loan policy. These loans generally do not exceed 65% of current
appraised or market value, whichever is lower, for unimproved land and 75% for
improved commercial real estate. Such loans are written on terms which provide
for a maturity provision of from one to three years.
Construction loans for the purpose of constructing commercial projects
are provided for periods of not greater than one year, at floating rates of
interest and are convertible to permanent financing consistent with terms
outlined in CBI loan policy. When a construction loan agreement is entered into,
particular care is taken to govern the process of the loan and, both initial
protect review and periodic inspections are conducted by competent personnel who
are independent of CBI. Advance ratios are closely monitored and appropriate
construction reserves are established.
CONSUMER LENDING. CBI currently offers most types of consumer demand,
time and installment loans, including automobile loans.
COMMERCIAL BUSINESS LENDING. As a full-service community bank, CBI
makes commercial loans to qualified small businesses in CBI's market area.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans but have commensurately higher yields. To manage
these risks, CBI generally secures appropriate collateral and carefully monitors
the financial condition of its business borrowers and the concentration of such
loans in CBI's portfolio. Most of CBI's commercial loans are secured by real
estate, which is viewed by CBI as the principal collateral
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securing such loans. Residential mortgage loans generally are made on the basis
of the borrower's ability to make repayment from his employment and other income
and are secured by real estate or real estate whose value tends to be easily
ascertainable. In contrast, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from cash flow from its
business and are either unsecured or secured by business assets, such as real
estate, accounts receivable, equipment and inventory. As a result, the
availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself. Further, the
collateral for secured commercial business loans may depreciate over time and
cannot be appraised with as much precision as residential real estate.
LOAN UNDERWRITING CRITERIA. CBI views as one of its primary functions
to be a lending source for sound individuals and businesses in the community.
This would include credit-worthy depositors and non-depositors alike. The loan
portfolio mix, of the previously mentioned loan types, will be determined by
customer demands, liquidity and local economic conditions. CBI's underwriting
practices involve investigation of sources of income, employment history,
details of existing debt and compiling a history of the borrower relative to all
of the areas. Commercial applicants are required to provide a financial
statement and tax return. All outstanding lines of credits are required to
maintain current financial statements on file. From the data collected the
applicant's ability to repay will be determined. All sources of repayment will
be considered. The maximum debt service to gross income ratio acceptable for
consumer loans is 36%. While CBI has not quantified required minimum cash flow
on commercial loans, the applicant would be required to show the capability to
meet the scheduled debt curtailment over the life of the loan.
CBI will consider collateral that is readily marketable with a value
easily recognized by either appraisal or publication. CBI will not accept the
assignment of personal assets such as; furniture, jewelry, art collections, and
similar collateral for which a ready market and resale value cannot be
determined, or is difficult to determine. Automobiles, both new and used, will
be acceptable collateral provided there is a listed N.A.D.A. value in excess of
the amount requested. The maximum loan to value for loans secured by residential
real estate is 80%, and commercial real estate is 75%. A market valuation is
performed for all real estate loans in excess of $100,000, and a full appraisal
for all real estate loans in excess of $250,000 will be engaged by CBI from a
licensed appraiser that has been approved. Unimproved real estate is subject to
a 65% loan to value maximum. Generally, listed securities are subject to a
maximum loan to value ratio of 80%, unlisted securities to a 60% of determined
market value and bank deposits to a 100% ratio. While CBI does not participate
in commercial asset based lending as a separate activity, loans are made on
inventory and accounts receivable provided additional collateral is available as
primary security.
COLLECTION PRACTICES. Often, CBI will not immediately proceed to
foreclose on real estate loans that become more than 90 days past due. Instead,
CBI will permit the borrower to market and sell the collateral in an orderly
manner. If the borrower does not sell the collateral within a reasonable time,
CBI will foreclose and sell the collateral. CBI's experience has been that
losses on well collateralized real estate loans are minimized when it works with
borrowers in this manner, although its practice of working with borrowers at
times results in relatively high balances of past due loans. CBI also has found
that its loan collection practices enable it to compete with larger and less
flexible financial institutions that are not based in the community. See
"Community Bankshares Incorporated - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Nonperforming Assets."
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COMMUNITY BANKSHARES INCORPORATED
ELECTION OF DIRECTORS; MANAGEMENT
The CBI Board of Directors is divided into three classes. At the CBI
Meeting, three directors are expected to be elected to Class II to hold office
for a term of three years or until their respective successors are duly elected
and qualified. Unless authority to do so is withheld, shares represented by
properly executed proxies in the enclosed form will be voted for the election of
the three persons named below. All have consented to be named and have indicated
their intent to serve if elected. If a nominee should become unavailable, the
Board of Directors will designate a substitute for whom the proxies in the
enclosed form are to be voted, or will reduce the size of the Board to the
number of remaining nominees for whom the proxies will be voted. At this time,
the Board knows of no reason why any of the nominees listed below may not be
able to serve as a director if elected.
In the election of directors, those receiving the greatest number of
votes will be elected even if they do not receive a majority. Abstentions and
broker non-votes will not be considered a vote for, or a vote against, a
director.
NOMINEES
CLASS II (TO SERVE UNTIL THE 1999 ANNUAL MEETING OF SHAREHOLDERS)
Principal Occupation or Director of
Employment During Last Corporation/
Name Five Years Bank Since Age
James A. Boyd Retired Orthodontist; Director, 1984/1973 66
The Community Bank,
Petersburg, Virginia
Dr. Phillip H. Kirkpatrick Retired, Department of Army; 1984/1973 63
Civilian, Owner of Quality Now,
Petersburg, Virginia; Director,
The Community Bank, Petersburg,
Virginia; Director, Cornerstone
Realty Income Trust, Inc.,
Richmond, Virginia
Louis C. Shell Attorney-at-Law, Firm of White, 1993/1988 70
Hamilton, Wyche and Shell,
Petersburg, Virginia; Vice-
Chairman of the Board of
Community Bankshares Inc.,
Petersburg, Virginia; Director,
The Community Bank, Petersburg,
Virginia
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<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
NOMINEES SET FORTH ABOVE.
Directors Continuing in Office
There are seven directors whose present term of office will continue
after the CBI Meeting until 1997 or 1998, as indicated below, and until their
respective successors are duly elected and qualified. The remaining directors
have served continuously since the year they joined the Board.
CLASS III (TO SERVE UNTIL THE 1997 ANNUAL MEETING OF SHAREHOLDERS)
<TABLE>
<CAPTION>
Principal Occupation or Director of
Employment During Last Corporation/
Name Five Years Bank Since Age
<S> <C> <C> <C>
Dr. B. Glenn Holden Physician, Petersburg, Virginia; 1984/1973 65
Director, The Community Bank,
Petersburg, Virginia
Nathan S. Jones, 3rd President and Chief Executive 1984/1976 50
Officer, Community Bankshares
Incorporated, Petersburg, Virginia;
President and Chief Executive
Officer and Director, The
Community Bank, Petersburg,
Virginia
Harold L. Vaughn President, Southern Hardware and 1984/1976 66
Building Supply Corporation,
Incorporated, Petersburg, Virginia;
Chairman of the Board, of
Community Bankshares
Incorporated; Chairman of the
Board and Director of The
Community Bank, Petersburg,
Virginia
W. Courtney Wells Owner, Wells Realty and Insurance, 1992/1985 62
Chester, Virginia; Director, The
Community Bank, Petersburg,
Virginia
</TABLE>
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<PAGE>
CLASS I (TO SERVE UNTIL THE 1998 ANNUAL MEETING OF SHAREHOLDERS)
<TABLE>
<CAPTION>
Principal Occupation or Director of
Employment During Last Corporation/
Name Five Years Bank Since Age
<S> <C> <C> <C>
Lawrence F. DeSouza Retired, Life Insurance Corporation 1984/1973 66
of Virginia, Chester, Virginia;
Secretary, Community Bankshares
Incorporated, Petersburg, Virginia;
Vice Chairman and Director, The
Community Bank, Petersburg,
Virginia
Elinor B. Marshall President, Elinor Marshall, Ltd., 1992/1985 59
Petersburg, Virginia; Secretary and
Director, The Community Bank,
Petersburg, Virginia
Alvin L. Sheffield President, L.A. Sheffield Transfer 1984/1974 64
and Storage Incorporated,
Petersburg, Virginia; Director, The
Community Bank, Petersburg,
Virginia
</TABLE>
As indicated opposite each director's name, all of the nominees and
other directors of CBI are also directors of its subsidiary, The Community Bank.
The Community Bank's current Board of Directors is divided into the same classes
as the CBI Board. CBI, as the sole shareholder of The Community Bank, elects
annually one class of The Community Bank's Board. It is the present intention of
CBI's Board of Directors that any nominee elected by the CBI shareholders to
serve as a director of CBI will also be elected to The Community Bank's Board of
Directors. Directors of CBOV who become directors of CBI as a result of the
Reorganization will remain directors of CBOV, also, but will not serve as
directors of The Community Bank.
COMMITTEES OF THE BOARD
CBI currently has no standing committees. The only standing committee
of the Board of Directors of The Community Bank is the Audit Committee. The
Audit Committee of The Community Bank reviews with management and CBI's auditors
the scope of the annual audit, the results of the audit and CBI's and The
Community Bank's internal accounting and control systems. The Audit Committee
also recommends to the full Board of Directors of CBI and The Community Bank the
auditors to be appointed by CBI's Board and reviews the auditor's service to CBI
and the auditor's fees. The Audit Committee held one meeting during 1995.
Committee members serve at the pleasure of The Community Bank's Board.
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<PAGE>
EXECUTIVE OFFICERS
Nathan S. Jones, 3rd, President and Chief Executive Officer and a
director of CBI, is the only executive officer of CBI.
ATTENDANCE AND COMPENSATION
The Board of Directors held 12 meetings during the fiscal year ended
December 31, 1995 and all directors attended at least 75 percent of the meetings
of the Board. Directors of CBI receive no compensation from CBI. However, at
present, all directors of CBI also are directors of The Community Bank, which
does compensate its directors. All directors of The Community Bank are paid a
fee of $525 for each meeting attended and $25 for each committee meeting of The
Community Bank. Total fees paid to the directors in 1995 for attendance at
meetings were $62,125. Additionally, all directors participate in The Community
Bank's Directors Performance Adjusted Fees Program, which provides for
performance adjusted fees to directors, based upon The Community Bank's return
on assets. For the year ended December 31, 1995, each director received $4,048
under this program. Pursuant to CBI's Incentive Stock Option and Nonstatutory
Stock Option Plan, each Director of CBI, except Mr. Jones, was granted a
nonstatutory option to purchase 10,000 shares of CBI's Common Stock. Such
options, granted in July 1993, were approved by the shareholders at the 1994
Annual Meeting of Shareholders. The options were granted at a price of $6.25 per
share and are exercisable at anytime before July 20, 2003, on which date such
options expire.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below presents certain information as of April 23, 1996
regarding beneficial ownership of shares of CBI's Common Stock by all directors
and nominees for director, by each of the executive officers named in the
"Summary Compensation Table" herein, by all directors and executive officers as
a group, and all of those persons believed by management to be beneficial owners
of more than five percent ("Five Percent Holders") of the outstanding shares of
CBI's Common Stock. The mailing address of each Five Percent Holder is also
included. For the purposes of this table, beneficial ownership has been
determined in accordance with the provisions of Rule 13d-3 under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), under which, in
general, a person is deemed to be a beneficial owner of a security if he has or
shares the power to vote or direct the voting of the security or the power to
dispose or direct disposition of the security, or if he has the right to acquire
beneficial ownership of the security within 60 days.
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<PAGE>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class (2)
- ------------------------ ----------------------- ------------
Directors and Executive Officers
James A. Boyd 16,968(3) 1.463%
Lawrence F. DeSouza 17,440 1.503
B. Glenn Holden 30,100 2.595
Nathan S. Jones, 3rd 125,119(3) 10.786
P.O. Box 2166
Petersburg, VA 23804
Phillip H. Kirkpatrick 23,018(3) 1.984
Elinor B. Marshall 33,828 2.916
Alvin L. Sheffield 54,540 4.701
Louis C. Shell 13,112 1.130
Harold L. Vaughn 27,268 2.351
W. Courtney Wells 16,000 1.379
All executive officers and
directors as a group (10) 357,393 30.810
Others
Lillian Umphlett 78,109 6.733
P.O. Box 2166
Petersburg, VA 23804
Community Bankshares Incorporated 174,284 15.024
Employee Stock Ownership Plan
P.O. Box 2166
Petersburg, VA 23804
(1) As to each director, includes presently exercisable options to purchase
CBI Common Stock granted in July 1993 under CBI's Incentive Stock
Option and Nonstatutory Stock Option Plan.
(2) Based on 1,160,000 shares of Common Stock issued and outstanding as of
April 26, 1996 and assumes the exercise of options to purchase
shares of Common Stock.
(3) Does not include unallocated shares held in trust pursuant to CBI's
Employee Stock Ownership Plan ("ESOP") by Messrs. Boyd, Jones and
Kirkpatrick, as trustees. Shares which have not been allocated to
participants are voted by the trustees. As of December 31, 1995, the
last date for which information is available to CBI, 138,344 shares of
Common Stock had been allocated to participant accounts.
-95-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid or accrued
by CBI and its subsidiaries to Nathan S. Jones, 3rd, President and Chief
Executive Officer of CBI and The Community Bank, for the three fiscal years
ended December 31, 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Number of
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary (1) Bonus(2) Compensation Options Compensation (5)
- --------------------------- ---- ---------- -------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Nathan S. Jones, 3rd, 1995 $129,513 $27,846 (3) -0- $23,531
President and Chief 1994 $117,341 $27,846 (3) -0- $19,070
Executive Officer 1993 $111,153 $18,564 (3) 30,000(4) $15,300
</TABLE>
(1) Includes directors' fees of $10,348, $9,123 and $6,000 in 1995, 1994 and
1993, respectively.
(2) Amounts represent cash incentive payments based on an increase in return on
assets pursuant to the Executive Incentive Compensation Plan adopted in
July 1993.
(3) The value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or ten percent of total annual salary and bonus.
(4) Represents incentive stock options granted in July 1993 pursuant to CBI's
Incentive Stock Option and Nonstatutory Stock Option Plan.
(5) Includes: (i) $14,000, $11,995, $9,062 in contributions by CBI to the KSOP,
(ii) $8,472, $6,402 and $5,562 accrued in connection with an Executive
Supplemental Income Plan, and (iii) $1,059, $673 and $676 paid by CBI on
Mr. Jones' behalf for term life insurance; in each of 1995, 1994, 1993,
respectively.
Supplemental Retirement Agreement
CBI and Mr. Jones were parties to an agreement, dated February 2, 1987
which provided benefits in the event of retirement or death prior to retirement.
Under the agreement, Mr. Jones would have been entitled to an annual benefit of
$30,527 for a period of 15 years if he retired after attaining age 65.
All benefits under the agreement were conditioned upon Mr. Jones'
continuous employment by CBI unless there was a change in control of CBI. In
January 1996, Mr. Jones and CBI agreed to terminate the Supplemental Retirement
Agreement in exchange for a cash payment of $115,000, which represented the
amount of the liability that CBI had accrued with respect to such agreement.
-96-
<PAGE>
Employment Contract
CBI and Mr. Jones are parties to an employment contract for a term
beginning July 1, 1995 and ending on June 30, 1998, which provides for his
employment as President and Chief Executive Officer. Under the contract, Mr.
Jones is entitled to annual base compensation of $112,500.00. any increases in
base compensation are at the discretion of the Board of Directors. The contract
will renew for successive terms of one year each if it is not expressly
terminated by Mr. Jones or CBI. If, during the term of the contract, CBI
terminates Mr. Jones' employment without cause, CBI must continue Mr. Jones'
salary and benefits for six months. The contract provides for increased
severance pay if Mr. Jones' employment terminates within three years after a
change of control of CBI. In that case, Mr. Jones is entitled to a payment equal
to 2.99 times his cash compensation for the twelve months that precede the
termination of his employment and a continuation of fringe benefits. However,
the payments to Mr. Jones under the contract following a change of control will
be reduced, if necessary, so that no such payments would constitute an "excess
parachute payment" under section 280G of the internal revenue code. As of
January 1, 1996, the cash amount payable to Mr. Jones if his employment
terminated after a change of control would be $359,590.00. Mr. Jones and CBI
have agreed that the reorganization will not be considered a change of control
for purposes of interpreting or applying his employment contract.
Option Exercises and Holdings
The Chief Executive Officer did not exercise any options during the
fiscal year ended December 31, 1995. The following table sets forth information
with respect to unexercised options held by such officer as of the end of the
fiscal year:
FISCAL YEAR END OPTION VALUES
Number of Value of Unexercised
Shares Underlying Unexercised In-The-Money Options
Options at December 31, 1995 At December 31, 1995 (1)
Name Exercisable Unexercisable Exercisable Unexercisable
Nathan S. Jones, 3rd 30,000 -0- $210,000 -0-
(1) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between the market value per share of
Corporation's Common Stock at December 29, 1995 ($13.25) and the per share
exercise price of the options. CBI's Common Stock is traded on the OTC Bulletin
Board, and the fair market value reflects published prices on December 29, 1995.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Certain directors and officers and their associates were customers of
and had transactions with The Community Bank during 1995, and up to the present
time. All loans and commitments to loan by The Community Bank to directors and
officers were made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time
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<PAGE>
for comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features. The
Community Bank expects to have, in the future, similar banking transactions with
directors and officers. The aggregate balance of loans outstanding to directors
and officers of CBI and The Community Bank and their associates was $1.7 million
(17.5 percent of Shareholders' Equity) on December 31, 1995.
SECTION 16 TRANSACTIONS
Under Section 16(a) of the Securities Exchange Act of 1934, directors
and executive officers of CBI are required to file reports with the Securities
and Exchange Commission and CBI of their beneficial ownership and changes in
ownership of CBI Common Stock.
Based on a review of the forms that were filed and representations of
the directors and executive officers, CBI believes that all required forms were
timely filed for the year ended December 31, 1995.
COMMUNITY BANKSHARES INCORPORATED
PROPOSAL TO AMEND ARTICLES OF INCORPORATION
Shareholders will vote on a proposed amendment to Article 8 of the
Articles of Incorporation that will permit an increase in the size of the Board
of Directors by more than two in a twelve month period in certain situations.
Article 8 currently limits increases in the number of directors set forth in the
bylaws to two during any twelve month period with one exception. Such a
limitation does not exist when the increase is accompanied by the affirmative
vote of holders of 85% of all shares of CBI's voting stock. The proposed
amendment to Article 8 will add another exception to this limitation. Under the
amendment, an increase of more than two in the number of directors is allowed if
the increase is in connection with a merger or share exchange to which CBI or a
wholly owned subsidiary of CBI is a party, provided that the 85% vote
requirement of Article 9 does not apply to such merger or share exchange.
Approval of the proposed amendment to the CBI Articles of Incorporation is a
condition to the obligation of CBOV to consummate the Reorganization. If the
Reorganization is approved by the shareholders, the directors of CBOV will serve
on the CBI Board as well. See Appendix B for a copy of the proposed amendment to
CBI's Articles of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
PROPOSAL SET FORTH ABOVE.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of Community Bankshares Incorporated. This discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements.
OVERVIEW
Net income for the year ended December 31, 1995 of $1.623 million was
an increase of 23.7% over the year ended December 31, 1994. The increase in net
income during 1995 reflects primarily an increase in the lending volume and an
improvement in the rates earned on interest-earning assets. Earnings per share
for the year ended December 31, 1995 was $1.34, up from $1.10 for the year ended
December 31, 1994. CBI has shown an increase of 118% in net income over the five
years ended December 31, 1995, from $743,000 in 1991 to $1.623 million during
1995. The increase in income over the past five years is attributable to the 49%
growth in the loan portfolio. As total assets grew from $60.252 million in 1991
to $88.137 million as of December 31, 1995, net loans grew from $43.667 million
to $65.256 million.
[NET INCOME CHART]
(Dollars in Millions)
1991 1992 1993 1994 1995
NET INCOME 0.743 .8496 1.079 1.312 1.623
[TOTAL ASSETS CHART]
(Dollars in Millions)
1991 1992 1993 1994 1995
TOTAL ASSETS 60 69 77 77 88
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<PAGE>
The Bank increased net income 21.6% to $1.312 million during 1994 over
1993. This increase was attributable to an increase in the net interest yield
and a decrease in the provision for loan losses. Net income during 1993 of
$1.079 million was a 27% increase over 1992. On a per share basis, net income
was $.95 in 1993.
The Company's return on average equity and average assets has increased
over the past five years. The return on average equity was 17.77% for the year
ended December 31, 1995. The return on average equity was 16.25% in 1994,
compared to 15.49% for 1993. The return on average assets amounted to 1.91%,
1.69% and 1.48% for the three years ended December 31, 1995, 1994 and 1993,
respectively.
CBI is not aware of any current recommendations by the bank regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between CBI and either the Federal Reserve or the SCC, nor has either regulatory
agency made any recommendations concerning the operations of CBI that could have
a material effect on its liquidity, capital resources or results of operations.
NET INTEREST INCOME
Net interest income represents the principal source of earnings for The
Community Bank. Net interest income equals the amount by which interest income
exceeds interest expense. Changes in the volume and mix of interest-earning
assets and interest-bearing liabilities, as well as their respective yields and
rates, have a significant impact on the level of net interest income.
Net interest income increased 18% to $4.472 million in 1995. This
increase was attributable to an 11% growth in average earning assets, a larger
percentage of total average assets being interest-earning assets and a 10%
increase in rates earned on interest-earning assets. The increase in
interest-earning assets was due primarily to an increase in the lending volume.
During the three years ended December 31, 1995, the Bank has had a consistent
increase in loan demand. It is management's belief that the increase in the
lending volume is a result of competitive pricing and, most importantly,
responsiveness to loan demands. The ability to make a timely loan decision is an
operating characteristic that often allows CBI the opportunity to meet the needs
of borrowers before its large bank competitors. Rates earned on average assets
were 9.28% during 1995 as compared to 8.42% one year earlier. This return was a
result of increased rates earned on loans. The Bank is competitive with rates
and origination fees charged on loans. However, since 75% of the Bank's loan
portfolio may be repriced in one year or less, the Bank may respond quickly to
market changes in rates.
Interest expense for the year ended December 31, 1995 increased 29.5%
to $2.890 million, from $2.232 million for the year ended December 31, 1994.
This increase was due to an increase in rates on interest-bearing liabilities
and an 8.09% increase in average interest-bearing liabilities from $57.427
million during 1994 to $62.074 million in 1995. The increase in rates was
created by national and regional economic factors. In addition, periodically
during 1995 management decided to offer rates on large certificates of deposit
at 10 to 15 basis points higher than that of other financial institutions.
Net interest income was $3.784 million for the year ended December 31,
1994, an increase of 18.7% over the $3.188 million reported in 1993. This
increase was partially due to the 7.5% increase in interest-earning assets.
Again, the increase in the lending volume was the most significant portion of
the increase in average interest-earning assets with a 10.89% increase. Also
contributing to the rise in
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<PAGE>
net interest income was the 3.95% increase in the yield on interest-earning
assets, which increased from 8.10% to 8.42%. During 1994 interest expense
increased by $33,000 to $2.232 million. This small increase was a result of a
decline in rates, which offset the effect of a $3.835 million increase in
average interest-bearing liabilities. As the rates declined during 1994, many
depositors elected not to invest in time deposits and opted for short-term
interest-bearing demand deposits which paid a lower rate. Average certificates
of deposit decreased 3%, or $766,000, at the same time demand interest-bearing
liabilities increased 15.5%, or $4.445 million. This change in the mix of
deposits enabled the Bank to reduce its cost of funds for 1994.
Interest income increased 0.4%, or $21,000, from $5.366 million in 1992
to $5.387 million during 1993. This increase was very insignificant considering
average loans increased by $6.669 million or 13.85% during 1993. This increase
in volume took place at a time when average rates earned on loans decreased by
9.4%, from 9.40% in 1992 to 8.51% in 1993. Again, the decrease in rates was
controlled by national and regional economic factors. The Bank was able to
maintain a relatively unchanged interest yield for 1993 by maintaining a deposit
mix at lower rates. Interest expense decreased 9.95%, from $2.442 million in
1992 to $2.199 million in 1993. The net interest yield for 1993 was 4.84%, down
slightly from 4.92% during 1992.
The following table sets forth CBI's average interest-earning assets
(on a tax equivalent basis) and average interest-bearing liabilities, the
average yields earned on such assets and rates paid on such liabilities, and the
net interest margin for the periods indicated:
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<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS, INTEREST INCOME AND EXPENSE, YIELDS AND RATES
Years Ended December 31,
----------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance(6) Interest Rate(1) Balance(6) Interest Rate(1)
----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 10,937 $ 730 6.67% $ 9,420 $ 639 6.78%
Federal funds sold 3,940 276 7.01% 629 29 4.61%
----------------------------------------------------------------------------------------------
Loans(5) 64,427 6,356 9.87% 61,425 5,348 8.71%
Total interest-earning
assets $ 79,304 $ 7,362 9.28% $ 71,474 $ 6,016 8.42%
------- --------
Noninterest-earning assets:
Cash and due from
banks 4,060 4,308
Premises and
equipment 1,075 1,147
Other assets 1,311 1,541
Less allowance for
loan losses (777) (688)
--------- --------
Total $ 84,973 $ 77,782
========= ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and
NOW accounts $22,436 $ 801 3.57% $ 24,819 $ 811 3.27%
Savings deposits 7,780 270 3.47% 8,194 265 3.23%
Time deposits 26,002 1,456 5.60% 19,683 955 4.85%
Large denomination
deposits 5,759 357 6.20% 4,541 196 4.32%
Federal funds
purchased 97 6 6.19% 190 5 2.63%
----------------------------------------------------------------------------------------------
$62,074 $2,890 4.66% $ 57,427 $ 2,232 3.89%
------ --------
Noninterest-bearing liabilities:
Demand deposits $12,986 $11,690
Other liabilities 780 591
-------- --------
$75,840 $69,708
Stockholders' Equity 9,133 8,074
-------- --------
Total $84,973 $77,782
======= =======
Non Interest income/
yield (2)(3) $4,472 5.64% $ 3,784 5.29%
====== =======
Interest spread (4) 4.62% 4.53%
</TABLE>
-------------------------------------------
1993
-------------------------------------------
Average Yield/
Balance(6) Interest Rate(1)
-------------------------------------------
Assets
Interest-earning assets:
Securities $ 8,930 $ 663 7.42%
Federal funds sold 2,158 59 2.73%
---------------------------------------------
Loans(5) 55,390 4,665 8.42%
Total interest-earning
assets $ 66,478 $ 5,387 8.10%
-------
Noninterest-earning assets:
Cash and due from
banks 4,375
Premises and
equipment 1,107
Other assets 1,411
Less allowance for
loan losses (597)
--------
Total $ 72,774
========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and
NOW accounts $ 22,056 $ 750 3.40%
Savings deposits 6,512 220 3.38%
Time deposits 20,304 970 4.78%
Large denomination
deposits 4,686 258 5.51%
Federal funds
purchased 34 1 2.94%
---------------------------------------------
$ 53,592 $ 2,199 4.10%
-------
Noninterest-bearing liabilities:
Demand deposits $11,823
Other liabilities 392
-------
$65,807
Stockholders' Equity 6,967
-------
Total $72,774
=======
Non Interest income/
yield (2)(3) $ 3,188 4.80%
=======
Interest spread (4) 4.00%
- ------------------
(1) Computed on an annualized fully taxable equivalent basis.
(2) Net interest income is the difference between income from earning assets
and interest expense.
(3) Net interest yield is net interest income divided by total average earning
assets.
(4) Interest spread is the difference between the average interest rate
received on earning assets and the average interest rate paid for
interest-bearing liabilities.
(5) Average loan balances include non-accrual loans.
(6) Average balances are computed on monthly balances and management believes
such balances are representative of the operations of the Bank.
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<PAGE>
Interest income and interest expense are affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table analyzes changes in net
interest income attributable to changes in the volume of interest-bearing assets
and liabilities compared to changes in interest rates. Nonaccruing loans are
included in average loans outstanding. The change in interest due to both rate
and volume has been allocated to change due to volume and change due to rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
VOLUME AND RATE ANALYSIS
Years Ended December 31,
1995 vs. 1994 1994 vs. 1993
Increase (decrease) Increase (decrease)
due to changes in: due to changes in:
Volume Rate Total Volume Rate Total
------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Investment securities,
taxable $ 101 $ (10) $ 91 $ 35 $(59) $(24)
Federal funds sold 225 22 247 (56) 26 (30)
Loans 338 670 1,008 517 167 684
----------------------------------------------------------
$ 664 $ 682 $ 1,346 $ 496 $134 $630
----------------------------------------------------------
Interest expense:
Savings and time
deposits $ 195 $ 462 $ 657 $ 145 $(116) $ 29
Federal funds purchased (3) 4 1 5 - 5
----------------------------------------------------------
$ 192 $ 466 $ 658 $ 150 $(116) $ 34
----------------------------------------------------------
Net interest income $ 472 $ 216 $ 688 $ 346 $ 250 $596
==========================================================
</TABLE>
1993 vs. 1992
Increase (decrease)
due to changes in:
Volume Rate Total
-----------------------------------
Increase (decrease) in:
Interest income:
Investment securities,
taxable $ 4 $ (96) $ (92)
Federal funds sold (7) (19) (26)
Loans 592 (454) 138
------------------------------
$ 589 $ (569) $ 20
------------------------------
Interest expense:
Savings and time
deposits $ 210 $ (453) $(243)
Federal funds purchase - - -
-------------------------------
$ 210 $ (453) $(243)
-------------------------------
Net interest income $ 379 $ (116) $ 263
===============================
INTEREST SENSITIVITY
An important element of both earnings performance and the maintenance
of sufficient liquidity is management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest-sensitive assets and
interest-sensitive liabilities in a specific time interval. The gap can be
managed by repricing assets or liabilities, by replacing an asset or liability
at maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
interval helps to hedge the risk and minimize the impact on net interest income
in periods of rising or falling interest rates.
The objective of interest sensitivity management is to provide
flexibility in controlling the response of both rate-sensitive assets and
liabilities to wide and frequent fluctuations in market rates of interest so
that the effect of such swings on net interest income is minimized. The most
important part of this objective is to maximize earnings while keeping risks
within defined limits. To reduce the impact of changing interest rates as much
as possible, CBI attempts to keep a large portion of its interest-sensitive
assets and liabilities in generally shorter maturities, usually one year or
less. This allows CBI the opportunity to adjust interest rates as needed to
react to the loan and deposit market conditions.
-103-
<PAGE>
Management evaluates interest sensitivity through the use of a static
gap model on a monthly basis and then formulates strategies regarding asset
generation and pricing, funding sources and pricing, and off-balance sheet
commitments in order to decrease sensitivity risk. These strategies are based on
management's outlook regarding interest rate movements, the state of the
regional and national economies and other financial and business risk factors.
In addition, the Company establishes prices for deposits and loans based on
local market conditions and manages its securities portfolio with policies set
by itself.
The following table summarizes the contractual repayment terms of the
interest earning assets and interest bearing liabilities of CBI as of December
31, 1995. The table has not been adjusted for estimates of prepayments and does
not reflect periodic repricing of adjustable rate loans.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1995
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 2,281 $ - $ - $ - $ 2,281
Investment securities - - 452 13,659 14,111
Loans 25,441 25,257 15,320 - 66,018
-----------------------------------------------------------------
Total interest earning assets $ 27,722 $ 25,257 $ 15,772 $ 13,659 $ 82,410
- ----------------------------- -----------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand $ 21,514 $ - $ - $ - $ 21,514
Savings 7,409 - - - 7,409
Time deposits, $100,000 and over 1,972 2,275 2,686 - 6,933
Other time deposits 7,319 10,685 10,666 4 28,674
-----------------------------------------------------------------
Total interest-bearing liabilities $ 38,214 $ 12,960 $ 13,352 $ 4 $ 64,530
- ---------------------------------- -----------------------------------------------------------------
Period gap $ (10,492) $ 12,297 $ 2,420 $ 13,655 $ 17,880
=================================================================
Cumulative gap $ (10,492) $ 1,805 $ 4,225 $ 17,880
====================================================
Ratio cumulative gap to total
interest-earning assets -12.73% 2.19% 5.13% 21.70%
====================================================
</TABLE>
The December 31, 1995 results of the rate sensitivity analysis show CBI
had $10.492 million more in liabilities than assets subject to repricing within
three months or less and was, therefore, in a liability-sensitive position. The
cumulative gap at the end of one year was a positive $1.805 million and,
therefore, in an asset-sensitive position. The one year positive gap position
reflects a loan portfolio that is weighted predominantly in shorter maturities.
Approximately $50.7 million, or 75% of the total loan portfolio, matures or
reprices within one year or less. An asset-sensitive institution's net interest
margin
-104-
<PAGE>
and net interest income generally will be impacted favorably by rising interest
rates, while that of a liability sensitive institution generally will be
impacted favorably by declining rates.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1994
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 1,017 $ - $ - $ - $ 1,017
Investment securities - - 670 7,898 8,568
Loans 22,281 26,130 13,802 - 62,213
---------------------------------------------------------------------------
Total interest-earning assets $ 23,298 $26,130 $14,472 $7,898 $71,798
- ----------------------------- ---------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits:
Demand $ 24,629 $ - $ - $ - $ 24,629
Savings 8,555 - - - 8,555
Time deposits, $100,000 and over 1,569 1,252 1,588 - 4,409
Other time deposits 4,388 8,839 5,725 29 18,981
---------------------------------------------------------------------------
Total interest-bearing liabilities $ 39,141 $ 10,091 $ 7,313 $ 29 $ 56,574
- ---------------------------------- ---------------------------------------------------------------------------
Period gap $ (15,843) $ 16,039 $ 7,159 $ 7,869 $ 15,224
===========================================================================
Cumulative gap $ (15,843) $ 196 $ 7,355 $ 15,224
=========================================================
Ratio cumulative gap to total
interest-earning assets -22.07% 0.27% 10.24% 21.20%
==========================================================
</TABLE>
NONINTEREST INCOME
For the year ended December 31, 1995 noninterest income declined by
6.07% to $752,553. This decline is partially attributable to a 9%, or $66,315,
decrease in service charges. The Bank has marketed "Free Checking" in order to
increase deposits, to increase name recognition in the community, and at the
same time, reduce the cost of funds.
Noninterest income for the year ended December 31, 1994 was $801,213, a
decrease of $57,562 or 6.7% from 1993. The primary reason for this decrease was
the loss recognized on the disposition of other real estate owned in the amount
of $33,980. In addition, service charges, commissions and fees decreased by
$56,060. This reduction is due to an increase in free checking accounts marketed
by the Bank. Due to the offering of these accounts, service charges on deposit
accounts decreased 5.3%, or $36,000, during 1994.
-105-
<PAGE>
Noninterest income for 1993 increased 8.13% or $64,598 from 1992.
Service charges, commissions and fees, the largest single item of noninterest
income, increased by $34,767 for 1993, up 4.6% from 1992. This increase was due
to service charges on demand deposit accounts and fees charged for letters of
credit.
NONINTEREST EXPENSE
Noninterest expense of $2.499 million for the year ended December 31,
1995 was a decrease of 1.9% from 1994. Salaries and employee benefits, the
largest single component of noninterest expense, had a slight increase of 4.9%
for the year. The Bank was able to maintain a small increase in salaries, as
compared to previous years, due to the closing of its Washington Street branch.
Management has shifted personnel to other locations to reduce the need for
additional staffing during peak periods of operations. Due to deposit insurance
rate reductions, FDIC assessments declined by 54% or $81,000, from the previous
year. In addition, general insurance decreased by $50,000 due to a new carrier
on the general liability policy that offered more competitive rates and an
increase in the cash surrender value in excess of premiums paid on the lives of
executives. Professional fees increased by $59,000 over the previous year.
During 1995, the Corporation has incurred approximately $45,000 additional
professional fees associated with the Reorganization that have been expensed as
current operating expenses.
For 1994, noninterest expense increased by $265,821 or 11.65% over
1993. Salaries and employee benefits increased 11% or $132,000 to $1.330 million
in 1994 from $1.198 million in 1993. In addition to inflation and merit pay
increases, the Board of Directors increased the contribution to the ESOP plan by
38% or $25,000 for the year. Furniture and equipment expense increased 11.71%
from $185,400 to $207,114 for the year ended December 31, 1994. Almost 100% of
this increase was attributable to increased depreciation due to acquisition of
operations equipment. During 1994, FDIC assessments continued to be a
significant portion of noninterest expenses increasing by 10.16% to $150,693
from $136,789 during 1993. Other taxes increased 56% or $36,000 due to a change
in regulatory guidance in the computation of state and local franchise tax.
During the year ended December 1993, noninterest expenses increased by
10.8% or $223,000 from $2.058 million during 1992 to $2.281 million in 1993. The
majority of the increase was due to an increase in salaries and employee
benefits of 15.07% or $156,940 from $1.041 million to $1.198 million. During
1993, the Board of Directors adopted a Cash Incentive Plan for certain employees
of the Bank. The Plan set forth predetermined award pools for each group of
participants. Under this plan, $74,256 was awarded during 1993. Also
attributable to the increase in other expenses in 1993 was $31,000 awarded to
the directors under the Cash Incentive Plan.
INCOME TAXES
The provision for income taxes for the year ended December 31, 1995 was
$856,092, a 29.7% increase from the previous year. The increase in the provision
was due to the increase in taxable income.
The income tax provision for the year ended December 31, 1994 was
$660,019, up from $566,553 for the year ended December 31, 1993.
-106-
<PAGE>
LOAN PORTFOLIO
CBI's loan portfolio is comprised of commercial loans, real estate
loans, home equity loans, consumer loans, participation loans with other
financial institutions, and other miscellaneous types of credit. The primary
markets in which CBI makes loans are generally in areas contiguous to its branch
locations in the Cities of Petersburg and Colonial Heights and Chesterfield
County. The philosophy is consistent with CBI's focus on providing
community-based financial services.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31,
------------------------------------------------------------------------------------------------
1995 1994 1993 ---------
-------------------------------------------------------------------------------------------------
% to Total % to Total % to Total
Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $6,304 9.39% $6,702 9.98% $6,391 9.52%
Real estate construction 786 1.17% 167 0.26% 189 0.32%
Real estate mortgage:
Residential (1-4 family) 30,819 45.88% 29,914 47.69% 28,346 49.36%
Multifamily - 0.00% - 0.00% 213 0.36%
Nonfarm, nonresidential 24,896 37.07% 22,185 34.94% 19,190 32.53%
-------------------------------------------------------------------------------------------------
Real estate mortgage, subtotal 55,715 82.95% 52,099 82.63% 47,749 82.25%
-------------------------------------------------------------------------------------------------
Real estate, total 56,501 84.12% 52,266 82.89% 47,938 82.57%
-------------------------------------------------------------------------------------------------
Consumer installment 4,362 6.49% 4,525 7.13% 4,669 7.91%
-------------------------------------------------------------------------------------------------
Total loans 67,167 100.00% 63,493 100.00% 58,998 100.00%
======= ======= =======
Less unearned income 1,149 1,280 1,228
-------- -------- --------
$66,018 $62,213 $57,770
======= ======= =======
</TABLE>
The following table shows the maturity of loans outstanding as of
December 31, 1995. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates. Loans are classified
based upon the period in which the payments are due.
-107-
<PAGE>
<TABLE>
<CAPTION>
LOAN MATURITY SCHEDULE
December 31,1995
------------------------------------------------------------------------------------
Maturing
------------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 5,274 $ 1,030 $ - $ 6,304
Installment 1,910 1,936 - 3,846
Real Estate 39,423 15,007 1,438 55,868
-------------------------------------------------------------------------------------
Total $ 46,607 $ 17,973 $ 1,438 $ 66,018
=====================================================================================
Loans maturing after one year
with:
Fixed interest rates $ 11,604 $ -
Variable interest rates 6,369 1,438
------ -----
Total $ 17,973 $ 1,438
====== =====
</TABLE>
As of December 31, 1995, the loan portfolio was $66.018 million, net of
unearned income, an increase from the prior year of 6.1% or $3.805 million. Real
estate lending continues to be the growth of the portfolio with loans secured by
real estate comprising 84.12% of total loans.
Loans, net of unearned income, were $62.2 million at December 31, 1994,
up $4.5 million or 7.8% from $57.7 million at December 31, 1993. The growth in
real estate loans, which increased $4.33 million or 9.03%, accounted for 96% of
the growth.
Loans secured by real estate comprise 82.32% of total loans at December
31, 1994 and 82.57% at December 31, 1993.
The Bank's unfunded loan commitments amounted to $9.451 million as of
December 31, 1995, up from $6.4 million at December 31, 1994. This increase is
attributable to customer loan demands at a specific point in time. Fixed rate
commitments were $4.438 million and $2.593 million as of December 31, 1995 and
1994, respectively. The average rates charged on the fixed rate commitments were
8.5% to 10.5% for the years then ended.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio of the Bank. The level of
loan losses is affected by general economic trends, as well as conditions
affecting individual borrowers. The allowance is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance and the size of the
allowance in comparison to peer companies identified by regulatory agencies.
The provision for loan losses for the year ended December 31, 1995 was
$247,000, an increase of $181,000 over the previous year. Management charged
income for the provision deemed necessary
-108-
<PAGE>
based on its analysis of the loan portfolio. After reviewing the increase in
nonperforming loans and specifically nonaccrual loans, management feels the
current year provision increases the allowance for loan losses to the
appropriate level to cover potential losses. The Bank had charge-offs, net of
recoveries, of $209,412 during 1995, an increase of $260,253 over the previous
year. This increase was partially the result of a complete charge-off on one
real estate loan in the amount of $103,000 and partial charge-offs on three
additional real estate loans in the amount of $85,000.
The provision for loan losses totaled $66,000 for the year ended
December 31, 1994, a decrease of $54,000 from the previous year. The improved
economy along with more effective collection efforts permitted the Bank to
reduce its provision. This decision was made as a result of management's
analysis of the nonperforming loans of $564,000 at December 31, 1994 and the
fact that the Bank had net recoveries for the year ended December 31, 1994 of
$50,841 as compared to net charge-offs during 1993 of $80,799. After
consideration of these factors and the local economy, management recorded a
provision for loan loss that it believed would provide coverage for potential
losses.
The provision in 1993 decreased to $120,000 as compared to $371,800 in
1992. The reduction in the 1993 provision was a result of management's belief
that the quality of the loan portfolio had improved. This improvement was due to
the large charge-offs of the previous year that no longer needed to be reserved
for and the relatively low level of nonperforming loans.
As of December 31, 1995, the allowance for loan losses was $762,479, up
from $724,891 at December 31, 1994. The allowance as of December 31, 1994 was up
$116,841 over the $608,050 at December 31, 1993. The ratio of the allowance for
loan loss to total loans, net of unearned income, has remained relatively
constant over the last three years; 1.15% at December 31, 1995, 1.17% at
December 31, 1994, and 1.05% at December 31, 1993. It is management's opinion
that the allowance for loan losses is adequate to absorb any future losses that
may occur.
The multiple of the allowance for loan losses to nonperforming assets
was .48x at December 31, 1995, 1.28x at December 31, 1994 and 2.08x at December
31, 1993. Management continually evaluates nonperforming loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
Effective January 1, 1995, CBI adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure). The effect of adopting this new
accounting standard was immaterial to the operating results of CBI for the year
ended December 31, 1995. Prior financial statements have not been restated to
apply the provision of the new standard.
Under the new accounting standard, a loan is considered to be impaired
when it is probable that CBI will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
loan is not considered impaired if (a) there is an insignificant delay in or
shortfall in amounts of payments, or (b) CBI expects to collect all amounts due,
including interest accrued at the contractual interest rate for the period of
delay. CBI does not aggregate loans for risk classification.
The allowance for loan losses related to loans identified as impaired
is primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate of
the future cash flows on the loan discounted at the loan's effective interest
rate. As of December 31, 1995, CBI had eleven loans with a carrying amount of
$427,000 that were considered to be impaired. The amount of impairment
-109-
<PAGE>
based on present value of future cash flows or collateral values, if applicable,
was approximately $174,000. The amount provided in the allowance for loan losses
for these impaired loans was $174,000. The following table summarizes changes in
the allowance for loan losses:
-110-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31,
-----------------------------------------------------------
1995 1994 1993
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 725 $ 608 $ 569
------------------------------------------------------------
Loans charged off:
Commercial $ 26 $ 2 $ 17
Installment 19 42 36
Real Estate 199 18 69
-----------------------------------------------------------
Total $ 244 $ 62 $ 122
-----------------------------------------------------------
Recoveries of loans previously charged off:
Commercial $ 14 $ 6 $ 22
Installment $ 12 $ 3 14
Real Estate 8 104 5
-----------------------------------------------------------
Total $ 34 $ 113 $ 41
-----------------------------------------------------------
Net loans recovered (charged off) $ (210) $ 51 $ (81)
Provision for loan losses 247 66 120
-----------------------------------------------------------
Allowance for loan losses at end of year $ 762 $ 725 $ 608
===========================================================
Average total loans (net of unearned income) $ 63,650 $ 60,737 $ 54,793
Total loans (net of unearned income) $ 66,018 $ 62,213 $ 57,770
Selected Loan Loss Ratios:
Net charge-offs to average loans (2) 0.33% - 0.08% 0.15%
Provisions for loan losses to average loans .39% 0.11% 0.22%
Provision for loan losses to net charge-offs (2) 118% - 148%
Allowance for loan losses to year-end loans 1.15% 1.17% 1.05%
Loan loss coverage (1)(2) 1298% - 2180%
</TABLE>
- ----------------------
(1) Income before income taxes plus provision for loan losses, divided by net
charge-offs.
(2) Net recoveries for the year.
A breakdown of the allowance for loan losses is provided in the
following table; however, such a breakdown has not historically been maintained
by the Bank and management does not believe that the
-111-
<PAGE>
allowance can be fragmented by category with any precision that would be useful
to investors. The entire amount of the allowance is available to absorb losses
occurring in any category. The allowance is allocated below based on the
relative percentage in each category to total loans.
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
Balance at End of
Period Applicable to: 1995 1994 1993
------------------------------------------------------------------------------------
% of % of % of
Loans in Loans in Loans in
each each each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 72 9.39% $ 72 9.98% $ 58 9.52%
Installment 49 6.49% 52 7.13% 48 7.91%
Real Estate 641 84.12% 601 82.89% 502 82.57%
-------------------------------------------------------------------------------------
$ 762 100% $ 725 100% $ 608 100%
=====================================================================================
</TABLE>
Management has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred. The allocation of the allowance as shown in the table above should not
be interpreted as an indication that loan losses in future years will occur in
the same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
NONPERFORMING ASSETS
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, loans 90 days or more past due, and other real estate owned
were $1.570 million at December 31, 1995, an increase of $731,000 from one year
earlier. Total nonperforming assets were $839,000 at December 31, 1994, an
increase of $104,000 over December 31, 1993. Nonperforming loans increased
$204,000 during 1993 over 1992.
-112-
<PAGE>
NONPERFORMING ASSETS
December 31,
1995 1994 1993
(Dollars in thousands)
Nonaccrual loans $ 220 $ 4 $ -
Loans contractually past due 90 days
or more and still accruing 882 560 292
Troubled debt restructuring - - -
---------------------------------------
Total nonperforming loans $ 1,102 $ 564 $ 292
Other real estate owned 468 275 443
---------------------------------------
Total nonperforming assets $ 1,570 $ 839 $ 735
=======================================
Nonperforming assets to period-end
total loans and other real estate 2.36% 1.32% 1.24%
=======================================
Foregone interest income on
nonaccrual loans $ 12 $ 2 $ 2
=======================================
Interest income recorded on non
accrual loans during the year $ 8 $ - $ 3
=======================================
The following table summarizes all nonperforming loans, by loan type as of
December 31, 1995:
Number
of Principal
(Dollars in thousands) Loans Balance
- ------------------------------------------------------------
Residential mortgage 12 $ 1,028
Installment loans 3 12
Commercial loans 6 62
----------------------------------
21 $ 1,102
----------------------------------
Loans, including impaired loans, are generally placed in nonaccrual
status when loans are delinquent in principal and interest payments greater than
90 days and the loan is not well secured and in process of collection. Accruals
of interest are discontinued until it becomes certain that both principal and
interest can be repaid. As shown in the above table, the Bank does have loans
that are contractually past due greater than 90 days that are not in nonaccrual
status, however, those loans are still accruing because they are well secured
and in the process of collection. A loan is well secured if collateralized by
liens on real or personal properly, including securities, that have a realizable
value sufficient to discharge the debt in full or by the guarantee of a
financially responsible party. Approximately 70% of these loans are
collateralized by residential real estate.
As of December 31, 1995, nonaccrual loans and loans contractually past
due greater than 90 days have increased $216,000 and $322,000 over the December
31, 1994 levels, respectively. While the increase is significant, there are only
eight loans in nonaccrual status. The largest two loans, $105,000
-113-
<PAGE>
and $51,000, are mortgage real estate loans secured by residential real estate.
In the case of the $105,000 loan, the borrower has entered into a contract to
sell the collateral and curtailment for this loan should be forthcoming.
If foreclosure of property is required, the property is generally sold
at a public auction in which CBI may participate as a bidder. If the Bank is the
successful bidder, the acquired real estate property is then included in the
Bank's real estate owned account until it is sold.
Management is not aware of any information concerning possible credit
problems of borrowers, not otherwise disclosed, that would cause management to
have serious doubts about the borrowers' ability to comply with current
repayment terms.
INVESTMENT SECURITIES
The securities portfolio is maintained to manage excess funds in order
to provide diversification and liquidity in the overall asset management policy.
The maturity of securities purchased are based on the needs of the Bank and
current yields and other market conditions.
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. This Statement establishes accounting and reporting
standards for investments in debt and equity securities that have readily
determinable fair values. SFAS No. 115 requires that securities be classified as
either Trading, Available-for-Sale or Held-to-Maturity at the time of purchase.
The Bank does not buy with the intent of trading and, accordingly, does not
maintain a Trading Account. Gains and losses on the sale of securities are
determined by the specific identification method.
Securities are classified as held-to-maturity when management has the
positive intent and the Bank has the ability at the time of purchase to hold
them until maturity. These securities are carried at cost adjusted for
amortization of premium and accretion of discount.
Securities to be held for indefinite periods of time and not intended
to be held-to-maturity or on a long-term basis are classified as
available-for-sale and accounted for at fair market value on an aggregate basis.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect.
The book value of the investment portfolio as of December 31, 1995 was
$14.111 million compared to $8.568 million at December 31, 1994.
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of December 31,
1995 and 1994:
-114-
<PAGE>
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO
December 31, 1995
Held-to-Maturity Available-for-Sale
Cost Market Cost Market
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Guaranteed or issued by
GNMA,FNMA or FHLMC 12,359 12,407 $ 1,583 $ 1,612
Other securities - - 141 141
------------------------------------------------------------------
$ 12,359 $ 12,407 $ 1,724 $ 1,753
==================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Held-to-Maturity Available-for-Sale
Cost Market Cost Market
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC $ 7,599 $ 7,104 $ 802 $ 776
Other securities - - 190 193
------------------------------------------------------------------
$ 7,599 $ 7,104 $ 992 $ 969
==================================================================
</TABLE>
The maturity distribution, book value, market value, and yield of the
total investment securities portfolio at December 31, 1995 and December 31, 1994
are presented as follows:
-115-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
Held-to-Maturity Available-for-Sale
Book Market Book Market
Value Value Yield Value Value Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ - $ - - $ - $ - -
Over 1 year through 5 years 452 460 8.75% - - -
Over 5 years through 10 years 1,125 1,130 7.40% 289 287 7.35%
Over 10 years 10,782 10,817 7.05% 1,435 1,466 7.08%
----------------------------------------------------------------------------
12,359 12,407 7.14% $ 1,724 $ 1,753 7.12%
============================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Held-to-Maturity Available-for-Sale
Book Market Book Market
Value Value Yield Value Value Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ - $ - - $ - $ - -
Over 1 year through 5 years 670 671 8.51% - - -
Over 5 years through 10 years 1,430 1,344 7.61% 366 346 7.45%
Over 10 years 5,499 5,089 7.08% 626 623 8.22%
----------------------------------------------------------------------------
$ 7,599 $ 7,104 7.31% $ 992 $ 969 7.87%
============================================================================
</TABLE>
DEPOSITS
Deposits at December 31, 1995 were $77.214 million, up $9.133 million
from 1994, an increase of 13.41%. The growth in deposits was led by the 52.23%
increase in certificates of deposit, which increased from $23.390 million at
December 31, 1994 to $35.607 million at December 31, 1995. At December 31, 1995,
certificates of deposit in excess of $100,000 had grown by $2.524 million, an
increase of 57.25% over December 31, 1994 levels.
Deposits at December 31, 1994 were $68.081 million, a 1.2% decrease
from 1993. Certificates of deposit of $100,000 or more decreased by $310,192
from 1993 levels. Similarly, certificates of deposit under $100,000 decreased
$1.720 million from 1993 levels. Noninterest-bearing deposits were 16.9% of
total deposits at December 31, 1994 compared to 15.46% at December 31, 1993.
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DEPOSITS ANALYSIS
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
---------------------------------------------------------------------------------
Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Noninterest-bearing demand deposits $ 12,684 $ 11,507 $ 10,651
-------- -------- --------
Interest-bearing liabilities:
Money market and NOW accounts 21,514 3.57% 24,629 3.27% 24,792 3.40%
Savings deposits 7,409 3.47% 8,555 3.23% 8,052 3.38%
Time deposits 28,674 5.60% 18,981 4.85% 20,701 4.78%
Large denomination deposits 6,933 6.20% 4,409 4.32% 4,719 5.51%
----------------------------------------------------------------------------------
Total interest-bearing accounts $ 64,530 4.65% $ 56,574 3.89% $ 58,264 4.10%
---------------------------------------------------------------------
Total deposits $ 77,214 $ 68,081 $ 68,915
======== ======== ========
</TABLE>
MATURITY OF CD'S OF $100,000 AND OVER
<TABLE>
<CAPTION>
Within Three Six to Over Percent
Three to Six Twelve One of Total
Months Months Months Year Total Deposit
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 $ 1,972 $ 1,253 $ 1,022 $ 2,686 $ 6,933 8.98%
</TABLE>
CAPITAL RESOURCES
The adequacy of the Bank's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of the Bank's
asset and liability levels and consistency with regulatory requirements and
industry standards. Management seeks to maintain a capital structure that will
assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The primary source of capital for CBI is internally generated retained
earnings. Average stockholders' equity increased 13.11% in 1995 over 1994.
Similarly, average stockholders' equity increased 15.89% in 1994 over 1993. The
following table highlights certain ratios for the periods indicated:
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RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income before securities gains and losses to:
Average total assets 1.87% 1.63% 1.46%
Average stockholders' equity 17.44% 15.66% 15.26%
Net income to:
Average total assets 1.91% 1.69% 1.48%
Average stockholders' equity 17.77% 16.25% 15.49%
Dividend payout ratio (dividends declared
per share divided by net income per share) 13.06% 13.64% 10.53%
Average stockholders' equity to average
total assets ratio 10.75% 10.38% 9.57%
</TABLE>
[RETURN ON AVERAGE ASSSETS CHART]
1991 1992 1993 1994 1995
RETURN ON AVERAGE ASSETS 1.29% 1.28% 1.48% 1.69% 1.91%
[RETURN OF AVERAGE EQUITY CHART]
1991 1992 1993 1994 1995
RETURN OF AVERAGE EQUITY 13.71% 13.86% 15.49% 16.25% 17.77%
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The FDIC has adopted capital guidelines to supplement the existing
definitions of capital for regulatory purposes and to establish minimum capital
standards. Specifically, the guidelines categorize assets and off-balance sheet
items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1
capital, composed of common equity, retained earnings and a limited amount of
perpetual preferred stock, less certain goodwill items. The Bank had a ratio of
risk-weighted assets to total capital of 16.10% at December 31, 1995 and a ratio
of risk-weighted assets to Tier 1 capital of 14.94%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
December 31 ,
-------------------------------------------------
1995 1994 1993
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
TIER 1 CAPITAL:
Common stock $ 3,450 $ 1,710 $ 1,710
Surplus - 989 989
Retained earnings 6,645 5,912 4,771
Unearned ESOP shares (330) - -
-------------------------------------------------
Total Tier 1 Capital $ 9,765 $ 8,611 $ 7,470
-------------------------------------------------
TIER 2 CAPITAL:
Allowance for loan losses 762 725 608
-------------------------------------------------
Total Tier 2 Capital $ 762 $ 725 $ 608
-------------------------------------------------
Total risk-based capital $ 10,527 $ 9,336 $ 8,078
=================================================
Risk weighted assets $ 65,377 $ 59,523 $ 58,279
CAPITAL RATIOS:
Tier 1 risk-based capital 14.94% 14.47% 12.82%
Total risk-based capital 16.10% 15.68% 13.86%
Tier 1 capital to average total assets 11.49% 11.07% 10.26%
</TABLE>
LIQUIDITY
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investment in Treasury securities, and loans maturing within one year. As
a result of the Bank's management of liquid assets and the ability to generate
liquidity through liability funding, management believes that the Bank maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
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<PAGE>
For the year ended December 31, 1995 the Bank provided cash or
liquidity from operations in the amount of $1.884 million. This increase in
funds in addition to a $9.132 million increase in deposits has given the Bank
approximately $10.878 million in funds available for investment during 1995. In
determining investment strategies management considers objectives for the
composition of the loan and investment portfolio, such as type, maturity
distribution, and fixed or variable interest rate characteristics of investment
opportunities. Management's use of funds has included the funding of a $4.196
million increase in loan demands and the purchase of $7.918 million of
securities. With 75% of the loan portfolio repricing or maturing in the next
twelve months the Bank has enough asset liquidity to meet the needs of maturing
deposits.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of the financial position and operating results of CBI
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Virtually all of the assets of CBI are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as prices
of goods and services.
ADOPTION OF ACCOUTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. The accounting requirements for CBI's financial statements are
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, CBI will estimate
future undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the asset, an important loss is recognized.
Otherwise, an impairment loss is not recognized.
CBI intends to adopt SFAS No. 121 beginning January 1, 1996, and
anticipates no material effect on its results of operations upon the adoption of
the financial statements.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Mitchell, Wiggins and Company LLP has been The Community Bank's and
CBI's independent certified public accountants since 1973 and 1984,
respectively. CBI's consolidated financial statements for the year ended
December 31, 1995 were examined by Mitchell, Wiggins and Company LLP.
Although it has not yet selected auditors for the current year, CBI
anticipates that Mitchell, Wiggins and Company LLP will be selected as CBI's
auditors for 1996. A representative of Mitchell, Wiggins and Company LLP is
expected to be present at the Annual Meeting.
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<PAGE>
DESCRIPTION OF CBI CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
CBI is authorized to issue up to 4,000,000 shares of Common Stock, par
value $3.00 per share. CBI had 1,160,000 shares of Common Stock outstanding at
April 26, 1996, held by 735 stockholders of record. The following summary
description of the capital stock of CBI is qualified in its entirety by
reference to the Articles of Incorporation of CBI (the "CBI Articles") and CBI's
Bylaws, copies of which are available for inspection as exhibits to the
registration statement filed with the Securities and Exchange Commission (the
"SEC") in connection with this Joint Proxy Statement.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders. Subject to certain limitations on
the payment of dividends, holders of CBI Common Stock are entitled to receive
dividends when and as declared by the CBI Board of Directors from funds legally
available therefor.
All outstanding shares of Common Stock, including the shares offered
hereby, are fully paid and non-assessable. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election. Holders of Common Stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to the Common Stock.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
Provisions with Anti-takeover Implications. A number of provisions of
CBI's Articles and Bylaws deal with matters of corporate governance and the
rights of stockholders.
Article 9 of CBI's Articles of Incorporation is intended to provide
that a minimum price be offered to CBI's stockholders if another company first
acquires 20% of CBI's then-outstanding shares and thereafter seeks to accomplish
a combination of the two businesses. It also imposes other restrictions on such
a combination intended to benefit stockholders. An overall effect of Article 9
is to render more difficult the accomplishment of mergers or other business
combinations after an entity acquires a 20% interest in CBI and to reduce the
likelihood that management may be removed or replaced by such a stockholder.
Article 9 affects voting requirements for business combinations only if an
entity first acquires a 20% voting interest in CBI.
Article 9 provides that if an entity that acquires a 20% interest in
CBI meets certain standards and follows specified procedures, the customary
approval of only two-thirds of CBI's voting stock will be sufficient to
authorize a subsequent business combination. If such standards are not met or if
such procedures are not complied with, Article 9 requires that nay such business
combination be approved by 85% of CBI's voting stock. The term "business
combination" as used in Article 9 includes a merger or consolidation, a sale
lease or exchange of all or substantially all of CBI's assets, and a plan of
share exchange.
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<PAGE>
Virginia law generally requires a two-thirds vote to authorize a merger
or consolidation of a Virginia corporation with any other corporation or a sale,
lease or exchange of all, or substantially all, of a Virginia corporation's
assets, or a plan of share exchange.
It is possible that because of the resulting need to comply with
Article 9 as a precondition to any subsequent business combination, Article 9
will tend to discourage other entities from making a tender offer or takeover
bid for less than all of CBI's Common Stock. Management's ability to negotiate
favorable employment contracts or other considerations with a company interested
in making a tender offer or takeover bid may be enhanced, and management changes
which sometimes result from successful takeovers may not occur.
It is the CBI Board of Director's opinion, however, that with a
majority of the Board made up of outside directors, the evaluation of a proposed
business combination will not be affected by the pecuniary interests of
management. Since a tender offer is usually made at a price somewhat in excess
of the then-existing market price, to the extent the tender offers are
discouraged, stockholders may be denied the opportunity of selling at the higher
price. This possible disadvantage is offset, however, by the benefit provided by
Article 9 to those stockholders who do not accept the tender offer or, having
done so, do not have all of their shares taken up.
As a practical matter, the requirement of an 85% favorable vote
probably means that the type of business combination to which Article 9 is
addressed could not be accomplished by the person having the 20% of more voting
interest, at least while there remains any widely-dispersed public market in
CBI's stock. Therefore, any entity gaining a 20% interest in CBI would probably
have to abide by the requirements of Article 9 if it expected to accomplish a
future business combination. The major requirement of Article 9 imposes a
minimum price to be offered remaining stockholders in the case of a future
combination with such other entity. However, if the market price of CBI's stock
declines due to economic or other factors, a proposed combination that might be
favorable to the public stockholders could be prevented because the terms of
such combination did not meet the minimum price required by Article 9 to avoid
the 85% vote.
If an entity that has gained a 20% voting interest in CBI should fail
to observe the procedures of Article 9, the holders of 15% plus one share of
CBI's Common Stock, which could include management and the Board of Directors,
would have, in essence a veto power over any merger or other business
combination even if the transaction were desired by holders of two-thirds of
CBI's shares. Such a veto power could assist existing management in retaining
its position. CBI's directors and officers, including the present directors and
officers of CBOV would beneficially own or control 644,550 shares of CBI's
Common Stock, or approximately 27.89% if the Reorganization had been consummated
on December 31, 1995. This is more than the 15% plus one share required to block
a merger or other business combination if an 85% vote to approve any such
transaction were required.
CBI's Bylaws provide that a special meeting of stockholders may be
called by the Board of Directors or by stockholders together holding at least
25% of the number of shares of stock entitled to vote on the business to be
transacted at the meeting. The number of directors provided in the Bylaws cannot
be increased by more than two in a 12 month period except by the affirmative
vote of holders of 85% of all shares of voting stock. CBI's Articles of
Incorporation provide that a director may be removed with or without cause, but
only by the affirmative vote of holders of at least 85% of the outstanding
shares of CBI Common Stock.
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<PAGE>
The foregoing provisions, together with certain provisions of the
Virginia SCA (See, "Comparative Rights Of Shareholders - State Anti-Takeover
Statutes," below), also could discourage or make more difficult a merger, tender
offer or proxy contest, even if they may be favorable to the interests of
stockholders, thus depressing the market price of the Common Stock.
The CBI Articles provide that a director or officer of CBI will be
indemnified by CBI against all expense, liabilities and loss reasonably incurred
or suffered in connection with service for or on behalf of CBI, except in
relation to matters as to which he shall have been finally adjudged to be liable
by reason of having been guilty of gross negligence or willful misconduct in the
performance of his duties. The CBI Articles also provides that the right of
directors and officers to indemnification is not exclusive of any other right
under any statute, agreement or otherwise.
COMPARATIVE RIGHTS OF SECURITY HOLDERS
GENERAL
CBI is a Virginia corporation organized as a bank holding company
subject to the provisions of the Virginia SCA. CBOV is a Virginia corporation
organized as a state bank and also is subject to the provisions of the Virginia
SCA. Shareholders of CBOV, whose rights are governed by CBOV's Articles of
Incorporation and Bylaws and by the Virginia SCA, will become shareholders of
CBI upon consummation of the Reorganization. The rights of such shareholders as
shareholders of CBI will then be governed by the Articles of Incorporation and
Bylaws of CBI and by the Virginia SCA.
Except as set forth below, there are no material differences between
the rights of a CBOV shareholder under its Articles and Bylaws and under the
Virginia SCA, on the one hand, and the rights of a CBI shareholder under the
Articles of Incorporation and Bylaws of CBI and under the Virginia SCA, on the
other hand. This summary is qualified in its entirety by reference to the
Articles of Incorporation and Bylaws of CBOV and to the Virginia SCA and the
Articles of Incorporation and Bylaws of CBI and the Virginia SCA.
AUTHORIZED CAPITAL
CBOV. CBOV's Articles of Incorporation (the "CBOV Articles") authorize
the issuance of up to 1,500,000 shares of CBOV Common Stock, par value $3.50 per
share, of which 527,850 shares were issued and outstanding as of April 26,
1996. CBOV is not authorized to issue shares of preferred stock.
CBI. CBI is authorized to issue 4,000,000 shares of Common Stock, par
value $3.00 per share, of which 1,160,000 shares were issued and outstanding as
of April 26, 1996. See "Description of CBI Capital Stock" for additional
information.
AMENDMENT OF ARTICLES OF INCORPORATION OR BYLAWS
The Virginia SCA provides that an amendment to a corporation's articles
of incorporation must be approved by each voting group entitled to vote on the
proposed amendment. Under Virginia law, an amendment to the corporation's
articles of incorporation must be approved by more than two-thirds of all votes
entitled to be cast by that voting group. However, the corporation's articles of
incorporation
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<PAGE>
may require a greater vote or a lesser vote, which may not be not less than a
majority, by each voting group entitled to vote on the transaction. A
corporation's board of directors may require a greater vote.
CBOV. The CBOV Articles do not address amendments, so CBOV is governed
by the provisions of the Virginia SCA. Accordingly, amendments to CBOV's
Articles of Incorporation must be approved by more than two-thirds of all votes
entitled to be cast by each voting group.
CBOV's Bylaws may be amended by a majority of the directors then
holding office at a meeting which was properly called and at which a quorum is
present. Also, under Virginia law, the Bylaws may be amended by action of the
majority of the shareholders.
CBI. The CBI Articles provide that an amendment of the CBI Articles may
be approved by a majority of the shares of CBI Common Stock issued and
outstanding, except that under certain circumstances an affirmative vote of at
least 85% of all the shares entitled to vote is required in order to amend
certain provisions of the Articles. The provisions that require such a
super-majority vote relate to amendments pertaining to business combinations
with affiliates, removal of directors, increasing the size of the Board of
Directors, and the abolition of cumulative voting. Such super-majority voting
requirements do not apply to any amendment that is unanimously recommended by
the Board of Directors at a time when no entity owns or proposes to acquire 20%
or more of the CBI voting stock.
CBI's Bylaws may be amended by a majority vote of the directors in
office or by the affirmative vote of holders of a majority of the shares CBI
Common Stock.
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS
CBOV. CBOV's Bylaws provide that its Board of Directors shall consist
of no more than 11 or fewer than five individuals. Under Virginia banking laws a
majority of the directors must be residents of Virginia and each director must
own CBOV stock having a book value of not less than $5,000. Directors are
elected at each annual meeting of shareholders.
CBI. CBI's Bylaws provide for a board of directors consisting of ten
individuals. The Board of Directors is divided into three classes, only one
class of which is elected each year for a three year term. Directors serve until
their successors are elected and qualified.
VACANCIES AND REMOVAL OF DIRECTORS
CBOV. CBOV's Bylaws provide that any vacancy on the board of directors
may be filled by an election by the active board members. CBOV's Bylaws provide
that shareholders may remove directors with or without cause at a special
meeting of shareholders.
CBI. CBI's Articles provide that vacancies on the board of directors
may be filled by a majority vote of the directors then in office. Directors so
elected shall hold office until the next annual meeting of shareholders at which
the term of office of the class to which they have been elected expires and
until such director's successor is elected and qualified. CBI's Articles provide
that a director may be removed, with or without cause, but only by the
affirmative vote of the holders of at least 85% of the outstanding shares of CBI
Common Stock.
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<PAGE>
DIRECTOR LIABILITY AND INDEMNIFICATION
The Virginia SCA provides that in any proceeding brought by or in the
right of a corporation or brought by or on behalf of shareholders of the
corporation, the damages assessed against an officer or director arising out of
a single transaction, occurrence or course of conduct may not exceed the lesser
of (1) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
as a limitation on or elimination of the liability of the officer or director;
or (2) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
CBOV's Articles of Incorporation provide that the liability of a
director or officer to CBOV or its stockholders for monetary damages arising out
of any transaction, occurrence or course of conduct shall be limited to one
hundred dollars.
CBOV. CBOV's Articles of Incorporation provide that each present or
former director and officer of the corporation shall be indemnified by the
corporation to the full extent permitted and in the manner prescribed by the
Virginia SCA. The Articles also require CBOV to pay for or reimburse reasonable
expenses incurred in advance of final determination or other disposition of a
proceeding if the applicant furnishes to the corporation a written statement of
his good faith belief that indemnity will be due to him and the applicant
furnishes to the corporation a written undertaking to repay the advance if it is
ultimately determined that he did not meet the standard required, and a
determination is made that facts then known would not preclude indemnification.
CBI. The CBI Articles provide that each director and officer shall be
indemnified against liabilities imposed on or asserted against him by reason of
having been a director or officer and against all expenses reasonably incurred
by him in connection therewith, except in relation to matters as to which he is
finally adjudged to be liable by reason of having been guilty of gross
negligence or willful misconduct in the performance of his duties. In the event
of any other judgment or in the event of a settlement, indemnification shall be
made only if CBI shall be advised, in the case none of the persons involved
shall be or have been a director, by the Board of Directors, and otherwise by
independent counsel to be appointed by the Board of Directors that in its or his
opinion such director or officer was not guilty of gross negligence or willful
misconduct in the performance of his duties and, in the event of settlement,
that such settlement was, or is still to be made is, in the best interest of
CBI. The right of indemnification provided in the CBI articles is not exclusive
of any other rights to which the director may be entitled by Virginia law or
otherwise.
SPECIAL MEETINGS OF SHAREHOLDERS
CBOV. CBOV's Bylaws provide that special meetings of shareholders may
be held on the call of the President, the secretary, a majority of the Board of
Directors or by shareholders holding at least 10% of all shares entitled to vote
at the meeting.
CBI. CBI's Bylaws provide that special meetings of the shareholders may
be called by the Board of Directors or by stockholders together holding at least
25% of the number of shares of stock entitled to vote on the business to be
transacted at the meeting.
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DIRECTOR NOMINATIONS
The Bylaws of neither CBI nor CBOV prescribe procedures for directors'
nominations.
SHAREHOLDER PROPOSALS
The Articles of Incorporation and Bylaws of neither CBI nor CBOV
contain any requirements relating to the timing or content of shareholder
proposals for shareholder votes.
SHAREHOLDER VOTING RIGHTS IN GENERAL
The Virginia SCA generally provides that shareholders do not have
cumulative voting rights unless those rights are provided in the corporation's
articles. The Virginia SCA requires the approval of a majority of a
corporation's board of directors and the holders of more than two-thirds of all
the votes entitled to be cast by each voting group entitled to vote on any plan
of merger or consolidation, plan of share exchange or sale of substantially all
of the assets of a corporation not in the ordinary course of business. The
Virginia SCA also specifies additional voting requirements for Affiliated
Transactions which are discussed below under "State Anti-Takeover Statutes."
CBOV. CBOV's Articles of Incorporation do not provide shareholders
cumulative voting rights for the election of directors. Therefore, the holders
of a majority of the shares voted in the election of directors can elect all of
the directors then standing for election. The holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders. Holders of Common Stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the Common Stock.
CBI. See "Description of CBI Capital Stock - Common Stock."
STATE ANTI-TAKEOVER STATUTES
The Virginia SCA restricts transactions between a corporation and its
affiliates and potential acquirors. The summary below is necessarily general and
is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the statutory provisions contained in the Virginia SCA. Because both CBI and
CBOV are Virginia corporations, the provisions of the Virginia SCA described
below apply to CBI and CBOV and will continue to apply to CBI after the
Reorganization.
AFFILIATED TRANSACTIONS. The Virginia SCA contains provisions governing
"Affiliated Transactions," found at Sections 13.1-725 - 727.1 of the Virginia
SCA. Affiliated Transactions include certain mergers and share exchanges,
certain material dispositions of corporate assets not in the ordinary course of
business, any dissolution of a corporation proposed by or on behalf of an
Interested Shareholder (as defined below), and reclassifications, including
reverse stock splits, recapitalizations or mergers of a corporation with its
subsidiaries, or distributions or other transactions which have the effect of
increasing the percentage of voting shares beneficially owned by an Interested
Shareholder by more than 5%. For purposes of the Virginia SCA, an Interested
Shareholder is defined as any beneficial owner of more than 10% of any class of
the voting securities of a Virginia corporation.
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Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia SCA as a member of a
corporation's board of directors who (i) was a member before the later of
January 1, 1988 or the date on which an Interested Shareholder became an
Interested Shareholder and (ii) was recommended for election by, or was elected
to fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the corporation's board of directors. At the
expiration of the three year period after a shareholder becomes an Interested
Shareholder, these provisions require approval of the Affiliated Transaction by
the affirmative vote of the holders of two-thirds of the outstanding shares of
the corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of: the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder who has been an
Interested Shareholder continuously since the effective date of the statute
(January 26, 1988) or who became an Interested Shareholder by gift or
inheritance from such a person or whose acquisition of shares making such person
an Interested Shareholder was approved by a majority of the Disinterested
Directors of the corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia SCA provides that by affirmative vote of
a majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. CBOV has
not adopted such an amendment. Currently, no shareholder of CBOV owns or
controls 10% or more of CBOV Common Stock, and there are no Interested
Shareholders as defined by the Virginia SCA.
CONTROL SHARE ACQUISITIONS. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728 - 728.8 of the Virginia SCA, also is
designed to afford shareholders of a public company incorporated in Virginia
protection against certain types of non-negotiated acquisitions in which a
person, entity or group ("Acquiring Person") seeks to gain voting control of
that corporation. With certain enumerated exceptions, the statute applies to
acquisitions of shares of a corporation which would result in an Acquiring
Persons ownership of the corporation's shares entitled to vote in the election
of directors falling within any one of the following ranges: 20% to 33-1/3%,
33-1/3% to 50% or 50% or more (a "Control Share Acquisition"). Shares that are
the subject of a Control Share Acquisition ("Control Shares") will not be
entitled to voting rights unless the holders of a majority of the "Disinterested
Shares" vote at an annual or special meeting of shareholders of the corporation
to accord the Control Shares with
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voting rights. Disinterested Shares do not include shares owned by the Acquiring
Person or by officers and inside directors of the target company. Under certain
circumstances, the statute permits an Acquiring Person to call a special
shareholders' meeting for the purpose of considering granting voting rights to
the holders of the Control Shares. As a condition to having this matter
considered at either an annual or special meeting, the Acquiring Person must
provide shareholders with detailed disclosures about his identity, the method
and financing of the Control Share Acquisition and any plans to engage in
certain transactions with, or to make fundamental changes to, the corporation,
its management or business. Under certain circumstances, the statute grants
dissenters' rights to shareholders who vote against granting voting rights to
the Control Shares. The Virginia Control Share Acquisitions statute also enables
a corporation to make provisions for redemption of Control Shares with no voting
rights. A corporation may opt-out of the statute, which CBOV has not done, by so
providing in its articles of incorporation or bylaws. Among the acquisitions
specifically excluded from the statute are acquisitions which are a part of
certain negotiated transactions to which the corporation is a party and which,
in the case of mergers or share exchanges, have been approved by the
corporation's shareholders under other provisions of the Virginia SCA.
DISSENTERS' RIGHTS
The provisions of Article 15 of the Virginia SCA provide shareholders
of Virginia corporations certain rights of appraisal or dissent, for payment of
the fair value of their shares in the event of mergers, consolidations and
certain other corporate transactions. The Virginia SCA provides dissenters'
rights in a share exchange only to the acquired corporation, and not the
acquiring corporation. Therefore, the shareholders of CBOV have dissenters'
rights and may exercise that right and obtain payment of the fair value of their
shares upon compliance and in accordance with the provisions of Article 15 of
the Virginia SCA.
SUPERVISION AND REGULATION
Banks and their holding companies are extensively regulated entities.
CBI is currently a holding company subject to supervision and regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve"). CBI's
sole subsidiary is The Community Bank, a Virginia chartered bank which is
subject to supervision and regulation by the Federal Reserve and the Bureau of
Financial Institutions of the State Corporation Commission of the State of
Virginia (the "SCC"). CBOV is a Virginia chartered bank regulated principally at
the federal level by the Federal Reserve and at the state level by the SCC. The
regulatory oversight of CBOV and CBI will not change as a result of the
Reorganization.
The regulatory discussion is divided into two major subject areas.
First, the discussion addresses the general regulatory considerations governing
bank holding companies. This focuses on the primary regulatory considerations
applicable to CBI as a bank holding company. Second, the discussion addresses
the general regulatory provisions governing depository institutions. This
focuses on the regulatory considerations of The Community Bank and CBOV.
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework before and after the
Reorganization. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
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BANK HOLDING COMPANIES
As a result of the Reorganization, CBOV will become a subsidiary of
CBI. The Federal Reserve has jurisdiction under the BHC Act to approve any bank
or nonbank acquisition, merger or consolidation proposed by a bank holding
company. The BHC Act generally limits the activities of a bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any
other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by statute of the state where the bank whose shares were to be
acquired was located. However, under federal legislation enacted in 1994, the
restriction on interstate acquisitions was abolished, effective September 1995.
A bank holding company from any state now may acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks also will be able to
branch across state lines by acquisition, merger or de novo, effective June 1,
1997 (unless state law would permit such interstate branching at an earlier
date), provided certain conditions are met, including that applicable state law
must expressly permit such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the Bank Insurance Fund
("BIF"). The FDIC's claim for damages is superior to claims of stockholders of
the insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
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CERTAIN REGULATORY CONSIDERATIONS AFFECTING CBI
Regulatory Capital Requirements
All financial institutions are required to maintain minimum levels of
regulatory capital. The federal bank regulatory agencies have established
substantially similar risked based and leverage capital standards for financial
institutions they regulate. These regulatory agencies also may impose capital
requirements in excess of these standards on a case-by-case basis for various
reasons, including financial condition or actual or anticipated growth. Under
the risk-based capital requirements of these regulatory agencies, The Community
Bank and CBOV are required to maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of The Community Bank and CBOV
on a pro forma combined basis following the Reorganization as of December 31,
1995 are 14.06% and 15.15%, exceeding the minimums required. Based upon the
applicable Federal Reserve regulations, at December 31, 1995, CBI, The Community
Bank and CBOV would be considered "well capitalized". (See the "Capital Ratios"
table in this section below.)
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The pro forma leverage ratio
of CBI and CBOV as of December 31, 1995, was 10.33%, which is well above the
minimum requirements.
Each federal regulatory agency is required to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The Federal Reserve and the FDIC have jointly
solicited comments on a proposed framework for implementing the interest rate
risk component of the risk-based capital guidelines. Under the proposal, an
institution's assets, liabilities, and off-balance sheet positions would be
weighed by risk factors that approximate the instruments' price sensitivity to a
100 basis point change in interest rates. Institutions with interest rate risk
exposure in excess of a threshold level would be required to hold additional
capital proportional to that risk. In 1994, the federal bank regulatory agencies
solicited comments on a proposed revision to the risk-based capital guidelines
to take account of concentration of credit risk and the risk of nontraditional
activities. The revision proposed to amend each agency's risk- based capital
standards by explicitly identifying concentration of credit risk and the risk
arising from nontraditional activities, as well as an institution's ability to
manage those risks, as important factors to be taken into account by the agency
in assessing an institution's overall capital adequacy. The proposal was adopted
as a final rule by the federal bank regulatory agencies and subsequently became
effective on January 17, 1995. CBI and CBOV do not expect the final rule to have
a material impact on their respective capital requirements; however, the Federal
regulatory agencies may, as an integral part of their
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examination process, require either CBI or CBOV to provide additional capital
based on such agency's judgments of information available at the time of
examination.
The following table summarizes the minimum regulatory and current
capital ratios for CBI, on a consolidated basis, and CBOV at December 31, 1995,
and also the pro forma combined capital ratios as of December 31, 1995.
CAPITAL RATIOS
<TABLE>
<CAPTION>
REGULATORY CBI CBOV PRO FORMA COMBINED
MINIMUM CURRENT CURRENT CBI AND CBOV
<S> <C> <C> <C> <C>
Risk-based capital (1)
Tier 1 (2)(4)............... 4.00% 14.94% 12.85% 14.06%
Total (2)(4)................ 8.00% 16.10% 13.84% 15.15%
Leverage (2)(3)(4) 3.00% 11.49% 9.11% 10.33%
Total shareholders' equity
to total assets............. N/A 11.10% 8.38% 9.87%
</TABLE>
(1) The pro forma risk-based capital ratios have been computed using pro
forma combined historical data for CBI and CBOV at December 31, 1995.
(2) Risk-based capital ratios and leverage ratios are applicable only to CBI
and CBOV.
(3) Leverage ratio is calculated by Tier 1 capital as a percentage of
quarterly period end assets.
(4) Calculated in accordance with the OTS's and Federal Reserve's capital
rules, with adjustment for net unrealized depreciation on securities
available for sale.
Limits on Dividends and Other Payments
Certain state law restrictions are imposed on distributions of
dividends to shareholders of CBI. CBI shareholders are entitled to receive
dividends as declared by the CBI Board of Directors. However, no such
distribution may be made if, after giving effect to the distribution, it would
not be able to pay its debts as they become due in the usual course of business
or its total assets would be less than its total liabilities. There are similar
restrictions with respect to stock repurchases and redemptions.
CBOV and The Community Bank are subject to legal limitations on capital
distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). For all state member banks of the Federal Reserve seeking
to pay dividends, the prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal law also generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The Virginia SCC has general authority to
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prohibit payment of dividends by a Virginia chartered bank if it determines that
the limitation is in the public interest and is necessary to ensure the bank's
financial soundness.
Following the consummation of the Reorganization, most of the revenues
of CBI and CBI's ability to pay dividends to its shareholders will depend on
dividends paid to it by The Community Bank and CBOV. Based on The Community
Bank's and CBOV's current financial conditions, CBI expects that the
above-described provisions will have no impact on CBI's ability to obtain
dividends from The Community Bank or CBOV or on CBI's ability to pay dividends
to its shareholders.
THE DEPOSITORY INSTITUTIONS
In addition to the regulatory provisions regarding holding companies
addressed above, The Community Bank and CBOV are subject to extensive regulation
as well. The following discussion addresses certain primary regulatory
considerations affecting The Community Bank and CBOV.
CBOV and The Community Bank are regulated extensively under both
federal and state law. CBOV and The Community Bank each is organized as a
Virginia chartered banking corporation and is regulated and supervised by the
Bureau of Financial Institutions of the Virginia SCC. As members of the Federal
Reserve System as well, CBOV and The Community Bank each is regulated and
supervised by the Federal Reserve Bank of Richmond. The Virginia SCC and the
Federal Reserve Bank of Richmond conduct regular examinations of CBOV and The
Community Bank, reviewing such matters as the adequacy of loan loss reserves,
quality of loans and investments, management practices, compliance with laws,
and other aspects of their operations. In addition to these regular
examinations, CBOV and The Community Bank must furnish the Virginia SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC
The Community Bank's and CBOV's deposits are insured up to $100,000 per
insured depositor (as defined by law and regulation) through the BIF. The BIF is
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by BIF-insured institutions.
The actual assessment to be paid by each BIF member is based on the
institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. In 1995, deposit insurance assessments paid by CBOV and
The Community Bank were $65,123 and $69,734, respectively.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution, including The Community
Bank or CBOV, if it determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed in writing by the FDIC. It also may
suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible capital.
If deposit insurance is terminated, the deposits at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period from six months to two years, as determined by
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the FDIC. Management is aware of no existing circumstances that could result in
termination of The Community Bank's or CBOV's deposit insurance.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and to maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and managerial
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposal contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. CBI has not
yet determined the effect that the proposed rule would have on its operations
and the operations of its depository institution subsidiary if it is enacted
substantially as proposed.
Community Reinvestment
The requirements of the Community Reinvestment Act ("CRA") affect both
The Community Bank and CBOV. The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. To the best knowledge of The Community Bank and CBOV, each
is meeting its obligations under the CRA. The CRA rating of CBOV is
"satisfactory," and the CRA rating of The Community Bank is "satisfactory."
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PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
PRO FORMA CONDENSED BALANCE SHEETS
The following unaudited pro forma condensed balance sheets combines the
consolidated historical balance sheets CBI and the historical balance sheets of
CBOV on the assumption that the Reorganization had been effective as of December
31, 1995 and 1994, giving effect to the transaction on a pooling of interests
accounting basis. These unaudited pro forma condensed balance sheets should be
read in conjunction with the consolidated historical financial statements of CBI
and the historical financial statements of CBOV, including the respective notes
thereto, included elsewhere in this Joint Proxy Statement or in documents
delivered herewith or incorporated herein by reference. See "Available
Information."
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COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,636,524 $ 3,971,894 $ 7,608,418
Federal funds sold 2,281,000 3,763,000 6,044,000
-----------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 5,917,524 7,734,894 - 13,652,418
Investment securities:
Available for sale 1,752,646 9,222,655 10,975,301
Held to maturity (approximate market value, 12,358,741 10,923,360 23,282,101
$23,430,785)
Loans, net 65,255,723 42,149,438 107,405,161
Bank premises and equipment, net 1,024,856 1,823,125 2,847,981
Accrued interest receivable 518,555 463,719 982,274
Other assets 1,308,682 623,200 1,931,882
-----------------------------------------------------------------------
$ 88,136,727 $72,940,391 $ - $ 161,077,118
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 12,683,516 $10,848,734 23,532,250
Interest bearing demand deposits 21,514,060 19,054,387 40,568,447
Savings deposit 7,409,280 16,978,183 24,387,463
Time deposits, $100,000 and over 6,932,820 4,047,014 10,979,834
Other time deposits 28,673,838 15,429,259 44,103,097
--------------------------------------------------------- -------------
77,213,514 66,357,577 - 143,571,091
Accrued interest payable 417,782 72,042 489,824
Other liabilities 391,644 402,138 793,782
Guaranteed debt of Employee
Stock Ownership Trust 330,000 - 330,000
--------------------------------------------------------- -------------
78,352,940 66,831,757 - 145,184,697
--------------------------------------------------------- -------------
Commitments and Contingencies
Stockholders' Equity
Capital stock, par value $3 3,450,000 - 2,111,925 5,561,925
Capital stock, par value $3.50 - 1,754,424 (1,754,424) -
Surplus - 2,045,823 (357,501) 1,688,322
Retained earnings 6,645,036 2,240,940 8,885,976
Net unrealized gain on available for sale
securities, net of tax 18,751 67,447 86,198
--------------------------------------------------------- -------------
10,113,787 6,108,634 - 16,222,421
Unearned ESOP shares (330,000) - (330,000)
--------------------------------------------------------- -------------
9,783,787 6,108,634 - 15,892,421
--------------------------------------------------------- -------------
$ 88,136,727 $ 72,940,391 $ - $161,077,118
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,709,432 $ 4,982,284 $ 8,691,716
Federal funds sold 1,017,000 - 1,017,000
----------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 4,726,432 4,982,284 - 9,708,716
Investment securities:
Available for sale 969,213 - 969,213
Held to maturity (approximate market value, 7,598,690 15,164,608 22,763,298
$21,769,000)
Loans, net 61,488,230 38,801,575 100,289,805
Bank premises and equipment, net 1,167,973 1,461,589 2,629,562
Accrued interest receivable 371,809 432,102 803,911
Other assets 1,040,781 243,544 1,284,325
----------------------------------------------------------------------
$ 77,363,128 $61,085,702 $ - $138,448,830
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 11,506,655 $ 9,019,064 20,525,719
Interest bearing demand deposits 24,628,724 11,985,232 36,613,956
Savings deposit 8,555,392 20,803,498 29,358,890
Time deposits, $100,000 and over 4,408,657 2,293,766 6,702,423
Other time deposits 18,981,366 11,709,965 30,691,331
----------------------------------------------------------------------
68,080,794 55,811,525 - 123,892,319
Federal funds purchased - 793,000 793,000
Accrued interest payable 335,439 37,346 372,785
Other liabilities 351,095 185,118 536,213
----------------------------------------------------------------------
68,767,328 56,826,989 - 125,594,317
----------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
Capital stock, par value $3 1,710,000 - 1,816,830 3,526,830
Capital stock, par value $3.50 - 1,509,281 (1,509,281) 0
Surplus 988,932 1,240,352 (307,549) 1.921,735
Retained earnings 5,911,858 1,509,080 7,420,938
Net unrealized losses on available for sale
securities, net of tax (14,990) - - (14,990)
----------------------------------------------------------------------
8,595,800 4,258,713 - 12,854,513
----------------------------------------------------------------------
$ 77,363,128 $61,085,702 $ - $138,448,830
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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PRO FORMA CONDENSED STATEMENTS OF INCOME
The following unaudited pro forma condensed statements of income for
the three years ended December 31, 1995 present the combined statements of
income of CBI and CBOV assuming that CBI and CBOV were combined at the beginning
of each period presented on a pooling of interests accounting basis. These
unaudited pro forma condensed statements of income should be read in conjunction
with the consolidated historical financial statements of CBI and the historical
financial statements of CBOV, including the respective notes thereto, included
elsewhere in this Joint Proxy Statement or in documents derived herewith or
incorporated herein by reference.
The pro forma information is not necessarily indicative of the results
of operations that would have resulted had the Reorganization been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
the results of operations of future periods.
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COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDING DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,355,812 $ 4,207,636 $ $ 10,563,448
Interest on investment securities:
U.S. Government agencies and corporations 724,658 837,331 1,561,989
Other securities 5,504 127,099 132,603
States and political subdivisions - 47,513 47,513
Interest on federal funds sold and securities
purchased under agreements to resell 276,189 100,392 376,581
---------------------------------------------------------------
TOTAL INTEREST INCOME 7,362,163 5,319,971 12,682,134
---------------------------------------------------------------
Interest expense:
Interest on deposits 2,883,527 2,197,051 5,080,578
Interest on federal funds purchased and securities
sold under agreements to repurchase 6,465 10,159 16,624
---------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,889,992 2,207,210 5,097,202
---------------------------------------------------------------
NET INTEREST INCOME 4,472,171 3,112,761 7,584,932
Provision for loan losses 247,000 195,000 442,000
---------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,225,171 2,917,761 7,142,932
---------------------------------------------------------------
Other income:
Service charges, commissions and fees 672,042 305,346 977,388
Security gains (losses) 29,763 29,763
Other operating income 50,748 76,698 127,446
---------------------------------------------------------------
TOTAL OTHER INCOME 752,553 382,044 1,134,597
---------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,395,308 1,279,469 2,674,777
Net occupancy expense 138,535 157,950 296,485
Furniture and equipment expense 193,786 129,296 323,082
Other operating expense 771,007 633,624 1,404,631
---------------------------------------------------------------
TOTAL OTHER EXPENSES $ 2,498,636 $ 2,200,339 $ 4,698,975
---------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 2,479,088 $ 1,099,466 $ 3,578,554
Income taxes 856,092 367,800 1,223,892
---------------------------------------------------------------
NET INCOME $ 1,622,996 $ 731,666 $ 2,354,662
===============================================================
Earnings per share (based on 1,208,672
shares outstanding CBI; 459,239 shares
outstanding CBOV) $ 1.34 $ 1.60 $ 1.27
======================================================================
Earnings per share (based on 1,208,672
shares outstanding CBI; 459,239 shares
outstanding CBOV), assuming full dilution $ 1.34 $ 1.60 $ 1.27
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDING DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 5,347,803 $ 3,266,997 $ $ 8,614,800
Interest on investment securities:
U.S. Government agencies and corporations 630,802 605,141 1,235,943
Other securities 8,282 149,183 157,465
States and political subdivisions - 64,655 64,655
Interest on federal funds sold and securities
purchased under agreements to resell 28,629 118,692 147,321
---------------------------------------------------------------
TOTAL INTEREST INCOME 6,015,516 4,204,668 10,220,184
---------------------------------------------------------------
Interest expense:
Interest on deposits 2,226,620 1,495,867 3,722,487
Interest on federal funds purchased and securities
sold under agreements to repurchase 5,287 3,674 8,961
---------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,231,907 1,499,541 3,731,448
---------------------------------------------------------------
NET INTEREST INCOME 3,783,609 2,705,127 6,488,736
Provision for loan losses 66,000 199,838 265,838
---------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,717,609 2,505,289 6,222,898
---------------------------------------------------------------
Other income:
Service charges, commissions and fees 738,357 289,406 1,027,763
Security gains (losses) 47,800 - 47,800
Loss on sale of other real estate (33,980) - (33,980)
Other operating income 49,036 140,450 189,486
---------------------------------------------------------------
TOTAL OTHER INCOME 801,213 429,856 1,231,069
---------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,329,570 1,187,014 2,516,584
Net occupancy expense 150,818 154,624 305,442
Furniture and equipment expense 207,114 227,875 434,989
Other operating expense 859,289 653,203 1,512,492
-------------------------------------------------------------
TOTAL OTHER EXPENSES $ 2,546,791 $ 2,222,716 $ 4,769,507
---------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 1,972,031 $ 712,429 $ 2,684,460
Income taxes 660,019 225,600 885,619
---------------------------------------------------------------
NET INCOME $ 1,312,012 $ 486,829 $ 1,798,841
===============================================================
Earnings per share (based on 1,195,026
shares outstanding CBI: 429,399 shares
outstanding CBOV) $ 1.10 $ 1.13 $ $ 1.00
===============================================================
Earnings per share (based on 1,195,026
shares outstanding CBI: 429,399 shares
outstanding CBOV), assuming full dilution $ 1.10 $ 1.13 $ $ 1.00
===============================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
-139-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED STATEMENTS OF INCOME
YEAR ENDING DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,664,533 $ 2,786,466 $ $ 7,450,999
Interest on investment securities:
U.S. Government agencies and corporations 657,976 322,644 980,620
Other securities 5,004 148,974 153,978
States and political subdivisions - 56,439 56,439
Interest on federal funds sold and securities
purchased under agreements to resell 58,798 195,634 254,432
---------------------------------------------------------------
TOTAL INTEREST INCOME 5,386,311 3,510,157 8,896,468
---------------------------------------------------------------
Interest expense:
Interest on deposits 2,197,885 1,324,068 3,521,953
Interest on federal funds purchased and securities
sold under agreements to repurchase 763 - 763
---------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,198,648 1,324,068 3,522,716
---------------------------------------------------------------
NET INTEREST INCOME 3,187,663 2,186,089 5,373,752
Provision for loan losses 120,000 75,000 195,000
---------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,067,663 2,111,089 5,178,752
---------------------------------------------------------------
Other income:
Service charges, commissions and fees 794,417 200,568 994,985
Security gains (losses) 16,000 - 16,000
Other operating income 48,358 63,268 111,626
---------------------------------------------------------------
TOTAL OTHER INCOME 858,775 263,836 1,122,611
---------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,197,749 1,002,556 2,200,305
Net occupancy expense 161,290 169,688 330,978
Furniture and equipment expense 185,400 186,883 372,283
Other operating expense 736,531 635,207 1,371,738
---------------------------------------------------------------
TOTAL OTHER EXPENSES $ 2,280,970 $ 1,994,334 $ 4,275,304
---------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 1,645,468 $ 380,591 $ 2,026,059
Income taxes 566,553 103,000 669,553
---------------------------------------------------------------
NET INCOME $ 1,078,915 $ 277,591 $ 1,356,506
===============================================================
Earnings per share (based on 1,140,076
shares outstanding CBI: 409,463 shares
outstanding CBOV) $ 0.95 $ 0.68 $ $ 0.79
===============================================================
Earnings per share (based on 1,140,076
shares outstanding CBI: 409,463 shares
outstanding CBOV), assuming full dilution $ 0.95 $ 0.68 $ $ 0.79
===============================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
-140-
<PAGE>
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
(1) The pro forma information presented is not necessarily
indicative of the results of operations or the financial
position that would have resulted had the Reorganization been
consummated at the beginning of the periods indicated, nor is
it necessarily indicative of the results of operations in
future periods or the future financial position of the
combined entities.
(2) It is assumed that the Reorganization will be accounted for on
a pooling of interests accounting basis and, accordingly, the
related pro forma adjustments have been calculated using the
exchange ratio, whereby CBI will issue 1.4044 shares of stock
for each share of CBOV common stock.
As a result, as of December 31, 1995, information was
appropriately adjusted for the Reorganization by the (a)
addition of 703,975 shares of CBI common stock amounting to
$2,111,925, (b) elimination of 501,264 shares of CBOV common
stock amounting to $1,754,424, and (c) recordation of the
remaining amount of $357,501 as a decrease in capital surplus.
As a result, as of December 31, 1994, information was
appropriately adjusted for the Reorganization by the (a)
addition of 605,610 shares of CBI common stock amounting to
$1,816,830; (b) elimination of 431,223 shares of CBOV common
stock amounting to $1,509,281; and (c) recordation of the
remaining amount of $307,549 as a decrease in capital surplus.
(3) Per share data has been computed based on the combined
historical income applicable to common shareholders of CBI and
CBOV using the historical weighted average shares, adjusted to
equivalent shares of CBI Common Stock, of CBOV, as of the
earliest period presented.
COST AND MEANS OF PROXY SOLICITATION
The cost of the solicitation of proxies will be borne by CBOV and CBI,
respectively. In addition to solicitation by use of the mails, some officers and
employees of CBOV and CBI (who will not be compensated in addition to their
regular salaries) may solicit proxies from their respective shareholders
personally or by telephone. CBOV and CBI will reimburse banks, brokerage firms
and other custodians, nominees and fiduciaries for reasonable expenses incurred
by them in sending proxy materials to beneficial owners of CBOV and CBI Common
Stock.
ANNUAL REPORT AND FINANCIAL STATEMENTS
A copy of CBI's Annual Report to Stockholders for the year ended
December 31, 1995 accompanies this Proxy Statement. Additional copies may be
obtained by written request to the Secretary of CBI at the address indicated
below. Such Annual Report is not part of the proxy solicitation materials.
-141-
<PAGE>
UPON RECEIPT OF A WRITTEN REQUEST OF ANY PERSON WHO, ON THE RECORD
DATE, WAS RECORD OWNER OF CBI COMMON STOCK OR WHO REPRESENTS IN GOOD FAITH THAT
HE OR SHE WAS ON SUCH DATE THE BENEFICIAL OWNER OF SUCH STOCK ENTITLED TO VOTE
AT THE ANNUAL MEETING OF STOCKHOLDERS, CBI WILL FURNISH TO SUCH PERSON, WITHOUT
CHARGE, A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995 AND THE EXHIBITS THERETO REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE EXCHANGE ACT. ANY SUCH REQUEST
SHOULD BE MADE IN WRITING TO LAWRENCE F. DESOUZA, SECRETARY, COMMUNITY
BANKSHARES INCORPORATED, 200 NORTH SYCAMORE STREET, PETERSBURG, VIRGINIA 23803.
THE FORM 10-K IS NOT PART OF THE PROXY SOLICITATION MATERIALS.
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors knows of no
matter to come before the meeting other than those stated in the notice of the
meeting. As to other matters, if any, that may properly come before the meeting,
it is intended that proxies in the accompanying form will be voted in accordance
with the best judgment of the person or persons named therein.
EXPERTS
The consolidated financial statements of CBI included in this Joint
Proxy Statement have been so included in reliance on the report of Mitchell,
Wiggins & Company LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of CBOV as of December 31, 1995, 1994 and 1993
and for each of the three years in the period ended December 31, 1995 included
in this Joint Proxy Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, as stated in their report appearing elsewhere
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
LEGAL OPINION
The validity of CBI Common Stock to be issued in connection with the
Reorganization will be passed upon by Williams, Mullen, Christian & Dobbins.
SHAREHOLDER NOMINATIONS AND PROPOSALS
The Bylaws of CBI permit any shareholder entitled to vote to submit
nominations for directors and proposals for business at annual meetings. Such
nominations and proposals must be made in writing
-142-
<PAGE>
and must be mailed or delivered to the Secretary of CBI not less than 60 days
nor more than 90 days prior to the annual meeting of shareholders. A written
notice of nomination must include (a) the nominee's name, age, business address
and residence address, (b) the nominee's principal occupation, and (c) the
number of shares of CBI that the nominee owns. A written notice of nomination
must also include the name and address of the nominating shareholder and the
number of shares of CBI that the nominating shareholder owns. Nominations not
made in accordance with the above procedure may, in the sole discretion of the
chairman of the meeting, be disregarded.
A written notice of proposal for business must include (a) a brief
description of the business desired to be brought at the meeting and the reasons
for conducting such business at the meeting, (b) the name and address of the
proposing shareholder, (c) the number of shares of CBI that the proposing
shareholder owns, and (d) any material interest of the shareholder in the
proposal. Proposals not made in accordance with the above procedure may, in the
sole discretion of the chairman of the meeting, be disregarded.
Shareholders having director nominations or other proposals which they
desire to present at next year's annual meeting should, if they desire that such
proposals be included in the Board of Director's proxy and proxy statement
relating to such meeting, submit such proposals in time to be received by CBI at
its principal executive office in Petersburg, Virginia not later than February
19, 1997, to be so included. All such submissions must comply with the
requirements of Rule 14(a)-8 of the Securities and Exchange Commission under the
Exchange Act, and the Board of Directors directs the close attention of
interested shareholders to that Rule.
-143-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
between
Commerce Bank of Virginia
and
Community Bankshares Incorporated
-------------------------
December 12, 1995
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
THE REORGANIZATION AND RELATED MATTERS
PAGE
1.1 The Reorganization ............................................ 6
1.2 Management and Business of CBOV and CBI........................ 6
1.3 The Closing and Effective Date................................. 7
1.4 Definitions.................................................... 7
ARTICLE 2
BASIS AND MANNER OF EXCHANGE
2.1 Conversion of Shares........................................... 8
2.2 Manner of Exchange............................................. 9
2.3 No Fractional Shares........................................... 9
2.4 Dividends...................................................... 9
2.5 Dissenting Shares.............................................. 9
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of CBOV.......................... 9
(a) Organization, Standing and Power.......................10
(b) Authority..............................................10
(c) Capital Structure......................................10
(d) Ownership of Stock.....................................11
(e) Financial Statements...................................11
(f) Absence of Undisclosed Liabilities.....................11
(g) Legal Proceedings; Compliance with Laws................11
(h) Regulatory Approvals...................................11
(i) Labor Relations........................................11
(j) Tax Matters............................................12
(k) Property...............................................12
(l) Reports................................................12
(m) Employee Benefit Plans.................................12
(n) Investment Securities..................................13
(o) Certain Contacts.......................................13
(p) Insurance..............................................14
(q) Absence of Material Changes and Events.................14
<PAGE>
PAGE
(r) Loans, OREO and Allowance for Loan Losses..............14
(s) Statements True and Correct............................15
(t) Brokers and Finders....................................15
(u) Repurchase Agreements..................................16
(v) Administration of Trust Accounts.......................16
(w) Environmental Matters..................................16
3.2 Representations and Warranties of CBI...........................18
(a) Organization, Standing and Power.......................18
(b) Authority..............................................18
(c) Capital Structure......................................19
(d) Ownership of the CBI Subsidiaries; Capital Structure
of the CBI Subsidiaries; and Organization of the CBI
Subsidiaries...........................................19
(e) Financial Statements...................................20
(f) Absence of Undisclosed Liabilities.....................20
(g) Legal Proceedings; Compliance with Laws................20
(h) Regulatory Approvals...................................21
(i) Labor Relations........................................21
(j) Tax Matters............................................21
(k) Property...............................................21
(l) Reports................................................22
(m) Employee Benefit Plans.................................22
(n) Investment Securities..................................22
(o) Certain Contacts.......................................23
(p) Insurance..............................................23
(q) Loans, OREO and Allowance for Loan Losses..............24
(r) Absence of Material Changes and Events.................25
(s) Statements True and Correct............................25
(t) Brokers and Finders....................................25
(u) Repurchase Agreements..................................25
(v) Administration of Trust Accounts.......................25
(w) Environmental Matters..................................26
ARTICLE 4
CONDUCT PRIOR TO THE EFFECTIVE DATE
4.1 Access to Records and Properties................................27
4.2 Confidentiality.................................................27
4.3 Registration Statement, Proxy Statement and
Shareholder Approval............................................28
4.4 Operation of the Business of CBOV and CBI.......................28
4.5 Dividends.......................................................29
<PAGE>
PAGE
4.6 No Solicitation.................................................29
4.7 Regulatory Filings..............................................30
4.8 Public Announcements............................................30
4.9 Notice of Breach................................................30
4.10 Accounting Treatment............................................30
4.11 Reorganization Consummation.....................................30
4.12 Amendment to Articles of Incorporation..........................30
4.13 Employment Contracts............................................31
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Conversion of Stock Options.....................................31
5.2 Accounting Treatment............................................31
5.3 Benefit Plans...................................................31
5.4 Indemnification.................................................32
ARTICLE 6
CONDITIONS TO THE REORGANIZATION
6.1 Conditions to Each Party's Obligations to Effect
the Reorganization..................................32
(a) Shareholder Approvals..................................32
(b) Regulatory Approvals...................................32
(c) Registration Statement.................................32
(d) Tax Opinion............................................33
(e) Accountant's Letter....................................33
(f) Opinions of Counsel....................................33
(g) Legal Proceedings......................................33
(h) Employment Contracts...................................33
6.2 Conditions to Obligations of CBI................................33
(a) Representations and Warranties.........................33
(b) Performance of Obligations.............................33
(c) Affiliate Letters......................................34
(d) Investment Banking Letter..............................34
6.3 Conditions to Obligations of CBOV...............................34
(a) Representations and Warranties.........................34
(b) Performance of Obligations.............................34
(c) Investment Banking Letter..............................34
(d) Amendment to Articles of Incorporation.................35
<PAGE>
PAGE
ARTICLE 7
TERMINATION
7.1 Termination....................................................35
7.2 Effect of Termination..........................................36
7.3 Non-Survival of Representations, Warranties and Covenants......36
7.4 Expenses.......................................................36
ARTICLE 8
GENERAL PROVISIONS
8.1 Entire Agreement...............................................37
8.2 Waiver and Amendment...........................................37
8.3 Descriptive Headings...........................................37
8.4 Governing Law..................................................37
8.5 Notices........................................................37
8.6 Counterparts...................................................38
8.7 Severability...................................................38
8.8 Brokers and Finders............................................39
8.9 Subsidiaries...................................................39
Exhibit A - Plan of Share Exchange between Commerce Bank of Virginia
and Community Bankshares Incorporated
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of December 12, 1995 by and between Commerce Bank of Virginia, a
Virginia state bank with its principal office located in Richmond, Virginia
("CBOV"), and Community Bankshares Incorporated, a Virginia corporation with
its principal office located in Petersburg, Virginia ("CBI").
WITNESSETH:
WHEREAS, CBOV and CBI desire to combine their respective businesses;
and
WHEREAS, CBOV and CBI have agreed to the affiliation of their two
companies through a Share Exchange under Virginia law, as a result of which CBOV
would become a wholly-owned subsidiary of CBI and the shareholders of CBOV would
become shareholders of CBI, all as more specifically provided in this Agreement
and the Plan of Share Exchange in the form attached hereto as Exhibit A (the
"Plan"); and
WHEREAS, the respective Boards of Directors of CBOV and CBI have
resolved that the transactions described herein are in the best interests of the
parties and their respective shareholders and have authorized and approved the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
THE REORGANIZATION AND RELATED MATTERS
1.1 THE REORGANIZATION. Subject to the terms and conditions of this
Agreement, at the Effective Date as defined in Section 1.3 hereof, CBOV shall
become a wholly-owned subsidiary of CBI through the exchange of each outstand-
ing share of common stock of CBOV for shares of the common stock of CBI in
accordance with Section 2.1 of this Agreement and pursuant to a statutory share
exchange under Section 13.1-717 of the Virginia Stock Corporation Act (the
"Reorganization"). At the Effective Date, the Reorganization shall have the
effect provided in Section 13.1-721 of the Virginia Stock Corporation Act.
1.2 MANAGEMENT AND BUSINESS OF CBOV AND CBI. The directors, officers
and employees of CBOV will not change as a result of the Reorganization. The
members of the CBOV Board shall become directors of CBI on the Effective Date.
When the CBOV directors become directors of CBI, three members of the CBOV Board
shall become members of each of the three classes of CBI Directors, as
determined by the CBOV Board. The CBOV Directors appointed to Class I shall
serve until the 1998 annual meeting of shareholders; those appointed to Class II
shall serve until the 1999 annual meeting of shareholders; and those appointed
to Class III shall serve until the 1997 annual meeting of shareholders. The
parties anticipate that immediately before the Effective Date CBI will have ten
directors and CBOV will have nine
<PAGE>
directors. As a result of the Reorganization, CBI will have 19 directors on and
after the Effective Date. It is the intention of CBI and CBOV that after the
Effective Date, directors of CBOV, or individuals designated by directors of
CBOV, shall continue to constitute nine nineteenths (9/19) of the Board of CBI
and the parties shall use their best efforts to maintain that ratio. The parties
also acknowledge, however, that such ratio might change as a result of
unanticipated events, including, for example, the acquisition in the future of
another bank by CBI. The parties intend that after the Effective Date, the chief
executive officer of CBOV and the chief executive officer of The Community
Bank, a wholly owned subsidiary of CBI, each will attend the meetings of the
other's Board of Directors.
1.3 THE CLOSING AND EFFECTIVE DATE. The closing of the transactions
contemplated by this Agreement and the Plan of Reorganization shall take place
at the offices of Williams, Mullen, Christian & Dobbins, 1021 East Cary Street,
Richmond, Virginia or at such other place as may be mutually agreed upon by the
parties. The Reorganization shall become effective on the date shown on the
Certificate of Share Exchange issued by the State Corporation Commission of
Virginia effecting the Reorganization (the "Effective Date"). Unless otherwise
agreed upon in writing by the chief executive officers of CBI and CBOV, subject
to the conditions to the obligations of the parties to effect the Reorganiza-
tion as set forth in Article 6, the parties shall use their best efforts to
cause the Effective Date to occur on the first day of the month following the
month in which the conditions set forth in Sections 6.1(a) and 6.1(b) are sat-
isfied. All documents required by the terms of this Agreement to be delivered at
or prior to consummation of the Reorganization will be exchanged by the parties
at the closing of the Reorganization (the "Reorganization Closing"), which shall
be held on or before the Effective Date. Prior to the Reorganization Closing,
CBI and CBOV shall execute and deliver to the Virginia State Corporation
Commission Articles of Share Exchange containing a Plan of Share Exchange in
substantially the form of Exhibit A hereto.
1.4 DEFINITIONS. Any term defined anywhere in this Agreement shall have
the meaning ascribed to it for all purposes of this Agreement (unless expressly
noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a
party shall mean the knowledge, after due inquiry, of any "Executive Officer"
of such party, as such term is defined in Regulation O, (12 C.F.R. 215);
(b) the term "Material Adverse Effect", when applied to a
party, shall mean an event, occurrence or circumstance (including without limi-
tation (i) the making of any provisions for possible loan and lease losses,
write-downs or other real estate and taxes and (ii) any breach of a representa-
tion or warranty by such party) which (a) has or is reasonably likely to have a
material adverse effect on the financial position, results of operations or
business of the party and its subsidiaries, taken as a whole, or (b) would
materially impair the party's ability to perform its obligations under this
Agreement or the consummation of the Reorganization and the other transactions
contemplated by this Agreement; provided, however, that solely for purposes of
measuring whether an event, occurrence or circumstance has a material adverse
effect on such party's results of operations, the term "results of operations"
shall mean net interest income plus non-interest income (less securities gains)
less gross expenses (excluding provisions for possible loan and lease losses,
write-downs of other real estate and taxes); and
<PAGE>
provided further, that material adverse effect and material impairment shall not
be deemed to include the impact of (i) changes in banking and similar laws of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to banks and bank holding
companies generally, and (iii) the Reorganization on the operating performance
of the parties to this Agreement; and
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure letter that is delivered by that
party to the other party prior to or contemporaneously with the execution of
this Agreement and specifically designated as information "Previously Dis-
closed" pursuant to this Agreement.
ARTICLE 2
BASIS AND MANNER OF EXCHANGE
2.1 CONVERSION OF SHARES. Upon, and by reason of, the Reorganization
becoming effective pursuant to the issuance of a Certificate of Share Exchange
by the Virginia State Corporation Commission, no cash, except as set forth in
Section 2.3 below, shall be allocated to the shareholders of CBOV, and stock
shall be issued and allocated as follows:
(a) Each share of common stock, par value $3.50 per share, of
CBOV ("CBOV Common Stock") issued and outstanding immediately prior to the
Effective Date shall, by operation of law, be automatically exchanged for 1.4044
(the "Exchange Ratio") shares of common stock of CBI, par value $3.00 per share
(CBI Common Stock), plus cash for fractional shares. Each holder of a
certificate representing any shares of CBOV Common Stock upon the surrender of
his CBOV stock certificates to CBI, 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 CBI Common
Stock that his shares shall be converted into pursuant to the Exchange Ratio.
Each such holder of CBOV Common Stock shall have the right to receive any
dividends previously declared but unpaid as to such stock and the considera-
tion described in Sections 2.1 and 2.3 upon the surrender of such certificate in
accordance with Section 2.2. In the event CBI changes the number of shares of
CBI Common Stock issued and outstanding prior to the Effective Date as a result
of any stock split, stock dividends, recapitalization or similar transaction
with respect to the outstanding CBI Common Stock and the record date therefor
shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted.
(b) Shares of CBOV Common Stock issued and outstanding shall,
by virtue of the Reorganization, continue to be issued and outstanding shares
held by CBI.
2.2 MANNER OF EXCHANGE. As promptly as practicable after the Effective
Date, CBI shall cause The Community Bank, acting as the exchange agent
("Exchange Agent"), to send to each former shareholder of record of CBOV
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of CBOV Common
<PAGE>
Stock (other than shares held by shareholders who perfect their dissenters'
rights as provided under Section 2.5 hereof) for the consideration set forth in
Section 2.1 above and Section 2.3 below. Any fractional share checks which a
CBOV shareholder shall be entitled to receive in exchange for such share-
holder's shares of CBOV Common Stock, and any dividends paid on any shares of
CBI 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 CBOV 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 CBI and the
Exchange Agent, in their judgement, if any of such certificates are lost, stolen
or destroyed). No interest will be paid on any such fractional share checks or
dividends to which the holder of such shares shall be entitled to receive upon
such delivery.
2.3 NO FRACTIONAL SHARES. No certificates or scrip for fractional
shares of CBI Common Stock will be issued. In lieu thereof, CBI will pay the
value of such fractional shares in cash on the basis of the book value per share
of CBI Common Stock at the end of the calendar quarter that immediately precedes
the Effective Date.
2.4 DIVIDENDS. No dividend or other distribution payable to the holders
of record of CBI Common Stock at or as of any time after the Effective Date
shall be paid to the holder of any certificate representing shares of CBOV
Common Stock issued and outstanding at the Effective Date until such holder
physically surrenders such certificate for exchange as provided in Section 2.2
of this Agreement, promptly after which time all such dividends or distributions
shall be paid (without interest).
2.5 DISSENTING SHARES. Shareholders of CBOV shall have the right to
demand and receive payment of the fair value of their shares of CBOV Common
Stock pursuant to the provisions of Virginia Code ss. 13.1-729 et seq. (the
"Dissenting Shares"). If, however, a holder shall have failed to perfect his
right to dissent or shall have effectively withdrawn or lost such right, each of
his shares of CBOV Common Stock shall be deemed to have been converted into, at
the Effective Date, the right to receive the number of shares of CBI Common
Stock based on the Exchange Ratio and cash in lieu of any fractional shares
pursuant to Section 2.3 hereof.
ARTICLE 3
REPRESENTATION AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF CBOV. CBOV represents and
warrants to CBI as follows:
(a) ORGANIZATION, STANDING AND POWER. (1) CBOV is a corpora-
tion and a Virginia state bank, duly organized, validly existing and in good
standing under the laws of Virginia, and it has all requisite corporate power
and authority to carry on its business in Virginia as now being conducted and to
own and operate its assets, properties and business; CBOV has no subsidiaries;
and CBOV has the corporate power and authority to execute and
<PAGE>
deliver this Agreement and perform the respective terms of this Agreement and
the Plan of Share Exchange. CBOV is a member of the Federal Reserve System, and
except as Previously Disclosed is in compliance in all material respects with
all rules and regulations promulgated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Virginia State Corporation
Commission ("SCC") and any other relevant regulatory authority, and it has all
requisite corporate power and authority to carry on a commercial banking
business as now being conducted and to own and operate its assets, properties
and business.
(2) CBOV is an "insured bank" as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder. All of the shares
of capital stock of CBOV are fully paid and nonassessable.
(b) AUTHORITY. (1) The execution and delivery of this
Agreement, the Plan of Share Exchange and the consummation of the
Reorganization, have been duly and validly authorized by all necessary cor-
porate action on the part of CBOV, except the approval of shareholders. The
Agreement represents the legal, valid, and binding obligations of CBOV,
enforceable against CBOV in accordance with its terms (except in all such cases
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discre-
tion of the court before which any proceeding may be brought).
(2) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, nor compliance by CBOV
with any of the provisions hereof will: (i) conflict with or result in a breach
of any provision of CBOV's Articles of Incorporation or Bylaws; (ii) to the
knowledge of CBOV, except as Previously Disclosed, constitute or result in the
breach of any term, condition or provision of, or constitute a default under, or
give rise to any right of termination, cancellation or acceleration with respect
to, or result in the creation of any lien, charge or encumbrance upon, any
property or assets of CBOV pursuant to (A) any note, bond, mortgage, indenture,
or (B) any material license, agreement, lease, or other instrument or
obligation, to which CBOV is a party or by which any of them or any of their
properties or assets may be bound, or (iii) to the knowledge of CBOV, subject to
the receipt of the requisite approvals referred to in Section 4.7, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
CBOV or any or its properties or assets.
(c) CAPITAL STRUCTURE. The authorized capital stock of CBOV
consists of 1,500,000 shares of common stock, par value $3.50 per share, of
which, as of the date hereof, 501,254 shares are issued, outstanding, fully paid
and nonassessable, not subject to shareholder preemptive rights and were not
issued in violation of any agreement to which CBOV is a party or otherwise
bound, or of any registration or qualification provisions of any federal or
state securities laws. Except as Previously Disclosed, there are no outstand-
ing options, warrants or other rights to subscribe for or purchase from CBOV any
capital stock of CBOV or securities convertible into or exchangeable for capital
stock of CBOV.
<PAGE>
(d) OWNERSHIP OF STOCK. (1) CBOV does not own, directly or
indirectly, 5% or more of the outstanding capital stock or other voting securi-
ties of any corporation, bank or other organization actively engaged in busi-
ness except as Previously Disclosed.
(e) FINANCIAL STATEMENTS. CBOV has previously furnished to CBI
true and complete copies of its audited balance sheets and related statements
of income, statements of cash flows, and statements of stockholders' equity for
the three year period ended December 31, 1994, and its unaudited balance sheets
and related statements of income and statements of stockholders' equity for the
three month and nine month periods ending September 30, 1995 (together with the
notes thereto, the "CBOV Financial Statements"). The CBOV Financial Statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods presented, and present fairly
the financial position of CBOV as of the respective dates thereof and the
results of its operations for the three year and nine month periods then ended,
except as may be noted therein, and subject to normal and recurring year end
audit adjustments in the case of unaudited statements.
(f) ABSENCE OF UNDISCLOSED LIABILITIES. At September 30, 1995,
CBOV, to its knowledge, had no obligation or liability (contingent or otherwise)
of any nature which was not reflected in the CBOV Financial Statements, except
for those which in the aggregate are immaterial or have been Previously
Disclosed.
(g) LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS. Except as Pre-
viously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of CBOV's management, threatened against CBOV,
or against any property, asset, interest or right of CBOV, that are reasonably
expected to have, either individually or in the aggregate a material adverse
effect on the financial condition of CBOV or that are reasonably expected to
threaten or impede the consummation of the Reorganization. CBOV is not a party
to any agreement or instrument or subject to any judgment, order, writ,
injunction, decree or rule that might reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), business or
prospects of CBOV. To the best knowledge of CBOV's management, CBOV has complied
in all material respects with all laws, ordinances, requirements, regulations or
orders applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders).
(h) REGULATORY APPROVALS. CBOV knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) LABOR RELATIONS. CBOV is not a party to or bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is it the subject of a proceeding
asserting that it has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel it to bargain with any
labor organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving it, pending or, to the best of its
knowledge, threatened, nor is it aware of any activity involving its employees
seeking to certify a collective bargaining
<PAGE>
unit or engaging in any other organization activity.
(j) TAX MATTERS. CBOV has filed all federal, state and local
tax returns and reports required to be filed, and all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability in
the CBOV Financial Statements or are being contested in good faith and have been
Previously Disclosed. Except to the extent that liabilities therefor are
specifically reflected in the CBOV Financial Statements, there are no federal,
state or local tax liabilities of CBOV other than liabilities that have arisen
since September 30, 1995, all of which have been properly accrued or otherwise
provided for on the books and records of CBOV. Except as Previously Disclosed,
no tax return or report of CBOV 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 CBOV by any taxing authority.
(k) PROPERTY. Except as disclosed or reserved against in the
CBOV Financial Statements, CBOV has good and marketable title free and clear of
all material liens, encumbrances, charges, defaults or equities of whatever
character to all of the material properties and assets, tangible or intangible,
reflected in the CBOV Financial Statements as being owned by CBOV as of the
dates thereof. To the best knowledge of CBOV, all buildings, and all fixtures,
equipment, and other property and assets which are material to its business,
held under leases or subleases by CBOV are held under valid instruments
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws. The buildings,
structures, and appurtenances owned, leased, or occupied by CBOV are in good
operating condition and in a state of good maintenance and repair, and to the
best knowledge of CBOV (i) comply with applicable zoning and other municipal
laws and regulations, and (ii) there are no latent defects therein.
(l) REPORTS. Since January 1, 1990, CBOV has filed all reports
and statements, together with any amendments required to be made with respect
thereto, that were required to be filed with the SCC, the Federal Reserve, and
to the best knowledge of CBOV, any other governmental or regulatory authority
or agency having jurisdiction over its operations.
(m) EMPLOYEE BENEFIT PLANS. (1) CBOV will deliver for CBI's
review, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
CBOV for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "CBOV Benefit Plans"). Any of the CBOV Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section (3(2) of ERISA, is referred to herein as a "CBOV ERISA Plan." No CBOV
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
<PAGE>
(2) Except as Previously Disclosed, all CBOV Benefit Plans are
in compliance with the applicable terms of ERISA and the Internal Revenue Code
of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to CBOV on a consolidated basis.
(3) No CBOV ERISA Plan which is a defined benefit pension plan
has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) INVESTMENT SECURITIES. Subject to FASB 115 and except for
pledges to secure public and trust deposits and obligations under agreements
pursuant to which CBOV has sold securities subject to an obligation to
repurchase, none of the investment securities reflected in the CBOV Financial
Statements is subject to any restriction, contractual, statutory, or otherwise,
which would impair materially the ability of the holder of such investment to
dispose freely of any such investment at any time. With respect to any
agreements pursuant to which CBOV has purchased securities subject to any
agreement to resell, it has a valid, perfected first lien or security interest
in the government securities or other collateral securing such agreement, and
the value of such collateral equals or exceeds the amount of the debt secured
thereby.
(o) CERTAIN CONTRACTS. (1) Except as Previously Disclosed,
CBOV is not a party to, or is bound by, (i) any material agreement, arrangement
or commitment, (ii) any agreement, indenture or other instrument relating to the
borrowing of money by CBOV or the guarantee by CBOV of any such obligation,
(iii) any agreement, arrangement or commitment relating to the employment of a
consultant or the employment, election, retention in office or severance of any
present or former director or officer, (iv) any agreement to make loans or for
the provision, purchase or sale of goods, services or property between CBOV and
any director of officer of CBOV, or any member of the immediate family or
affiliate of any of the foregoing, or (v) any agreement between CBOV and any 5%
or more shareholder of CBOV; in each case other than agreements entered into in
the ordinary course of the banking business of CBOV consistent with past
practice.
(2) Neither CBOV nor, to the knowledge of CBOV, the other
party thereto, is in default under any material agreement, commitment,
arrangement, lease, insurance policy or other instrument whether entered into in
the ordinary course of business or otherwise, nor has there occurred any event
that, with the lapse of time or giving of notice or both, would constitute such
a default, other than defaults of loan agreement by borrowers from CBOV in the
ordinary course of its business.
(3) Since September 30, 1995 CBOV has not incurred or paid any
obligation or liability that would be material to CBOV, except obligations
incurred or paid in connection with transactions in the ordinary course of
business of CBOV consistent with its practice and, except as Previously
Disclosed, from September 30, 1995 to the date hereof, CBOV has not taken any
action that, if taken after the date hereof, would breach any of the covenants
contained in Section 4.4 hereof.
<PAGE>
(p) INSURANCE. A complete list of all policies or binders of
fire, liability, product liability, workmen's compensation, vehicular and other
insurance held by or on behalf of CBOV has previously been furnished to CBI and
all such policies or binders are valid and enforceable in accordance with their
terms, are in full force and effect, and insure against risks and liabilities to
the extent and in the manner customary for the industry and are deemed
appropriate and sufficient by CBOV. To its knowledge, CBOV is not in default
with respect to any provision contained in any such policy or binder and has not
failed to give any notice or present any claim under any such policy or binder
in due and timely fashion. CBOV has not received notice of cancellation or
non-renewal of any such policy or binder. CBOV has no knowledge of any inac-
curacy in any application for such policies or binders, any failure to pay
premiums when due or any similar state of facts or the occurrence of any event
that is reasonably likely to form the basis for any material claim against it
not fully covered (except to the extent of any applicable deductible) by the
policies or binders referred to above. CBOV has not received notice from any of
its insurance carriers that any insurance premiums will be increased materially
in the future or that any such insurance coverage will not be available in the
future on substantially the same terms as now in effect.
(q) ABSENCE OF MATERIAL CHANGES AND EVENTS. Since September
30, 1995, there has not been any material adverse change in the condition
(financial or otherwise), aggregate assets or liabilities, cash flow, earnings
or business of CBOV, and CBOV has conducted its business only in the ordinary
course consistent with past practice.
(r) LOANS, OREO AND ALLOWANCE FOR LOAN LOSSES. (1) Except as
Previously Disclosed, and except for matters which individually or in the
aggregate do not materially adversely affect the Reorganization or the finan-
cial condition of CBOV, to the best knowledge of CBOV, each loan reflected as an
asset in the CBOV Financial Statements (i) is evidenced by notes, agreements,
or other evidences of indebtedness which are true, genuine and what they purport
to be, (ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency and other laws of general applica-
bility relating to or affecting creditors' rights and to general equity prin-
ciples. All loans and extensions of credit which are subject to regulation by
the Federal Reserve which have been made by CBOV comply therewith.
(2) The classification on the books and records of CBOV of
loans and/or non-performing assets as nonaccrual, troubled debt restructuring,
OREO or other similar classification, complies in all material respects with
generally accepted accounting principles and applicable regulatory accounting
principles.
(3) Except for liens, security interests, claims, charges, or
such other encumbrances as have been appropriately reserved for in the CBOV
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty
<PAGE>
claims with respect to the OREO have been timely filed and CBOV has not received
any notice of denial of any such claim.
(4) CBOV is in possession of all of the OREO or, if any of the
OREO remains occupied by the mortgagor, eviction or summary proceedings have
been commenced or rental arrangements providing for market rental rates have
been agreed upon and CBOV is diligently pursuing such eviction or summary
proceedings or such rental arrangements. Except as Previously Disclosed, no
legal proceeding or quasi-legal proceeding is pending or, to the knowledge of
CBOV, threatened concerning any OREO or any servicing activity or omission to
provide a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by CBOV to
facilitate the disposition of OREO are performing in accordance with their
terms.
(6) The allowance for possible loan losses shown on the CBOV
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of CBOV as of dates subsequent to the execution of this
Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of CBOV and other extensions of credit (including letters of credit
and commitments to make loans or extend credit) by CBOV.
(s) STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by CBOV for inclusion in the Registration Statement
on Form S-4 (the "Registration Statement") to be filed by CBI with the SEC, the
Proxy Statement/Prospectus (as defined in Section 4.3) to be mailed to every
CBOV shareholder or any other document to be filed with the SEC, the SCC, the
Federal Reserve, or any other regulatory authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and, in the case of the Registration Statement, when it becomes
effective and with respect to the Proxy Statement/Prospectus, when first mailed
to CBOV shareholders, be false or misleading with respect to any material fact
or omit to state any material fact necessary in order to make the statements
therein not misleading, or, in the case of the Proxy Statement/Prospectus or any
supplement thereto, at the time of the CBOV Shareholders' Meeting (as defined in
Section 4.3), be false or misleading with respect to any material fact or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the CBOV
Shareholders' Meeting.
(t) BROKERS AND FINDERS. Neither CBOV nor any of its officers,
directors or employees, has employed any broker, finder or financial advisor or
incurred any liability for any fees or commissions in connection with the
transactions contemplated herein, except for McKinnon & Company, Inc.
(u) REPURCHASE AGREEMENTS. With respect to all agreements
pursuant to which CBOV has purchased securities subject to an agreement to
resell, if any, CBOV has a valid, perfected first lien or security interest in
the government securities or other collateral
<PAGE>
securing the repurchase agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(v) ADMINISTRATION OF TRUST ACCOUNTS. CBOV has properly
administered, in all respects material and which could reasonably be expected
to be material to the business, operations or financial condition of CBOV, all
accounts for which it acts as a fiduciary including but not limited to accounts
for which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither CBOV nor any director, officer or employee of CBOV has
committed any breach of trust with respect to any such fiduciary account which
is material to or could reasonably be expected to be material to the business,
operations or financial condition of CBOV and the accountings for each such
fiduciary account are true and correct in all material respects and accurately
reflect the assets of such fiduciary account in all material respects.
(w) ENVIRONMENTAL MATTERS. (1) Except as Previously Disclosed,
to the best of CBOV's knowledge, CBOV does not own or lease any properties
affected by toxic waste, radon gas or other hazardous conditions or constructed
in part with the use of asbestos. CBOV is in substantial compliance with all
Environmental Laws applicable to real or personal properties in which it has a
direct fee ownership or, with respect to a direct interest as lessee, applicable
to the leasehold premises or, to the best knowledge of CBOV, the premises on
which the leasehold is situated. CBOV has not received any Communication
alleging that CBOV is not in such compliance and, to the best knowledge of CBOV,
there are no present circumstances (including Environmental Laws that have been
adopted but are not yet effective) that would prevent or interfere with the
continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on CBOV of any liability
arising under any Environmental Laws pending or, to the best knowledge of CBOV,
threatened against (A) CBOV, (B) any person or entity whose liability for any
Environmental Claim CBOV has or may have retained or assumed either
contractually or by operation of law, or (C) any real or personal property which
CBOV owns or leases, or has been or is judged to have managed or to have
supervised or participated in the management of, which liability might have a
material adverse effect on the business, financial condition or results of
operations of CBOV. CBOV 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.
(3) To the best knowledge of CBOV, there are no legal,
administrative, arbitral or other proceedings, or Environmental Claims or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on CBOV of any liability
arising under any Environmental Laws pending or threatened against any real or
personal property in which CBOV holds a security interest in connection with a
loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of CBOV.
CBOV is not subject to
<PAGE>
any agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.
(4) With respect to all real and personal property owned or
leased by CBOV, other than OREO, CBOV has made available to CBI copies of any
environmental audits, analyses and surveys that have been prepared relating to
such properties. With respect to all OREO held by CBOV and all real or personal
property which CBOV has been or is judged to have managed or to have supervised
or participated in the management of, CBOV has made available to CBI the
information relating to such OREO available to CBOV. CBOV is in compliance in
all material respects with all recommendations contained in any environmental
audits, analyses and surveys relating to any of the properties, real or
personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against CBOV or against any person or
entity whose liability for any Environmental Claim CBOV has or may have retained
or assumed either contractually or by operation of law.
(6) For the purpose of this Agreement, the following terms
shall have the following meanings:
(i) "Communication" means a communication which is of a
substantive nature and which is made (A) in writing to CBOV on the one hand or
to CBI or any CBI Subsidiary on the other hand, or (B) orally to a senior
officer of CBOV or of CBI or any CBI Subsidiary, whether from a governmental
authority or a third party.
(ii) "Environmental Claim" means any Communication from any
governmental authority or third party alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from the
presence, or release into the environment, of any Material of Environmental
Concern.
(iii) "Environmental Laws" means all applicable federal, state
and local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata). This definition includes, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
<PAGE>
(iv) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other materials regulated under Environmental Laws.
3.2 REPRESENTATIONS AND WARRANTIES OF CBI. CBI represents and warrants
to CBOV as follows:
(a) ORGANIZATION, STANDING AND POWER. (1) CBI is a corporation
duly organized, validly existing and in good standing under the laws of
Virginia. It has all requisite corporate power and authority to carry on its
business as now being conducted and to own and operate its assets, properties
and business, and CBI has the corporate power and authority to execute and
deliver this Agreement and perform the respective terms of this Agreement and
Plan of Reorganization. CBI is duly registered as a bank holding company under
the Bank Holding Company Act of 1956. The Community Bank is a wholly owned
subsidiary of CBI and is a Virginia corporation and a Virginia state bank, duly
organized, validly existing and in good standing under the laws of Virginia, is
in compliance in all material respects with all rules and regulations
promulgated by any relevant regulatory authority, and it has all requisite
corporate power and authority to carry on a commercial banking business as now
being conducted and to own and operate its assets, properties and business.
(2) CBI has Previously Disclosed its subsidiary corporations
(and the subsidiaries thereof), all of which are duly organized, validly
existing and in good standing in their respective states of incorporation and
which have all requisite corporate power and authority to carry on their
businesses as now being conducted and to own and operate their assets,
properties and business (the "CBI Subsidiaries" and, collectively with CBI, the
"CBI Companies"). Each CBI Subsidiary that is a depository institution is an
"insured bank" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder. All of the shares of capital stock of the CBI
Subsidiaries held by CBI are duly and validly issued, fully paid and
nonassessable, and all such shares are owned by CBI or a CBI Subsidiary free and
clear of any claim, lien, pledge or encumbrance of any kind, and were not issued
in violation of the preemptive rights of any shareholder or in violation of any
agreement or of any registration or qualification provisions of federal or state
securities laws. Except as Previously Disclosed, none of the CBI Companies owns
any equity securities of any other corporation or entity. Except as Previously
Disclosed, each of the CBI Companies is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by it require such qualification and where failure to
so qualify either singly or in the aggregate would have a material adverse
effect on the financial condition, properties, businesses or results of
operations of the CBI Companies.
(b) AUTHORITY. (1) The execution and delivery of this
Agreement and the Plan of Share Exchange and the consummation of the
Reorganization have been duly and validly authorized by all necessary corporate
action on the part of CBI, except the approval of shareholders. This Agreement
represents the legal, valid, and binding obligation of CBI, enforceable against
CBI in accordance with its terms (except in all such cases as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws
<PAGE>
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought).
(2) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, nor the compliance by CBI
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 CBI, (ii) to the
knowledge of CBI, except as Previously Disclosed, constitute or result in the
breach of any term, condition or provision of, or constitute default under, or
give rise to any right of termination, cancellation or acceleration with respect
to, or result in the creation of any lien, charge or encumbrance upon, any
property or assets of the CBI Companies pursuant to (A) any note, bond,
mortgage, indenture, or (B) any material license, agreement, lease or other
instrument or obligation, to which any of the CBI Companies is a party or by
which any of them or any of their properties or assets may be bound, or (iii) to
the knowledge of CBI, subject to the receipt of the requisite approvals referred
to in Section 4.7, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to any of the CBI Companies or any of their properties or
assets.
(c) CAPITAL STRUCTURE. The authorized capital stock of CBI
consists of: 4,000,000 shares of common stock, par value $3.00 per share, of
which 1,150,000 shares are issued and outstanding, fully paid and nonassessable,
not subject to shareholder preemptive rights, and not issued in violation of any
agreement to which CBI is a party or otherwise bound, or of any registration or
qualification provisions of any federal or state securities laws. The shares of
CBI Common Stock to be issued in exchange for shares of CBOV Common Stock upon
consummation of the Reorganization will have been duly authorized and, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable and subject to no preemptive rights. Except as
Previously Disclosed, there are no outstanding understandings or commitments of
any character pursuant to which CBI and any of the CBI Companies could be
required or expected to issue shares of capital stock.
(d) OWNERSHIP OF THE CBI SUBSIDIARIES; CAPITAL STRUCTURE OF
CBI SUBSIDIARIES; AND ORGANIZATION OF THE CBI SUBSIDIARIES. (1) CBI does not
own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed (collectively the "CBI"
Subsidiaries" and each individually a "CBI Subsidiary"). The outstanding shares
of capital stock of each CBI Subsidiary have been duly authorized and are
validly issued, and are fully paid and nonassessable and all such shares are
directly or indirectly owned by CBI free and clear of all liens, claims and
encumbrances. No Rights are authorized, issued or outstanding with respect to
the capital stock of any CBI Subsidiary and there are no agreements,
understandings or commitments relating to the right of CBI to vote or to dispose
of said shares. None of the shares of capital stock of any CBI Subsidiary has
been issued in violation of the preemptive rights of any person.
(2) Each CBI Subsidiary is a duly organized corporation,
validly existing and in good standing under applicable laws. Each CBI
Subsidiary (i) has full corporate power and
<PAGE>
authority to own, lease and operate its properties and to carry on its business
as now conducted except where the absence of such power or authority would not
have a material adverse effect on the financial condition, results of operations
or business of CBI on a consolidated basis, and (ii) is duly qualified to do
business in the states of the United States and foreign jurisdictions where its
ownership or leasing of property or the conduct of its business requires such
qualification and where failure to do qualify would have a material adverse
effect on the financial condition, results of operations or business of CBI on a
consolidated basis. Each CBI Subsidiary has all federal, state, local and
foreign governmental authorizations and licenses necessary for it to own or
lease its properties and assets and to carry on its business as it is now being
conducted, except where failure to obtain such authorization or license would
not have a material adverse effect on the business of such CBI Subsidiary.
(e) FINANCIAL STATEMENTS. CBI's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, and all other documents filed or to be
filed subsequent to December 31, 1994 under Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), in the form filed with the SEC (in
each such case, the "CBI Financial Statements") did not and will not contain any
untrue statement of a material fact or omit to state a material face required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the CBI Financial Statements
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date and each of the statements of income and changes in
stockholders' equity and cash flows or equivalent statements in the CBI
Financial Statements (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the periods
involved, except as may be noted therein, subject to normal and recurring
year-end audit adjustments in the case of unaudited statements.
(f) ABSENCE OF UNDISCLOSED LIABILITIES. At September 30, 1995,
none of the CBI Companies, to their knowledge, had any obligation or liability
(contingent or otherwise) of any nature which were not reflected in the CBI
Financial Statements, except for those which in the aggregate are immaterial or
have been Previously Disclosed.
(g) LEGAL PROCEEDINGS; COMPLIANCE WITH LAWS. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of CBI's management, threatened or probable of
assertion against any of the CBI Companies, or against any property, asset,
interest or right of any of them, that are reasonably expected to have, either
individually or in the aggregate, a material adverse effect on the financial
condition of CBI on a consolidated basis or that are reasonably expected to
threaten or impede the consummation of the transactions contemplated by this
Agreement. None of the CBI Companies is a party to any agreement or instrument
or subject to any judgment, order, writ, injunction, decree or rule that might
reasonably be expected to have a material adverse effect
<PAGE>
on the condition (financial or otherwise), business or prospects of CBI on a
consolidated basis. Except as Previously Disclosed, as of the date of this
Agreement, none of the CBI Companies nor any of their properties is a party to
or is subject to any order, decree, agreement, memorandum of understanding or
similar arrangement with, or a commitment letter or similar submission to, any
federal or state governmental agency or authority charged with the supervision
or regulation of depository institutions or mortgage lenders or engaged in the
insurance of deposits which restricts or purports to restrict in any material
respect the conduct of the business to it or any of its subsidiaries to
properties, or in any manner relates to the capital, liquidity, credit policies
or management of it; and except as Previously Disclosed, none of the CBI
Companies has been advised by any such regulatory authority that such authority
is contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter or similar submission. To the best knowledge of
CBI, the CBI Companies have complied in all material respects with all laws,
ordinances, requirements, regulations or orders applicable to its business
(including environmental laws, ordinances, requirements, regulations or orders).
(h) REGULATORY APPROVALS. CBI knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) LABOR RELATIONS. None of the CBI Companies is a party to,
or is bound by any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is it the subject
of a proceeding asserting that is has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
(j) TAX MATTERS. The CBI Companies have filed all federal,
state, and local tax returns and reports required to be filed, and all taxes
shown by such returns to be due and payable have been paid or are reflected as a
liability in the CBI Financial Statements or are being contested in good faith
and have been Previously Disclosed. Except to the extent that liabilities
therefor are specifically reflected in the CBI Financial Statements, there are
no federal, state or local tax liabilities of the CBI Companies other than
liabilities that have arisen since September 30, 1995, all of which have been
properly accrued or otherwise provided for on the books and records of the CBI
Companies. Except as Previously Disclosed, no tax return or report of any of the
CBI 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 any of the CBI Companies by any taxing authority.
(k) PROPERTY. Except as disclosed or reserved against in the
CBI Financial Statements, all of the CBI Companies have good and marketable
title free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the material properties and assets,
tangible or intangible, reflected in the CBI Financial Statements
<PAGE>
as being owned by the CBI Companies as of the dates thereof. To the best
knowledge of CBI, all buildings, and all fixtures, equipment, and other property
and assets which are material to its business on a consolidated basis, held
under leases or subleases by the CBI Companies are held under valid instruments
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws. The buildings,
structures, and appurtenances owned, leased, or occupied by the CBI Companies
are, to the best knowledge of CBI, in good operating condition, in a state of
good maintenance and repair and (i) comply with applicable zoning and other
municipal laws and regulations, and (ii) there are no latent defects therein.
(l) REPORTS. Since January 1, 1990, the CBI Companies have
filed all reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with the Securities
and Exchange Commission ("SEC"), the Federal Reserve, the SCC, and any other
governmental or regulatory authority or agency having jurisdiction over their
operations.
(m) EMPLOYEE BENEFIT PLANS. (1) CBI will deliver for CBOV's
review, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
CBI for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "CBI Benefit Plans"). Any of the CBI Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as a "CBI ERISA Plan." No CBI
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(2) Except as Previously Disclosed, all CBI Benefit Plans are
in compliance with the applicable terms of ERISA and the Internal Revenue Code
of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations the breach or violation of which could result in a material
liability to CBI on a consolidated basis.
(3) No CBI ERISA Plan which is a defined benefit pension plan
has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) INVESTMENT SECURITIES. Subject to FASB 115 and except for
pledges to secure public and trust deposits and obligations under agreements
pursuant to which any of the CBI Companies has sold securities subject to an
obligation to repurchase, none of the investment securities reflected in the CBI
Financial Statements is subject to any restriction, contractual, statutory, or
otherwise, which would impair materially the ability of the holder of such
<PAGE>
investment to dispose freely of any such investment at any time. With respect to
any agreements pursuant to which any of the CBI Companies has purchased
securities subject to any agreement to resell, it has a valid, perfected first
lien or security interest in the government securities or other collateral
securing such agreement, and the value of such collateral equals or exceeds the
amount of the debt secured thereby.
(o) CERTAIN CONTRACTS. (1) Except as Previously Disclosed,
neither CBI nor any CBI subsidiary is a party to, or is bound by, (i) any
material agreement, arrangement or commitment, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by CBI or any CBI Subsidiary
or the guarantee by CBI or any CBI Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement to make loans or for the
provision, purchase or sale of goods, services or property between CBI or any
CBI Subsidiary and any director or officer of CBI or any CBI Subsidiary, or any
member of the immediate family or affiliate of any of the foregoing, or (v) any
agreement between CBI or any CBI Subsidiary and any 5% or more shareholder of
CBI; in each case other than agreements entered into in the ordinary course of
the banking business of CBI or a CBI Subsidiary consistent with past practice.
(2) Neither CBI or any CBI Subsidiary, nor to the knowledge of
CBI, the other party thereto, is in default under any material agreement,
commitment, arrangement, lease, insurance policy or other instrument, whether
entered into in the ordinary course of business or otherwise, nor has there
occurred any event that, with the lapse of time or giving of notice or both,
would constitute such a default, other than defaults of loan agreements by
borrowers from CBI or a CBI Subsidiary in the ordinary course of its business.
(3) Since September 30, 1995, CBI has not incurred or paid any
obligation or liability that would be material to CBI, except obligations
incurred or paid in connection with transactions in the ordinary course of
business of CBI consistent with its practice and, except as Previously
Disclosed, from September 30, 1995 to the date hereof, CBI has not taken any
action that, if taken after the date hereof, would breach any of the covenants
contained in Section 4.4 hereof.
(p) INSURANCE. A complete list of all policies or binders of
fire, liability, product liability, workmen's compensation, vehicular and other
insurance held by or on behalf of the CBI Companies has previously been
furnished to CBOV and all such policies or binders are valid and enforceable in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by CBI. To the knowledge of CBI, the
CBI Companies are not in default with respect to any provision contained in any
such policy or binder and have not failed to give any notice or present any
claim under any such policy or binder in due and timely fashion. None of the CBI
Companies has received notice of cancellation or non-renewal of any such policy
or binder. None of the CBI Companies has knowledge of any inaccuracy in any
application for such policies or binders, any failure to pay premiums when due
or any similar state of facts or the occurrence of any event that is reasonably
likely to form the basis for any
<PAGE>
material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. None of the
CBI Companies has received notice from any of its insurance carriers that any
insurance premiums will be increased materially in the future or that any such
insurance coverage will not be available in the future on substantially the same
terms as now in effect.
(q) LOANS, OREO, AND ALLOWANCE FOR LOAN LOSSES. (1) Except as
Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the Reorganization or the
financial condition of CBI, to CBI's best knowledge each loan reflected as an
asset in the CBI Financial Statements (i) is evidenced by notes, agreements, or
other evidences of indebtedness which are true, genuine and what they purport to
be, (ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. All loans and extensions of credit which are subject to regulation
of the Federal Reserve which have been made by CBI and the CBI Subsidiaries
comply therewith.
(2) The classification on the books and records of CBI and
each CBI Subsidiary of loans and/or non-performing assets as nonaccrual,
troubled debt restructuring, OREO or other similar classification, complies in
all material respects with generally accepted accounting principles and
applicable regulatory accounting principles.
(3) Except for liens, security interests, claims, charges, or
such other encumbrances as have been appropriately reserved for in the CBI
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty claims with
respect to the OREO have been timely filed and neither CBI nor any CBI
Subsidiary has been received any notice of denial of any such claim.
(4) CBI and each CBI Subsidiary are in possession of all of
the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and CBI and/or each CBI Subsidiary are
diligently pursuing such eviction of summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of CBI and each CBI Subsidiary,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by any of
the CBI Companies to facilitate the disposition of OREO are performing in
accordance with their terms.
(6) The allowance for possible loan losses shown on the CBI
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of CBI as of dates subsequent to the execution of this
Agreement will be, in each case as of the
<PAGE>
dates thereof, adequate in all material respects to provide for possible losses,
net of recoveries relating to loans previously charged off, on loans outstanding
(including accrued interest receivable) of the CBI Companies and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by CBI.
(r) ABSENCE OF MATERIAL CHANGES AND EVENTS. Since September
30, 1995, there has not been any material adverse change in the condition
(financial or otherwise), aggregate assets or liabilities, cash flow, earnings
or business or CBI, and CBI has conducted its business only in the ordinary
course consistent with past practice.
(s) STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by CBI for inclusion in the Registration Statement,
the Proxy Statement/Prospectus or any other document to be filed with the SEC or
any other regulatory authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and, in the case
of the Registration Statement, when it becomes effective and with respect to the
Proxy Statement/Prospectus, when first mailed to CBOV shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the time of
the CBOV Shareholders' Meeting, be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the CBOV Shareholders' Meeting. All documents that CBI is responsible
for filing with the SEC or any other regulatory authority in connection with the
transactions contemplated, hereby will comply as to form in all material
respects with the provisions of applicable law, including applicable provisions
of federal and state securities law.
(t) BROKERS AND FINDERS. Neither CBI nor any CBI Subsidiary,
nor any of their respective officers, directors or employees, has employed any
broker, finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions contemplated herein, except for
the McKinnon & Company, Inc.
(u) REPURCHASE AGREEMENTS. With respect to all agreements
pursuant to which CBI or any CBI Subsidiary has purchased securities subject to
an agreement to resell, if any, CBI or such CBI Subsidiary, as the case may be,
has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt secured thereby.
(v) ADMINISTRATION OF TRUST ACCOUNTS. CBI and CBI Subsidiaries
have properly administered, in all respects material and which could reasonably
be expected to be material to the business, operations or financial condition of
CBI and CBI Subsidiaries, taken as a whole, all accounts for which they act as
fiduciaries including but not limited to accounts for which they serve as
trustees, agents, custodians, personal representatives, guardians, conservators
or investment advisors, in accordance with the terms of the governing documents
and applicable state and federal law and regulation and common law. Neither CBI
nor a CBI Subsidiary, nor any director, officer or employee of CBI or a CBI
Subsidiary has committed any
<PAGE>
breach of trust with respect to any such fiduciary account which is material to
or could reasonably be expected to be material to the business, operations or
financial condition of CBI, or a CBI Subsidiary, taken as a whole, and the
accountings for each such fiduciary account are true and correct in all material
respects and accurately reflect the assets of such fiduciary account in all
material respects.
(w) ENVIRONMENTAL MATTERS. (1) Except as Previously Disclosed,
to the best of CBI's knowledge, neither CBI nor any CBI Subsidiary owns or
leases any properties affected by toxic waste, radon gas or other hazardous
conditions or constructed in part with the use of asbestos. Each of CBI and the
CBI Subsidiaries is in substantial compliance with all Environmental Laws
applicable to real or personal properties in which it has a direct fee ownership
or, with respect to a direct interest as lessee, applicable to the leasehold
premises or, to the best knowledge of CBI and the CBI Subsidiaries, the premises
on which the leasehold is situated. Neither CBI nor any CBI Subsidiary has
received any Communication alleging that CBI or such CBI Subsidiary is not in
such compliance and, to the best knowledge of CBI and the CBI Subsidiaries,
there are no present circumstances (including Environmental Laws that have been
adopted but are not yet effective) that would prevent or interfere with the
continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on CBI and the CBI
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of CBI and the CBI Subsidiaries, threatened against (A)
CBI or any CBI Subsidiary, (B) any person or entity whose liability for any
Environmental Claim, CBI or any CBI Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C)any real or personal
property which CBI or any CBI Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of CBI. CBI and the CBI
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of CBI and the CBI Subsidiaries,
there are no legal, administrative, arbitral or other proceedings, or
Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on CBI or any CBI Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which CBI or any CBI Subsidiary holds a security interest in connection with
a loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of CBI. CBI
and the CBI Subsidiaries are not subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
(4) With respect to all real and personal property owned or
leased by CBI or any CBI Subsidiary, other than OREO, CBI has made available to
CBOV copies of any
<PAGE>
environmental audits, analyses and surveys that have been prepared relating to
such properties. With respect to all OREO held by CBI or any CBI Subsidiary and
all real or personal property which CBI or any CBI Subsidiary has been or is
judged to have managed or to have supervised or participated in the management
of, CBI has made available to CBOV the information relating to such OREO
available to CBI. CBI and the CBI Subsidiaries are in compliance in all material
respects with all recommendations contained in any environmental audits,
analyses and surveys relating to any of the properties, real or personal,
described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against CBI or any CBI Subsidiary or
against any person or entity whose liability for any Environmental Claim CBI or
any CBI Subsidiary has or may have retained or assumed either contractually or
by operation of law.
ARTICLE 4
CONDUCT PRIOR TO THE EFFECTIVE DATE
4.1 ACCESS TO RECORDS AND PROPERTIES. CBOV will keep CBI, and CBI will
keep CBOV advised of all material developments relevant to their respective
businesses prior to consummation of the Reorganization. Prior to the Effective
Date, CBI, on the one hand, and CBOV on the other, agree to give to the other
party reasonable access to all the premises and books and records (including tax
returns filed and those in preparation) of it and its subsidiaries and to cause
its officers to furnish the other with such financial and operating data and
other information with respect to the business and properties as the other shall
from time to time request for the purposes of verifying the warranties and
representations set forth herein; provided, however, that any such investigation
shall be conducted in such manner as not to interfere unreasonably with the
operation of the respective business of the other.
4.2 CONFIDENTIALITY. Between the date of this Agreement and the
Effective Date, CBI and CBOV each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and not use to the detriment of the other party, any written, oral or other
information obtained in confidence from the other party or a third party in
connection with this Agreement or the transactions contemplated hereby unless
such information is already known to such party or to others not bound by a duty
of confidentiality or unless such information becomes publicly available through
no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Reorganization is not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested.
<PAGE>
4.3 REGISTRATION STATEMENT, PROXY STATEMENT AND SHAREHOLDER APPROVAL.
The Board of Directors of CBOV, and the Board of Directors of CBI, each will
duly call and will hold a meeting of their respective shareholders as soon as
practicable for the purpose of approving the Reorganization (the "CBOV
Shareholders' Meeting" and the "CBI Shareholders' Meeting", respectively) and,
subject to the fiduciary duties of the Board of Directors of CBOV and of CBI (as
advised in writing by its counsel), CBOV and CBI each shall use its best efforts
to solicit and obtain votes of the holders of its Common Stock in favor of the
Reorganization and will comply with the provisions in their respective Articles
of Incorporation and Bylaws relating to the call and holding of a meeting of
shareholders for such purpose; each member of the Board of Directors of CBOV and
CBI shall vote all shares of CBOV Common Stock and CBI Common Stock under his
control (and not held in a fiduciary capacity) in favor of the Reorganization;
and CBOV and CBI shall, at the other's request, recess or adjourn the meeting if
such recess or adjournment is deemed by the other to be necessary or desirable.
CBI and CBOV will prepare jointly the proxy statement/prospectus to be used in
connection with the CBOV Shareholders' Meeting and the CBI Shareholders' Meeting
(the "Joint Proxy Statement"). CBI will prepare and file with the SEC the
Registration Statement, of which such Joint Proxy Statement shall be a part and
will use its best efforts to have the Registration Statement declared effective
as promptly as possible. When the Registration Statement or any post-effective
amendment or supplement thereto shall become effective, and at all times
subsequent to such effectiveness, up to and including the date of the Meeting,
such Registration Statement and all amendments or supplements thereto, with
respect to all information set forth therein furnished or to be furnished by
CBOV relating to CBOV and by CBI relating to the CBI Companies, (i) will comply
in all material respects with the provisions of the Securities Act of 1933 and
any other applicable statutory or regulatory requirements, including applicable
state blue-sky and securities laws, and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; provided, however, in no event shall any party hereto be liable for
any untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
written information concerning another party furnished by such other party
specifically for use in the Registration Statement.
4.4 OPERATION OF THE BUSINESS OF CBOV AND CBI. CBOV and CBI each agrees
that from the date hereof to the Effective Date it will operate its business
substantially as presently operated and only in the ordinary course, and,
consistent with such operation, it will use its best efforts to preserve intact
its relationships with persons having business dealings with it. Without
limiting the generality of the foregoing, CBOV and CBI each agrees that it will
not, without the prior written consent of the other:
(a) Make any change in its authorized capital stock, or issue
or sell any additional shares of, securities convertible into or exchangeable
for, or options, warrants or rights to purchase, its capital stock, nor shall it
purchase, redeem or otherwise acquire any of its outstanding shares of capital
stock, provided that CBI and CBOV each may issue shares of common stock pursuant
to options granted or issued prior to the date hereof:
(b) Voluntarily make any changes in the composition of its
officers, directors or other key management personnel;
<PAGE>
(c) Make any change in the compensation or title of any
officer, director of key management employee or make any change in the
compensation or title of any other employee, other than permitted by current
employment policies in the ordinary course of business, any of which changes
shall be reported promptly to the other party;
(d) Enter into any bonus, incentive compensation, stock
option, deferred compensation, profit sharing, thrift, retirement, pension,
group insurance or other benefit plan or any employment or consulting agreement;
(e) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or encumber
any of its assets, nor dispose of any of its assets in any other manner, except
in the ordinary course of its business and for adequate value, or as otherwise
specifically permitted in this Agreement;
(f) Except as permitted by Section 4.4(a) hereof, issue or
contract to issue any shares of its Common Stock, options for shares of its
Common Stock, or securities exchangeable for or convertible into such shares;
(g) Knowingly waive any right to substantial value:
(h) Enter into material transactions otherwise than in the
ordinary course of its business;
(i) Alter, amend or repeal its Bylaws or Articles of
Incorporation; or
(j) Propose or take any other action which would make any
representation or warranty in Section 3.1 or Section 3.2 hereof untrue.
4.5 DIVIDENDS. CBI and CBOV each agree that the other may declare and
pay only regular periodic cash dividends in the ordinary course of business and
consistent with past practice from the date of this Agreement through the
Effective Date.
4.6 NO SOLICITATION. (a) Unless and until this Agreement shall have
been terminated pursuant to its terms, neither CBOV nor any of its officers,
directors, representatives or agents shall, directly or indirectly, (i)
encourage, solicit or initiate discussions or negotiations with any person other
than CBI concerning any merger, share exchange, sale of substantial assets,
tender offer, sale of shares of capital stock or similar transaction involving
CBOV, (ii) enter into any agreement with any third party providing for a
business combination transaction, equity investment or sale of a significant
amount of assets, or (iii) furnish any information to any other person relating
to or in support of such transaction. CBOV will promptly communicate to CBI the
terms of any proposal which it may receive in respect to any of the foregoing
transactions.
(b) Unless and until this Agreement shall have been terminated
pursuant to its terms,
<PAGE>
neither CBI nor any of its officers, directors, representatives or agents shall,
directly or indirectly, (i) encourage, solicit or initiate discussions or
negotiations with any person other than CBOV concerning any merger, share
exchange, sale of substantial assets, tender offer, sale of shares of capital
stock or similar transaction involving CBI, (ii) enter into any agreement with
any third party providing for a business combination transaction, equity
investment or sale of a significant amount of assets, or (iii) furnish any
information to any other person relating to or in support of such transaction.
CBI will promptly communicate to CBOV the terms of any proposal which it may
receive in respect to any of the foregoing transactions.
4.7 REGULATORY FILINGS. CBI and CBOV shall prepare jointly all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Plan of Share Exchange and submit the filings for approval
with the Federal Reserve Board and the SCC, and any other governing regulatory
authority, as soon as practicable after the date hereof. CBI and CBOV shall use
their best efforts to obtain approvals of such filings.
4.8 PUBLIC ANNOUNCEMENTS. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Reorganization and shall not issue any such press release or make any
such public statement prior to such consultations except as may be required by
law.
4.9 NOTICE OF BREACH. CBI and CBOV will give written notice to the
other promptly upon becoming aware of the impending or threatened occurrence of
any event which would cause or constitute a breach of any of the
representations, warranties or covenants made to the other party in this
Agreement and will use its best efforts to prevent or promptly remedy the same.
4.10 ACCOUNTING TREATMENT. CBI and CBOV shall each use their best
efforts to ensure that the Reorganization qualifies for pooling-of-interests
accounting treatments.
4.11 REORGANIZATION CONSUMMATION. Subject to the terms and conditions
of this Agreement, each party shall use its best efforts in good faith to take,
or cause to be taken, all actions, and to do or cause to be done all things
necessary, proper or desirable, or advisable under applicable laws, as promptly
as practicable so as to permit consummation of the Reorganization at the
earliest possible date, consistent with Section 1.3 herein, and to otherwise
enable consummation of the transactions contemplated hereby and shall cooperate
fully with the other parties hereto to that end, and each of CBOV and CBI shall
use, and shall cause each of their respective subsidiaries to use, its best
efforts to obtain all consents (governmental or other) necessary or desirable
for the consummation of the transactions contemplated by this Agreement.
4.12 AMENDMENT TO ARTICLES OF INCORPORATION. At the CBI Shareholders'
Meeting, the CBI Board of Directors shall solicit the approval of the
shareholders of CBI of an amendment to the Articles of Incorporation of CBI
sufficient to permit the appointment of all CBOV Directors to the CBI Board in
accordance with Section 1.2 hereof.
4.13 EMPLOYMENT CONTRACTS. CBI and CBOV each will use its best efforts
to cause all employment contracts to which it is a party to be amended in the
manner described in Section 6.1(h).
<PAGE>
ARTICLE 5
Additional AgreementS
5.1 CONVERSION OF STOCK OPTIONS. (a) On the Effective Date, all rights
with respect to CBOV Common Stock pursuant to stock options ("CBOV Options")
granted by CBOV under a CBOV stock option plan which are outstanding on the
Effective Date, whether or not they exercisable, shall be converted into and
become rights with respect to CBI Common Stock, and CBI shall assume each CBOV
Option in accordance with the terms of the stock option plan under which it was
issued and the stock option agreement by which it is evidenced. From the
Effective Date forward, (i) each CBOV Option assumed by CBI may be excised
solely for shares of CBI Common Stock, (ii) the number of shares of CBI Common
Stock subject to each CBOV Option shall be equal to the number of shares of CBOV
Common Stock subject to such option immediately prior to the Effective Date
multiplied by the Exchange Ratio and (iii) the per share exercise price under
each such CBOV Option shall be adjusted by dividing the per share exercise price
under each such option by the Exchange Ratio and rounding down to the nearest
cent; provided, however, that the terms of each CBOV Option shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar transaction after
the Effective Date. It is intended that the foregoing assumption shall be
undertaken in a manner that will not constitute a "modification" as defined in
Section 425 of the Code, as to any stock option which is an "incentive stock
option."
5.2 ACCOUNTING TREATMENT. This Reorganization shall qualify for
pooling-of-interests accounting treatment.
5.3 BENEFIT PLANS. Upon consummation of the Reorganization, as soon as
administratively practicable and subject to CBI's best efforts, employees of
CBOV shall be entitled to participate in CBI pension, benefit, health and
similar plans on the same terms and conditions as employees of CBI and its
subsidiaries, without waiting periods or exceptions for pre-existing conditions
and giving effect to years of service with CBOV as if such service were with
CBI. Alternatively, subject to applicable law, CBOV may maintain any or all of
the CBOV employee benefit plans that currently are in effect. Provided
employment contracts are amended in the manner described in Section 6.1(h), CBI
also shall assume and honor in accordance with their terms as in effect on the
date hereof (or as amended after the date hereof with the prior written consent
of CBI), all employment, severance, consulting and other compensation contracts
and agreements Previously Disclosed and executed in writing by CBOV on the one
hand and any individual current or former director, officer or employee thereof
on the other hand, including the CBOV Directors' deferred fee plan, copies of
which have previously been delivered by CBOV to CBI.
5.4 INDEMNIFICATION. CBI agrees that following the Effective Date,
it shall indemnify
<PAGE>
and hold harmless any person who has rights to indemnification from CBOV, to the
same extent and on the same conditions as such person is entitled to
indemnification pursuant to Virginia law and CBOV'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. CBI further agrees that any such person who has rights to
indemnification pursuant to this Section 5.4 is expressly made a third party
beneficiary of this Section 5.4 and may directly, in such person's personal
capacity, enforce such rights through an action at law or in equity or through
any other manner or means of redress allowable under Virginia law to the same
extent as if such person were a party hereto. Without limiting the foregoing, in
any case in which corporate approval may be required to effectuate any
indemnification, CBI 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 CBI and the
indemnified party. CBI shall use its reasonable best efforts to maintain CBOV's
existing directors' and officers' liability policy, or some other policy,
including CBI's existing policy, providing at least comparable coverage,
covering persons who are currently covered by such insurance of CBOV on terms no
less favorable than those in effect on the date hereof.
ARTICLE 6
CONDITIONS TO THE REORGANIZATION
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
REORGANIZATION. The respective obligations of each of CBI and CBOV to effect the
Reorganization and the other transaction contemplated by this Agreement shall be
subject to the fulfillment or waiver at or prior to the Effective Date of the
following conditions:
(a) SHAREHOLDER APPROVALS. Shareholders of CBOV and of CBI
shall have approved all matters relating to this Agreement and the
Reorganization required to be approved by such shareholders in accordance with
Virginia law.
(b) REGULATORY APPROVALS. This Agreement and the Plan of Share
Exchange shall have been approved by the Federal Reserve, the SCC, and any other
regulatory authority whose approval is required for consummation of the
transactions contemplated hereby, and such approvals shall not have imposed any
condition or requirement which would so materially adversely impact the economic
or business benefits of the transactions contemplated by this Agreement as to
render inadvisable the consummation of the Reorganization in the reasonable
opinion of the Board of Directors of CBI or CBOV.
(c) REGISTRATION STATEMENT. The Registration Statement shall
have been declared effective and shall not be subject to a stop order or any
threatened stop order.
(d) TAX OPINION. CBI and CBOV shall have received an opinion
of Williams, Mullen, Christian & Dobbins, or other counsel reasonably
satisfactory to CBI and CBOV, to the effect that the Reorganization will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code and that no gain or loss will be recognized by the
<PAGE>
shareholders of CBOV to the extent they receive CBI Common Stock solely in
exchange for their CBOV Common Stock in the Reorganization.
(e) ACCOUNTANTS' LETTER. CBI and CBOV shall have received a
letter, dated as of the Effective Date, from Mitchell, Wiggins & Company,
satisfactory in form and substance to each of CBI and CBOV, that the
Reorganization will qualify for pooling-of-interests accounting treatment under
generally accepted accounting principles.
(f) OPINIONS OF COUNSEL. CBOV shall have delivered to CBI and
CBI shall have delivered to CBOV opinions of counsel, dated as of the Effective
Date, as to such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(g) LEGAL PROCEEDINGS. Neither CBI nor CBOV shall be subject
to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Reorganization.
(h) EMPLOYMENT CONTRACTS. All employment contracts of CBI and
CBOV shall have been effectively amended in order that the Reorganization shall
not be considered a change of control that would entitle any employee of CBI or
CBOV to any special severance payments after the Effective Date.
6.2 CONDITIONS TO OBLIGATIONS OF CBI. The obligations of CBI to effect
the Reorganization shall be subject to the fulfillment or waiver at or prior to
the Effective Date of the following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties contained herein of CBOV shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective Date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and CBI shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of CBOV dated the Effective Date, to such effect.
(b) PERFORMANCE OF OBLIGATIONS. CBOV shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and CBI shall have received a certificate
signed by the Chief Executive Officer of CBOV to that effect.
<PAGE>
(c) AFFILIATE LETTERS. Each shareholder of CBOV who may be
deemed by counsel for CBI to be an "affiliate" of CBOV within the meaning under
the Securities Act of 1933 and the rules and regulations thereunder shall have
executed and delivered a commitment and undertaking to the effect that (1) such
shareholder will dispose of the shares of CBI Common Stock received by him in
connection with the Reorganization only in accordance with the Securities Act
of 1933 and the rules and regulations thereunder and in a manner that would not
prevent the Reorganization from qualifying for pooling-of-interests accounting
treatment; (2) such shareholders will not dispose of any such shares until CBI
has received an opinion of counsel acceptable to it that such proposed
disposition will not violate the provisions of any applicable security laws;
and (3) the certificates representing said shares may bear a conspicuous legend
referring to the foregoing restrictions.
(d) INVESTMENT BANKING LETTER. CBI shall have received a
written opinion in form and substance satisfactory to CBI from McKinnon &
Company, Inc. addressed to CBI and dated the date the Proxy Statement/Prospectus
is mailed to shareholders of CBI, or in the alternative on the Effective Date,
to the effect that the terms of the Reorganization, including the Exchange
Ratio, are fair, from a financial point of view, to CBI. At its option CBI may
require that such fairness opinion be updated as of the Effective Date and, in
such event, it shall also be a condition to CBI'S obligation to consummate the
Reorganization that CBI receive such updated fairness opinion.
6.3 CONDITIONS TO OBLIGATIONS OF CBOV. The obligations of CBOV to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties contained herein of CBI shall be true and correct
as of the date of this Agreement and upon the Effective Date with the same
effect as though all such representations and warranties had been made on the
Effective date, except (i) for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and CBOV shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of CBI dated the Effective Date, to such effect.
(b) PERFORMANCE OF OBLIGATIONS. CBI shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and CBOV shall have received a
certificate signed by Chief Executive Officer of CBI to that effect.
(c) INVESTMENT BANKING LETTER. CBOV shall have received a
written opinion in form and substance satisfactory to CBOV from McKinnon &
Company, Inc. addressed to CBOV and dated the date the Proxy
Statement/Prospectus is mailed to shareholders of CBOV, to the effect that the
terms of the Reorganization, including the Exchange Ratio, are fair, from a
financial point of view, to CBOV. At its option, CBOV may require that such
fairness opinion be updated as of the Effective Date and, in such event, it
shall also be a condition to CBOV's obligation to consummate the Reorganization
that CBOV receive such updated opinion.
<PAGE>
(d) AMENDMENT TO ARTICLES OF INCORPORATION. The Articles of
Incorporation of CBI shall have been amended to permit the appointment of all
CBOV Directors to the CBI Board in accordance with Section 1.2 hereof.
ARTICLE 7
TERMINATION
7.1 TERMINATION. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement and the Plan of Share
Exchange by the shareholders of CBI and CBOV, this Agreement may be terminated
and the Reorganization abandoned at any time prior to the Effective Date:
(a) By the mutual consent of the Board of Directors of each
of CBI and CBOV;
(b) By the respective Boards of Directors of CBI or CBOV if
the conditions set forth in Section 6.1 have not been met or waived by CBI and
CBOV;
(c) By the Board of Directors of CBI if the conditions set
forth in Section 6.2 have not been met or waived by CBI;
(d) By the Board of Directors of CBOV if the conditions set
forth in Section 6.3 have not been met or waived by CBOV;
(e) By the respective Boards of Directors of CBI or CBOV if
the Reorganization is not consummated by August 31, 1996.
(f)(i) By the Board of Directors of CBI if the Board of
Directors of CBOV receives a subsequent offer to acquire CBOV and does not
within fourteen (14) days after receipt of such subsequent offer confirm in
writing to CBI that each member of the Board of Directors of CBOV supports the
Reorganization, will vote his shares of CBOV Common Stock in favor of the
Reorganization, and will recommend to the shareholders of CBOV that they approve
the Reorganization.
(ii) By the Board of Directors of CBOV if the Board of
Directors of CBI receives a subsequent offer to acquire CBI and does not within
fourteen (14) days after receipt of such subsequent offer confirm in writing to
CBOV that each member of the Board of Directors of CBI supports the
Reorganization, will vote his shares of CBI Common Stock in favor of the
Reorganization, and will recommend to the shareholders of CBI that they approve
the Reorganization.
(g) By the Board of Directors of CBOV if, before the Effective
Date, CBI shall enter into any agreement or letter of intent providing for the
direct or indirect acquisition of substantially all of the assets and
liabilities or voting stock of CBI.
<PAGE>
7.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this agreement and the Reorganization pursuant to Section 7.1,
this Agreement shall become void and have no effect, except that (i) the last
sentence of Section 4.2 and all of Sections 4.8 and 7.4 shall survive any such
termination and abandonment and (ii) no party shall be relieved or released from
any liability arising out of an intentional breach of any provision of this
Agreement.
7.3 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Except
for Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 5.3, 5.4 and 7.4 of this Agreement,
none of the respective representations and warranties, obligations, covenants
and agreements of the parties shall survive the Effective Date, provided that no
such representations, warranties, obligations, covenants and agreements shall be
deemed to be terminated or extinguished so as to deprive CBI or CBOV (or any
director, officer, or controlling person thereof) of any defense in law or
equity which otherwise would be available against the claims of any person,
including without limitation any shareholder or former shareholder of either CBI
or CBOV.
7.4 EXPENSES. The parties provide for the payment of expenses as
follows:
(a) Except as provided below, each of the parties shall bear
and pay all costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated herein, including fees and expenses of its
own consultants, investment bankers, accountants and counsel.
(b) Notwithstanding the provisions of Section 7.4(a) hereof,
if for any reason the Reorganization is not approved by the shareholders of
either party as required, that party shall bear and pay 50% of the costs and
expenses incurred by the other party with respect to the fees and expenses of
accountants, counsel, printers and persons involved in the transactions
contemplated by this Agreement, including the preparation of the Registration
Statement and the Joint Proxy Statement.
(c) If this Agreement is terminated by CBI or CBOV because of
a willful and material breach by the other of any representation, warranty,
covenant, undertaking or restriction set forth herein, and provided that the
terminating party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall bear and pay all such costs and expenses
of the other party, including fees and expenses of consultants, investment
bankers, accountants, counsel, printers, and persons involved in the
transactions contemplated by this Agreement, including the preparation of the
Registration Statement and the Joint Proxy Statement.
(d) (i) If this Agreement is terminated by CBI pursuant to
Section 7.1(f)(i), then CBOV shall pay all of the costs and expenses incurred by
CBI relating to the Reorganization including, fees and expenses of consultants,
investment bankers, accountants, counsel, printers and persons involved in the
transactions contemplated by this Agreement, including the preparation of the
Registration Statement and the Joint Proxy Statement.
(ii) If this Agreement is terminated by CBOV pursuant to
Section 7.1(f)(ii),
<PAGE>
then CBI shall pay all of the costs and expenses incurred by CBOV relating to
the Reorganization including, fees and expenses of consultants, investment
bankers, accountants, counsel, printers and persons involved in the transactions
contemplated by this Agreement, including the preparation of the Registration
Statement and the Joint Proxy Statement.
(e) Any liability to the other incurred by CBOV or CBI
pursuant to this Section 7.4 shall not exceed a total of $50,000.
(f) Final settlement with respect to the payment of such fees
and expenses by the parties shall be made within thirty (30) days after the
termination of this Agreement.
ARTICLE 8
GENERAL PROVISIONS
8.1 ENTIRE AGREEMENT. This Agreement contains the entire agreement
among CBI and CBOV with respect to the Reorganization and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
8.2 WAIVER AND AMENDMENT. Any term or provision of this Agreement may
be waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof, and this Agreement may be amended or
supplemented by written instructions duly executed by the parties hereto at any
time, whether before or after the meetings of CBOV and CBI shareholders referred
to in Section 6.1(a) hereof, except statutory requirements and requisite
approvals of shareholders and regulatory authorities.
8.3 DESCRIPTIVE HEADINGS. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
8.4 GOVERNING LAW. Except as required otherwise or otherwise indicated
herein, this Agreement shall be construed and enforced according to the laws of
the Commonwealth of Virginia.
8.5 NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
If to CBI:
Nathan S. Jones, 3rd, President
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23804
(Tel. 804-861-2320)
<PAGE>
Copy to:
Wayne A. Whitham, Jr.
Williams, Mullen, Christian & Dobbins
1021 East Cary Street
P.O. Box 1320
Richmond, Virginia 23210-1320
(Tel. 804-783-6473)
If to CBOV:
Richard C. Huffman, President
Commerce Bank of Virginia
Post Office Box 29569
Richmond, Virginia 23242-0569
(Tel. 804-360-2222)
Copy to:
Sam T. Beale
Beale, Balfour and Davidson
701 East Franklin Street, #1200
Richmond, Virginia 23219
(Tel. 804-788-1500)
8.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
8.7 SEVERABILITY. In the event any provisions of this Agreement shall
be held invalid or unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
8.8 BROKERS AND FINDERS. Except for McKinnon & Company, Inc. as to CBI
and McKinnon & Company, Inc. as to CBOV, each of the parties represents and
warrants that neither it nor any of its officers, directors, employees,
affiliates, or subsidiaries has employed any broker or finder or incurred any
liability for any financial advisory fees, investment banker's fees, brokerage
fees, commissions, or finders' fees in connection with this Agreement or the
transactions contemplated hereby. In the event of any claim by any broker or
finder based upon his or its representing or being retained by or allegedly
representing or being retained by either
<PAGE>
CBI or CBOV, CBI or CBOV, as the case may be, agrees to indemnify and hold the
other party harmless of and from any such claim.
8.9 SUBSIDIARIES. All representations, warranties, and covenants
herein, where pertinent, include and shall apply to the wholly owned
subsidiaries belonging to the party making such representations, warranties, and
covenants.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in counterparts by their duly authorized officers and
their corporate seals to be affixed hereto, all as of the dates first written
above.
Community Bankshares Incorporated
By: /s/ Nathan S. Jones, 3rd
Nathan S. Jones, 3rd
President and Chief
Executive Officer
ATTEST:
/s/ Phillip H. Kirkpatrick
- --------------------------
Secretary
Commerce Bank of Virginia
By: /s/ Richard C. Huffman
-------------------
Richard C. Huffman
President and Chief
Executive Officer
ATTEST:
/s/ Sam T. Beale
- ----------------
Secretary
<PAGE>
COMMERCE BANK OF VIRGINIA
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of Commerce
Bank of Virginia agrees to be bound by his personal obligations as provided in
Section 4.3 and 4.6 of this Agreement.
/s/ Sam T. Beale
Sam T. Beale
/s/ James R. V. Daniel
James R. V. Daniel
/s/ James E. Bloom
James E. Bloom
/s/ Ralph Fields
Ralph Fields
/s/ David E. Hudgins
David E. Hudgins
/s/ Barry M. Kornblau
Barry M. Kornblau
/s/ Lawrence B. Nuckols
Lawrence B. Nuckols
/s/ John D. Seal, III
John D. Seal, III
/s/ R. C. Huffman
R. C. Huffman
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of Community
Bankshares Incorporated agrees to be bound by his personal obligations as
provided in Section 4.3 and 4.6 of this Agreement.
/s/ Lawrence F. DeSouza
Lawrence F. DeSouza
/s/ Elinor B. Marshall
Elinor B. Marshall
/s/ Alvin L. Sheffield
Alvin L. Sheffield
/s/ James A. Boyd
James A. Boyd
/s/ Phillip H. Kirkpatrick
Dr. Phillip H. Kirkpatrick
/s/ Louis C. Shell
Louis C. Shell
/s/ B. Glenn Holden
Dr. B. Glenn Holden
/s/ Nathan S. Jones, 3rd
Nathan S. Jones, 3rd
/s/ Harold L. Vaughn
Harold L. Vaughn
/s/ W. Courtney Wells
W. Courtney Wells
<PAGE>
EXHIBIT A
TO THE
AGREEMENT AND PLAN
OF REORGANIZATION
PLAN OF SHARE EXCHANGE
BETWEEN
COMMERCE BANK OF VIRGINIA
AND
COMMUNITY BANKSHARES INCORPORATED
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"),
Commerce Bank of Virginia ("CBOV"), a Virginia state bank, shall become a
wholly-owned subsidiary of Community Bankshares Incorporated ("CBI"), a Virginia
corporation pursuant to a share exchange under Section 13.1-717 of the Virginia
Stock Corporation Act.
ARTICLE 1
TERMS OF THE SHARE EXCHANGE
1.1 THE SHARE EXCHANGE. Subject to the terms and conditions of the
Agreement and Plan of Reorganization, dated as of December 12, 1995 between CBOV
and CBI, at the Effective Date, CBOV shall become a wholly-owned subsidiary of
CBI through the exchange of each outstanding share of common stock of CBOV for
shares of the common stock of CBI in accordance with Section 2.1 of this Plan of
Share Exchange and pursuant to a share exchange under Section 13.1-717 of the
Virginia Stock Corporation Act (the "Share Exchange"). At the Effective Date,
the Share Exchange shall have the effect as provided in Section 13.1-721 of the
Virginia Stock Corporation Act.
1.2 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of Incorporation
and Bylaws of CBI in effect immediately prior to the consummation of the Share
Exchange shall remain in effect following the Effective Date until otherwise
amended or repealed.
1.3 MANAGEMENT AND BUSINESS OF CBOV AND CBI. The directors, officers
and employees of CBOV will not change as a result of the Reorganization. The
members of the CBOV Board shall become directors of CBI on the Effective Date.
When the CBOV directors become directors of CBI, three members of the CBOV Board
shall become members of each of the three classes of CBI Directors, as
determined by the CBOV Board. The CBOV Directors appointed to Class I shall
serve until the 1998 annual meeting of shareholders; those appointed to Class II
shall serve until the 1999 annual meeting of shareholders; and those appointed
to Class III shall serve until the 1997 annual meeting of shareholders. The
parties anticipate that immediately before the Effective Date CBI will have ten
directors and CBOV will have nine directors. As a result of the Reorganization,
CBI will have 19 directors on and after the Effective Date. It is the intention
of CBI and CBOV that after the Effective Date, directors of
<PAGE>
CBOV, or individuals designated by directors of CBOV, shall continue to
constitute nine nineteenths (9/19) of the Board of CBI and the parties shall use
their best efforts to maintain that ratio. The parties also acknowledge,
however, that such ratio might change as a result of unanticipated events,
including, for example, the acquisition in the future of another bank by CBI.
The parties intend that after the Effective Date, the chief executive officer of
CBOV and the chief executive officer of The Community Bank, a wholly owned
subsidiary of CBI, each will attend the meetings of the other's Board of
Directors.
ARTICLE 2
MANNER OF EXCHANGING SHARES
2.1 CONVERSION OF SHARES. Upon, and by reason of, the Share Exchange
becoming effective pursuant to the issuance of a Certificate of Share Exchange
by the Virginia State Corporation Commission, no cash, except as set forth in
Section 2.3 below, shall be allocated to the shareholders of CBOV, and stock
shall be issued and allocated as follows:
(a) Each share of common stock, par value $3.50 per share, of
CBOV ("CBOV Common Stock") issued and outstanding immediately prior to the
Effective Date shall, by operation of law, be automatically exchanged for 1.4044
(the "Exchange Ratio") shares of common stock of CBI, par value $3.00 per share
(CBI Common Stock), plus cash for fractional shares. Each holder of a
certificate representing any shares of CBOV Common Stock upon the surrender of
his CBOV stock certificates to CBI, 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 CBI Common
Stock that his shares shall be converted into pursuant to the Exchange Ratio.
Each such holder of CBOV Common Stock shall have the right to receive any
dividends previously declared but unpaid as to such stock and the consideration
described in Sections 2.1 and 2.4 upon the surrender of such certificate in
accordance with Section 2.3. In the event CBI changes the number of shares of
CBI Common Stock issued and outstanding prior to the Effective Date as a result
of any stock split, stock dividends, recapitalization or similar transaction
with respect to the outstanding CBI Common Stock and the record date therefor
shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted.
(b) Shares of CBOV Common Stock issued and outstanding shall,
by virtue of the Reorganization, continue to be issued and outstanding shares
held by CBI.
2.2 CONVERSION OF STOCK OPTIONS. (a) On the Effective Date, all rights
with respect to CBOV Common Stock pursuant to stock options ("CBOV Options")
granted by CBOV under a CBOV stock option plan which are outstanding on the
Effective Date, whether or not then exercisable, shall be converted into and
become rights with respect to CBI Common Stock, and CBI shall assume each CBOV
Option in accordance with the terms of the stock option plan under which it was
issued and the stock option agreement by which it is evidenced. From the
Effective Date forward, (i) each CBOV Option assumed by CBI may be exercised
solely for
<PAGE>
shares of CBI Common Stock, (ii) the number of shares of CBI Common Stock
subject to each CBOV Option shall be equal to the number of shares of CBOV
Common Stock subject to such option immediately prior to the Effective Date
multiplied by the Exchange Ratio and (iii) the per share exercise price under
each such CBOV Option shall be adjusted by dividing the per share exercise price
under each such option by the Exchange Ratio and rounding down to the nearest
cent; provided, however, that the terms of each CBOV Option shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar transaction after
the Effective Date. It is intended that the forgoing assumption shall be
undertaken in a manner that will not constitute a "modification" as defined in
Section 425 of the Code, as to any stock option which is an "incentive stock
option."
(b) Pursuant to approval of this Plan of Share Exchange, the
CBI stock option plan shall be amended to increase the number of authorized
shares to cover the conversion of the CBOV Options into options to purchase CBI
common stock pursuant to Section 2.2(a) above and to otherwise provide for
conversion of the CBOV Options as described herein.
2.3 MANNER OF EXCHANGE. As promptly as practicable after the Effective
Date, CBI shall cause The Community Bank, acting as the exchange agent
("Exchange Agent") to send to each former shareholder of record of CBOV
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of CBOV Common Stock (other than
shares held by shareholders who perfect their dissenter's rights as provided
under Section 2.5 hereof) for the consideration set forth in Section 2.1 above
and Section 2.4 below. Any fractional share checks which a CBOV shareholder
shall be entitled to receive in exchange for such shareholder's shares of CBOV
Common Stock, and any dividends paid on any shares of CBI 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 CBOV 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 CBI and the Exchange Agent, in their
judgment, if any of such certificates are lost, stolen or destroyed). No
interest will be paid on any such fractional share checks or dividends to which
the holder of such shares shall be entitled to receive upon such delivery.
2.4 NO FRACTIONAL SHARES. No certificates or scrip for fractional
shares of CBI Common Stock will be issued. In lieu thereof, CBI will pay the
value of such fractional shares in cash on the basis of the book value per share
of CBI Common Stock at the end of the calendar quarter that immediately precedes
the Effective Date.
2.5 DIVIDENDS. No dividend or other distribution payable to the holders
of record of CBI Common Stock at or as of any time after the Effective Date
shall be paid to the holder of any certificate representing shares of CBOV
Common Stock issued and outstanding immediately prior to the Effective Date
until such holder physically surrenders such certificate for exchange as
provided in Section 2.3, promptly after which time all such dividends or
distributions shall be paid by CBI (without interest).
<PAGE>
2.6 RIGHTS OF DISSENTING SHAREHOLDERS. Shareholders of CBOV who
object to the Share Exchange will be entitled to the dissenters' rights and
remedies set forth in sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act.
ARTICLE 3
Termination
This Plan of Share Exchange may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 7 of the Agreement
and Plan of Reorganization, dated December 12, 1995, between the parties.
<PAGE>
[This page intentionally left blank]
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
AMENDMENT TO ARTICLES OF INCORPORATION
SECTION 8
8. Directors. The number of Directors shall be as stated in the
Corporation's bylaws, but the number of directors set forth in the bylaws cannot
be increased by more than two during any 12-month period except (i) by the
affirmative vote of holders of 85% of all shares of voting stock of the
Corporation or (ii) in connection with a merger or share exchange to which the
Corporation or a wholly owned subsidiary of the Corporation is a party, provided
that the 85% voting requirement set forth in Article 9 does not apply to such
merger or share exchange. In the absence of a bylaw, the number of Directors
shall be three.
Commencing with the 1984 Annual Meeting of Stockholders, the
Board of Directors shall be divided into three classes -- Class I, Class II and
Class III -- as nearly equal in number as possible. At the 1984 Annual Meeting
of Stockholders, directors of the first class (Class I) shall be elected to hold
office for a term expiring at the 1985 Annual Meeting of Stockholders; directors
of the second class (Class II) shall be elected to hold office for a term
expiring at the 1986 Annual Meeting of Stockholders; and directors of the third
class (Class III) shall be elected to hold office for a term expiring at the
1987 Annual Meeting of Stockholders. At each annual meeting of
B-1
<PAGE>
stockholders after 1984, the successors to the class of directors whose term
shall then expire shall be identified as being of the same class as the
directors they succeed and elected to hold office for a term expiring at the
third succeeding annual meeting of stockholders. When the number of directors is
changed, any newly-created directorships or any decrease in directorships shall
be so apportioned among the classes as to make all classes as nearly equal in
number as possible.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any vacancy occurring in the Board of Directors, including a
vacancy resulting in an increase by not more than two in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors, and directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which they have been elected
expires. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director may be removed, without cause, but only by the
affirmative vote of the holders of at least 85% of the outstanding shares of
Common Stock.
B-2
<PAGE>
COMMERCE BANK OF VIRGINIA
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994 AND
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<PAGE>
COMMERCE BANK OF VIRGINIA
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS C - 2
FINANCIAL STATEMENTS
Statements of Condition C - 4
Statements of Operations C - 5
Statements of Stockholders' Equity C - 7
Statements of Cash Flows C - 8
NOTES TO FINANCIAL STATEMENTS C - 10
C-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Commerce Bank of Virginia
Richmond, Virginia
We have audited the accompanying statements of condition of Commerce Bank of
Virginia as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commerce Bank of Virginia at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
BDO Seidman, LLP
Richmond, Virginia
February 7, 1996
C-2
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CONDITION
December 31, 1995 1994
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,971,894 $ 4,982,284
Federal funds sold 3,763,000 -
Investment securities (Note 2)
Held to maturity 10,923,360 15,164,608
Available for sale 9,222,655 -
Loans receivable, net (Note 3) 42,149,438 38,801,575
Other real estate owned 316,855 -
Bank premises and equipment, net (Note 4) 1,823,125 1,461,589
Accrued interest receivable 463,719 432,102
Other assets 306,345 243,544
- -------------------------------------------------------------------------------
$72,940,391 $61,085,702
- -------------------------------------------------------------------------------
C-3
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CONDITION
December 31, 1995 1994
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 5) $66,357,577 $55,811,525
Federal funds purchased (Note 7) - 793,000
Accrued interest payable 72,042 37,346
Deferred income taxes (Note 8) 34,746 64,436
Other liabilities 367,392 120,682
- --------------------------------------------------------------------------------
Total liabilities 66,831,757 56,826,989
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, 12 and 13)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11)
Common stock, $3.50 par value; authorized
1,500,000 shares issued; and outstanding
501,264 and 431,223 shares 1,754,424 1,509,281
Capital surplus 2,045,823 1,240,352
Retained earnings 2,240,940 1,509,080
Net unrealized gain on securities available
for sale (Note 2) 67,447 -
- --------------------------------------------------------------------------------
Total stockholders' equity 6,108,634 4,258,713
- --------------------------------------------------------------------------------
$72,940,391 $61,085,702
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
C-4
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $4,207,636 $3,266,997 $2,786,466
Investment securities
U. S. Government agencies (taxable) 837,331 605,141 322,644
Other securities (taxable) 122,152 143,937 144,723
State and County municipals (tax exempt) 47,513 64,655 56,439
Federal Reserve Bank 4,947 5,246 4,251
Federal funds sold 100,392 118,692 195,634
- -------------------------------------------------------------------------------------------
Total interest and dividend income 5,319,971 4,204,668 3,510,157
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,197,051 1,495,867 1,324,068
Federal funds purchased (Note 7) 10,159 3,674 -
- -------------------------------------------------------------------------------------------
Total interest expense 2,207,210 1,499,541 1,324,068
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME 3,112,761 2,705,127 2,186,089
PROVISION FOR LOAN LOSSES (NOTE 3) 195,000 199,838 75,000
- -------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 2,917,761 2,505,289 2,111,089
- -------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 305,346 289,406 200,568
Other 76,698 140,450 63,268
- -------------------------------------------------------------------------------------------
Total noninterest income 382,044 429,856 263,836
- -------------------------------------------------------------------------------------------
</TABLE>
continued
C-5
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST EXPENSES
Salaries and employee benefits
(Notes 9, 10 and 12) $1,279,469 $1,187,014 $1,002,556
Occupancy (Note 13) 157,950 154,624 169,688
Depreciation and amortization 129,296 227,875 186,883
Other 633,624 653,203 635,207
- -------------------------------------------------------------------------------------------
Total noninterest expenses 2,200,339 2,222,716 1,994,334
- -------------------------------------------------------------------------------------------
Income before income taxes 1,099,466 712,429 380,591
INCOME TAXES (Note 8) 367,800 225,600 103,000
- -------------------------------------------------------------------------------------------
NET INCOME $ 731,666 $ 486,829 $ 277,591
- -------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.60 $ 1.13 $ 0.68
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-6
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Securities Total
COMMON CAPITAL RETAINED AVAILABLE STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 $1,360,958 $ 994,088 $1,115,179 $ - $3,470,225
Issuance of 1,176
shares of common stock
to ESOP (Note 9) 4,116 8,232 - - 12,348
10% common stock
dividend (39,002
shares) (Note 11) 136,507 234,012 (370,519) - -
Net income - - 277,591 - 277,591
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 1,501,581 1,236,332 1,022,251 - 3,760,164
Exercise of stock
options (Note 10) 7,700 4,020 - - 11,720
Net income - - 486,829 - 486,829
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 1,509,281 1,240,352 1,509,080 - 4,258,713
Proceeds from stock
sale (Note 11) 245,143 805,471 194 - 1,050,808
Net income - - 731,666 - 731,666
Net unrealized gain
on securities
available for
sale (Note 2) - - - 67,447 67,447
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 $1,754,424 $2,045,823 $2,240,940 $67,447 $6,108,634
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-7
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 731,666 $ 486,829 $ 277,591
Adjustments to reconcile net income to net
cash provided by operating activities
Provisions for loan losses 195,000 199,838 75,000
Depreciation and amortization 129,296 227,875 186,883
Amortization and accretion of premiums
and discounts, net (3,871) 14,045 17,682
Net (increase) decrease in mortgage loans
held for sale - 2,125,261 (810,824)
(Increase) decrease in accrued interest
receivable 31,617 (173,154) 23,495
Increase (decrease) in accrued interest payable 34,696 (8,049) 8,766
Increase (decrease) in deferred income taxes (29,690) 32,720 (31,000)
Increase (decrease) in income taxes payable 163,822 52,527 (107,296)
Other (132,036) (105,496) (49,480)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (ABSORBED) BY OPERATING ACTIVITIES 1,120,500 2,852,396 (409,183)
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investment securities available for sale (9,222,655) - -
Purchases of securities held to maturity (3,008,000) (6,985,198) (6,557,553)
Proceeds from principal payments and maturities
of investment securities 7,355,312 5,186,390 1,155,000
Loan originations, net of principal collected (3,542,863) (8,223,052) (5,738,483)
Proceeds from sale of real estate - 19,603 -
Purchase of other real estate (316,855) - -
Purchases of bank premises and equipment (436,689) (59,356) (562,401)
- -------------------------------------------------------------------------------------------------------
NET CASH ABSORBED BY INVESTING ACTIVITIES (9,171,750) (10,061,613) (11,703,437)
- -------------------------------------------------------------------------------------------------------
</TABLE>
continued
C-8
<PAGE>
COMMERCE BANK OF VIRGINIA
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $10,546,052 $2,514,022 $15,291,065
Net increase (decrease) in federal funds purchased (793,000) 793,000 -
Proceeds from stock sale 1,050,808 - -
Proceeds from exercise of stock options - 11,720 -
Repurchase of common stock for issuance to ESOP - - (12,652)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,803,860 3,318,742 15,278,413
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,752,610 (3,890,475) 3,165,793
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,982,284 8,872,759 5,706,966
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 7,734,894 $4,982,284 $ 8,872,759
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------------------------------------------------------------
Cash payments of interest expense $ 2,173,000 $1,508,000 $ 1,315,000
- -------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 268,000 $ 140,000 $ 241,000
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------------------
Transfers from loans to real estate acquired
through foreclosure $ - $ 25,000 $ -
- -------------------------------------------------------------------------------------------------------
Issuance of common stock through contribution
to ESOP $ - $ - $ 12,348
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-9
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Commerce Bank of Virginia conform to
generally accepted accounting principles and general practices within the
banking industry. A summary of the more significant policies follows:
GENERAL
Commerce Bank of Virginia (the "Bank") is a state-chartered member bank subject
to examination and regulation by the Federal Reserve Bank of Richmond and Bureau
of Financial Institutions of the Commonwealth of Virginia.
REGULATION
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
enacted on December 19, 1991. Provisions of the legislation became effective
January 1, 1993.
Specifically, FDICIA contains provisions which allows regulators to impose
prompt corrective action on undercapitalized institutions in accordance with a
categorized capital-based system. In addition, FDICIA includes provisions for
revising capital requirements to include the effect of interest rate risk,
operating standards in key areas of the Bank's operations, standards for
compensating executives, audit expansion and increased frequency of regulatory
examinations, reducing the scope of deposit insurance coverage, risk-based
deposit insurance assessments, and restricting state banking activities.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
C-10
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investment securities are classified as either held-to-maturity, trading or
available for sale. Investment securities classified as held for investment are
stated at cost, adjusted for amortization of premiums and accretion of discounts
using the level yield method. It is management's intention and it has the
ability to hold investment securities classified as held for investment to
maturity and, accordingly, adjustments are not made for temporary declines in
their market value below amortized cost. Securities held for sale are carried at
their estimated market value with unrealized holding gains and losses, net of
tax, reported as a separate component of stockholders' equity until realized.
Trading account assets are carried at estimated market value. Gains and losses
on securities sold are determined based on the specific identification of the
securities sold.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are granted to borrowers predominantly in the Richmond metropolitan area
and are stated at the amount of unpaid principal reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. The accrual of interest
on loans is discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become due.
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged off partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Bank's regulators.
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan
(as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures). The effect of adopting these new
accounting standards were immaterial to the operating results of the Bank
for the year ended December 31, 1995. Prior financial statements have not
been restated to apply the provision of the new accounting standard.
C-11
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Bank will be unable to collect all principal and interest
amounts according to the contractual terms of the loan agreement. The allowance
for loan losses related to loans identified as impaired is primarily based on
the excess of the loan's current outstanding principal balance over the
estimated fair market value of the related collateral. For a loan that is not
collateral-dependent, the allowance is recorded at the amount by which the
outstanding principal balance exceeds the current best estimate of the future
cash flows on the loan discounted at the loan's original effective interest
rate. Loans with outstanding balances under $50,000 are considered to be
smaller balance, homogenous loans which are not evaluated under the provisions
of SFAS No. 114. Prior to 1995, the allowance for loan losses for all loans
which would have qualified as impaired under the new accounting standard was
primarily based upon the estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
As of December 31, 1995, the Bank had no loans that were considered as impaired.
The Bank defers loan origination and commitment fees, net of certain direct loan
origination costs, and the net deferred fees are amortized into interest income
over the lives of the related loans as yield adjustments. Any unamortized net
fees on loans fully repaid or sold are recognized as income in the year of
repayment or sale. Deferred fees on permanent adjustable-rate loans are
amortized into income over the period necessary to adjust the yield on the loans
to market rates using the level yield method.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of fair value less
estimated selling costs or the balance of the loan on the property at date of
foreclosure. Costs related to capital additions or improvements are capitalized,
whereas those relating to holding the property are charged to operations.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of the property
exceeds its fair value.
C-12
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes, provisions for depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the individual assets or the terms of the related leases, if
shorter, for leasehold improvements. Accelerated depreciation methods are used
for income tax purposes. Expenditures for betterments and major renewals are
capitalized and ordinary maintenance and repairs are charged to operations as
incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of "temporary
differences" between the financial statement carrying amounts and the tax basis
of existing assets and liabilities by applying enacted statutory rates
applicable to future years to those differences.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of shares outstanding during the year. The weighted average number of
shares outstanding for the years ended December 31, 1995, 1994 and 1993 were
459,239, 429,399 and 409,463, respectively. Existing stock options are not
considered in the computation as their dilutive effect is less than three
percent.
CASH EQUIVALENTS
For purposes of this presentation, cash equivalents include federal funds sold.
C-13
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
In May 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the mortgage servicing rights and the loans, based on their relative fair
values, if the bank sells or securitizes the loans and retains the mortgage
servicing rights. In addition, SFAS 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted prospectively beginning January
1, 1996. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Bank.
C-14
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
Certain reclassifications have been made in the prior years' financial
statements to conform to the December 31, 1995 presentation.
2. INVESTMENT SECURITIES
A summary of the amortized cost and estimated market values of investment
securities is as follows:
DECEMBER 31, 1995
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
HELD TO MATURITY
U. S. Treasury and agency
securities $ 7,990,490 $ 48,438 $ 9,883 $ 8,029,045
Mortgage-backed securities 540,935 9,360 - 550,295
Corporate securities 1,256,485 13,647 392 1,269,740
State and county
Municipal bonds 1,135,450 41,585 2,015 1,175,020
- --------------------------------------------------------------------------------
10,923,360 113,030 12,290 11,024,100
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury and agency
securities 5,253,137 51,368 3,970 5,300,535
Mortgage-backed
Securities 3,734,825 54,795 - 3,789,620
Other 132,500 - - 132,500
- --------------------------------------------------------------------------------
9,120,462 106,163 3,970 9,222,655
- --------------------------------------------------------------------------------
$20,043,822 $219,193 $16,260 $20,246,755
- --------------------------------------------------------------------------------
C-15
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market values at December 31, 1995, by
contractual maturity, are as follows:
ESTIMATED
AMORTIZED MARKET
COST VALUE
- -------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 5,455,790 $ 5,457,585
Due after one year through five years 3,691,391 3,729,530
Due after five years through ten years 399,634 419,971
Due after ten years 1,376,545 1,417,014
- -------------------------------------------------------------------
10,923,360 11,024,100
- -------------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less 499,200 500,000
Due after one year through five years 2,450,937 2,472,017
Due after five years through ten years 2,557,632 2,585,811
Due after ten years 3,612,693 3,664,827
- -------------------------------------------------------------------
9,120,462 9,222,655
- -------------------------------------------------------------------
$20,043,822 $20,246,755
- -------------------------------------------------------------------
C-16
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1994
- -------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
HELD TO MATURITY
U. S. Treasury and agency
securities $11,041,123 $ - $343,369 $10,697,754
Mortgage-backed securities 1,146,932 - 97,312 1,049,620
Corporate securities 1,577,160 - 37,388 1,539,772
State and county
Municipal bonds 1,267,243 7,307 27,846 1,246,704
Other 132,150 - - 132,150
- -------------------------------------------------------------------------------
$15,164,608 $7,307 $505,915 $14,666,000
- -------------------------------------------------------------------------------
At December 31, 1995 and 1994, securities with an amortized cost of $6,347,304
and $5,005,000 and a market value of approximately $6,367,000 and $4,902,000,
respectively, were pledged as collateral to secure public funds as required by
law.
3. LOANS
Loans receivable are summarized as follows:
DECEMBER 31, 1995 1994
- ---------------------------------------------------------------------------
Commercial and industrial $ 5,667,207 $ 3,682,996
Real estate - construction and
land development 2,959,741 4,113,018
Real estate - other 25,480,625 21,812,940
Consumer 5,986,000 7,588,973
Other 2,529,000 1,977,990
- ---------------------------------------------------------------------------
42,622,573 39,175,917
Less allowance for loan losses 473,135 374,342
- ---------------------------------------------------------------------------
$42,149,438 $38,801,575
- ---------------------------------------------------------------------------
C-17
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
3. LOANS (CONTINUED)
Loans to directors, executive officers, and those individuals or organizations
that are related to them, are made in the ordinary course of business on
substantially the same terms as those loans prevailing at the time for
comparable transactions with others and do not involve more than normal risk of
collectibility or present other unfavorable features. The activity in such loans
was as follows:
YEAR ENDED DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------
Beginning balance $ 963,000 $1,052,000
Additions 628,000 363,500
Repayments (526,000) (452,500)
- -------------------------------------------------------------------------------
Ending balance $1,065,000 $ 963,000
- -------------------------------------------------------------------------------
Activity in the allowance for loan losses are as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Balance, beginning of year $374,342 $330,333 $300,692
Provision charged to expense 195,000 199,838 75,000
Charge-offs, net of recoveries (96,207) (155,829) (45,359)
- -------------------------------------------------------------------------------
Balance, end of year $473,135 $374,342 $330,333
- -------------------------------------------------------------------------------
C-18
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
4. BANK PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Land $ 192,177 $ 192,177
Building and leasehold improvements 1,577,064 1,172,059
Furniture and equipment 1,081,281 993,402
- --------------------------------------------------------------------------------
2,850,522 2,357,638
Less allowance for depreciation
and amortization 1,027,397 896,049
- --------------------------------------------------------------------------------
$1,823,125 $1,461,589
- --------------------------------------------------------------------------------
5. DEPOSITS
Deposits are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Demand $10,848,734 $ 9,019,064
Interest-bearing transaction accounts 19,054,387 11,985,232
Savings 16,978,183 20,803,498
Certificates of deposit 19,476,273 14,003,731
- --------------------------------------------------------------------------------
Total deposits $66,357,577 $55,811,525
- --------------------------------------------------------------------------------
Certificates of deposits with balances of $100,000 or more totalled $4,047,014
and $2,992,516 at December 31, 1995 and 1994, respectively.
Certificates of deposit mature as follows:
YEAR ENDING DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Within one year $11,320,983
One to two years 6,596,970
More than two years 1,558,320
- --------------------------------------------------------------------------------
$19,476,273
- --------------------------------------------------------------------------------
C-19
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of
Financial Instruments", effective for fiscal years ending after December 15,
1992. This statement requires disclosure of the fair values of financial
instruments, both assets and liabilities recognized and not recognized in the
statement of condition, where it is practicable to estimate fair value.
The estimated fair values of the Bank's financial instruments as of December 31,
1995, are as follows:
Carrying Fair
Amount Value
- --------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and short-term investments $ 3,971,894 $ 3,971,894
Federal funds sold 3,763,000 3,763,000
Investment securities 20,146,015 20,247,000
Loans, net of allowance for loan losses 42,149,438 41,989,000
FINANCIAL LIABILITIES
DEPOSITS 66,357,577 66,501,000
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit N/A N/A
Standby letters of credit N/A 10,700
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Investment securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
C-20
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.
The fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the borrowers at the reporting date.
C-21
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
7. FEDERAL FUNDS PURCHASED
The following is a summary of certain information regarding the Bank's federal
funds purchased:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Balance at end of year $ - $793,000
Weighted average interest rate
at end of year - 5.56%
Average amount outstanding
during the year $ 166,100 $ 66,000
Maximum amount outstanding at
any month end during the
year $1,052,000 $793,000
8. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Current $432,200 $192,900 $134,000
Deferred expense (benefit) (64,400) 32,700 (31,000)
- -------------------------------------------------------------------------------
Total provision for income taxes $367,800 $225,600 $103,000
- -------------------------------------------------------------------------------
A reconciliation of income taxes computed at the statutory income tax rate to
the effective rate is as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Income taxes at the statutory rate $373,800 $242,200 $129,401
Increase (decrease) in taxes:
Municipal bond interest (9,562) (22,000) (15,956)
Other 3,562 5,400 (10,445)
- -------------------------------------------------------------------------------
$367,800 $225,600 $103,000
- -------------------------------------------------------------------------------
C-22
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are as follows:
DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Accrual to cash basis adjustment $(130,031) $(150,515) $(79,463)
Bad debt deduction 109,825 74,224 61,679
Depreciation and amortization (31,146) (16,187) (33,797)
Deferred compensation 51,352 28,042 19,865
Available for sale securities (34,746) - -
- -------------------------------------------------------------------------------
Deferred tax liability, net $ (34,746) $ (64,436) $(31,716)
- -------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS
The Bank sponsors a non-contributory Employee Stock Ownership Plan (ESOP)
covering substantially all employees. Contributions to the ESOP, which are
recorded as compensation expense, and can be cash or stock at fair value, are at
the discretion of the Board of Directors and amounted to $40,000, $30,000 and
$25,000 for the years ended December 31, 1995, 1994 and 1993, respectively. At
December 31, 1995, there were 10,765 shares allocated to participants which are
considered outstanding for purposes of computation of earnings per share.
Effective June 1, 1992, the Bank adopted a 401(k) profit-sharing plan (the
"Plan") covering substantially all employees. Participants may contribute up to
15% of their compensation to the Plan. The Bank contributes 50% of the
participant's contribution, up to 6% of the participant's compensation, as a
matching contribution. Contributions to the Plan by the Bank were approximately
$16,800, $12,100 and $12,100 for the years ending December 31, 1995, 1994 and
1993, respectively.
C-23
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTION PLAN
The Bank has a noncompensatory Incentive Stock Option Plan (the "Plan") designed
to provide long-term incentives to officers, directors and key employees.
Pursuant to the Plan, 50,000 shares of the Bank's common stock were made
available for awards on April 21, 1986. In June 1993, the Board of Directors
declared a 10% stock dividend. The Plan requires that in the event of a stock
dividend that the number of shares of common stock then covered by each
outstanding option granted shall be increased proportionately with no increase
in option price. In accordance with the Plan and in connection with the stock
dividend, 5,000 additional shares of the Bank's common stock have been made
available for awards and 3,000 options to purchase common stock were granted.
The Bank also granted an additional 2,000 options to purchase common stock
during 1993. All options granted under the Plan were at the estimated market
value of the Bank's stock on the date of grant.
The following table presents options exercisable and outstanding under the Plan:
YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------
OPTION PRICE
- -------------------------------------------------------------------------------
Outstanding at beginning of year $5.33 - $6.12 24,000 26,200 23,400
Options granted 5.33 - 8.63 - - 5,000
Options exercised 5.33 - (2,200) -
Options terminated 5.33 - - (2,200)
- -------------------------------------------------------------------------------
Outstanding at end of year $5.33 - $8.63 24,000 24,000 26,200
- -------------------------------------------------------------------------------
11. STOCKHOLDERS' EQUITY
During June 1993, the Board of Directors declared a 10% stock dividend.
Accordingly, amounts equal to the fair market value of the additional shares
issued have been charged to retained earnings and credited to common stock and
capital surplus.
In August 1995, the Bank completed an offering of 70,041 shares of common stock
to existing shareholders which provided the Bank with proceeds of $1,050,808 net
of expenses.
C-24
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On December 12, 1995, the Bank entered into an Agreement and Plan of
Reorganization (the "Agreement") with Community Bankshares, Inc. ("CBI"), a bank
holding company headquartered in Petersburg, Virginia, pursuant to which the
Bank will engage in a Share Exchange with CBI (the "Reorganization"). Under the
terms of the Agreement, each share of common stock of the Bank outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.4044 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, the Bank will continue its
banking business as a wholly-owned subsidiary of CBI in substantially the same
manner as before the Reorganization. This Agreement is subject to approval by
the shareholders of both the Bank and CBI.
Banking laws and regulations place certain restrictions on the amount of
dividends that a bank may pay to its stockholders. Of the $6,041,187 in total
stockholders' equity at December 31, 1995 $1,496,086 is available for dividends
and the remaining $4,545,101 is restricted based on minimum capital
requirements.
12. DEFERRED COMPENSATION PLAN
The Bank has a Deferred Compensation Plan (the "Plan") for the benefit of its
directors. Contributions amounted to approximately $38,900, $24,000 and $16,400
for the years ended December 31, 1995, 1994 and 1993, respectively. The Plan
provides each director with an annual benefit payment upon attaining 70 years of
age. In addition, benefit payments are available upon early retirement,
termination and death as defined by the Plan Document.
During 1995, the Bank adopted a Deferred Compensation Plan (the "Officers Plan")
for the benefit of certain officers. Contributions of approximately $29,600 were
made to the Plan during the year ended December 31, 1995. The Officers Plan
provides each officer an annual benefit payment upon retirement. In addition,
benefit payments are available upon death or early termination as defined by the
Plan Document.
C-25
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers,
primarily in the Richmond metropolitan area. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized on the statement of condition. Financial instruments with
off-balance-sheet risk are summarized as follows:
DECEMBER 31, 1995 1994
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $7,894,000 $6,873,000
- --------------------------------------------------------------------------------
Standby letters of credit $ 777,000 $ 596,000
- --------------------------------------------------------------------------------
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 notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. 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 counterparty. Collateral held varies but may include personal property,
commercial property, residential property, land and accounts receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
C-26
<PAGE>
COMMERCE BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Bank has entered into employment agreements with its President and Chief
Executive Officer and with two Senior Vice Presidents which expire at dates
through December 31, 1997. These agreements, which contain continual
self-renewing terms of one year subject to cancellation by the Bank, provide
minimum salaries during the terms of the agreements and certain severance
benefits if a change of control and termination occurs as defined in the
agreements. The maximum severance benefits payable, if such a termination upon
change in control occurred at December 31, 1995, would have been approximately
$423,000.
The Bank leases land, tenant space and certain equipment under operating leases
expiring at various dates to 2006. Total rental expense amounted to
approximately $68,500, $84,700 and $96,855 for the years ended December 31,
1995, 1994 and 1993, respectively. At December 31, 1995, minimum annual lease
payments in the aggregate were as follows:
YEAR ENDING DECEMBER 31,
----------------------------------------------------
1996 $ 81,900
1997 74,000
1998 55,500
1999 15,000
2000 15,000
Thereafter 76,300
----------------------------------------------------
$317,700
----------------------------------------------------
The Hanover branch facility is owned by a company whose principal shareholder is
the Bank's Chairman. The base annual rent is $36,000 per year.
C-27
<PAGE>
APPENDIX D
OPINION OF MCKINNON & COMPANY, INC.
May 9, 1996
Board of Directors
Commerce Bank of Virginia
11500 West Broad Street
Richmond, Virginia 23233
Dear Board Members:
In connection with the proposed acquisition of Commerce Bank of
Virginia ("CBOV") by Community Bankshares Incorporated ("CBI") (the
"Reorganization"), you have asked us to render an opinion as to whether the
financial terms of the Reorganization as provided in the Agreement and Plan of
Reorganization, dated as of December 12, 1995 among such parties (the
"Agreement"), and the Plan of Share Exchange attached thereto as Exhibit A (the
"Share Exchange"), are fair, from a financial point of view, to the stockholders
of CBOV. Under the terms of the Agreement and Share Exchange, holders of all
outstanding shares of CBOV stock will receive consideration equal to 1.4044 CBI
shares prior to the effective date of the Reorganization (the "Reorganization
Effective Date") for each CBOV share, subject to adjustment under certain
circumstances, with cash being paid in lieu of fractional shares.
McKinnon is an investment banking firm that specializes in Virginia
community banks. In eight years McKinnon has been lead managing underwriter in
approximately twenty public stock offerings for Virginia community banks and has
served as financial advisor, including providing fairness opinions, to numerous
Virginia community banks. McKinnon, as part of its investment banking business,
is engaged in the evaluation of businesses, particularly banks, and their
securities, in connection with mergers and acquisitions, initial public
offerings, private placements and evaluations for estates and corporate
recapitalizations. McKinnon is also a market maker in Virginia community bank
stocks listed on NASDAQ and the NNOTC Bulletin Board. McKinnon believes it has a
thorough working knowledge of the banking industry throughout Virginia.
In developing our opinion, we have among other things, reviewed and
analyzed material bearing upon the financial and operating conditions of CBI,
CBOV, and, on a pro forma basis, CBI and CBOV combined, and material proposed in
connection with the Agreement and Share Exchange, including, among other things,
the following:
D-1
<PAGE>
(1) the Agreement and Share Exchange, dated as of December 12, 1995
among CBI and CBOV;
(2) CBI's and CBOV's financial results for fiscal years 1989 through
1995, and certain documents and information we deem relevant to our analysis;
(3) held discussions with senior management of CBI and CBOV regarding
past and current business operations of, and outlook for, CBI, CBOV, including
trends, the terms of the proposed Reorganization, and related matters;
(4) reviewed the reported price and trading activity of CBI and CBOV
Common Stock and compared financial and stock market information (when
available) for CBI and CBOV with similar information for certain other
companies, the securities for which are publicly traded;
(5) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part; and
(6) performed such other studies and analyses as we considered
appropriate, including an analysis of the pro forma financial impact of the
Merger on CBI and CBOV.
(7) the Form S-4 Registration Statement filed with the Securities and
Exchange Commission in connection with the Reorganization, which contains the
CBI Proxy Statement and CBI Prospectus; and
(8) reviewed other published information, performed certain financial
analyses and considered other factors and information which we deem relevant.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of CBI and CBOV. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of CBI or CBOV. With respect to financial forecasts, we have relied on
information furnished to us by CBI and CBOV and we have assumed that they have
been reasonably prepared and reflect the best currently available estimates of
CBI's and CBOV's management as to the expected future financial performance of
CBI and CBOV, as the case may be. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience
D-2
<PAGE>
in business valuation in general.
We have been retained by you as a financial advisor to CBOV with
respect to the proposed Reorganization. In the normal course of business
McKinnon & Company, Inc. is a market maker in the common stock of CBI listed on
the NNOTC Bulletin Board, and principals of McKinnon & Company, Inc. and/or its
affiliates own share of CBI Common Stock. Our opinion is directed to the Board
of Directors of CBOV. We did not recommend the structure of, participate in any
of the negotiations surrounding, or give any opinion regarding the business
reasons for doing this proposed Reorganization.
On the basis of our analysis and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof, the terms
of the Share Exchange are fair, from a financial point of view, to the holders
of CBOV Common Stock.
Very truly yours,
McKinnon & Company, Inc.
D-3
<PAGE>
Code of Virginia (1950), as amended
Title 13.1
Chapter 9
Article 15.
Dissenters' Rights.
SS. 13.1-729. DEFINITIONS.
In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 13.1-730 and who exercises that right when and in the
manner required by ss.ss. 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 13.1-730. RIGHT TO DISSENT.
A. A shareholder is entitled to dissent from, and obtain payment of
the fair value of his shares in the event of, any of the following corporate
actions:
1. Consummation of a plan of merger to which the corporation
is a party (i) if shareholder approval is required for the merger by
ss. 13.1-718 or the articles of incorporation and the shareholder is
entitled to vote on the merger or (ii) if the corporation is a
subsidiary that is merged with its parent under ss. 13.1-719;
2. Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation if the shareholder was entitled
to vote on the sale or exchange or if the sale or exchange was in
furtherance 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
E-1
<PAGE>
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 (ii) held by at least 2,000 record
shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share
exchange to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date
fixed to determine the shareholders entitled to receive notice of and
to vote at the meeting at which the plan of merger or share exchange is
to be acted on, were either listed subject to notice of issuance on a
national securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as
set forth in subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms
are defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
SS. 13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
A. A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
SS. 13.1-732. NOTICE OF DISSENTERS' RIGHTS.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under ss. 13.1-730
is taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall
E-2
<PAGE>
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.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and
when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
3. Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial
ownership of the shares before or after that date;
4. Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty nor more than
sixty days after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
SS. 13.1-735. DUTY TO DEMAND PAYMENT.
A. A shareholder sent a dissenters' notice described in ss. 13.1-734
shall demand payment, certify that he acquired beneficial ownership of the
shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of ss. 13.1-734, and, in the
case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
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
E-3
<PAGE>
rights of a shareholder except to the extent that these rights are canceled or
modified by the taking of the proposed corporate action.
SS. 13.1-737. PAYMENT.
A. Except as provided in ss. 13.1-738, within thirty days after receipt
of a payment demand made pursuant to ss. 13.1-735, the corporation shall pay the
dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the effective date of
the corporate action creating dissenters' rights, an income statement
for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair
value of the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment
under ss. 13.1-739; and 4. A copy of this article.
SS. 13.1-738. AFTER-ACQUIRED SHARES.
A. A corporation may elect to withhold payment required by ss. 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss. 13.1-739.
SS. 13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under ss. 13.1-737), or reject the
corporation's offer under ss. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
SS. 13.1-740. COURT ACTION.
A. If a demand for payment under ss. 13.1-739 remains unsettled, the
corporation shall commence a
E-4
<PAGE>
proceeding within sixty days after receiving the payment demand and petition the
circuit court in the city or county described in subsection B of this section to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under ss. 13.1-738.
SS. 13.1-741. COURT COSTS AND COUNSEL FEES.
A. The court in an appraisal proceeding commenced under ss. 13.1-740
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed did not act in good faith with respect
to the rights provided by this article.
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A of ss. 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
E-5
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1995
F-1
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Nathan S. Jones, 3rd. President and Chief Executive Officer
Lillian M. Umphlett Vice-President/Chief Financial Officer
DIRECTORS
Louis C. Shell, Chairman
W. Courtney Wells, Vice-Chairman
Phillip H. Kirkpatrick, Secretary-Treasurer
Nathan S. Jones, 3rd., President and Chief Executive Officer
James A. Boyd, D.D.S. Elinor B. Marshall
Lawrence F. DeSouza Alvin L. Sheffield
B. Glenn Holden, M.D. Harold L. Vaughn
F-2
<PAGE>
THE COMMUNITY BANK
OFFICERS
Nathan S. Jones, 3rd. President and Chief Executive Officer
Joseph F. Uzzle Senior Vice-President
Lillian M. Umphlett Vice-President and Cashier
Richard F. Ward, Jr. Vice-President
Deborah L. Eberhardt Assistant Vice-President
Susan P. Ormand Assistant Cashier
Patricia H. Robinson Assistant Cashier
Delores J. Miller Assistant Cashier
Tammy F. Ferguson Assistant Cashier
DIRECTORS
Lawrence F. DeSouza, Chairman
Alvin L. Sheffield, Vice-Chairman
Elinor B. Marshall, Secretary-Treasurer
Nathan S. Jones, 3rd., President and Chief Executive Officer
James A. Boyd, D.D.S. Louis C. Shell
B. Glen Holden, M.D. W. Courtney Wells
Phillip H. Kirkpatrick Harold L. Vaughn
F-3
<PAGE>
C O N T E N T S
- ----------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- ----------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
- ----------------------------------------------------------------
F-4
<PAGE>
MITCHELL,
WIGGINS &
COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
We have audited the accompanying consolidated balance sheets of
Community Bankshares Incorporated, and its subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Corporation'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Bankshares Incorporated, and its subsidiary at December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
MITCHELL, WIGGINS & COMPANY, LLP
Petersburg, Virginia
January 9, 1996
F-5
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ ----------- -----------
<S> <C> <C>
Cash and due from banks $ 3,636,524 $ 3,709,432
Federal funds sold 2,281,000 1,017,000
------------ -----------
TOTAL CASH AND CASH
EQUIVALENTS 5,917,524 4,726,432
Securities available for sale 1,752,646 969,213
Securities held to maturity
(approximate market value,
$12,406,685 in 1995 and
$7,103,471 in 1994) 12,358,741 7,598,690
Loans, net 65,255,723 61,488,230
Bank premises and equipment, net 1,024,856 1,167,973
Other real estate owned 467,588 274,710
Accrued interest receivable 518,555 371,809
Other assets 841,094 766,071
----------- -----------
$88,136,727 $77,363,128
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $12,683,516 $11,506,655
Interest-bearing demand deposits 21,514,060 24,628,724
Savings deposits 7,409,280 8,555,392
Time deposits, $100,000 and over 6,932,820 4,408,657
Other time deposits 28,673,838 18,981,366
----------- -----------
77,213,514 68,080,794
Accrued interest payable 417,782 335,439
Other liabilities 391,644 351,095
Guaranteed debt of Employee Stock
Ownership Trust 330,000 -
----------- -----------
78,352,940 68,767,328
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Note 15)
STOCKHOLDERS' EQUITY
Capital stock, par value $3;
authorized 4,000,000 shares;
issued 1995 1,150,000 shares;
1994 1,140,000 shares 3,450,000 1,710,000
Surplus - 988,932
Retained earnings 6,645,036 5,911,858
Net unrealized gain (loss)
on available for sale
securities, net of tax 18,751 (14,990)
----------- -----------
10,113,787 8,595,800
Unearned ESOP shares (330,000) -
----------- -----------
9,783,787 8,595,800
----------- -----------
$88,136,727 $77,363,128
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6,355,812 $5,347,803 $4,664,533
Interest on investment
securities:
U.S. Government agencies
and corporations 724,658 630,802 657,976
Other securities 5,504 8,282 5,004
Interest on federal funds sold
and securities purchased
under agreements to resell 276,189 28,629 58,798
---------- ---------- ----------
TOTAL INTEREST INCOME 7,362,163 6,015,516 5,386,311
---------- ---------- ----------
Interest expense:
Interest on deposits 2,883,527 2,226,620 2,197,885
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 6,465 5,287 763
---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,889,992 2,231,907 2,198,648
---------- ---------- ----------
NET INTEREST INCOME 4,472,171 3,783,609 3,187,663
Provision for loan losses 247,000 66,000 120,000
---------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 4,225,171 3,717,609 3,067,663
---------- ---------- ----------
Other income:
Service charges, commissions
and fees 672,042 738,357 794,417
Security gains 29,763 47,800 16,000
Loss on sale of other real
estate - (33,980) -
Other operating income 50,748 49,036 48,358
---------- ---------- ----------
TOTAL OTHER INCOME 752,553 801,213 858,775
---------- ---------- ----------
</TABLE>
(continued)
F-7
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Other expenses:
Salaries, wages and
employee benefits $1,395,308 $1,329,570 $1,197,749
Net occupancy expense 138,535 150,818 161,290
Furniture and equipment
expense 193,786 207,114 185,400
Other operating expenses 232,430 235,675 176,951
Insurance, general 25,685 75,675 48,748
Professional fees 107,329 48,703 70,559
Director's fees 102,604 98,552 92,131
FDIC assessments 69,734 150,693 136,789
Postage 67,087 86,491 76,438
Stationery and supplies 75,695 65,310 72,296
Taxes 90,443 98,190 62,619
----------------------------------
TOTAL OTHER EXPENSES 2,498,636 2,546,791 2,280,970
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,479,088 1,972,031 1,645,468
Income taxes 856,092 660,019 566,553
---------- ---------- ----------
NET INCOME $1,622,996 $1,312,012 $1,078,915
========== ========== ==========
Earnings per common and common
equivalent share $ 1.34 $ 1.10 $ 0.95
========== ========== ==========
Earnings per common share,
assuming full dilution $ 1.34 $ 1.10 $ 0.95
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
SECURITIES UNEARNED
CAPITAL RETAINED GAIN ESOP
STOCK SURPLUS EARNINGS (LOSS) SHARES
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $1,713,000 $ 995,934 $3,805,931 $ - $ -
Net income for the
year ended December
31, 1993 - - 1,078,915 - -
Cash dividends
declared, $.10 per
share (based on
1,140,000 shares - - (114,000) - -
outstanding)
Purchase of 1,000
shares of common
stock (3,000) (7,002) - - -
----------- ---------- ----------- ----------- ----------
Balance, December 31, 1,710,000 998,932 4,770,846 - -
1993
Net income for the
year ended December
31, 1994 - - 1,312,012 - -
Cash dividends
declared, $.15 per
share (based on
1,450,000 shares - (171,000) - -
outstanding) -
Unrealized loss
on available for
sale securities, net - - - (14,990) -
---------- --------- ---------- ----------- ----------
Balance, December 31,
1994 1,710,000 988,932 5,911,858 (14,990) -
Issuance of common
stock pursuant to
exercise of stock
options 15,000 47,500 - - -
Stock split effected
the form of a 100%
stock dividend 1,725,000 (1,036,432) (688,568) - -
Net income for the
year ended
December 31, 1995 - - 1,622,996 - -
Cash dividends
declared, $1.75 per
share (based on
1,150,000 shares
outstanding) - - (201,250) - -
Unrealized gain on
available for sale
securities, net - - - 33,741 -
Leveraged ESOP stock
purchase - - - - (365,500)
Release of ESOP shares 35,500
----------------------------------------------------------------------------------------
$3,450,000 $ - $6,645,036 $ 18,751 $(330,000)
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,622,996 $1,312,012 $1,078,915
Adjustments to reconcile net
income to net cash provided
by operating
activities:
Depreciation 166,159 177,190 158,887
Deferred income taxes (14,294) (68,367) (8,382)
Provision for loan losses 247,000 66,000 120,000
Amortization and accretion of
investment securities 11,991 14,453 5,311
Gain on sale of securities (29,763) (47,800) (16,000)
Gain on sale of other
real estate - 33,980 -
Loss on sale of bank premises
and equipment (26,975) (14,181) (7,500)
Changes in operating assets and
liabilities:
Increase in accrued interest
receivable (146,746) (42,290) (8,559)
Decrease in prepaid expenses 7,675 11,596 10,220
Increase in accrued expenses 90,790 126,385 94,609
Net change in other
operating assets and
liabilities (45,154) 23,801 (4,983)
------------ ----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,883,679 1,592,779 1,422,518
------------ ----------- ------------
INVESTING ACTIVITIES
Proceeds from maturity of
investment securities 2,364,884 2,884,140 4,280,656
Proceeds from sale of investment
securities 78,700 87,800 -
Purchase of investment securities (7,918,174) (1,091,887) (5,906,570)
Net increase in loans (4,196,475) (4,261,535) (5,206,977)
Proceeds from the sale of bank
premises and equipment 98,561 19,750 7,500
Capital expenditures (93,478) (266,074) (88,528)
(Increase) decrease in other
assets (8,530) 26,319 (15,897)
Purchase of other real estate (12,045) - -
------------ ----------- ------------
NET CASH USED IN
INVESTING ACTIVITIES $(9,686,557) $(2,601,487) $(6,898,002)
------------ ------------ ------------
</TABLE>
(continued)
F-10
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in $9,132,720 $ (834,468) $ 7,195,287
deposits
Dividends paid (201,250) (171,000) (114,000)
Redemption of common stock - - (10,002)
Net proceeds from issuance
of common stock 62,500 - -
---------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES) 8,993,970 (1,005,468) 7,071,285
---------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,191,092 (2,014,176) 1,595,781
Cash and cash equivalents,
beginning 4,726,432 6,740,608 5,144,827
---------- ----------- -----------
Cash and cash equivalents, ending $5,917,524 $ 4,726,432 $ 6,740,608
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid $2,807,649 $ 2,204,327 $ 2,235,248
========== =========== ===========
Income taxes paid $ 923,836 $ 663,000 $ 583,601
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Acquisition of other real estate:
Purchase price $ 229,027 $ - $ -
Reduction of loans (216,982) - -
---------- ----------- -----------
CASH PAID TO ACQUIRE
OTHER REAL ESTATE $ 12,045 $ - $ -
========== =========== ===========
Sale of other real estate:
Sales price, net of
closing cost $ 35,000 $ 131,235 $ -
Increase in loans (35,000) (131,235) -
---------- ----------- -----------
CASH PROCEEDS FROM SALE
OF OTHER REAL ESTATE $ - $ - $ -
========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Community Bankshares Incorporated is a one bank holding
company headquartered in Petersburg, Virginia. The Corporation's subsidiary, The
Community Bank, provides a variety of financial services to individuals and
corporate customers from its four branches located throughout Southside
Virginia.
The Community Bank's subsidiary, Community Title Insurance Agency, Inc., is a
corporation organized under the laws of the Commonwealth of Virginia. The
Company's primary purpose is to own a partnership interest in a title insurance
company.
Consolidation and basis of financial statement presentation: The accompanying
consolidated financial statements include the accounts of Community Bankshares
Incorporated, and its subsidiary, The Community Bank, including its subsidiary,
Community Title Insurance Agency, Inc. All significant intercompany transactions
and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management uses estimates and assumptions. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. A substantial portion of the Corporation's loans are
secured by real estate in local markets. In addition, foreclosed real estate is
located in this same market. Accordingly, the ultimate collectibility of a
substantial portion of the Corporation's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Cash and cash equivalents: For purposes of reporting the consolidated statements
of cash flows, the Corporation includes cash on hand, amounts due from banks,
federal funds sold and all highly liquid debt instruments purchased with a
maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash flows from deposits and loans 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.
Accounting change and securities: Effective January 1, 1994, the Corporation
adopted Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities. This Statement
establishes accounting and reporting standards for investments in debt
securities and investments in equity securities that have readily determinable
fair values. SFAS No. 115 requires that securities be classified as either Held
to Maturity, Available for Sale, or Trading.
Securities are classified as held to maturity when management has the positive
intent and the Bank has the ability at the time of purchase to hold them until
maturity. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the straight-line method over
their contractual lives. If the interest method of accounting for amortization
of premiums and accretion of discounts was used, it would not have a material
effect on the consolidated financial statements. Gains and losses on the sale of
such securities are determined by the specific identification method.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
accounted for at market value on an aggregate basis. These include securities
used as part of the Bank's asset/liability management strategy and may be sold
in response to changes in interest rates, prepayment risk, the need or desire to
increase capital, to satisfy regulatory requirements and other similar factors.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Realized gains and
losses of securities available for sale are included in net securities gains
(losses) based on the specific identification method.
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. The Corporation held no trading securities during the years
ended December 31, 1995, 1994, and 1993.
Accounting change and loans and allowance for loan losses: Loans are stated at
the amount of unpaid principal, reduced by unearned discount and fees and an
allowance for possible loan losses.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is accrued
daily on the outstanding balances.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Bank makes periodic credit reviews of the loan portfolio and
considers current economic conditions, historical loss experience, review of
specific problem loans and other factors in determining the adequacy of the
allowance balance.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is generally amortizing these amounts over the average
contractual life.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1995, the Corporation adopted the SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. This Statement, as amended by SFAS No.
118, generally requires impaired loans to be measured on the present value of
expected future cash flows discounted at the loan's effective interest rate or
as an expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
Bank does not aggregate loans for risk classification.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. Loans may be returned to accrual status when all
principal and interest amounts contractually due are reasonably assured of
repayment.
When a loan is classified as nonaccrual, all interest receivable on that
particular loan is charged back to income at that time. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. On charged-off loans, cash receipts in excess of the
amount charged to the allowance for loan losses is recognized as income on the
cash basis.
Individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement also may be based on observable
market prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. The
Bank does not aggregate loans for risk classification. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for credit
losses. All impaired loans are included in nonaccrual loans, therefore, there is
no impact on the comparability of credit risk information.
The basic policy of the Bank is to charge off loans when the loss can be readily
determined. Changes in the allowance for loan losses relating to impaired loans
are charged or credited to the provision for loan losses.
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.
<TABLE>
<CAPTION>
YEARS
<S> <C>
Buildings and improvements 5 - 50
Furniture and fixtures 3 - 20
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreclosed properties: Foreclosed properties represents real estate held for
resale acquired through foreclosure or other proceedings. Foreclosed properties
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 foreclosure is charged to the allowance
for loan losses. Property is evaluated regularly to ensure the recorded amount
is supported by its current fair value and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as
necessary and are charged to expense.
Income taxes: The provision for income taxes relates to items of revenue and
expenses recognized for financial accounting purposes during each of the years.
The actual current tax liability may be more or less than the charge against
earnings due to the effect of deferred 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. As explained
in Note 6 to the consolidated financial statements, during the year ended
December 31, 1993, the Corporation changed its method of accounting for deferred
income taxes.
Earnings per share: All per share calculations are based on the weighted average
number of shares outstanding of common and common equivalent shares during each
year. Calculations are based on 1,208,672 shares outstanding in 1995, 1,195,026
shares outstanding in 1994, and 1,140,076 shares outstanding in 1993.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Current accounting developments: The Financial Accounting Standards Board has
issued two Statements, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of and SFAS No. 123, Accounting
for Stock-Based Compensation. The accounting requirements for these Statements
are effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Bank will estimate
future undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the asset, an important loss is recognized.
Otherwise, an impairment loss is not recognized.
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of the employer's stock. This Statement provides a fair value based method
to measure compensation cost at the grant date based on the value of the award
and is recognized over the service period.
The Bank intends to adopt SFAS No. 121 and No. 123 beginning
January 1, 1996, and anticipates no material effect on its
results of operations upon the adoption of these Statements.
Reclassifications: Various items in the consolidated balance sheet at December
31, 1994 have been reclassified to conform to the classifications used at
December 31, 1995.
Various items in the consolidated statements of income and cash flows for the
years ended December 31, 1994 and 1993 have been reclassified to conform to the
classifications used at December 31, 1995. These reclassifications have no
effect on net income.
NOTE 2. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is required to maintain average reserve and clearing balances in cash
with the Federal Reserve Bank. The total of these balances, after receiving
credit for vault cash on hand, was approximately $51,000 and $29,000 at December
31, 1995 and 1994, respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
The amortized cost and estimated market value of securities available for sale
at December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- --------- --------- ----------
Obligations of:
U. S. Agency $1,583,185 $ 34,417 $ (6,006) $1,611,596
Other securities 141,050 - - 141,050
---------- --------- --------- ---------
$1,724,235 $ 34,417 $ (6,006) $1,752,646
========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- --------- ---------
Obligations of:
U. S. Agency $ 801,937 $ 3,942 $(29,916) $ 775,963
Other securities 189,988 3,262 - 193,250
---------- --------- --------- ---------
$ 991,925 $ 7,204 $(29,916) $ 969,213
========== ========= ========= =========
</TABLE>
The amortized cost and estimated market values of securities available for sale
at December 31, 1995, by expected maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year but less than five years - -
Due after five years but less than ten years 289,129 287,428
Due after ten years 1,435,106 1,465,218
---------- ----------
$1,724,235 $1,752,646
========== ==========
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES (CONTINUED)
Proceeds from sales of securities available for sale were $78,700 and $87,800
during 1995 and 1994, respectively, resulting in gross gains of $29,763 and
$47,800 and no losses. There were no proceeds from sale of securities during
1993. No gross gains or losses were realized during the year ended December 31,
1993.
The amortized cost and estimated fair value of securities being held to maturity
at December 31 were:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of:
U. S. Agency $12,358,741 $ 129,640 $ (81,696) $12,406,685
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of:
U. S. Agency $ 7,598,690 $ 8,135 $ (504,354) $ 7,103,471
=========== ========== =========== ===========
</TABLE>
The amortized cost and estimated market values of securities being held to
maturity at December 31, 1995, by expected maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year but less than five years 451,863 460,133
Due after five years but less than ten years 1,125,048 1,129,144
Due after ten years 10,781,830 10,817,408
----------- -----------
$12,358,741 $12,406,685
=========== ===========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES (CONTINUED)
Securities with an amortized cost of $1,350,495 and $1,632,340 at December 31,
1995 and 1994, respectively, and a market value of $1,330,647 and $1,500,693 at
December 31, 1995 and 1994, respectively, were pledged to secure public deposits
and for other purposes as required by law.
NOTE 4. LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Commercial $ 6,304,047 $ 6,702,335
Installment 4,362,203 4,524,976
Real estate 56,500,916 52,266,324
------------ ------------
67,167,166 63,493,635
Less unearned discount (1,148,964) (1,280,514)
------------ ------------
66,018,202 62,213,121
Allowance for loan losses (762,479) (724,891)
------------ ------------
LOANS, NET $65,255,723 $61,488,320
============ ============
</TABLE>
An analysis of the transactions in the allowance for loan losses is given below:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of
year $ 724,891 $ 608,050 $ 568,849
Loans charged off (243,934) (61,774) (122,452)
Recoveries credited to
reserve 34,522 112,615 41,653
Provision charged to
operations 247,000 66,000 120,000
----------- ----------- -----------
Balance, end of year $ 762,479 $ 724,891 $ 608,050
=========== =========== ===========
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS (CONTINUED)
At December 31, 1995, the Bank had loans totaling approximately $426,000 for
which impairment had been recognized. Of the total loans impaired $64,000 were
valued on the present value of future cash flows and $362,000 were valued
according to the underlying collateral. The average balance of the impaired
loans amounted to approximately $460,500 for the year ended December 31, 1995.
The allowance for loan losses related to these loans totaled approximately
$174,000 at December 31, 1995. The following is a summary of cash receipts on
these loans and how they were applied in 1995:
Cash receipts applied to reduce
principal balance $14,683
Cash receipts recognized as
interest income 10,241
--------
Total cash receipts $24,924
=======
At December 31, 1995 and 1994, the Bank had nonaccrual loans of approximately
$280,000 and $564,000, respectively. If interest on these loans had been
recognized at the original interest rates, interest income would have
increased approximately $12,000 and $2,000 in 1995 and 1994, respectively.
NOTE 5. BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Land $ 231,470 $ 275,040
Bank premises 1,010,126 1,079,903
Furniture and equipment 1,486,261 1,484,816
------------ -----------
$ 2,727,857 $ 2,839,759
Less accumulated 1,703,001 1,671,786
------------ -----------
depreciation
$ 1,024,856 $ 1,167,973
============ ===========
</TABLE>
NOTE 6. INCOME TAXES
Effective January 1, 1993, the Corporation adopted SFAS No. 109, Accounting for
Income Taxes. As explained in Note 1, SFAS No. 109 adopts a liability method
that requires the recognition of deferred tax assets and liabilities for the
expected future consequences of events that have been recognized in the
Corporation's financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than enactments of changes in tax laws or rates. Previously, the Corporation
used a liability method under SFAS No. 96, but that method gave no recognition
to future events other than the recovery of assets and settlement of liabilities
at their reported amounts.
The cumulative effect of adopting SFAS No. 109 at the beginning of 1993 was
deemed to be immaterial and is included in the income tax provision for the year
ended December 31, 1993.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The components of the income tax provision for the years ended December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Currently payable $870,386 $728,386 $574,935
Deferred (14,294) (68,367) (8,382)
-----------------------------------------
$856,092 $660,019 $566,533
=========================================
</TABLE>
A reconciliation of the expected income tax expense computed at 34 percent to
the income tax expense included in the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Tax provision computed applying
current Federal income tax
rates to income before income
taxes $842,890 $670,491 $559,459
Other 13,202 (10,472) 7,094
------------------------------------------------
$856,092 $660,019 $566,553
================================================
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
The deferred income taxes result from timing differences in the recognition of
certain income and expense items for tax and financial reporting purposes. The
sources of these timing differences and their related tax effect are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C>
Difference between the depreciation methods
used for financial statements and for
income tax purposes $ 11,992 $ (3,590) $ (2,812)
Difference between loan loss provision charged
to operating expense and the bad debt
deduction taken for income tax purposes (10,539) (41,966) (11,153)
Accretion of discount recognized on financial
statements but not recognized for income
tax purposes until realized 708 749 2,192
Other timing differences - - 3,391
Deferred compensation (16,455) (23,560) -
--------------------------------------------------
$(14,294) $(68,367) $ (8,382)
==================================================
</TABLE>
Net deferred tax assets consist of the following components as of December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $206,999 $196,460
Deferred compensation 42,936 26,481
Property and equipment - 4,131
Unrealized loss on available for sale securities - 7,722
------------------------------
$249,935 $237,794
------------------------------
Deferred tax liabilities:
Investment securities $ 9,669 $ 8,961
Property and equipment 7,861 -
Unrealized gain on available for sale securities 9,660 -
------------------------------
$ 27,190 $ 8,961
------------------------------
Net deferred tax assets (included in other taxes) $222,745 $225,833
==============================
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
During the year ended December 31, 1994, management decreased its deferred tax
asset valuation allowance by $17,000 due to management's expectations of future
tax benefits.
NOTE 7. DEFERRED COMPENSATION AGREEMENTS
The Bank has adopted deferred compensation agreements for certain officers
providing for payments upon retirement, death or disability. These agreements
consist of individual contracts with specific terms determined on an
individual-by-individual basis. The estimated actuarial values of the benefits
are being charged to operations over the period from the effective dates of each
agreement to the normal retirement dates of the officers.
The amount charged to operations in 1995, 1994 and 1993, was $44,201, $20,412
and $18,168, respectively.
These agreements do not qualify under the Internal Revenue Code, and therefore
tax deductions are allowable only when benefits are paid. Appropriate provision
has been made for deferred income taxes associated with the deferred
compensation liability.
The lives of the officers for which deferred compensation agreements have been
adopted have been insured for amounts sufficient to discharge the obligations
thereunder.
Subsequent to year end, the Board of Directors voted to cancel all individual
contracts that were not vested as of December 31, 1995. In addition, the Board
voted to accelerate the liquidation of the vested contract by making full and
complete payment by January 31, 1996. Accordingly, the present value of such
payment has been accrued and reflected in the accompanying financial statements.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EMPLOYEE STOCK OWNERSHIP PLAN WITH 401(K) PROVISIONS
Effective January 1, 1993, the Corporation established an Employee Stock
Ownership Plan with 401(K) provisions by restating, amending and consolidating
the Employee Stock Ownership Plan originally effective January 1, 1987, and the
Profit-Sharing and Thrift Plan originally effective December 31, 1981. All
participants of the pension plans are eligible to participate. Thereafter, each
employee will become eligible to participate in the plan on the first
anniversary date, December 31, following their initial date of service. The
employee must be at least 18 years old and be employed in a full-time position
requiring at least 1,000 hours of service for the plan year ending on that
anniversary date. The Corporation matches 75% of employee contributions up to 5%
of the participant's compensation. Annual contributions to the ESOP are made at
the discretion of the Board of Directors.
During the year ended December 31, 1995, the ESOP purchased additional shares
through the proceeds of a $365,000 direct bank loan. The shares purchased were
pledged as collateral for its debt. As the debt is repaid, shares are released
and allocated to participants. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the shares pledged are reported as
unearned ESOP shares in the balance sheet. As shares are released, the Company
reports compensation expense equal to the current market price of the shares,
and the shares then become outstanding for earnings per share (EPS) computation.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated ESOP shares are recorded as a reduction of
retained earnings. Dividends on unallocated ESOP shares are recorded as a
reduction of debt and interest or as compensation costs if paid to participants
or added to their accounts. There were no dividends paid during 1995 after the
leveraged transaction occurred.
Compensation expense for the 401(k) match and the ESOP was $105,000, $90,000 and
$72,000 for the three years ended December 31, 1995, 1994 and 1993,
respectively. The ESOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------------
<S> <C> <C>
Allocated shares 138,344 135,452
Unreleased 30,515 -
--------------------------------
168,859 135,452
================================
Fair value of unreleased shares $ 404,327 $ -
================================
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. AGREEMENT AND PLAN OF REORGANIZATION
On December 12, 1995, the Board of Directors unanimously voted to enter into an
Agreement and Plan of Reorganization (the Plan) with Commerce Bank of Virginia
to combine their businesses. Commerce Bank of Virginia is a Virginia state bank
with its principal office located in Richmond, Virginia. The combination of the
two companies will be consummated through a Share Exchange under Virginia law.
Under the terms of the Plan, Commerce Bank of Virginia would become a
wholly-owned subsidiary of Community Bankshares Incorporated. For each share
owned, the shareholders of Commerce Bank of Virginia would receive 1.4044 shares
of stock of Community Bankshares Incorporated. It is anticipated that the
transaction will qualify for and be accounted for as a pooling of interests. The
stockholders of Community Bankshares Incorporated and Commerce Bank of Virginia
will be asked to consider and vote on the proposed Plan at their Annual
Meetings. If adopted by the shareholders, it is anticipated that the transaction
will become effective late in the second quarter of 1996. The proposed
transaction is subject to approval by regulatory authorities.
If the transaction had been consummated prior to December 31, 1995, the
accompanying financial statements would have included the financial position and
results of operations of Commerce Bank of Virginia. Interest income, net income,
and net income per share for the three years ended December 31, 1995 would have
been as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income $12,682 $10,220 $ 8,896
Net income $ 2,355 $ 1,799 $ 1,357
Earnings per common and common $ 1.27 $ 1.00 $ 0.79
equivalent share
Earnings per common share, assuming $ 1.27 $ 1.00 $ 0.79
full dilution
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. EMPLOYMENT CONTRACT
The Corporation has entered into an employment contract with Mr. Nathan S. Jones
3rd its President and Chief Executive Officer through June 30, 1998. The
contract will renew for successive terms of one year each if it is not expressly
terminated by either of the parties. The contract provides for a minimum annual
salary, adjusted at the discretion of the Board of Directors. If, during the
term of the contract, the Corporation terminates Mr. Jones' employment without
cause, the Corporation must continue Mr. Jones' salary and benefits for six
months. In addition, the contract provides for increased severance pay if Mr.
Jones' employment terminates within three years after a change in control of the
Corporation. As of December 31, 1995, the cash amount payable to Mr. Jones if
his employment was terminated after a change in control would be approximately
$360,000.
NOTE 11. INCENTIVE COMPENSATION PLANS
During 1993, a Cash Incentive Plan was established for certain employees and
directors of the Bank. The Plan sets forth predetermined award pools for each
group of participants. The level of the award pool is dependent upon the Bank
attaining certain returns on average assets for the year. The amounts awarded
under the Plan for the years ended December 31, 1995, 1994 and 1993 were
$146,294, $151,860, and $105,487, respectively.
NOTE 12. INCENTIVE STOCK OPTION AND NONSTATUTORY STOCK OPTION PLAN
During 1993, the Board of Directors adopted a Stock Plan that provides for the
grant of Incentive Stock Options and the grant of Nonstatutory Stock Options and
Stock Appreciation Rights. This Plan was adopted to encourage key officers and
directors to acquire or to increase their acquisition of the Company's common
stock, thus increasing their personal and proprietary interest in the Company's
continued success. The options were granted at the market value on the date of
each grant. Options may be exercised from date of grant through the period
ending July 20, 2003 and October 18, 2004 for Grants A and B,
respectively.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCENTIVE STOCK OPTION AND NONSTATUTORY STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
Shares Under Option
------------------------------------------------------
1995 1994
------------------------------------------------------
GRANT A GRANT B Grant A Grant B
------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 170,000 10,000 170,000 -
Granted during year at $9.75 - - - 10,000
Exercised during year at $6.25 (10,000) - - -
------------------------------------------------------
Outstanding, end of year (Grant A 160,000 10,000 170,000 10,000
$6.25, Grant B $9.75)
======================================================
</TABLE>
NOTE 13. LIFE INSURANCE
The Bank is owner and designated beneficiary on life insurance in the face
amount of $3,109,000 maintained on certain of its officers and directors. At
December 31, 1995, the cash surrender value of these policies was $481,847 which
is included in other assets.
During the third quarter of 1994, the Bank was notified that the life insurance
carrier for the above policies, Confederation Life Insurance Company, had been
placed under regulatory control. Regulators have said that the insurance company
will continue to pay claims made; however, it will restrict access to cash value
until further notice. Rehabilitators and management are of the opinion that no
losses will occur as a result of the insurance company's rehabilitation and
accordingly, a provision for possible losses due to asset impairment is not
reflected in the accompanying financial statements.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
corporations to disclose the fair value of its financial instruments, whether or
not recognized in the balance sheet, where it is practical to estimate that
value.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates made as of December 31, 1995 are based on relevant market
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Corporation's entire holding of a particular financial instrument. In cases
where quoted market prices are not available, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and short-term instruments approximate those assets' fair values.
Securities available for sale and investment securities: Fair values were based
on quoted market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
Loans: The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics were
considered fair values. For other loans, the fair market values were calculated
by discounting scheduled future cash flows using current interest rates offered
on loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio.
Accrued interest receivable and accrued interest payable: The carrying amounts
reported in the balance sheets for accrued interest receivable and accrued
interest payable approximate their fair values.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, savings, and money market deposits,
was, by definition, equal to the amount payable on demand as of December 31,
1995. The fair value of certificates of deposit was based on the discounted
value of contractual cash flows, calculated using the discount rates that
equaled the interest rates offered at the valuation date for deposits of similar
remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Corporation's financial assets and liabilities to include off-balance sheet
financial instruments as December 31, 1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks, noninterest bearing $ 3,636,524 $ 3,636,524
Federal funds sold and other short-term 2,281,000 2,281,000
investments
Securities available for sale 1,752,646 1,752,646
Investment securities 12,358,741 12,406,685
Loans, net of reserve for credit losses 65,255,723 65,234,223
Accrued interest receivable 518,555 518,555
FINANCIAL LIABILITIES:
Demand and variable rate deposits $41,816,367 $41,816,367
Fixed-rate certificates of deposit 35,397,147 35,838,147
Accrued interest payable 417,782 417,782
</TABLE>
At December 31, 1995, the Corporation had outstanding standby letters of credit
and fixed and variable rate commitments to extend credit. For fair value, the
fixed rate loan commitments were considered based on committed rates versus
market rates for similar transactions. Due to market constraints, rates have
remained relatively unchanged on these products, therefore, management has
determined fair value to be the same as the committed value. Standby letters of
credit and variable rate commitments are generally exercisable at the market
rate prevailing at the date the underlying transaction will be completed, and
therefore, they were deemed to have no current fair market value.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. 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 consolidated 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 at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Commitments to extend credit $ 7,977,000 $ 4,969,000
Standby letters of credit 1,474,000 1,422,000
------------ ------------
$ 9,451,000 $ 6,391,000
------------ ------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The Bank
evaluates each customer's credit-worthiness 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, inventory, properly and equipment,
residential real estate and income-producing commercial properties.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. 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. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The 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.
Fixed-rate commitments were $4,438,000 and $2,593,000 as of December 31, 1995
and 1994, respectively. The average rates charged on the fixed-rate commitments
were 8.5% - 10.5% for the years then ended.
Concentrations of credit risk:
All of the Bank's loans, commitments to extend credit, and standby letters of
credit have been granted to customers within the state and, more specifically,
its local geographic area of Virginia. The concentrations of credit by type of
loan are set forth in Note 4.
NOTE 16. RELATED PARTY TRANSACTIONS
At December 31, 1995, loans to officers and directors and corporations in which
officers and directors own a significant interest totaled $1,672,048. All such
loans were made in the normal course of business on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions.
An analysis of these related party transactions is as follows:
<TABLE>
<CAPTION>
Balance BALANCE
December DECEMBER
31, 1994 Additions Repayments 31, 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Directors $1,328,776 $379,257 $449,033 $1,259,000
Officers and 465,987 429,581 482,521 413,047
Employees
-----------------------------------------------------------------
$1,794,763 $808,838 $931,554 $1,672,047
=================================================================
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. CAPITAL STOCK AND COMMON STOCK SPLIT
On May 16, 1995, the Corporation changed its authorized capital from 1,000,000
shares of $3 par value common stock to 4,000,000 shares of $3 par value common
stock. On July 18, 1995, the Corporation's Board of Directors declared a two for
one split of the common stock effected in the form of a 100% stock dividend on
the outstanding stock to be distributed on August 31, 1995 to the stockholders
of record on July 31, 1995. The par value of the additional shares of common
stock was credited to common stock with reductions from surplus and retained
earnings.
All references in the accompanying consolidated financial statements to the
number of common shares and per share amounts have been restated to reflect the
stock split.
NOTE 18. REGULATORY CAPITAL REQUIREMENTS
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. Under that limitation,
the Bank could have declared additional dividends of approximately $3,567,000 to
the Corporation in 1995.
Banking regulations also require the Bank to maintain certain minimum capital
levels in relation to its assets. Capital is measured using a leverage ratio as
well as based on risk-weighing assets according to regulatory guidelines. A
comparison of the Bank's actual regulatory capitals as of December 31, 1995 and
1994, with minimum requirements, as defined by regulation, is shown below:
<TABLE>
<CAPTION>
Minimum Actual
--------------------------------
Requirements 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Tier 1 risk-based capital 4.0% 14.94% 14.40%
Total risk-based capital 8.0% 16.10% 15.65%
Leverage ratio 3.0% 11.08% 11.11%
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION
Financial statements for Community Bankshares Incorporated (not consolidated)
are presented below.
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Balance Sheets
December, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 82,075 $ 45,361
Investment in subsidiary 10,062,714 8,505,651
Investment securities available for sale - 52,200
Other assets 5,000 5,000
------------------------------------
TOTAL ASSETS $10,149,789 $8,608,212
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Guaranteed debt of Employee Stock Ownership $ 330,000 $ -
Trust
Other Liabilities 36,002 12,412
------------------------------------
TOTAL LIABILITIES 366,002 12,412
====================================
Stockholders' equity:
Common stock, par value $3 per share, authorized
4,000,000 shares; issued 1995 1,150,000
shares; 1994 1,140,000 shares 3,450,000 1,710,000
Surplus - 988,932
Retained earnings 6,645,036 5,911,858
Net unrealized gain on available for sale
securities, net of taxes - 2,153
Net unrealized gain (loss) on securities available
for sale held by subsidiary, net of taxes 18,751 (17,143)
------------------------------------
10,113,787 8,595,800
Unearned ESOP shares (330,000) -
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,783,787 8,595,800
====================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,149,789 $8,608,212
====================================
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ 140,000 $ 171,000 $ 139,000
Unrealized gain on securities - - 16,000
Gain on sale of securities 29,763 47,800 -
------------------------------------------------------------
TOTAL INCOME 169,763 218,800 155,000
------------------------------------------------------------
Expenses:
Professional fees 58,353 12,847 6,095
Supplies 3,782 2,008 1,612
Taxes, miscellaneous 850 850 850
Other 1,949 324 288
------------------------------------------------------------
TOTAL EXPENSES 64,934 16,029 8,845
------------------------------------------------------------
Income taxes (credits) 3,002 10,802 (6,827)
------------------------------------------------------------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 101,827 191,969 152,982
Equity in undistributed income
of subsidiary 1,521,169 1,120,043 925,933
------------------------------------------------------------
NET INCOME $1,622,996 $1,312,012 $1,078,915
============================================================
</TABLE>
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
UNREALIZED
CAPITAL RETAINED SECURITIES UNEARNED
STOCK SURPLUS EARNINGS GAIN (LOSS) ESOP SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $1,713,000 $ 995,934 $3,805,931 $ - $ -
Net income for the year ended
December 31, 1993 - - 1,078,915 - -
Cash dividends declared, $.10 per share
(based on 1,140,000 shares outstanding) - - (114,000) - -
Purchase of 1,000 shares of common stock (3,000) (7,002) - - -
---------------------------------------------------------------------------------------
Balance, December 31, 1993 1,710,000 988,932 4,770,846 - -
Net income for the year ended
December 31, 1994 - - 1,312,012 - -
Cash dividends declared $.15 per share
(based on 1,140,000 shares outstanding) - - (171,000) - -
Unrealized loss on available for sale
securities, net - - - (14,990) -
---------------------------------------------------------------------------------------
Balance, December 31, 1994 1,710,000 988,932 5,911,858 (14,990) -
Issuance of common stock pursuant to
exercise of stock options 15,000 47,500 - - -
Stock split effected in the form of a
100% stock dividend 1,725,000 (1,037,432) (688,568) - -
Net income for the year ended
December 31, 1995 - - 1,622,996 - -
Cash dividends declared, $.175 per share
(based on 1,150,000 shares outstanding) - - (201,250) - -
Unrealized gain on available for sale
securities, net - - - 33,741 -
Leveraged ESOP stock purchase - - - - (365,500)
Release of ESOP shares - - - - 35,500
---------------------------------------------------------------------------------------
$3,450,000 $ - $6,645,036 $ 18,751 $ (330,000)
---------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION (CONTINUED)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,622,996 $1,312,012 $1,078,915
Adjustments to reconcile net income to
net cash provided by operating
activities:
Gain on sale of securities (29,763) (47,800) -
Unrealized gain on securities - - (16,000)
Undistributed earnings of subsidiary (1,521,169) (1,120,043) (925,933)
Changes in operating assets and
liabilities:
(Increase) decrease in other assets - 10,077 (5,075)
Increase (decrease in other liabilities 24,700 11,303 (486)
-------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 96,764 165,549 131,421
-------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of investment
securities 78,700 87,800 -
Purchase of investment securities - (48,938) -
-------------------------------------------------------------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 78,700 38,862 -
-------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock - - (10,002)
Dividends paid (201,250) (171,000) (114,000)
Net proceeds from issuance of common
stock 62,500 - -
-------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (138,750) (171,000) (124,002)
-------------------------------------------------------------
INCREASE IN CASH 36,714 33,411 7,419
Cash, beginning 45,361 11,950 4,531
-------------------------------------------------------------
Cash, ending $ 82,075 $ 45,316 $ 11,950
=============================================================
</TABLE>
F-37
<PAGE>
APPENDIX G
OPINION OF MCKINNON & COMPANY, INC.
May 9, 1996
Board of Directors
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23803-1466
Dear Board Members:
In connection with the proposed acquisition of Commerce Bank of
Virginia ("CBOV") by Community Bankshares Incorporated ("CBI") (the
"Reorganization"), you have asked us to render an opinion as to whether the
financial terms of the Reorganization as provided in the Agreement and Plan of
Reorganization, dated as of December 12, 1995 among such parties (the
"Agreement"), and the Plan of Share Exchange attached thereto as Exhibit A (the
"Share Exchange"), are fair, from a financial point of view, to the stockholders
of CBI. Under the terms of the Agreement and Share Exchange, holders of all
outstanding shares of CBOV stock will receive consideration equal to 1.4044 CBI
shares prior to the effective date of the Reorganization (the "Reorganization
Effective Date") for each CBOV share, subject to adjustment under certain
circumstances, with cash being paid in lieu of fractional shares.
McKinnon is an investment banking firm that specializes in Virginia
community banks. In eight years McKinnon has been lead managing underwriter in
approximately twenty public stock offerings for Virginia community banks and has
served as financial advisor, including providing fairness opinions, to numerous
Virginia community banks. McKinnon, as part of its investment banking business,
is engaged in the evaluation of businesses, particularly banks, and their
securities, in connection with mergers and acquisitions, initial public
offerings, private placements and evaluations for estates and corporate
recapitalizations. McKinnon is also a market maker in Virginia community bank
stocks listed on NASDAQ and the NNOTC Bulletin Board. McKinnon believes it has a
thorough working knowledge of the banking industry throughout Virginia.
In developing our opinion, we have among other things, reviewed and
analyzed material bearing upon the financial and operating conditions of CBI,
CBOV, and, on a pro forma basis, CBI and CBOV combined, and material proposed in
connection with the Agreement and Share Exchange, including, among other things,
the following:
G-1
<PAGE>
(1) the Agreement and Share Exchange, dated as of December 12,
1995 among CBI and CBOV;
(2) CBI's and CBOV's financial results for fiscal years 1989 through
1995, and certain documents and information we deem relevant to our analysis;
(3) held discussions with senior management of CBI and CBOV regarding
past and current business operations of, and outlook for, CBI, CBOV, including
trends, the terms of the proposed Reorganization, and related matters;
(4) reviewed the reported price and trading activity of CBI and CBOV
Common Stock and compared financial and stock market information (when
available) for CBI and CBOV with similar information for certain other
companies, the securities for which are publicly traded;
(5) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part; and
(6) performed such other studies and analyses as we considered
appropriate, including an analysis of the pro forma financial impact of the
Merger on CBI and CBOV.
(7) the Form S-4 Registration Statement filed with the Securities and
Exchange Commission in connection with the Reorganization, which contains the
CBI Proxy Statement and CBI Prospectus; and
(8) reviewed other published information, performed certain financial
analyses and considered other factors and information which we deem relevant.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of CBI and CBOV. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of CBI or CBOV. With respect to financial forecasts, we have relied on
information furnished to us by CBI and CBOV and we have assumed that they have
been reasonably prepared and reflect the best currently available estimates of
CBI's and CBOV's management as to the expected future financial performance of
CBI and CBOV, as the case may be. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience
G-2
<PAGE>
in business valuation in general.
We have been retained by you as a financial advisor to CBI with respect
to the proposed Reorganization. In the normal course of business McKinnon &
Company, Inc. is a market maker in the common stock of CBI listed on the NNOTC
Bulletin Board. Our opinion is directed to the Board of Directors of CBI. We did
not recommend the structure of, participate in any of the negotiations
surrounding, or give any opinion regarding the business reasons for doing this
proposed Reorganization.
On the basis of our analysis and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof, the terms
of the Share Exchange are fair, from a financial point of view, to the holders
of CBI Common Stock.
Very truly yours,
McKinnon & Company, Inc.
G-3
