As filed with the Securities and Exchange Commission on January 22, 1996.
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Community Bankshares Incorporated
(Exact Name of Registrant as Specified in Its Charter)
The Community Bank
200 N. Sycamore Street
Petersburg, Virginia 23804
(804) 861-2320
(Address and Telephone Number of Registrant's Principal Executive Offices)
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Virginia 6060 54-1290793
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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Nathan S. Jones, 3rd
President and Chief Executive Officer
The Community Bank
200 N. Sycamore Street
Petersburg, Virginia 23804
(804) 861-2320
(Name, address and telephone number of agent
for service)
Copies of Communications to:
R. Brian Ball, Esquire
Wayne A. Whitham, Jr., Esquire
Williams, Mullen, Christian & Dobbins
1021 East Cary Street, 16th Floor
Richmond, Virginia 23219
(804) 643-1991
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount Proposed Maximum Proposed Maximum
Securities to to be Offering Price Aggregate Amount of
be Registered Registered (1) Per Share Offering Price (2) Registration Fee
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Common Stock, $3.00 par value 741,473 shares N/A $5,864,671.80 $2,022.30
================================================================================================================================
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(1) Based upon an assumed number of shares that may be issued in the
Share Exchange described in this Registration Statement. The assumed number is
based upon the maximum number of shares of common stock of Commerce Bank of
Virginia that may be issued pursuant to the Share Exchange outstanding
immediately prior to the mergers.
(2) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(f)(2), based on $5,864,671.80, the aggregate book value
of the common stock of Commerce Bank of Virginia to be cancelled in the Share
Exchange, as of September 30, 1995.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
Community Bankshares Incorporated
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Heading or Location in Prospectus of Information
Required by Items in Part I of Form S-4
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Item Number and Caption Heading or Location in Prospectus
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A. Information About the Transaction
1. Forepart of Registration Statement and Outside Front Facing Page of Registration Statement;
Cover of Page of Prospectus Cross Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Pro- Available Information; Table of Contents
spectus
3. Risk Factors, Ratio of Earnings to Fixed Charges, Summary; Selected Financial Information;
and Other Information Pro Forma Condensed Financial
Information (Unaudited); The Shareholder
Meetings; The Reorganization; Commerce
Bank of Virginia
4. Terms of the Transaction Summary; The Reorganization; Description
of CBI Capital Stock
5. Pro Forma Financial Information Pro Forma Condensed Financial
Information (Unaudited)
6. Material Contacts With the Company Being Acquired Not Applicable
7. Additional Information Required for Reoffering by Not Applicable
Persons and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel Experts; Legal Opinion
9. Disclosure of Commission Position on Indemnifica- Not Applicable
tion for Securities Act Liabilities
B. Information About the Registrant
10. Information With Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Reference Not Applicable
12. Information With Respect to S-2 or S-3 Registrants Not Applicable
<PAGE>
13. Incorporation of Certain Information by Reference Not Applicable
14. Information With Respect to Registrants Other Than Community Bankshares Incorporated;
S-3 or S-2 Registrants Selected Financial Information; Community
Bankshares Incorporated Management's
Discussion and Analysis of Financial
Condition and Results of Operations
C. Information About the Company Being Acquired
15. Information With Respect to S-3 Companies Not Applicable
16. Information With Respect to S-2 or S-3 Companies Not Applicable
17. Information With Respect to Companies Other Than Commerce Bank of Virginia; Selected
S-2 or S-3 Companies Financial Information; Commerce Bank of
Virginia Management's Discussion and
Analysis of Financial Condition and Results
of Operations
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations The Shareholder Meetings; The
Are to be Solicited Reorganization; Community Bankshares
Incorporated; Commerce Bank of Virginia
19. Information if Proxies, Consents or Authorizations Not Applicable
Are Not to be Solicited, or in an Exchange Offer
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<PAGE>
[LOGO]
Community Bankshares Incorporated
March __, 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 April 16, 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 April 16, 1996 at 3:30 p.m., local time
The Annual Meeting of Shareholders of Community Bankshares Incorporated
("CBI") will be held on April 16, 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 March 1, 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
March __, 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
March __, 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 April 16, 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 April 16, 1996 at 10:00 a.m., local time
The Annual Meeting of Shareholders of Commerce Bank of Virginia ("CBOV")
will be held on April 16, 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 March 1, 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
March __, 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 January 9, 1996, CBI Common Stock closed at $12.75 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
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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 March __, 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 March __, 1996.
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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 1994 Audited Financial
Statements. Copies of CBI's Annual Report on Form 10-K for the year ended
December 31, 1994, and CBI's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1995, June 30, 1995, and September 30, 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
_____ __, 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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TABLE OF CONTENTS
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Introduction.............................................................................................. 1
Available Information..................................................................................... 3
Summary................................................................................................... 6
The Companies........................................................................................... 6
The Shareholder Meetings................................................................................ 6
The Reorganization...................................................................................... 6
Comparative Per Share Information......................................................................... 11
Selected Financial Information............................................................................ 13
CBI Selected Historical Financial Information........................................................... 14
CBOV Selected Historical Financial Information.......................................................... 15
CBI and CBOV Selected Historical Pro Forma Financial Information........................................ 16
The Shareholder Meetings.................................................................................. 17
The Reorganization........................................................................................ 21
Investment Advisor Opinions............................................................................... 35
Commerce Bank of Virginia................................................................................. 43
Commerce Bank of Virginia Election of Directors; Management............................................... 48
Commerce Bank of Virginia Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 54
Independent Accountants................................................................................... 80
Other Business............................................................................................ 80
Community Bankshares Incorporated ........................................................................ 81
Community Bankshares Incorporated Election of Directors; Management....................................... 85
Community Bankshares Incorporated Proposal to Amend Articles of Incorporation............................. 92
Community Bankshares Incorporated Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 93
Relationship With Independent Certified Public Accountants................................................ 113
Description of CBI Capital Stock.......................................................................... 114
Comparative Rights of Security Holders.................................................................... 116
Supervision and Regulation................................................................................ 121
Pro Forma Condensed Financial Information (Unaudited)..................................................... 127
Pro Forma Condensed Balance Sheets...................................................................... 127
Pro Forma Condensed Statements of Income ............................................................... 130
Notes to Pro Forma Condensed Financial Information...................................................... 135
Cost and Means of Proxy Solicitation...................................................................... 135
Annual Report and Financial Statements.................................................................... 135
Other Matters............................................................................................. 136
Experts................................................................................................... 136
Legal Opinion............................................................................................. 136
Shareholder Nominations and Proposals..................................................................... 136
Appendices
General
A Agreement and Plan of Reorganization................................................................... A-1
B Amendment to CBI Articles of Incorporation............................................................. B-1
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Commerce Bank of Virginia
C Commerce Bank of Virginia Financial Statements (including the audited
December 31, 1994 Financial Statements and the unaudited
September 30, 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, 1994 Financial Statements and the unaudited
September 30, 1995 Financial Statements)............................................................. F-1
G Opinion of McKinnon & Company, Inc................................................................... G-1
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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 September 30, 1995, CBI had
total assets of $88.6 million, deposits of $78.3 million, and total
stockholders' equity of $9.3 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 September 30, 1995, CBOV had total assets of $67.9 million, deposits
of $61.7 million, and stockholders' equity of $5.9 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 April 16, 1996 at 3:30 p.m., local time. Only
holders of record of CBI Common Stock at the close of business on March 1, 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 April 16, 1996 at 10:00 a.m., local
time. Only holders of record of CBOV Common Stock at the close of business on
March 1, 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 December 29, 1995, CBI's closing price on the OTC Bulletin Board was
$13.25, which calculates to a price for CBOV Shareholders of $18.61 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, expire in April, 1996 and are expected to be exercised before the
Effective Date. The exercise prices of the various CBOV Options range from $5.33
to $8.63 per share. Based on the price of CBI Common Stock as of December 29,
1995 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. 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
potential shares of CBI Common Stock which the CBOV directors and executive
officers may receive in aggregate pursuant to the Reorganization, assuming the
exercise of all options, are 274,212 shares, which would have had a value of
approximately $3.63 million as of December 29, 1995. See "The Reorganization -
Interest of Certain Persons in 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."
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
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<PAGE>
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 195,252
shares of CBOV Common Stock, or approximately 37.2% 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."
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 _____ shares of CBI Common Stock, or approximately ___% 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 April 30, 1996, or as soon thereafter as
practicable.
-8-
<PAGE>
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, will deliver 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. For a more complete description of the
federal income tax consequences of the Reorganization, see "The Reorganization -
Federal Income Tax Matters." Due to the individual nature of the tax
consequences of the Reorganization, it is recommended that each CBOV shareholder
consult his or her own tax advisor concerning the tax consequences of the
Reorganization.
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."
-9-
<PAGE>
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. 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."
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. There are no known
trades involving CBOV Common Stock since October 7, 1995.
-10-
<PAGE>
<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
- -----------------------------------------------------------------------------------------------------------------------------
________ __, 1996 $ $ 15.50 $
=============================================================================================================================
</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 October 7, 1995.
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.
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.
-11-
<PAGE>
CBI AND CBOV
<TABLE>
<CAPTION>
For the
Nine Months Ended For the
September 30, Year Ended December 31,
1995 1994 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Common Share:
Net Income:
CBI-historical.............................. $.97 $.77 $1.10 $.95 $.74 $.65
CBOV-historical............................. 1.11 .80 1.13 .68 .83 .42
Pro forma combined ......................... .90 .70 1.00 .79 .69 .53
CBOV pro forma equivalent(1) ............... 1.26 .98 1.40 1.11 .97 .74
Cash Dividends Declared:
CBI-historical .......................... $.175 $.15 $.15 $.10 $.06 $.075
CBOV-historical ......................... - - - - - -
Pro forma combined(2) ................... .11 .10 .10 .07 .05 .05
CBOV pro forma equivalent(1)(2).......... .15 .14 .14 .10 .07 .07
</TABLE>
Book Value At September 30,
1995:
CBI-historical .......................... $ 8.13
CBOV-historical ......................... 11.70
Pro forma combined ...................... 8.21
CBOV pro forma equivalent................ 11.53
- -------------------------
(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.
-12-
<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.
-13-
<PAGE>
CBI Selected Historical Financial Information
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
1995 1994 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income . . . . . . . . . . $ 3,270 $ 2,696 $ 3,784 $ 3,187 $ 2,924 $ 2,681 $ 2,551
Provision for loan losses . . . . . . . $ 81 $ -- $ 66 $ 120 $ 372 $ 260 $ 189
-------------------------------------------------------------------------------
Net interest income after
provision for loan losses . . . . . . $ 3,189 $ 2,696 $ 3,718 $ 3,067 $ 2,552 $ 2,421 $ 2,382
Noninterest income . . . . . . . . . . $ 557 $ 669 $ 801 $ 859 $ 794 $ 681 $ 636
Noninterest expense . . . . . . . . . . $ 1,860 $ 1,918 $ 2,547 $ 2,281 $ 2,058 $ 2,011 $ 1,952
-------------------------------------------------------------------------------
Income before income taxes . . . . . . $ 1,886 $ 1,447 $ 1,972 $ 1,645 $ 1,288 $ 1,091 $ 1,046
Income taxes . . . . . . . . . . . . . $ 703 $ 521 $ 660 $ 566 $ 442 $ 348 $ 385
Net income . . . . . . . . . . . . . . $ 1,183 $ 926 $ 1,312 $ 1,079 $ 846 $ 743 $ 661
Per Share Data (1):
Net income . . . . . . . . . . . . . . $ 0.97 $ 0.77 $ 1.10 $ 0.95 $ 0.74 $ 0.65 $ 0.57
Cash dividends . . . . . . . . . . . . $ 0.18 $ 0.15 $ 0.15 $ 0.10 $ 0.08 $ 0.08 $ 0.08
Book value at period end . . . . . . . $ 8.13 $ 7.22 $ 7.54 $ 6.55 $ 5.71 $ 5.01 $ 4.41
Balance Sheet Data
Total assets . . . . . . . . . . . . . $88,648 $77,973 $77,363 $76,921 $68,686 $60,252 $55,328
Loans, net . . . . . . . . . . . . . . $63,005 $61,520 $61,488 $57,161 $52,074 $43,667 $39,081
Securities . . . . . . . . . . . . . . $12,582 $ 9,102 $ 8,568 $10,437 $ 8,801 $ 9,447 $ 7,529
Deposits . . . . . . . . . . . . . . . $78,314 $69,140 $68,081 $67,926 $60,524 $53,519 $49,473
Stockholder's equity (1) . . . . . . . $ 9,348 $ 8,234 $ 8,596 $ 7,470 $ 6,515 $ 5,761 $ 5,141
Shares outstanding (1) . . . . . . . . 1,150,000 1,140,000 1,140,000 1,140,000 1,142,000 1,150,000 1,166,656
Performance Ratios (2):
Return on average assets . . . . . . . 1.89% 1.59% 1.69% 1.48% 1.28% 1.29% 1.27%
Return on average equity . . . . . . . 17.71% 15.87% 16.25% 15.49% 13.86% 13.71% 13.71%
Net interest margin (3) . . . . . . . . 5.64% 5.11% 5.35% 4.84% 4.92% 5.22% 5.56%
Average loans to deposits . . . 85.71% 87.65% 85.38% 85.38% 82.67% 81.77% 81.80%
Asset Quality Ratios:
Allowance for loan losses to
period end loans . . . . . . . . . . 1.26% 1.08% 1.16% 1.05% 1.09% 1.13% 1.03%
Allowance for loan losses to
nonaccrual loans . . . . . . . . . . 2.87X 35.47X 41.20X 64.77X 11.47X 3.75X 74.11X
Nonperforming assets to period end
loans and other real estate owned . . 2.00% 0.61% 1.32% 1.24% 0.98% 2.77% 1.62%
Net charge-offs (recoveries)
to average loans . . . . . . . . . . -- -0.11% -0.08% 0.15% 0.62% 0.40% 0.17%
</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) Annualized for the nine months ended September 30, 1995 and 1994.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Bank's net yield on
its earning assets.
-14-
<PAGE>
CBOV Selected Historical Financial Information
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
1995 1994 1994 1993 1992 1991 1990
-------------------------------------------------------------
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income . . . . . . . . . . $2,324 $1,974 $2,705 $2,186 $1,871 $1,453 $1,455
Provision for loan losses . . . . . . . $165 $125 $200 $75 $127 $250 $101
-------------------------------------------------------------
Net interest income after
provision for loan losses . . . . . . $2,159 $1,849 $2,505 $2,111 $1,744 $1,203 $1,354
Noninterest income . . . . . . . . . . $259 $309 $430 $264 $241 $311 $172
Noninterest expense . . . . . . . . . . $1,575 $1,668 $2,223 $1,994 $1,524 $1,296 $1,209
---------------------------------------------------------------
Income before income taxes . . . . . . $843 $490 $712 $381 $461 $218 $317
Income taxes . . . . . . . . . . . . . $288 $147 $226 $103 $141 $55 $96
-------------------------------------------------------------
Net income. . . . . . . . . . . . . . . $555 $343 $486 $278 $320 $163 $221
Per Share Data:
Net income. . . . . . . . . . . . . . . $1.11 $0.80 $1.13 $0.68 $0.83 $0.42 $0.58
Cash dividends. . . . . . . . . . . . . $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Book value at period end. . . . . . . . $11.70 $9.56 $9.88 $8.76 $8.92 $8.11 $7.68
Balance Sheet Data
Total assets . . . . . . . . . . . . . $67,980 $60,536 $61,086 $57,208 $41,754 $38,023 $32,281
Loans, net. . . . . . . . . . . . . . . $43,568 $38,458 $38,802 $30,778 $25,070 $21,586 $20,408
Securities . . . . . . . . . . . . . . $17,286 $16,582 $15,165 $13,380 $7,995 $6,194 $508
Deposits. . . . . . . . . . . . . . . . $61,734 $56,172 $55,812 $53,298 $38,006 $34,697 $29,073
Stockholder's equity (1). . . . . . . . $5,865 $4,103 $4,259 $3,760 $3,470 $3,116 $2,947
Shares outstanding (1). . . . . . . . . 501,264 429,023 431,223 429,023 388,845 384,385 383,626
Performance Ratios (2):
Return on average assets. . . . . . . . 1.09% 0.76% 0.80% 0.49% 0.79% 0.46% 0.70%
Return on average equity. . . . . . . . 14.93% 11.48% 12.04% 7.58% 9.59% 5.38% 7.82%
Net interest margin (3) . . . . . . . . 5.10% 4.42% 5.07% 4.82% 5.04% 4.50% 5.12%
Average loans to average deposits . . . 70.07% 69.94% 63.77% 61.17% 64.17% 65.85% 65.86%
Asset Quality Ratios:
Allowance for loan losses to
period end loans . . . . . . . . . . 1.03% 0.87% 0.95% 1.06% 1.16% 1.32% 1.16%
Allowance for loan losses to
nonaccrual loans. . . . . . . . . . . N/A 3.59X 7.48X 3.33X 3.38X N/A N/A
Nonperforming assets to period end
loans and other real estate owned . . N/A 0.22% 0.13% 0.07% 0.33% 0.23% N/A
Net charge-offs (recoveries)
to average loans. . . . . . . . . . . 0.23% 0.35% 0.43% 0.15% 0.43% 0.93% 0.17%
</TABLE>
- ---------------
(1) Includes the sale of 70,041 shares of common stock to existing shareholders
at $15.00 per share resulting in the addition of $1,050,615 to
stockholder's equity.
(2) Annualized for the nine months ended September 30, 1995 and 1994.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Bank's net yield on
its earning assets.
-15-
<PAGE>
CBI and CBOV Selected Historical Pro Forma Financial Information
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
1995 1994 1994 1993 1992 1991 1990
-------------------------------------------------------------------
(In thousands, except ratios and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income . . . . . . . . . . $5,594 $4,670 $6,489 $5,373 $4,795 $4,134 $4,006
Provision for loan losses . . . . . . . $246 $125 $266 $195 $499 $510 $290
---- --------- ----------- --------- -------- --------- ---------
Net interest income after
provision for loan losses . . . . . . $5,348 $4,545 $6,223 $5,178 $4,296 $3,624 $3,716
Noninterest income . . . . . . . . . . $816 $978 $1,231 $1,123 $1,035 $992 $808
Noninterest expense . . . . . . . . . . $3,435 $3,586 $4,770 $4,275 $3,582 $3,307 $3,161
------ --------- ----------- --------- -------- --------- ---------
Income before income taxes . . . . . . $2,729 $1,937 $2,684 $2,026 $1,749 $1,309 $1,363
Income taxes . . . . . . . . . . . . . $991 $668 $886 $669 $583 $403 $481
---- --------- ----------- --------- -------- --------- ---------
Net income. . . . . . . . . . . . . . . $1,738 $1,269 $1,798 $1,357 $1,166 $906 $882
Per Share Data:
Net income. . . . . . . . . . . . . . . $0.90 $0.70 $1.00 $0.79 $0.69 $0.53 $0.52
Cash dividends. . . . . . . . . . . . . $0.11 $0.10 $0.10 $0.07 $0.05 $0.05 $0.05
Book value at period end. . . . . . . . $8.21 $7.07 $7.36 $6.44 $5.91 $5.25 $4.74
Balance Sheet Data
Total assets . . . . . . . . . . . . . $156,628 $138,509 $138,449 $134,129 $110,440 $98,275 $87,609
Loans, net. . . . . . . . . . . . . . . $106,573 $99,978 $100,664 $90,395 $78,759 $66,705 $60,852
Securities . . . . . . . . . . . . . . $29,868 $25,684 $23,733 $23,817 $16,796 $15,641 $8,037
Deposits. . . . . . . . . . . . . . . . $140,048 $125,312 $123,897 $121,224 $98,530 $88,216 $78,539
Stockholder's equity (1). . . . . . . . $15,213 $12,337 $12,855 $11,230 $9,985 $8,877 $8,088
Shares outstanding (1). . . . . . . . . 1,853,975 1,742,520 1,745,610 1,742,520 1,688,094 1,689,830 1,705,420
Performance Ratios (2):
Return on average assets. . . . . . . . 1.54% 1.23% 1.31% 1.10% 1.09% 0.97% 1.05%
Return on average equity. . . . . . . . 16.66% 14.31% 14.85% 12.78% 12.34% 10.71% 10.65%
Net interest margin (3) . . . . . . . . 4,88% 4.79% 4.83% 4.41% 4.45% 5.01% 5.46%
Average loans to average deposits . . . 78.91% 77.22% 78.22% 75.33% 75.70% 75.91% 77.54%
Asset Quality Ratios:
Allowance for loan losses to
period end loans . . . . . . . . . . 1.18% 1.01% 1.09% 1.04% 1.10% 1.17% 1.06%
Allowance for loan losses to
nonaccrual loans. . . . . . . . . . . 4.48X 10.29X 20.35X 42.64X 6.26X 4.12X 161.00X
Nonperforming assets to period end
loans and other real estate owned . . 1.23% 0.48% 0.88% 0.92% 1.04% 1.42% 1.05%
Net charge-offs (recoveries)
to average loans. . . . . . . . . . . 0.08% 0.06% 0.11% 0.15% 0.56% 0.58% 0.17%
</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) Annualized for the nine months ended September 30, 1995 and 1994.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Bank's net yield on
its earning assets.
-16-
<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 April 16, 1996
at 10:00 a.m., local time.
Record Date. The Board of Directors of CBOV has fixed the close of
business on March 1, 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 _______ shares of CBOV Common Stock outstanding held by _____
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 195,252 shares of the Common Stock or approximately
37.2% 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
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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.
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The CBI Meeting
Date, Place and Time. The CBI Meeting will be held at The Community
Bank, 200 N. Sycamore Street, Petersburg, Virginia on April 16, 1996 at 3:30
p.m., local time.
Record Date. Only shareholders of record at the close of business on
March 1, 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 ________ shares of CBI Common Stock outstanding
held by _____ 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 _____ shares of CBI Common Stock or approximately ___%
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
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. In September, 1995, the parties
entered into serious negotiations about an affiliation, involving members of the
Boards of Directors of both companies 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 and 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 and 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 and Company, Inc. was present at each meeting. He
advised each Board that, in the opinion of McKinnon and 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
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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 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.
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.
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<PAGE>
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 April 30,
1996, but there can be no assurance as to whether or when the Reorganization
will occur.
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.
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<PAGE>
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 regarding, among other things, 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, among others: 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 those persons associated with CBOV who are entitled to
indemnification 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
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<PAGE>
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
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
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<PAGE>
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:
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:
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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. The members of the CBOV Board of Directors hold options to
acquire CBOV Common Stock. All of such options expire in April, 1996 and are
expected to be exercised before the Effective Date.
Projected CBI Common Stock Ownership. 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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<PAGE>
<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 3.86% 1,110,032.00
James E. Bloom 12,204 0.53 161,703.00
James R.V. Daniel 15,588 0.67 206,541.00
Ralph Fields 27,882 1.21 369,436.50
David E. Hudgins 29,383 1.27 389,324.75
Richard C. Huffman 48,109 2.08 637,444.25
Barry M. Kornblau 34,924 1.51 462,743.00
Lawrence B. Nuckols 44,012 1.90 583,159.00
John D. Seal, III 18,774 0.81 248,755.50
All present executive officers and
directors as a group (11 persons) 320,900 13.88 4,251,925.00
</TABLE>
(1) Includes shares of CBI Common Stock currently owned by CBOV Directors and
executive officers.
(2) Based on _______ shares of CBOV Common Stock outstanding on March 1, 1996
and _______ shares of CBI Common Stock outstanding on March 1, 1996.
(3) Based on the closing price of $13.25 per share of CBI Common Stock on the
OTC Bulletin Board on December 29, 1995, without adjustment for any
holder's investment basis in CBOV Common Stock.
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 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,
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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 will receive 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
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,
could result in taxable income to the shareholders. The receipt of such cash
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. The receipt of such
cash may be treated as a dividend and taxed as ordinary income in certain
limited situations. 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. Shareholders should consult their own tax advisors concerning
proper treatment of such cash amounts.
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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 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
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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 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
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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.
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 $15.50 and $14.00,
respectively, as set forth below.
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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 _____ __, 199_)
(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 September
30, 1995, dividends were so limited to approximately $1.388 million.
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 $12.00 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
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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
Sales Price(1) Dividends(1)
1993: High Low
---- ---
1st quarter..................... 5.75 4.50 .10
2nd quarter..................... 6.75 5.75
3rd quarter..................... 7.375 6.625
4th quarter..................... 8.000 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 _____ __, 199_).
(1) All prices and dividends are adjusted for a 100% stock dividend paid on
August 31, 1995.
On _____ __, 1996, the closing price of CBI Common Stock on the OTC
Bulletin Board was $_____. As of March 1, 1996, there were _____ record holders
of CBI Common Stock and ___ record holders of CBOV Common Stock.
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 September 30, 1995, The Community
Bank had available for distribution as dividends to CBI approximately $3.1
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 certain liabilities,
including certain liabilities under the federal securities laws.
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 certain 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 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 bank 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.
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 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.
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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.
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.
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 CBI.
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.
CBI has agreed to indemnify McKinnon and certain related persons
against certain liabilities relating to or arising out of its engagement.
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 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.
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
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expenses for its services, including the fairness opinion. CBOV has agreed to
indemnify McKinnon against certain liabilities, including certain liabilities
under the federal securities laws.
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 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.
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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
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 bank 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
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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.
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 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.
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.
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.
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.
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.
CBOV has agreed to indemnify McKinnon and certain related persons
against certain liabilities relating to or arising out of its engagement.
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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 September 30, 1995 CBOV had net
loans of $43.6 million and held $61.7 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 December 31, 1995, there were 501,254 shares of Common Stock
outstanding held by 421 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 September 30, 1995. Of these, 35 were full
time employees and 7 were part time employees.
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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.
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").
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
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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.
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.
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<TABLE>
<CAPTION>
Principal Occupation at Present
Name and for Past Five Years; Directorships Age
<S> <C> <C>
Sam T. Beale Attorney - Beale, Balfour, Davidson, Etherington 58
& Parker, 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.
</TABLE>
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.
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<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Director Principal Occupations as of December 31,
Nominee and Age Since During Past Five Years 1995 (Percent of
Class) (1)
<S> <C> <C> <C>
Sam T. Beale (58) 1986 Attorney - Beale, Balfour, 36,346
Davidson, Etherington & Parker, (6.92%)
P.C.
James E. Bloom (53) 1986 Communications Consultant 8,690
(1.65%)
James R.V. Daniel (62) 1986 Consultant; formerly President and 11,100
CEO - RP Industries, Inc. (2.11%)
Ralph Fields (76) 1986 Consultant 19,854
(3.78%)
David E. Hudgins (63) 1986 David E. Hudgins and Associates, 17,126
Inc. - Insurance and Real Estate (3.26%)
Appraiser
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 (4.73%)
Investment Trust
Lawrence B. Nuckols 1986 Real Estate Developer and Investor 31,339
(55) (5.97%)
John D. Seal, III (57) 1986 President and Chairman - Virginia 13,368
Reproduction & Supply, Inc. (2.55%)
</TABLE>
(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
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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.
Name and Address Common Stock Percent
of Beneficial Owner Beneficially Owned of Class
Sam T. Beale 36,346 6.92%
6457 Barksdale Road
Richmond, VA 23231
R. C. Huffman 28,111 5.35%
11494 Otter Run Drive
Ashland, VA 23005
Lawrence B. Nuckols 31,339 5.97%
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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Executive Officers
Set forth below is certain information with respect to each executive
officer of CBOV.
<TABLE>
<CAPTION>
Name and Position Age Experience
<S> <C> <C>
Richard C. Huffman 56 President and CEO, CBOV, 1986 to
President and Chief Executive Officer present
Thomas H. Caffrey, Jr. 47 Senior Vice-President and CFO,
Senior Vice President and Chief Financial Officer 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 and Chief
Senior Vice President and Chief Credit Officer Credit Officer, June, 1992 to present;
Senior Vice-President, Head of
Commercial Lending, Dominion Bank
of Richmond, for over 20 years
</TABLE>
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 Annual Compensation All Other
Position Year Salary Bonus 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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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 ground 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, 1995, 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, 1995, 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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<PAGE>
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 first nine months of 1995 showed improvement
over the same period last year. Net income increased to $555,316 as compared to
$342,541 during the same period 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 $92,758 for the first nine months as compared to the same period
one year earlier, this represents an expense reduction of nearly 6% in this one
area.
Return on average equity for the first nine months increased to 14.93%
on an annualized basis, up from 11.48% for the same period last year. Return on
average assets improved to 1.09% on an annualized basis up from 0.76% for the
same period last year.
CBOV has enjoyed steady growth over the past five years, seeing total
assets increase to $67.9 million at September 30, 1995, up from $61.1 million at
December 31, 1994, and $57.2 million at December 31, 1993. Total assets stood at
$32.3 million on December 31, 1990. Total asset growth from that date has been
$35.6 million or 110.2%. Over the past five years (December 1990 through
September 1995) total loans increased to $43.6 million from $20.4 million, up
113.7% and total deposits increased to $61.7 million from $29.1 million, up
112.0%.
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 $16
million in deposits.
Interest Income, Interest Expense, and Net Interest Income
Nine Months Ended September 30, 1995
Interest Income. Interest income was $3.934 million in the nine months
ended September 30, 1995, up $848,000, or 27.5% from $3.086 in the first nine
months of 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 14.3% to $43.568 million and investment securities increased
4.2% to $17.268
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<PAGE>
million at September 30, 1994. CBOV's ratio of earning assets to total assets
increased to 90.08% at September 30, 1995, up 124 basis points from 88.84%, at
September 30, 1994. This increase resulted in CBOV having $7.5 million more in
earning assets at September 30, 1995 than in the same period one year earlier.
The average yield on the loan portfolio increased to 9.76%, up 113 basis points
from 8.63%, while the yield earned on investment securities remained fairly
constant at 5.55%, compared to 5.60%.
Interest Expense. Interest rates, on average, were higher for the first
nine months of 1995 compared to the first nine months of 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 $4.8 million
to $51.631 million from $46.792 million for the prior period. Because of these
two factors, interest expense increased $498,000, to $1.6 million. The average
interest rate for the first nine months of 1995 was 3.48%, as compared to 2.46%
for the same period of 1994, an increase of 102 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 $2.324 million
for the first nine months of 1995, 17.7% greater than the $1.974 million
reported during the comparable period of 1994. The average total yield on
earning assets for the period was 8.58% on an annualized basis compared to the
average expense on interest-bearing liabilities of 3.48%. This produced a net
interest spread of 5.10% or $2.324 million for the quarter compared to 4.42% or
$1.974 million one year earlier. Net income for the first nine months of 1995
was $555,316 compared to $342,541 for the same period in 1994.
One 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 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 7.80% compared to the total interest expense on average
interest-earning liabilities of 2.74%. This produced a net interest spread of
4.49%. In the same period
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<PAGE>
of the prior year the net interest spread was 4.82%. 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.
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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<PAGE>
Average Balance Sheets, Interest Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 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) $ 43,106 $ 4,147 9.62% $ 35,994 $ 3,301 9.17%
Securities (3) 16,895 1,000 5.92 15,152 848 5.60
Federal funds sold 1,154 64 5.55 2,740 119 4.34
--------- ------ ---------- ---------
Total interest-earning assets $ 61,155 $ 5,211 8.52% $ 53,886 $ 4,268 7.92%
-------- ---------
Noninterest-earning assets:
Cash and due from banks 3,981 3,661
Premises and equipment 1,546 1,521
Other assets 942 670
Less allowance for loan losses (439) (345)
----- -----
Total $ 67,186 $ 59,393
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and NOW accounts $ 14,583 $ 364 2.50% $ 11,064 $ 306 2.77%
Savings deposits 20,235 488 2.41 22,803 607 2.66
Time deposits 10,909 572 5.24 8,828 494 5.60
Large denomination deposits 4,947 176 3.56 2,584 89 3.44
Federal funds purchased 502 10 1.99 402 4 0.99
---------- -------- --------- ---------
Total interest-bearing liabilities $ 51,177 $ 1,610 3.15% $ 45,681 $ 1,500 3.28%
-------- ---------
Noninterest-bearing liabilities:
Demand deposits 10,742 9,464
Other liabilities 312 211
--- ---
$ 11,054 $ 9,675
Stockholders' Equity 4,955 4,036
----- -----
Total $ 67,186 $ 59,393
========= =========
Net interest earnings 3,601 2,768
Net margin (4) 5.36% 4.66 %
Less tax equivalent adjustment 19 29
-- --
Net interest income $ 3,582 $ 2,739
======== =========
</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.
-57-
<PAGE>
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1993 December 31, 1992
----------------- -----------------
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) $ 30,046 $ 2,815 9.37% $ 25,030 $ 2,601 10.39%
Securities (3) 9,877 557 5.64 7,725 538 6.97
Federal funds sold 6,115 196 3.21 4,393 144 3.28
------------------ ------------------
Total interest-earning assets $ 46,038 $ 3,568 7.75% $ 37,148 $ 3,283 8.84%
-------- ---------
Noninterest-earning assets:
Cash and due from banks 3,293 2,208
Premises and equipment 1,514 1,175
Other assets 558 465
Less allowance for loan losses (327) (303)
----- -----
Total $ 51,074 $ 40,693
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and NOW accounts $ 8,499 $ 226 2.66% $ 6,543 $ 211 3.22%
Savings deposits 16,603 478 2.88 11,540 418 3.62
Time deposits 11,376 490 4.31 10,476 571 5.45
Large denomination deposits 2,782 130 4.67 2,225 144 6.47
Federal funds purchased - - 0.00 - - 0.00
--------- ------- --------------
Total interest-bearing liabilities $ 39,260 $ 1,324 3.37% $ 30,783 $ 1,344 4.37%
-------- ---------
Noninterest-bearing liabilities:
Demand deposits 7,976 6,350
Other liabilities 188 218
--- ---
$ 8,164 $ 6,568
Stockholders' Equity 3,650 3,342
----- -----
Total $ 51,074 $ 40,693
========= =========
Net interest earnings 2,244 1,939
Net margin (4) 4.39% 4.77%
Less tax equivalent adjustment 29 30
-- --
Net interest income $ 2,215 $ 1,909
======== =========
</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.
-58-
<PAGE>
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 September 30, 1995, CBOV had $11.990 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 $9.152 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.
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<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
September 30, 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 $1,308 $0 $0 $0 $1,308
Investment securities 979 5,152 4,953 6,177 17,261
Loans 21,738 5,478 15,896 910 44,022
--------------------------------------------------------------
Total interest-earning assets $24,025 $10,630 $20,849 $7,087 $62,591
===============================================================
Interest-Bearing Liabilities
Deposits $36,015 $7,792 $7,831 $0 $51,638
Federal funds purchased 0 0 0 0 0
Other liabilities 0 0 0 0 0
--------------------------------------------------------------
Total interest-bearing liabilities $36,015 $7,792 $7,831 $0 $51,638
--------------------------------------------------------------
Period gap ($11,990) $2,838 $13,018 $7,087 $10,953
================================================================
Cumulative gap ($11,990) ($9,152) $3,866 $10,953
===================================================
Cumulative gap to total assets -17.64% -13.47% 5.69% 16.12%
=================================================
</TABLE>
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<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
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>
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<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 book value of the investment portfolio as of September 30, 1995 was
$17.260 million compared to $16.582 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 September 30, 1995, and December 31, 1994
and information showing the book value at September 30, 1995, and 1994, along
with the values at December 31, 1994, 1993, and 1992. The following tables also
show maturity distribution, book value, market value and yield for the nine
months ended on September 30, 1995, and the year ended on December 31, 1994.
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Investment Securities
The following table shows the amortized cost and fair market value of
CBOV's investment securities at September 30, 1995, and December 31, 1994.
SEPTEMBER 30,1995 Held to maturity Available-for-sale
(Dollars in Thousands) Cost Value Cost Value
U.S. Treasury securities $4,996 $5,000 $1,141 $1,142
U.S. Government agencies 3,042 3,032 1,553 1,555
Securities issued by states
and political subdivisions:
General obligations 512 520 0 0
Revenue obligations 325 349 0 0
Industrial development and
similar obligations 300 297 0 0
Mortgage-backed securities:
Issued or guaranteed by
FNMA, FHLMC, or GNMA 292 292 3,734 3,706
Other debt securities 1,259 1,267 0 0
Equity securities 0 0 132 132
---------- ------- -------- ----------
Total securities $10,726 $10,757 $6,560 $6,535
========== ======= ======== ===========
DECEMBER 31, 1994 Held to maturity
(Dollars in Thousands) Cost Value
U.S. Treasury securities $8,006 $7,810
U.S. Government agencies 3,933 3,688
Securities issued by states
and political subdivisions:
General obligations 743 739
Revenue obligations 324 317
Industrial development and
similar obligations 200 191
Mortgage-backed securities:
Issued or guaranteed by
FNMA, FHLMC, or GNMA 0 0
Other debt securities 1,827 1,790
Equity securities 132 132
-------------------
Total securities $15,165 $14,667
=======================
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<PAGE>
The period ending total securities portfolio is presented as follows:
September 30, December 31,
(Dollars in thousands) 1995 1994 1994 1993 1992
----------------- ---------------------------
Investment securities $17,285 $16,582 $15,165 $13,380 $7,995
==================== =============================
The maturity distribution, book value, market value, and yield of the
investment securities portfolio at September 30, 1995 and December 31, 1994 is
presented as follows:
SEPTEMBER 30, 1995 Book Market
(Dollars in thousands) Value Value Yield
Within 12 months $4,852 $4,838 5.16%
Over 1 year through 5 years 6,290 6,292 6.23%
Over 5 years through 10 years 1,713 1,750 7.26%
Over 10 years 4,430 4,411 6.72%
----------------------------------------
$17,285 $17,291 6.15%
==========================================
DECEMBER 31, 1994 Book Market
(Dollars in thousands) Value Value Yield
Within 12 months $3,779 $3,720 5.03%
Over 1 year through 5 years 9,172 8,879 5.73%
Over 5 years through 10 years 1,297 1,190 6.55%
Over 10 years 916 877 6.68%
--------------------------------------
$15,164 $14,666 5.68%
==========================================
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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 September 30, 1995 stood at $44.022 million,
up 14.5% or $5.564 million from September 30, 1994. 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 September 30, 1995 the composition of CBOV's loan portfolio was
primarily in the real estate portion with 58.83% of total loans. All types of
consumer loans amounted to 18.79% and various types of commercial loans
represented 10.61%.
One year earlier the real estate portion of the portfolio was 67.66%,
all types of consumer loans amounted to 16.01%, and various types of commercial
loans were 5.38% of the portfolio. The shifts in commercial loans from 5.38% to
10.61%, and the change in real estate loans from 67.66% to 58.83%, 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, 1994 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.
-65-
<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 September 30, 1995 there were no loans past due over
ninety days.
-66-
<PAGE>
Loan Portfolio
A detailed analysis of the loan portfolio as of September 30, 1995 and
1994 and the most recent three years is set forth in the following tables:
<TABLE>
<CAPTION>
Loan Portfolio
September 30, December 31,
(Dollars in thousands) 1995 1994 1994 1993 1992
----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $4,671 $2,069 $3,683 $3,646 $2,061
Real estate - construction
and land development 3,297 2,953 4,113 1,715 1,980
Real estate - other 25,898 26,019 21,813 19,080 15,290
Consumer 8,272 6,157 7,589 6,535 5,917
Other 1,884 1,260 1,978 133 122
------------------ -------------------------------
Total loans $44,022 $38,458 $39,176 $31,109 $25,370
Allowance for loan losses (454) (334) (374) (330) (301)
------------------ -------------------------------
Net loans $43,568 $38,124 $38,802 $30,779 $25,069
==================== =================================
Loan Portfolio by Percentage
September 30, December 31,
1995 1994 1994 1993 1992
----------------- ------------------------------
Commercial 10.61% 5.38% 9.40% 11.72% 8.12%
Real estate - construction
and land development 7.49% 7.68% 10.50% 5.51% 7.80%
Real estate - other 58.83% 67.66% 55.68% 61.33% 60.28%
Consumer 18.79% 16.01% 19.37% 21.01% 23.32%
Other 4.28% 3.28% 5.05% 0.43% 0.48%
------------------ -------------------------------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
==================== =================================
</TABLE>
-67-
<PAGE>
Maturity Schedule of Loans
The following table shows the maturity of loans outstanding at
September 30, 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 After One
(Dollars in thousands) Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $3,240 $15,896 $910 $20,046
Floating rate loans 23,976 0 0 23,976
----------------------------------------------------------
Total $27,216 $15,896 $910 $44,022
===========================================================
<CAPTION>
DECEMBER 31, 1994 After One
(Dollars in thousands) Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
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
===========================================================
</TABLE>
-68-
<PAGE>
Nonperforming Loans
Each new loan made by a Loan Officer pursuant to his/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 checking for proper risk rating, adherence to
covenants/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.
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:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
1995 1994 1994 1993 1992
------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans
Past due 90 days or more $0 $0 $0 $0 $140
Nonaccrual 0 83 40 0 39
Installment loans
Past due 90 days or more 0 0 0 0 7
Nonaccrual 0 11 10 22 50
Real estate loans
Past due 90 days or more 0 0 0 77 56
Nonaccrual 0 0 0 0 0
---------------- -------------------------------
Total $0 $94 $50 $99 $292
================= =================================
Nonperforming loans to total loans 0.00% 0.24% 0.13% 0.30% 1.09%
Interest income recorded on
nonaccrual loans during the period $0 $0 $0 $0 $0
</TABLE>
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.
-69-
<PAGE>
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 September 30, 1995 the allowance for loan losses was $454,000
compared to $334,000 for the same period one year earlier. Net charge offs were
$85,000, down 29.8% for the nine month period compared to $121,000 for the first
nine months of last year. The net charge offs as a percentage of average loans
outstanding was only 0.20% for the period ending at September 30, 1995, this is
down from 0.35% for the same period last year.
On September 30, 1995 the allowance for loan losses as a percentage of
the total loans outstanding stood at 1.03%. 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 nine
months ended September 30, 1995. Prior financial statements have not been
restated to apply the provision of the new accounting standard.
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 September 30, 1995 CBOV had no loans that were considered as
impaired.
-70-
<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 nine months ending on September 30, 1995 and 1994, along with the years
ended December 31, 1994, 1993, and 1992.
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1995 1994 1994 1993 1992
------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan loss at
beginning of year $374 $330 $330 $301 $281
Loans charged off:
Commercial 76 10 151 34 79
Installment 22 11 14 18 56
Real estate 2 125 25 0 0
---------------- --------------------------------
Total $100 $146 $190 $52 $135
------------------- ----------------------------------
Recoveries of loans previously charged off:
Commercial 3 18 28 4 13
Installment 13 6 6 2 15
Real estate 0 0 0 0 0
---------------- -------------------------------
Total $16 $24 $34 $6 $28
Net loans recovered(charged-off) ($84) ($122) ($156) ($46) ($107)
Provision for loan losses $165 $125 $200 $75 $127
------------------- ----------------------------------
Allowance for loan losses at
end of period $454 $334 $374 $330 $301
=================== ==================================
Average total loans $43,106 $34,933 $35,994 $30,046 $25,030
Total loans $44,022 $38,458 $39,176 $31,109 $25,370
Selected Loan Loss Ratios:
Net charge offs to average loans 0.19% 0.35% 0.43% 0.15% 0.43%
Provision for loan losses to
average loans 0.38% 0.36% 0.56% 0.25% 0.51%
Provision for loan losses to
net charge offs 1.94X 1.02X 1.28X 1.63X 1.19X
Allowance for loan losses to
year end loans 1.03% 0.87% 0.95% 1.06% 1.19%
Loan loss coverage (1) 12.00X 5.02X 5.85X 9.89X 5.50X
</TABLE>
- ---------------
(1) Income before income tax plus provision for loan losses, divided by net
chargeoffs.
-71-
<PAGE>
Allocation of the Allowance for Loan Losses
A breakdown of the allowance for loan losses is provided in the
following tables. However, CBOV's management does not believe that the allowance
for loan losses can be fragmented by category with a degree of precision that
would be useful to investors. 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
occurring in any category. The allowance is allocated below based on the
relative percent of loans in each category to total loans.
Allocation of Allowance for Loan Losses in Dollars
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 49 $ 18 $ 35 $39 $ 25
Real estate commercial
and land development 34 25 39 19 24
Real estate - other 267 226 209 202 181
Consumer 85 54 72 69 70
Other 19 11 19 1 1
Total Allowance $454 $334 $374 $330 $301
</TABLE>
Allocation of Allowance for Loan Losses in Percent
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial 10.61% 5.38% 9.40% 11.29% 8.12%
Real estate commercial
and land development 7.49% 7.67% 10.50% 5.51% 7.80%
Real estate - other 55.83% 67.66% 55.68% 61.33% 60.27%
Consumer 18.79% 22.68% 19.37% 21.01% 23.32%
Other 4.28% 3.27% 2.63% 0.43% 0.48%
Total Allowance 100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
-72-
<PAGE>
Other Operating Income
Non-interest income for the nine months ended September 30, 1995 was
$258,981, decreasing $49,922 or 16.2% from the total of $308,903 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. At September 30, 1995 this category represented $221,019 or 85.3% of
the total other operating income. On September 30, 1994 service charges
represented $216,790 or 70.2% of the total $308,903 of other operating income.
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 period ended on September 30, 1995 other operating expenses
decreased slightly to $1.576 million, down 5.6% or $92,758 from $1.668 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 of 1995. For the nine months ending September 30, 1995 FDIC insurance
expenses were $59,119, down 32.5% from $87,574 for the same period one year
earlier. An additional reduction is expected in 1996.
Income Taxes
For the first nine months of 1995 the provision for income taxes
increased to $287,500, up 95.8% from $146,834 for the first nine months in 1994.
This increase is traced to the improved earnings of CBOV, with income before
taxes of $842,816 for the period ending September 30, 1995 compared to $489,375
for the same period one year earlier.
Deposits
As of September 30, 1995 deposits totaled $61.734 million, an increase
of $5.562 million or 9.9% from the year earlier. CBOV primarily uses deposits to
fund its loan portfolio, with any excess funds utilized in the investment
securities portfolio.
For the first nine months of 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 September 30, 1995 CBOV had $16.828 million in
savings accounts compared to $20.803 million nine months earlier, this
represents a decline of $3.975 million, or 19.1%. During the same time period,
certificates of deposit increased to $18.836 million compared to $14.004 million
nine months earlier, this represents an increase of $4.832 million, or 34.5%.
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.
-73-
<PAGE>
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 the Bank's interest-bearing
transaction accounts and saving 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 the first
nine months of 1995 as interest rates on deposits peaked and started a small
decline.
CBOV offers individuals and small-to-medium sized business 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.
-74-
<PAGE>
Deposits
The breakdown of deposits at September 30, 1995, and 1994, and December
31, 1994, 1993, and 1992 is indicated as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1995 1994 1994 1993 1992
------------------- ----------------------------------
<S> <C> <C> <C> <C>
Demand $10,103 $11,887 $9,019 $8,712 $6,212
Interest-bearing transaction accounts 15,967 12,062 11,985 10,595 7,555
Savings 16,828 18,129 20,803 19,106 13,624
Certificate of deposit 18,836 14,094 14,004 14,885 10,615
--------------------- ------------------------------------
Total deposits $61,734 $56,172 $55,811 $53,298 $38,006
====================== =====================================
</TABLE>
Maturities of time certificates of deposit at September 30, 1995 and
December 31, 1994 are shown below:
<TABLE>
<CAPTION>
Maturity
(Dollars in thousands) September 30, 1995 December 31, 1994
$100,000 Less than $100,000 Less than
and over $100,000 and over $100,000
<S> <C> <C> <C> <C>
Three months or less $1,030 $2,190 $1,348 $1,658
Over three through twelve months 1,236 5,527 306 7,213
Over one year through five years 1,613 7,156 640 2,839
Over five years 0 84 0 0
---------------- ----------------
Total maturities $3,879 $14,957 $2,294 $11,710
===================== =====================
</TABLE>
-75-
<PAGE>
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 September 30, 1995. CBOV had no purchased funds on
September 30, 1995, and the largest amount outstanding for the period was $2.7
million, with the average being $166,084.
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 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.
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 12.72% on September 30, 1995 and a ratio of risk-weighted assets to
Tier 1 capital of 8.71%
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 nine month periods ended on
September 30, 1995 and 1994, and the three most recent years beginning with
1992.
-76-
<PAGE>
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 the
Bank's assets and liabilities are critical to the maintenance of acceptable
performance levels.
-77-
<PAGE>
Analysis of Capital
The following table sets forth CBOV's various capital ratios at the
dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
1995 1994 1994 1993 1992
------------------- ----------------------------------
Tier 1 Capital:
<S> <C> <C> <C> <C> <C>
Common stock $1,754 $1,502 $1,509 $1,502 $1,361
Capital surplus 2,046 1,236 1,241 1,236 994
Retained earnings 2,065 1,365 1,509 1,022 1,115
-------------------- -----------------------------------
Total Tier 1 capital $5,865 $4,103 $4,259 $3,760 $3,470
===================== ====================================
Tier 2 Capital:
Allowance for loan losses $454 $334 $374 $330 $301
Allowable long-term debt 0 0 0 0 0
------------------- ----------------------------------
Total Tier 2 capital $454 $334 $374 $330 $301
=================== ==================================
Risk-weighted assets $45,977 $36,480 $40,859 $33,338 $25,386
Capital Ratios:
Tier 1 risk-based capital ratio 12.76% 11.25% 10.42% 11.28% 13.67%
Total risk-based capital ratio 13.74% 12.16% 11.34% 12.27% 14.85%
Tier 1 capital to average
total assets 8.71% 6.97% 7.17% 7.36% 8.53%
</TABLE>
-78-
<PAGE>
Return on Equity and Assets
The following table highlights certain ratios for the periods
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1995 (1) 1994 (1) 1994 1993 1992
------------------------ ----------------------------------
Income before securities gains and losses to:
<S> <C> <C> <C> <C> <C>
Average total assets 1.12% 0.77% 0.82% 0.53% 0.79%
Average stockholders' equity 15.17% 11.48% 12.09% 7.45% 9.65%
Net income to:
Average total assets 1.09% 0.77% 0.82% 0.53% 0.80%
Average stockholders' equity 14.93% 11.48% 12.07% 7.45% 9.80%
Dividend payout ratio 0.00% 0.00% 0.00% 0.00% 0.00%
Average stockholders equity to
average total assets 7.38% 6.73% 6.80% 7.15% 8.15%
</TABLE>
- ---------------
(1) Annualized
-79-
<PAGE>
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.
-80-
<PAGE>
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 September 30, 1995, The
Community Bank had approximately $44.9 million of deposits in the City of
Petersburg; $14.5 million of deposits in the City of Colonial Heights; and $18.9
million of deposits in the village of Chester. CBI's present intention is to
continue concentrating its banking activities in its current market.
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 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.
-81-
<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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.
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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<PAGE>
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)
<TABLE>
<CAPTION>
Principal Occupation or Director of
Employment During Last Corporation/
Name Five Years Bank Since Age
<S> <C> <C> <C>
James A. Boyd Retired Orthodontist; Director, The 1984/1973 66
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
</TABLE>
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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 December 31, 1995
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.
-88-
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class (2)
- ------------------------ ----------------------- ------------
Directors and Executive Officers
<S> <C> <C>
James A. Boyd 18,968(3) 1.635%
Lawrence F. DeSouza 17,440 1.503
B. Glenn Holden 30,100 2.595
Nathan S. Jones, 3rd 124,615(3) 10.561
P.O. Box 2166
Petersburg, VA 23804
Phillip H. Kirkpatrick 23,018(3) 1.984
Elinor B. Marshall 29,828 2.571
Alvin L. Sheffield 52,540 4.529
Louis C. Shell 12,488 1.077
Harold L. Vaughn 27,268 2.351
W. Courtney Wells 16,000 1.379
All executive officers and
directors as a group (10) 352,265 29.853
Others
Lillian Umphlett 77,406 6.560
P.O. Box 2166
Petersburg, VA 23804
Community Bankshares Incorporated 168,859 14.680
Employee Stock Ownership Plan
P.O. Box 2166
Petersburg, VA 23804
</TABLE>
- --------------
(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 1,150,000 shares of Common Stock issued and outstanding as of
December 31, 1995 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, ______ shares of
Common Stock had been allocated to participant accounts.
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<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.
Summary Compensation Table
Annual Compensation Long Term Compensation
<TABLE>
<CAPTION>
Number of
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus(1) Compensation Options Compensation (4)
- --------------------------- ---- ------ -------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Nathan S. Jones, 3rd, 1995 $ 119,165 $ 27,846 -0- $ 23,531
President and Chief 1994 $ 108,218 $ 27,846 (2) -0- $ 19,070
Executive Officer 1993 $ 105,153 $ 18,564 (2) 30,000(3) $ 15,300
</TABLE>
- ----------
(1) Amounts represent cash incentive payments based on an increase in
return on assets pursuant to the Executive Incentive Compensation Plan
adopted in July 1993.
(2) 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.
(3) Represents incentive stock options granted in July, 1993 pursuant to
CBI's Incentive Stock Option and Nonstatutory Stock Option Plan.
(4) 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 are parties to an agreement, dated February 2, 1987
which provides benefits in the event of retirement or death prior to retirement.
Under the agreement, Mr. Jones will be entitled to an annual benefit of $30,527
for a period of 15 years if he retires after attaining age 65. With the prior
consent of the Board of Directors, Mr. Jones may receive an actuarially reduced
benefit if he retires after age 55 and has at least 15 years of service. The
Agreement also provides for an annual benefit, payable for 15 years if Mr. Jones
dies prior to retirement at age 65. In such case, the first years' benefit is
$66,000 and declines to $49,500 in years 2 through 5. For the next ten years,
the annual benefit would be $33,000.
All benefits under the agreement are conditioned upon Mr. Jones'
continuous employment by CBI unless there is a change in control of CBI.
Generally, if Mr. Jones' employment terminates after a change in control, the
benefit under the agreement shall be actuarially determined.
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<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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
Nathan S. Jones, 3rd 30,000 -0- $210,000 -0-
</TABLE>
(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 for comparable transactions with other persons and did not involve more
than the normal risk of collectibility
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<PAGE>
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 nine months ended September 30, 1995 of $1.183
million was an increase of 27.75% over the nine months ended September 30, 1994.
The results for the first nine months of 1995 reflect primarily an increase in
lending volume and an improvement in the rates earned on interest earning
assets. Earnings per share for the nine months ended September 30, 1995 were
$0.97, up from $0.77 for the nine months ended September 30, 1994. CBI has shown
an increase of 98.48% in net income over the five years ended December 31, 1994,
from $661,000 in 1990 to $1.312 million during 1994. The increase in income over
the past five years is largely attributable to the 40% growth in the loan
portfolio. As total assets grew from $55.328 million in 1990 to $77.363 million
as of December 31, 1994, loans grew from $39.486 million to $62.213 million.
The Bank increased net income 21.6% 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. On a per share basis, net income was
$1.10 for the year ended December 31, 1994 as compared to $.95 in 1993. Net
income during 1993 of $1.079 million was a 27% increase over 1992 earnings of
$845,917.
The Company's return on average equity and average assets has increased
over the past five years. The return on average equity was 17.71% for the nine
months ended September 30, 1995 as compared to the 15.87% return for the same
period one year earlier. The return on average equity was 16.25% in 1994,
compared to 15.49% for 1993 and 13.86% for 1992. During the nine months ended
September 30, 1995, the Company realized a 1.89% return on average assets as
compared to 1.59% for the nine months ended September 30, 1994. The return on
average assets amounted to 1.69%, 1.48% and 1.28% for the three years ended
December 31, 1994, 1993, and 1992, respectively.
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.
The Bank's net interest income was $3.271 million for the nine months
ended September 30, 1995, an increase of 21.3% from $2.696 million for the same
period during 1994. This increase was partially due to a 6.23% increase in
average loans during the period, which increased from $60.351 million to $64.111
million. Also contributing to the increase in net interest income was the 8.5%
increase in the yield on interest-earnings assets, which increased from 8.42% to
9.14% during the nine months ended September 30, 1995.
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<PAGE>
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
improvement in net interest income was due primarily to an increase in the
lending volume. Also contributing to the rise in net interest income was the
3.82% 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 $3.869 million increase in average deposits.
Net interest income increased by 9.0% during 1993 to $3.188 million
compared to $2.924 million for 1992. Most of this increase was also attributable
to an increase in loan volume.
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>
Average Balance Sheets, Interest Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, 1995 December 31, 1994
------------------ -----------------
Average Yield/ Average Yield/
Balance Interest Rate(1)(6) Balance Interest Rate(1)
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 9,926 $ 500 6.72% $ 9,420 $ 639 6.78%
Federal funds sold 4,124 188 6.08 629 29 4.61
Loans (5) 64,111 4,672 9.72 61,425 5,348 8.71
------------------- -------------------
Total interest-earning assets $ 78,161 $ 5,360 9.14% $ 71,474 $ 6,016 8.42%
-------- ---------
Noninterest-earning assets:
Cash and due from banks 3,943 4,308
Premises and equipment 1,094 1,147
Other assets 1,333 1,541
Less allowance for loan losses (765) (688)
----- -----
Total $ 83,766 $ 77,782
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and NOW accounts $ 22,761 $ 690 4.04% $ 24,819 $ 811 3.27%
Savings deposits 7,906 205 3.46 8,194 265 3.23
Time deposits 25,027 999 5.32 19,683 955 4.85
Large denomination deposits 5,424 188 4.62 4,541 196 4.32
Federal funds purchased 130 7 7.18 190 5 2.63
---------------- ----------------
Total interest-bearing liabilities $ 61,248 $ 2,089 4.55% $ 57,427 $ 2,232 3.89%
-------- ---------
Noninterest-bearing liabilities:
Demand deposits 12,791 11,690
Other liabilities 776 591
--- ---
$ 74,885 $ 69,708
Stockholders' Equity 8,951 8,074
----- -----
Total $ 83,766 $ 77,782
========= =========
Net interest income(2)/yield(3) $ 3,271 5.58% $ 3,784 5.29 %
======== =========
Interest spread (4) 4.60% 4.53 %
</TABLE>
- --------------
(1) Computed on a tax 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 interest-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 balance.
-95-
<PAGE>
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1993 December 31, 1992
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities $ 8,930 $ 663 7.42% $ 8,887 $ 755 8.50%
Federal funds sold 2,158 59 2.73 2,375 85 3.58
Loans (5) 55,390 4,665 8.42 48,668 4,526 9.30
------------------- -------------------
Total interest-earning assets $ 66,478 $ 5,387 8.10% $ 59,930 $ 5,366 8.95%
-------- ---------
Noninterest-earning assets:
Cash and due from banks 4,375 3,960
Premises and equipment 1,107 1,213
Other assets 1,411 1,470
Less allowance for loan losses (597) (544)
----- -----
Total $ 72,774 $ 66,029
========= =========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and NOW accounts $ 22,056 $ 750 3.40% $ 17,166 $ 680 3.96%
Savings deposits 6,512 220 3.38 5,223 203 3.89
Time deposits 20,304 970 4.78 21,260 1,216 5.72
Large denomination deposits 4,686 258 5.51 5,423 343 6.32
Federal funds purchased 34 1 2.94 - - 0.00
--------------- --------------
Total interest-bearing liabilities $ 53,592 $ 2,199 4.10% $ 49,072 $ 2,442 4.98%
-------- ---------
Noninterest-bearing liabilities:
Demand deposits 11,823 10,433
Other liabilities 392 418
--- ---
$ 65,807 $ 59,923
Stockholders' Equity 6,967 6,106
----- -----
Total $ 72,774 $ 66,029
========= =========
Net interest income(2)/yield(3) $ 3,188 4.80% $ 2,924 4.88%
======== =========
Interest spread (4) 4.00% 3.98%
</TABLE>
- --------------
(1) Computed on a tax 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 interest-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 balance.
-96-
<PAGE>
Net income is 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
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ----------------------------------------
1995 vs. 1994 1994 vs. 1993 1993 vs. 1992
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to changes in: Due to changes in: Due to changes in:
Volume Rate Total Volume Rate Total Volume Rate Total
(In Thousands)
Increase (Decrease) in:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Investment securities,
taxable $ 16 $ (7) $ 9 $ 35 $ (59) $ (24) $ 4 $ (96) $ (92)
Federal funds sold 179 (11) 168 (56) 26 (30) (7) (19) (26)
Loans 199 614 813 517 167 684 592 (454) 138
--------------------------- --------------------------------------------------------------
$ 394 $ 596 $ 990 $ 496 $ 134 $ 630 $ 589 $ (569) $ 20
--------------------------- --------------------------------------------------------------
Interest expense:
Savings and time
deposits $ 115 $ 297 $ 412 $ 145 $ (116) $ 29 $ 210 $ (453) $ (243)
Federal funds purchased (1) 5 4 5 - 5 - - -
--------------------------- --------------------------------------------------------------
$ 114 $ 302 $ 416 $ 150 $ (116) $ 34 $ 210 $ (453) $ (243)
--------------------------- --------------------------------------------------------------
Increase (Decrease) in:
Net interest income $ 280 $ 294 $ 574 $ 346 $ 250 $ 596 $ 379 $ (116) $ 263
=========================== ==============================================================
</TABLE>
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.
Management evaluates interest sensitivity risk 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 business
risk factors.
-97-
<PAGE>
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. Management reviews its interest sensitivity position at least
monthly.
The following tables present CBI's Interest Rate Sensitivity Analysis
as of September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
September 30, 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 $ 6,810 $ - $ - $ - $ 6,810
Investment securities - - 490 12,092 12,582
Loans 23,413 25,744 14,654 - 63,811
------------------------------------------------------------- ------
Total interest earning assets $ 30,223 $ 25,744 $ 15,144 $ 12,092 $ 83,203
- ----------------------------- -------------------------------------------------------------- ------
Interest-Bearing Liabilities:
Deposits:
Demand $ - $ - $ 21,222 $ - $ 21,222
Savings - - 7,412 - 7,412
Time deposits, $100,000 and over 772 2,686 2,582 - 6,040
Other time deposits 5,442 13,001 10,327 - 28,770
------------------------------------------------------------- ------
Total interest-bearing liabilities $ 6,214 $ 15,687 $ 41,543 $ - $ 63,444
- ---------------------------------- -------------------------------------------------------------- ------
Period gap $ 24,009 $ 10,057 $ (26,399) $ 12,092 $ 19,759
============================================================== ======
Cumulative gap $ 24,009 $ 34,066 $ 7,667 $ 19,759
=============================================== ======
Ratio cumulative gap to total
interest-earning assets 28.86% 40.94% 9.21% 23.75%
============================================== ======
</TABLE>
The September 30, 1995 results of the rate sensitivity show CBI had
$24.009 million more in assets than liabilities subject to repricing within
three months and $34.066 million more in assets than liabilities subject to
repricing within one year and was, therefore, in an asset-sensitive position.
Management has classified demand deposits and savings deposits as liabilities
repricing in years one through five based on historical performance during times
of changing rates. An asset-sensitive institution's net interest margin and net
interest income generally will be impacted favorably by rising interest rates,
while that of a liability-sensitive institution generally will be impacted
favorably by declining rates.
-98-
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1994
Within(1) 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 $ 5,957 $ 10,091 $ 40,497 $ 29 $ 56,574
- ---------------------------------- ------------------------------------------------------------------------
Period gap $17,341 $ 16,039 $ (26,025) $ 7,869 $ 15,224
========================================================================
Cumulative gap $17,341 $ 33,380 $ 7,355 $ 15,224
=========================================================
Ratio cumulative gap to total
interest-earning assets 24.15% 46.49% 10.24% 21.20%
=========================================================
</TABLE>
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.
Noninterest Income
For the nine months ended September 30, 1995 noninterest income
declined by 16.76% to $556,954 from $669,098 for the same period in the previous
year. This decline is partially attributable to a 11.78%, or $57,411 decrease in
service charges. The reduction is due to an increase in free checking accounts
marketed by CBI. In addition, income from the factoring of accounts receivable
loans has declined by $40,000 to $23,000 during the nine months ended September
30, 1995.
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
-99-
<PAGE>
other real estate owned in the amount of $33,980. In addition, service charges,
commissions and fees decreased by $56,060.
Noninterest income for 1993 increased 8.13% or $64,598 from 1992.
Service charges on deposit accounts, the largest single item of noninterest
income, increased by $34,767 for 1993, up 4.6% from 1992.
Noninterest Expense
Noninterest expense of $1.860 million for the nine months ended
September 30, 1995 was a decrease of 3.05% from the $1.918 million of expense
for the nine months ended September 30, 1994. Salaries and employee benefits,
the largest single component of noninterest expense, had a slight increase of
4.77% for the same period. Due to the rate reductions, FDIC assessments declined
by 36% or $40,000, from the nine month period ended September 31, 1994.
For 1994, noninterest expense increased by $265,821 or 11.65% over
1993. Salaries and employee benefits, the largest component of noninterest
expenses, increased 11% in 1994 or 1993. Furniture and equipment expense
increased 11.71% from $185,400 to $207,114 for the year ended December 31, 1994.
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.
During the year ended December 1993, noninterest expenses increased by
10.8% from $2.058 million to $2.281 million. The majority of the increase was
due to an increase in the salaries and employee benefits categories combined of
15.07% or $156,940 from $1.041 million to $1.198 million.
Income Taxes
The provision for income taxes for the nine months ended September 30,
1995 was $702,862 as compared to $521,500 for the nine months ended September
30, 1994. 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. The income tax
provision for the year ended December 31, 1992 was $442,629. The increase in the
income tax provision is attributable to increased taxable earnings.
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 in Chesterfield
County. The philosophy is consistent with CBI's focus on providing
community-based financial services.
-100-
<PAGE>
<TABLE>
<CAPTION>
Loan Portfolio
September 30, December 31,
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 5,594 $ 5,857 $ 5,903 $ 5,346 $ 5,072 $4,973 $ 5,893
Real estate construction 790 158 167 189 469 1,109 1,063
Real estate mortgage: 31,218 30,516 29,914 28,228 27,468 23,655 18,078
Residential (1-4 family)
Multifamily - - - 213 283 58 51
Nonfarm, nonresidential 21,687 21,463 21,941 19,190 14,784 9,438 8,823
------ ------ ------ ------ ------ ----- -----
Real estate mortgage 52,905 51,979 51,855 47,631 42,535 33,151 26,952
subtotal
Consumer installment 5,740 5,553 5,562 5,826 5,947 6,539 7,263
----- ----- ----- ----- ----- ----- -----
Total loans 65,029 63,547 63,487 58,992 54,023 45,772 41,171
Less unearned income 1,218 1,219 1,274 1,222 1,380 1,605 1,685
----- ----- ----- ----- ----- ----- -----
$ 63,811 $ 62,328 $ 62,213 $ 57,770 $ 52,643 $ 44,167 $ 39,486
========= ========== ========= ========= ========= ========= =========
</TABLE>
The following table shows the maturity of loans outstanding as of
September 30, 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 final payment is due.
-101-
<PAGE>
<TABLE>
<CAPTION>
Loan Maturity Schedule
September 30, 1995
Maturing
After One
Within But Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial $ 4,767 $ 827 $ - $ 5,594
Installment 644 5,096 - 5,740
Real Estate 35,896 16,566 1,233 53,695
---------------------------------------------------------------
Total $ 41,307 $ 22,489 $ 1,233 $ 65,029
===============================================================
Loans maturing after one year with:
Fixed interest rates $ 15,875 $ -
Variable Interest rates 6,614 1,233
-----------------------------
Total $ 22,849 $ 1,233
=============================
</TABLE>
The loan portfolio was $63.811 million at September 30, 1995, an
increase from September 30, of the previous year of 2.3% or $1.483 million. Real
estate lending continues to be the growth of the portfolio with loans secured by
real estate comprising 82.57% 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 $4.22 million or 8.87%, accounted for 96% of
the growth.
Loans secured by real estate comprised 81.94% of total loans at
December 31, 1994 and 81.06% at December 31, 1993.
The Bank's unfunded loan commitments amounted to $11.058 million as of
September 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.
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. 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.
-102-
<PAGE>
The provision for loan losses for the nine months ended September 30,
1995 was $81,000, increase of $81,000 over the nine months ended September 30,
1994. Management charged income for the provision deemed necessary, based on its
analysis of the loan portfolio. As of September 30, 1995, the ratio of the
allowance for loan losses to total loans was 1.26% as compared to 1.08% one year
earlier.
The provision for loan losses totaled $66,000 for 1994, a decrease of
$54,000 from 1993. The improved economy along with more effective collection
efforts have permitted the Bank to reduce its provision. 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 the loans charged off during the previous year. The
Bank had net recoveries for the year ended December 31, 1994 of $50,841 as
compared to net charge-offs during 1993 and 1992 of $80,799 and $303,562,
respectively.
The allowance for loan losses was $724,891 at December 31, 1994, up
$116,841 over the $608,050 at December 31, 1993. The allowance was $568,849 at
December 31, 1992. The ratio of the allowance for loan loss to total loans, net
of unearned income, has remained relatively constant over the last three years:
1.16% at December 31, 1994, 1.05% at December 31, 1993, and 1.09% at December
31, 1992. 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 1.28x at December 31, 1994, 2.08x at December 31, 1993 and 6.47x at December
31, 1992. 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. 188, 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 nine
months ended September 30,1995. 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. 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
September 30, 1995, CBI had one loan that was considered to be impaired in the
amount of $40,600. The amount provided in the allowance for loan losses for this
impaired loan was its carrying value of $40,600.
The following table summarizes changes in the allowance for loan
losses:
-103-
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
Nine months ended Year ended
September 30, December 31,
1995 1994 1994 1993 1992
---------------------- -------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning
of period $ 725 $ 608 $ 608 $ 569 $ 501
---------------------- -------------------------------------
Loans charged off:
Commercial $ 12 $ 2 $ 2 $ 17 $ 92
Installment 17 26 42 36 36
Real Estate 2 18 18 69 237
---------------------- -------------------------------------
Total $ 31 $ 46 $ 62 $ 122 $ 365
---------------------- -------------------------------------
Recoveries of loans previously charged off:
Commercial $ 13 $ 6 $ 6 $ 22 $ 14
Installment $ 9 2 $ 3 $ 14 $ 4
Real Estate 9 104 104 5 43
---------------------- -------------------------------------
Total $ 31 $ 112 $ 113 $ 41 $ 61
---------------------- -------------------------------------
Net loans recovered (charged off) $ - $ 66 $ 51 $ (81) $ (304)
Provision for loan losses 81 - 66 120 372
---------------------- -------------------------------------
Allowance for loan losses at end of period $ 806 $ 674 $ 725 $ 608 $ 569
====================== =====================================
Average total loans (net of unearned income) $ 63,346 $ 60,351 $ 60,737 $ 54,793 $ 48,124
Total loans (net of unearned income) $ 63,811 $ 61,519 $ 62,213 $ 57,770 $ 52,643
Selected Loan Loss Ratios:
Net chargeoffs to average loans(2) - - - 0.15% 0.63%
Provisions for loan losses to average loans 0.13% - 0.11% 0.22% 0.77%
Provision for loan losses to net chargeoffs(2) - 9.95 X - 1.48 X 1.22 X
Allowance for loan losses to year-end loans 1.26% 1.10% 1.17% 1.05% 1.08%
Loan loss coverage(1)(2) - - - 21.80 X 5.46 X
</TABLE>
- ----------------------
(1) Income before income taxes plus provision for loan losses, divided by
net chargeoffs.
(2) Net recoveries for the year.
-104-
<PAGE>
A breakdown of the allowance for loan losses is provided in the
following table; however, such a breakdown has not historically been maintained
by CBI and management does not believe that the 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>
September 30,
1995 1994
--------------------------------------- --------------------------------------
Balance at End of
Period Applicable to Amount* % Amount* %
--------------------------------------- --------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Commercial $ 73 9% $ 61 9%
Installment 73 9% 61 9%
Real Estate 661 82% 552 82%
--------------------------------- --------------------------------
Total $ 807 100% $ 674 100%
<CAPTION>
December 31,
1994 1993 1992
--------------------------------- -------------------------------------------------------------
Balance at End of
Period Applicable to Amount* % Amount* % Amount* %
--------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 67 9% $ 61 9% $ 63 11%
Installment 62 9% 67 10% 63 11%
Real Estate 596 82% 546 81% 443 78%
--------------------------------- --------------------------------- ------------------------------
Total $ 725 100% $ 674 100% $ 569 100%
</TABLE>
* Dollars in thousands
-105-
<PAGE>
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 $839,000 at December 31, 1994, an increase of $104,000 over December 31,
1993. Nonperforming assets increased $200,000 during 1993 over the December 31,
1992 balance of $535,000.
<TABLE>
<CAPTION>
Nonperforming Assets
September 30, December 31,
-------------------------- ------------------------------------
1995 1994 1994 1993 1992
-------------------------- ------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 281 $ 4 $ 4 $ - $ 50
Loan contractually past due 90 days
or more and still accruing 790 112 560 292 38
Restructured Loans - - - - -
-------- ------- ------ -------- -----
Total nonperforming loans $1,071 $116 $839 $292 $ 88
Other real estate owned 239 275 275 443 447
-------- ------- ------ -------- -----
Total nonperforming assets $1,310 $391 $839 $735 $ 535
=========================== ====================================
Nonperforming assets to period end
total loans and other real estate 2.00% 0.61% 1.32% 1.24% 0.98%
Foregone interest income on
nonaccrual loans $ 6 $ 1 $ 2 $ 2 $ 11
=========================== ====================================
Interest income recorded on non-
accrual loans during the year $ 8 $ - $ - $ 3 $ -
====================================================================
</TABLE>
The following table summarizes all nonperforming loans, by loan type as of
September 30, 1995:
<TABLE>
<CAPTION>
Number
of Principal
(Dollars in thousands) Loans Balance
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage 12 $ 872
Installment loans 12 146
Commercial loans 2 53
------- --------
26 $1,071
====== ========
</TABLE>
-106-
<PAGE>
Generally, loans are placed in nonaccrual status when loans are both 90
days delinquent and collection of interest and principal is doubtful. 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. Approximately 70% of these loans are
collateralized by residential real estate.
As of September 30, 1995, nonaccrual loans and loan contractually past
due greater than 90 days have increased 98.5% and 712.5% over the September 30,
1994 levels, respectively. While the increase is significant, there are only 5
loans in nonaccrual status. The largest two loans, $130,000 and $86,000, are
mortgage real estate loans secured by residential real estate. In the case of
the $130,000 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. See "Community Bankshares
Incorporated - Lending Activities - Collection Practices."
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
intent and the Bank has the ability at the time of purchase to hold them until
maturity or on a long-term basis. 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 September 30, 1995 was
$12.508 million compared to $9.102 million at September 30, 1994.
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of September 30,
1995 and December 31, 1994.
-107-
<PAGE>
<TABLE>
<CAPTION>
Securities Portfolio
September 30, 1995
Held-to-Maturity Available-for-Sale
Cost Market Cost Market
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government Agencies $ 10,724 $ 10,669 $ 1,634 $ 1,652
Other securities - - 190 206
------------------------------------------------------------------
$ 10,724 $ 10,669 $ 1,824 $ 1,858
==================================================================
December 31, 1994
Held-to-Maturity Available-for-Sale
Cost Market Cost Market
(In thousands)
U.S. Government Agencies $ 7,599 $ 7,104 $ 802 $ 776
Other securities - - 190 193
------------------------------------------------------------------
$ 7,599 $ 7,104 $ 992 $ 969
==================================================================
</TABLE>
The maturity distribution, book value, and yield of the total
investment securities portfolio at September 30, 1995 and December 31, 1994 are
presented as follows:
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September 30, 1995
Book Market
Value Value Yield
(In thousands)
Within 12 months $ - $ - -
Over 1 year through 5 years 489 497 8.64%
Over 5 years through 10 years 1,513 1,496 7.55%
Over 10 years 10,506 10,477 6.62%
---------------------------------------------
$ 12,508 $ 12,470 6.81%
=============================================
December 31, 1994
Book Market
Value Value Yield
(In thousands)
Within 12 months $ - $ - -
Over 1 year through 5 years 670 671 8.72%
Over 5 years through 10 years 1,647 1,566 7.09%
Over 10 years 6,251 5,835 7.53%
---------------------------------------------
$ 8,568 $ 8,072 7.39%
=============================================
Deposits
Deposits at September 30, 1995 were $78.314 million as compared to
$69.140 million as of September 30, 1994, an increase of 13.27%. The growth in
deposits was lead by the 49.29% increase in certificate of deposits, which
increased from $19.271 million at September 30, 1994 to $28.769 million at
September 30, 1995. At September 30, 1995 certificates of deposit in excess of
$100,000 had grown by $1.282 million, an increase of 26.96% over September 30,
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,
September 30, 1995 1994 1993 1992
------------------ ---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $14,870 $11,507 $10,651 $11,601
Interest-bearing liabilities:
Money market and NOW
accounts 21,221 4.04% 24,629 3.27% 24,792 3.40% 18,163 3.96%
Savings deposits 7,412 3.46% 8,555 3.23% 8,052 3.38% 5,971 3.89%
Time deposits 28,770 5.32% 18,981 4.85% 20,701 4.78% 19,983 5.72%
Large denomination deposits 6,041 4.62% 4,409 4.32% 4,719 5.51% 4,806 6.32%
----------------------------------------------------------------------------------------
Total interest-bearing accounts 63,444 4.54% 56,574 3.89% 58,264 4.10% 48,923 4.98%
--------------------------------------------------------------------------------------
Total Deposits $78,314 $68,081 $68,915 $60,524
======= ======= ======= =======
</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>
September 30, 1995 $ 667 $1,746 $941 $2,687 $6,041 7.72%
December 31, 1994 $1,469 $ 508 $739 $1,693 $4,409 6.48%
</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 15.89% in 1994 over 1993.
Similarly, average stockholders' equity increased 14.1% in 1993 over 1992.
During 1992, average stockholders' equity increased 12.7% over 1991. The
following table highlights certain ratios for the periods indicated:
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<PAGE>
<TABLE>
<CAPTION>
Return on Equity and Assets
Nine Months Ended
September 30, Years Ended December 31,
1995 1994 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income before securities gains and losses to:
Average total assets 1.88% 1.61% 1.63 % 1.46% 1.31%
Average stockholders' equity 17.25 15.92 15.66 15.26 14.12
Net income to:
Average total assets 1.88 1.59 1.69 1.48 1.28
Average stockholders' equity 17.71 15.87 16.25 15.49 13.86
Dividend payout ratio (dividends declared
per share divided by net income per share) 17.01 18.52 13.04 10.58 10.81
Average stockholders' equity to average
total assets ratio 10.69 10.13 10.38 9.57 9.25
</TABLE>
The federal banking agencies have 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. CBOV had a ratio of risk-weighted assets to total capital of
15.65% at December 31, 1994 and a ratio of risk-weighted assets to Tier 1
capital of 14.40%. Both of these exceed the minimum capital requirements adopted
by the federal regulatory agencies.
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<PAGE>
<TABLE>
<CAPTION>
Analysis of Capital
September 30, December 31
------------- -----------
1995 1994 1994 1993 1992
--------------------------- -----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Capital:
Common stock $ 3,450 $ 1,710 $ 1,710 $ 1,710 $ 1,713
Surplus 1,036 1,036 989 989 996
Retained earnings 5,169 5,525 5,912 4,771 3,806
Unrealized gain (loss) on
available-for-sale securities 22 10 (15) - -
Guaranteed ESOP indebtedness (330) - - - -
------------------------ --------------------------------------
Total Tier 1 Capital $ 9,347 $ 8,281 $ 8,596 $ 7,470 $ 6,515
Tier 2 Capital:
Allowance for loan losses 806 674 725 608 569
------------------------ ------------------------------------
Total Tier 2 Capital 806 674 725 608 569
------------------------ ------------------------------------
Total risk-based capital $ 10,153 $ 8,955 $ 9,321 $ 8,078 $ 7,084
====================== ===================================
Risk weighted assets $ 66,624 $62,548 $ 59,523 $58,279 $55,924
Capital Ratios:
Tier 1 risk-based capital 14.03% 13.16% 14.40% 12.82% 11.65%
Total risk based capital 15.24% 14.24% 15.65% 13.66% 12.67%
Tier 1 capital to average total assets 11.16% 10.56% 11.11% 9.71% 9.48%
</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 depositor's requirements and meet
its customers' credit needs.
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.
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<PAGE>
Interest rates do not necessarily move in the same direction or with the same
magnitude as prices of goods and services.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Mitchell, Wiggins and Company 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.
Although it has not yet selected auditors for the current year, CBI
anticipates that Mitchell, Wiggins and Company will be selected as CBI's
auditors for 1996. A representative of Mitchell, Wiggins and Company 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 1,150,000 shares of Common Stock outstanding at
March 1, 1996, held by ___ 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 ________ shares were issued and outstanding as of March 1, 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 1,150,000 shares were issued and outstanding as
of March 1, 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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 September 30,
1995 are 13.51% and 14.63%, exceeding the minimums required. Based upon the
applicable Federal Reserve regulations, at September 30, 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 September 30, 1995, was 10.08%, 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 September 30, 1995,
and also the pro forma combined capital ratios as of September 30, 1995.
<TABLE>
<CAPTION>
Capital Ratios
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% 14.03% 12.76% 13.51%
Total (2)(4)................ 8.00% 15.24% 13.74% 14.63%
Leverage (2)(3)(4)............. 3.00% 11.16% 8.71% 10.08%
Total shareholders' equity
to total assets............. N/A 10.55% 8.63% 9.71%
</TABLE>
(1) The pro forma risk-based capital ratios have been computed using pro
forma combined historical data for CBI and CBOV at September 30, 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 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.
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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<PAGE>
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.
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<PAGE>
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
September 30, 1995 and December 31, 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, including elsewhere in this Joint Proxy
Statement or in documents delivered herewith or incorporated herein by
reference. See "Available Information."
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<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,742,686 $ 2,964,310 $ 6,706,996
Federal funds sold 6,810,000 1,308,000 8,118,000
----------------------------------------------------------------------
Total cash and cash equivalents 10,552,686 4,272,310 - 14,824,996
Investment securities:
Available for sale 1,858,109 6,559,410 8,417,519
Held to maturity (approximate market value, 10,723,620 10,726,252 21,449,872
$21,769,000 in 1994 and $24,169,000 in 1993)
Loans, net 63,004,661 43,567,729 106,572,390
Bank premises and equipment, net 1,020,432 1,679,832 2,700,264
Accrued interest receivable 472,713 542,795 1,015,508
Other assets 1,015,323 631,920 1,647,243
----------------------------------------------------------------------
$ 88,647,544 $ 67,980,248 $ - $ 156,627,792
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 14,869,549 $10,103,154 24,972,703
Interest bearing demand deposits 21,222,239 15,967,100 37,189,239
Savings deposit 7,411,964 16,828,000 24,239,964
Time deposits, $100,000 and over 6,040,581 3,879,000 9,919,581
Other time deposits 28,769,708 14,957,000 43,726,708
----------------------------------------------------------------------
78,314,041 61,734,154 - 140,048,195
Accrued interest payable 386,654 60,462 447,116
Other liabilities 598,883 320,795 919,678
----------------------------------------------------------------------
79,299,578 62,115,411 - 141,414,989
----------------------------------------------------------------------
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) 0
Surplus 1,036,432 2,045,823 (357,501) 2,724,754
Retained earnings 5,169,247 2,064,590 - 7,233,837
Net unrealized gains on available for sale
securities, net of tax 22,287 - - 22,287
----------------------------------------------------------------------
9,677,966 5,864,837 - 15,542,803
Debt guaranteed in connection with acquisition
of Corporation's capital by Employee Stock
Ownership Trust (330,000) - - (330,000)
----------------------------------------------------------------------
9,347,966 5,864,837 - 15,212,803
----------------------------------------------------------------------
$ 88,647,544 $ 67,980,248 $ - $ 156,627,792
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
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 in 1994 and $24,169,000 in 1993)
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 12,778,232 37,406,956
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 56,604,525 - 124,685,319
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 (1,240,352) 988,932
Retained earnings 5,911,858 1,509,080 932,803 8,353,741
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 nine months ended September 30, 1995 and the three years ended December 31,
1994 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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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED STATEMENTS OF INCOME
Nine Months Ending September 30, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,671,768 $ 3,155,264 $ $ 7,827,032
Interest on investment securities:
U.S. Government agencies and corporations 489,794 594,376 1,084,170
Other securities 9,760 86,199 95,959
States and political subdivisions - 50,555 50,555
Interest on federal funds sold and securities
purchased under agreements to resell 187,620 47,768 235,388
------- ------ -------
Total interest income 5,358,942 3,934,162 9,293,104
--------- --------- ---------
Interest expense:
Interest on deposits 2,082,182 1,609,802 3,691,984
Interest on federal funds purchased and securities
sold under agreements to repurchase 6,466 - 6,466
----- -----
Total interest expense 2,088,648 1,609,802 3,698,450
--------- --------- ---------
Net interest income 3,270,294 2,324,360 5,594,654
Provision for loan losses 81,000 165,000 246,000
------ ------- -------
Net interest income after provision
for loan losses 3,189,294 2,159,360 5,348,654
--------- --------- ---------
Other income:
Service charges, commissions and fees 496,200 268,399 765,599
Security gains (losses) - (9,418) (9,418)
Other operating income 60,754 - 60,754
------ ------
Total other income 556,954 258,981 815,935
------- ------- -------
Other expenses:
Salaries and employee benefits 1,052,376 910,470 1,962,846
Net occupancy expense 118,231 155,050 273,281
Furniture and equipment expense 145,898 101,059 246,957
Other operating expense 543,242 408,946 952,188
------- ------- -------
Total other expenses $ 1,859,747 $ 1,575,525 $ 3,435,272
--------------- ------------ ------------
Income before income taxes $ 1,886,501 $ 842,816 $ 2,729,317
Income taxes 702,862 287,500 990,362
------- ------- -------
Net income $ 1,183,639 $ 553,316 $ 1,738,955
=============== ============ ============
Earnings per share (based on 1,217,817
shares outstanding CBI: 501,254 shares
outstanding CBOV) $ 0.97 $ 1.11 $ $ 0.90
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
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 187,620 47,768 235,388
------- ------ -------
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
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<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 58,798 198,634 254,432
------ ------- -------
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
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COMMERCE BANK OF VIRGINIA
PRO FORMA CONDENSED STATEMENTS OF INCOME
Year Ending December 31, 1992
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOV ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,526,079 $ 2,562,835 $ $ 7,088,914
Interest on investment securities:
U.S. Government agencies and corporations 748,266 313,016 1,061,282
Other securities 6,626 136,037 142,663
States and political subdivisions - 59,311 59,311
Interest on federal funds sold and securities
purchased under agreements to resell 85,184 144,208 229,392
------ ------- -------
Total interest income 5,366,155 3,215,407 8,851,562
--------- --------- ---------
Interest expense:
Interest on deposits 2,390,783 1,343,952 3,734,735
Interest on federal funds purchased and securities
sold under agreements to repurchase 51,097 - 51,097
------ ------
Total interest expense 2,441,880 1,343,952 3,785,832
--------- --------- ---------
Net interest income 2,924,275 1,871,455 4,795,730
Provision for loan losses 371,800 127,000 498,800
------- ------- -------
Net interest income after provision
for loan losses 2,552,475 1,744,455 4,296,930
--------- --------- ---------
Other income:
Service charges, commissions and fees 759,650 164,000 923,650
Security gains (losses) (16,000) 4,965 (11,035)
Other operating income 50,527 72,124 122,651
------ ------ -------
Total other income 794,177 241,089 1,035,266
------- ------- ---------
Other expenses:
Salaries and employee benefits 1,040,809 761,807 1,802,616
Net occupancy expense 155,139 107,545 262,684
Furniture and equipment expense 217,662 138,337 355,999
Other operating expense 644,496 516,579 1,161,075
------- ------- ---------
Total other expenses $ 2,058,106 $ 1,524,268 $ 3,582,374
--------------- ------------ ------------
Income before income taxes $ 1,288,546 $ 461,276 $ 1,749,822
Income taxes 442,629 141,000 583,629
------- ------- -------
Net income $ 845,917 $ 320,276 $ 1,166,193
=============== ============ ============
Earnings per share (based on 1,144,962
shares outstanding CBI: 384,417 shares
outstanding CBOV) $ 0.74 $ 0.83 $ $ 0.69
======================================================================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
-134-
<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 September 30, 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.
-135-
<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, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The financial statements of CBOV as of December 31, 1994, 1993 and 1992
and for each of the three years in the period ended December 31, 1994 included
in this Prospectus/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
-136-
<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 _________
___, 199___, 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.
-137-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
between
Commerce Bank of Virginia
and
Community Bankshares Incorporated
-------------------------
December 12, 1995
A-1
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
The Reorganization and Related Matters
<TABLE>
<CAPTION>
Page
<S> <C>
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
A-2
<PAGE>
Page
(p) Insurance.......................................................................... 14
(q) Absence of Material Changes and Events............................................. 14
(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
A-3
<PAGE>
Page
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
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
A-4
<PAGE>
Page
(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
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
</TABLE>
Exhibit A - Plan of Share Exchange between Commerce Bank of Virginia and
Community Bankshares Incorporated
A-5
<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 outstanding
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
A-6
<PAGE>
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 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 Reorganization
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 satisfied. 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
limitation (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 trans-
actions contemplated by this Agreement; provided, however, that solely for
A-7
<PAGE>
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 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 Disclosed"
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 consideration
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.
A-8
<PAGE>
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 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 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
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:
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(a) Organization, Standing and Power. (1) CBOV is a
corporation 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
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 corporate
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 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 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
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or otherwise bound, or of any registration or qualification provisions of any
federal or state securities laws. Except as Previously Disclosed, there are no
outstanding 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.
(d) Ownership of Stock. (1) CBOV 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.
(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
Previously 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
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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 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").
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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.
(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.
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(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.
(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
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 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 financial
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 applicability
relating to or affecting creditors' rights and to general equity principles. 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.
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(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 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.
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(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 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
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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 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
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Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern.
(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
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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 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.
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(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 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
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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 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
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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 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
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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 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
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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. 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.
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(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 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,
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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 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.
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(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 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
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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.
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
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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;
(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
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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, 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
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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).
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
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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 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.
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(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 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.
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(c) Affiliate Letters. Each shareholder of CBOV who may be
deemed by counsel for CBI to be an "affiliate" of CBOV within the meaning of
Rule 145 under the Securities Act of 1933 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 provisions of paragraph (d) of Rule
145 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 forgoing 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
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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.
(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.
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(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.
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,
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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), then CBI 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.
(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:
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If to CBI:
Nathan S. Jones, 3rd, President
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23804
(Tel. 804-861-2320)
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.
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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 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.
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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
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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
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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
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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
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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
A-44
<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).
A-45
<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.
A-46
<PAGE>
[This page intentionally left blank]
A-47
<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>
Appendix C
Commerce Bank of Virginia
Contents
Independent Auditors' Report C - 2
Financial Statements
Statements of Condition C - 3
Statements of Operations C - 5
Statements of Stockholders' Equity C - 7
Statements of Cash Flows C - 9
Notes to Financial Statements C - 11
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, 1994 and 1993, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
/s/ BDO Seidman
January 20, 1995
C-2
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
September 30, December 31,
1995 1994 1993
<S> <C> <C> <C>
Assets
Cash and due from banks $ 2,964,310 $ 4,982,284 $ 3,840,759
Federal funds sold 1,308,000 - 5,032,000
Investment securities (approximate
market value of $17,291,296
$14,666,000 and $13,569,000 (Note 2) 17,285,662 15,164,608 13,379,845
Loans receivable, net (Note 3) 43,567,729 38,801,575 30,778,361
Mortgage loans held for sale (Note 4) - - 2,125,261
Bank premises and equipment, net (Note 5) 1,679,832 1,461,589 1,630,108
Accrued interest receivable 542,795 432,102 258,948
Other assets 631,920 243,544 162,735
- -----------------------------------------------------------------------------------------------------------
$67,980,248 $61,085,702 $57,208,017
- -----------------------------------------------------------------------------------------------------------
</TABLE>
C-3
<PAGE>
- --------------------------------------------------------------------------------
Commerce Bank of Virginia
Statements of Condition
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 6) $61,734,154 $55,811,525 $53,297,503
Federal funds purchased - 793,000 -
Accrued interest payable 60,462 37,346 45,395
Deferred income taxes (Note 7) 64,436 64,436 31,716
Other liabilities 256,359 120,682 73,239
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 62,115,411 56,826,989 53,447,853
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 8, 9 and 10)
Common stock, $3.50 par value
Authorized 1,500,000 shares
Issued and outstanding 501,264, 431,223
and 429,023 shares 1,754,424 1,509,281 1,501,581
Capital surplus 2,045,823 1,240,352 1,236,332
Retained earnings 2,064,590 1,509,080 1,022,251
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,864,837 4,258,713 3,760,164
- -----------------------------------------------------------------------------------------------------------------------------
$67,980,248 $61,085,702 $57,208,017
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-4
<PAGE>
Commerce Bank of Virginia
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------
1995 1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest and dividend income
Loans $3,155,264 $2,373,492 $3,266,997 $2,786,466 $2,562,835
Investment securities
U. S. Government agencies
(taxable) 594,378 439,048 605,141 322,644 313,016
Other securities (taxable) 96,315 110,456 143,937 144,723 131,869
State and County municipals
(tax exempt) 36,728 47,581 64,655 56,439 59,311
Federal Reserve Bank 3,709 3,639 5,246 4,251 4,168
Federal funds sold 47,768 111,418 118,692 195,634 144,208
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 3,934,162 3,085,634 4,204,668 3,510,157 3,215,407
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 1,599,643 1,111,371 1,495,867 1,324,068 1,343,952
Federal funds purchased 10,159 670 3,674 - -
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,609,802 1,112,041 1,499,541 1,324,068 1,343,952
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 2,324,360 1,973,593 2,705,127 2,186,089 1,871,455
Provision for loan losses
(Note 3) 165,000 124,838 199,838 75,000 127,000
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,159,360 1,848,755 2,505,289 2,111,089 1,744,455
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges on deposit
accounts 221,019 216,790 289,406 200,568 164,000
Other 37,962 92,113 140,450 63,268 77,089
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 258,981 308,903 429,856 263,836 241,089
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
C-5
<PAGE>
Commerce Bank of Virginia
Statements of Operations
(continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------
1995 1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Noninterest expenses
Salaries and employee benefits
(Notes 8 and 11) $ 910,470 $ 896,367 $1,187,014 $1,002,556 $ 761,807
Occupancy (Note 12) 155,050 160,495 154,624 169,688 107,545
Depreciation and amortization 101,059 186,859 227,875 186,883 138,337
Other 408,946 424,561 653,203 635,207 516,579
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,575,525 1,668,282 2,222,716 1,994,334 1,524,268
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 842,816 489,376 712,429 380,591 461,276
Income taxes (Note 7) 287,500 146,835 225,600 103,000 141,000
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 555,316 $ 342,541 $ 486,829 $ 277,591 $ 320,276
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share $1.11 $0.80 $1.13 $0.68 $0.83
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-6
<PAGE>
<TABLE>
<CAPTION>
Commerce Bank of Virginia
Statements of Stockholders' Equity
Additional Total
Common Paid-in Retained Stockholders'
Nine Months Ended September 31, 1994 and 1995 Stock Capital Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $1,501,581 $1,236,332 $1,022,251 $3,760,164
Net income - - 342,541 342,541
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 1,501,581 1,236,332 1,364,792 4,102,705
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 1,509,281 1,240,352 1,509,080 4,258,713
Proceeds from stock sale 245,143 805,471 194 1,050,808
Net income - - 555,316 555,316
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $1,754,424 $2,045,823 $2,064,590 $5,864,837
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
continued...
C-7
<PAGE>
Commerce Bank of Virginia
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Total
Common Capital Retained Stockholders'
Stock Surplus Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1991 $1,345,348 $976,238 $ 794,903 $3,116,489
Issuance of 2,460
shares of common stock
to ESOP (Note 8) 8,610 11,390 - 20,000
Exercise of stock
options (2,000 shares)
(Note 9) 7,000 6,460 - 13,460
Net income - - 320,276 320,276
- ----------------------------------------------------------------------------------------------------------------
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 8) 4,116 8,232 - 12,348
10% common stock
dividend (39,002
shares) (Note 10) 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 9) 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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-8
<PAGE>
Commerce Bank of Virginia
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------
1995 1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income $ 555,316 $ 342,541 $ 486,829 $ 277,591 $ 320,276
Adjustments to reconcile net
income to net cash provided by
operating activities
Provisions for loan losses 165,000 124,838 199,838 75,000 127,000
Depreciation and amortization 101,059 186,859 227,875 186,883 138,337
Amortization and accretion of
premiums and discounts, net 617 9,363 14,045 17,682 27,225
Net (increase) decrease in
mortgage loans held for sale - 2,125,261 2,125,261 (810,824) (143,638)
(Increase) decrease in accrued
interest receivable (110,693) (213,720) (173,154) 23,495 81,003
Increase (decrease) in accrued
interest payable 23,116 8,014 (8,049) 8,766 (28,372)
Increase (decrease) in deferred
income taxes - - 32,720 (31,000) (19,000)
Increase (decrease) in income
taxes payable 69,540 - 52,527 (107,296) 189,608
Other (328,918) (102,420) (105,496) (49,480) (22,560)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by
operating activities 475,037 2,480,736 2,852,396 (409,183) 669,879
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of investment securities (8,823,135) (7,408,750) (6,985,198) (6,557,553) (3,854,103)
Proceeds from principal payments
and maturities of investment
securities 6,698,355 3,699,712 5,186,390 1,155,000 2,030,910
Loan originations, net of principal
collected (4,931,154) (7,470,151) (8,223,052) (5,738,483) (3,708,761)
Proceeds from sale of real estate - - 19,603 - 98,188
Purchases of bank premises and
equipment (309,514) (44,359) (59,356) (562,401) (517,402)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing
activities (7,365,448) (11,223,548) (10,061,613) (11,703,437) (5,951,168)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
C-9
<PAGE>
Commerce Bank of Virginia
Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------------------
1995 1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Financing Activities
Net increase in deposits $ 5,922,629 $2,874,262 $2,514,022 $15,291,065 $3,309,663
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 - 13,460
Repurchase of common stock
for issuance to ESOP - - - (12,652) -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 6,180,437 2,874,262 3,318,742 15,278,413 3,323,123
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (709,974) (5,868,550) (3,890,475) 3,165,793 (1,958,166)
Cash and cash equivalents -
beginning of year 4,982,284 8,872,759 8,872,759 5,706,966 7,665,132
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents -
end of year $4,272,310 $3,004,209 $4,982,284 $ 8,872,759 $5,706,966
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of
Cash Flow Information
- -----------------------------------------------------------------------------------------------------------------------------
Cash payments of interest
expense $1,609,802 $1,112,061 $1,508,000 $ 1,315,000 $1,372,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 150,000 $ 108,000 $ 140,000 $ 241,000 $ 33,000
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of
Non Cash Investing and
Financing Activities
- -----------------------------------------------------------------------------------------------------------------------------
Transfers from loans to real
estate acquired through foreclosure $ - $ - $ 25,000 $ - $ 98,000
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
through contribution to ESOP $ - $ - $ - $ 12,348 $ 20,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
C-10
<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.
C-11
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(continued)
1. Summary of Significant Accounting Policies (continued)
Investment Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 addresses the accounting
and reporting investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Investments in
securities are to be 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 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.
SFAS 115 is effective for annual financial statements for fiscal years beginning
after December 15, 1993, and was adopted by the Bank for the year ended December
31, 1994. The application of the pronouncement did not have a material effect on
the financial statements of the Bank.
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 on 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. Management's assessment of the adequacy of the allowance
is subject to evaluation and adjustment by the Bank's regulators.
C-12
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(continued)
1. Summary of Significant Accounting Policies (continued)
Loans and Allowance for Loan Losses (continued)
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 this new accounting
standard was immaterial to the operating results of the Bank for the nine months
ended September 30, 1995. Prior financial statements have not been restated to
apply the provision of the new accounting standard.
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 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 September 30, 1995, the Bank had no loans that were considered as
impaired.
Loan fees received on mortgage loans are recognized immediately as the Bank
sells these loans upon closing. Fees generated from other loans are also
recognized at closing. These loans are primarily short-term and deferral of fees
would not be significant to the operations of the Bank.
C-13
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(continued)
1. Summary of Significant Accounting Policies (continued)
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
plus the estimated cost to sell the property exceeds its fair value.
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 nine months ended September 30, 1995 and 1994 and the
years ended December 31, 1994, 1993 and 1992 were 500,285, 428,176, 429,399,
409,463 and 384,417, respectively. Existing stock options are not considered in
the computation as their dilutive effect is less than three percent.
C-14
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(continued)
1. Summary of Significant Accounting Policies (continued)
Cash Equivalents
For purposes of this presentation, cash equivalents include federal funds sold.
Accounting Pronouncements
In December 1991, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures About Fair
Value of Financial Instruments". SFAS 107 requires all entities to disclose the
fair value of financial instruments, both assets and liabilities recognized and
not recognized in the balance sheet, for which it is practicable to estimate
fair value. SFAS 107 is effective for fiscal years ending after December 15,
1995, for entities with less than $150 million in total assets. Management does
not expect the application of this pronouncement to have a material effect on
the financial statements of the Bank.
Other
Certain reclassifications have been made in the prior years' financial
statements to conform to the September 30, 1995 presentation.
C-15
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
2. Investment Securities
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
U. S. Treasury and agency
securities $ 8,037,853 $ - $ 6,334 $ 8,031,519
Mortgage-backed securities 292,063 257 - 292,320
Corporate securities 1,258,795 7,755 - 1,266,550
State and county Municipal bonds 1,136,547 29,069 - 1,165,616
-----------------------------------------------------------------------------
10,725,258 37,081 6,334 10,756,005
-----------------------------------------------------------------------------
Available for Sale
U.S. Treasury and agency
securities 2,694,155 2,767 - 2,696,922
Mortgage-backed
Securities 3,733,749 - 27,880 3,705,869
Other 132,500 - - 132,500
-----------------------------------------------------------------------------
6,560,404 2,767 27,880 6,535,291
-----------------------------------------------------------------------------
$17,285,662 $39,848 $34,214 $17,291,296
-----------------------------------------------------------------------------
</TABLE>
C-16
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
2. Investment Securities (continued)
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------
<CAPTION>
December 31, 1993
-------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
U. S. Treasury and agency
securities $ 9,517,552 $134,150 $ 6,667 $ 9,645,035
Mortgage-backed securities 588,017 1,908 5,667 584,258
Corporate securities 1,964,937 44,172 5,420 2,003,689
State and county
Municipal bonds 1,238,339 26,679 - 1,265,018
Other 71,000 - - 71,000
-------------------------------------------------------------------------------
$13,379,845 $206,909 $17,754 $13,569,000
-------------------------------------------------------------------------------
</TABLE>
C-17
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
2. Investment Securities (continued)
At September 30, 1995 and December 31, 1994 and 1993, securities with an
amortized cost of $6,345,652, $5,005,000 and $3,000,000 and a market value of
approximately $6,342,000, $4,902,000 and $3,139,000, respectively, were pledged
as collateral to secure public funds as required by law.
The amortized cost and estimated market values by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
- ----------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,851,733 $ 4,838,175 $ 3,779,070 $ 3,720,106
Due after one year through
five years 6,290,324 6,291,980 8,872,096 8,592,281
Due after five years through
ten years 1,200,000 1,221,157 400,000 376,528
Due after ten years 785,294 809,295 834,360 795,315
----------------------------------------------------------------------------
13,127,351 13,160,607 13,885,526 13,484,230
Mortgage-backed securities 4,025,811 3,998,189 1,146,932 1,049,620
Other 132,500 132,500 132,150 132,150
----------------------------------------------------------------------------
$17,285,662 $17,291,296 $15,164,608 $14,666,000
----------------------------------------------------------------------------
</TABLE>
C-18
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
3. Loans
Loans receivable are summarized as follows:
<TABLE>
September 30, December 31,
1995 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and industrial $ 4,670,732 $ 3,682,996 $3,645,722
Real estate - construction and
land development 3,297,247 4,113,018 1,715,000
Real estate - other 25,898,133 21,812,940 19,079,899
Consumer 8,271,731 7,588,973 6,535,444
Other 1,884,141 1,977,990 132,629
-----------------------------------------------------------------------------
44,021,984 39,175,917 31,108,694
Less allowance for loan losses 454,255 374,342 330,333
-----------------------------------------------------------------------------
$43,567,729 $38,801,575 $30,778,361
-----------------------------------------------------------------------------
</TABLE>
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
as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended December 31,
---------------------
September 30, 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 963,000 $1,052,000 $1,580,000
Additions 267,000 363,500 566,000
Repayents 149,000 452,500 1,094,000
-------------------------------------------------------------------------------
Ending balance $1,081,000 $ 963,000 $1,052,000
-------------------------------------------------------------------------------
</TABLE>
C-19
<PAGE>
- -------------------------------------------------------------------------------
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
3. Loans (continued)
Activity in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
1995 1994 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
year $374,342 $330,333 $330,333 $300,692 $281,073
Provision charged to
expense 165,000 124,838 199,838 75,000 127,000
Charge-offs, net of
recoveries (85,087) (120,884) (155,829) (45,359) (107,381)
---------------------------------------------------------------------------------------
Balance, end of year $454,255 $334,287 $374,342 $330,333 $300,692
--------------------------------------------------------------------------------------
</TABLE>
4. Mortgage Loans Held For Sale
First mortgage loans originated by the bank that qualify for sale in the
secondary market are classified by the Bank as held for sale. These loans are
carried at the lower of aggregate cost or market value. The Bank had no loans
classified as held for sale at September 30, 1995 and December 31, 1994. The
approximate market value of loans held for sale at December 31, 1993 was
$2,148,000.
5. Bank Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 192,177 $ 192,177 $ 192,177
Building and leasehold improvements 1,439,353 1,172,059 1,168,496
Furniture and equipment 1,035,622 993,402 938,187
--------------------------------------------------------------------
2,667,152 2,357,638 2,298,860
Less allowance for depreciation
and amortization 987,320 896,049 668,752
--------------------------------------------------------------------
$1,679,832 $1,461,589 $1,630,108
--------------------------------------------------------------------
</TABLE>
C-20
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
6. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand $10,103,596 $ 9,019,064 $ 8,711,703
Interest-bearing transaction accounts 15,966,661 11,985,232 10,594,639
Savings 16,828,180 20,803,498 19,105,937
Certificates of deposit 18,835,717 14,003,731 14,885,224
------------------------------------------------------------------------------
Total deposits $61,734,154 $55,811,525 $53,297,503
------------------------------------------------------------------------------
</TABLE>
Certificates of deposits with balances of $100,000 or more totalled $3,879,345,
$2,293,766 and $2,459,639 at September 30, 1995, December 31, 1994 and 1993,
respectively.
7. Federal Funds Purchased
The following is a summary of certain information regarding Commerce's federal
funds purchased:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 1993
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at end of period/year $ - $793,000 $ -
Weighted average interest rate
at end of period/year 6.60% 5.56% $ -
Average amount outstanding
during the period/year $ 154,000 $ 66,000 $ -
Maximum amount outstanding at
any month end during the
period/year $1,052,000 $793,000 $ -
</TABLE>
Interest expense on Commerce's federal funds purchased amounted to $3,674, $0
and $0 for the years ended December 31, 1994, 1993 and 1992, respectively, and
$10,159 and $670 for the periods ended September 30, 1995 and 1994,
respectively.
C-21
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
8. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Current $287,500 $115,119
Deferred expense - 31,716
-------------------------------------------------------------------------------
Total provision for income taxes $287,500 $146,835
Year Ended December 31,
1994 1993 1992
-------------------------------------------------------------------------------
Current $192,900 $134,000 $160,000
Deferred expense (benefit) 32,700 (31,000) (19,000)
-------------------------------------------------------------------------------
Total provision for income taxes $225,600 $103,000 $141,000
</TABLE>
A reconciliation of income taxes computed at the statutory income tax rate to
the effective rate is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
-------------------------------------------------------------------------------
<S> <C> <C>
Income taxes at the statutory rate $286,560 $166,390
Increase (decrease) in taxes:
Municipal bond interest (12,487) (17,621)
Other 13,427 (1,934)
-------------------------------------------------------------------------------
$287,500 $146,835
-------------------------------------------------------------------------------
</TABLE>
C-22
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
8. Income Taxes (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at the statutory rate $242,200 $129,401 $156,834
Increase (decrease) in taxes:
Municipal bond interest (22,000) (15,956) (16,153)
Other 5,400 (10,445) 319
-------------------------------------------------------------------------------
$225,600 $103,000 $141,000
-------------------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
Period Ended September 30,
1995
-------------------------------------------------------------------------------
<S> <C>
Accrual to cash basis adjustment $(176,550)
Bad debt deduction 94,876
Depreciation and amortization (10,804)
Deferred compensation 28,042
-------------------------------------------------------------------------------
Deferred tax liability, net $ (64,436)
-------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
1994 1993
-------------------------------------------------------------------------------
<S> <C> <C>
Accrual to cash basis adjustment $(150,515) $(79,463)
Bad debt deduction 74,224 61,679
Depreciation and amortization (16,187) (33,797)
Deferred compensation 28,042 19,865
-------------------------------------------------------------------------------
Deferred tax liability, net $ (64,436) $(31,716)
-------------------------------------------------------------------------------
</TABLE>
9. Obligation to ESOP
The Bank participates in the non-contributory Virginia Bankers Association
Employee Stock Ownership Plan (ESOP) which was made available to member banks in
December 1989. Contributions of $22,500 and $22,500 to the ESOP were approved by
the Bank's Board of Directors for the nine months ended September 30, 1995 and
1994 and $30,000, $25,000 and $25,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
C-23
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(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.
The following table presents options outstanding under the Plan:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
---------------------------------------------------------------------------------------
Option Price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year $5.33 - $6.12 24,000 26,200
Options granted 5.33 - 8.63 - -
Options terminated 5.33 - -
---------------------------------------------------------------------------------------
Outstanding at end of year $5.33 - $8.63 24,000 26,200
---------------------------------------------------------------------------------------
Year Ended December 31,
1994 1993
---------------------------------------------------------------------------------------
Option Price
---------------------------------------------------------------------------------------
Outstanding at beginning of year $5.33 - $6.12 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 26,200
---------------------------------------------------------------------------------------
</TABLE>
C-24
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
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.
12. Deferred Compensation Plan
The Bank has a Deferred Compensation Plan (the "Plan") for the benefit of its
directors. There were no contributions recorded for the nine months ended
September 30, 1995 and 1994 and $24,050, $16,425 and $14,250 for the years ended
December 31, 1994, 1993 and 1992, respectively. Effective January 1, 1991, the
contribution under the Plan was used to fund annual premiums on life insurance
policies for the benefit of the directors. Redemption of policies for the cash
surrender value will be available to the directors upon attaining 70 years of
age. Prior to July 1989, directors served with no compensation.
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:
<TABLE>
<CAPTION>
Contract
Notional Amount
September 30, December 31,
1995 1994
--------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
<S> <C> <C>
Commitments to extend credit $8,138,000 $6,873,000
--------------------------------------------------------------------------------------
Standby letters of credit $ 657,000 $ 596,000
--------------------------------------------------------------------------------------
</TABLE>
C-25
<PAGE>
Commerce Bank of Virginia
Notes to Financial Statements
(Unaudited as of September 30, 1995 and 1994)
(continued)
13. Commitments and Contingencies (continued)
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.
The Bank leases land, tenant space and certain equipment under operating leases
expiring at various dates to 2006. Total rental expense amounted to
approximately $63,969 and $70,411 for the nine months ended September 30, 1995
and 1994 and $84,700, $96,855 and $61,104 for the years ended December 31, 1994,
1993 and 1992, respectively. At December 31, 1995, minimum annual lease payments
in the aggregate were as follows:
Year Ending December 31,
1995 $ 88,600
1996 79,700
1997 70,600
1998 51,000
1999 15,000
Thereafter 91,300
-------------
$396,200
-------------
C-26
<PAGE>
Appendix D
OPINION OF MCKINNON & COMPANY, INC.
January 8, 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>
Page 2
(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
1994 and up through September 30, 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
D-2
<PAGE>
Page 3
and can be evaluated at the date hereof, as well as our experience
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.
E-1
<PAGE>
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to
a plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or (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.
E-2
<PAGE>
B. If corporate action creating dissenters' rights under ss. 13.1-730
is taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in writing
all record shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in ss. 13.1-734.
ss. 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (i) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (ii) shall not vote such shares in
favor of the proposed action.
B. A shareholder who does not satisfy the requirements of
subsection A of this section is not entitled to payment for his shares
under this article.
ss. 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is authorized at a shareholders' meeting, the corporation, during the
ten-day period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of ss. 13.1-733.
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.
E-3
<PAGE>
ss. 13.1-736. Share restrictions.
A. The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss. 13.1-737. Payment.
A. Except as provided in ss. 13.1-738, within thirty days after receipt
of a payment demand made pursuant to ss. 13.1-735, the corporation shall pay the
dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
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.
E-4
<PAGE>
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
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.
E-5
<PAGE>
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-6
<PAGE>
Appendix F
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED FINANCIAL REPORT
December 31, 1994
F-1
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
Nathan S. Jones, 3rd. President and Chief Executive Officer
Lillian M. Umphlett Vice-President/Chief Financial Officer
D I R E C T O R S
Harold L. Vaughn, Chairman
Louis C. Shell, Vice-Chairman
Lawrence F. DeSouza, Secretary-Treasurer
Nathan S. Jones, 3rd., President and Chief Executive Officer
James A. Boyd, D.D.S. Elinor B. Marshall
B. Glenn Holden, M.D. Alvin L. Sheffield
Phillip H. Kirkpatrick W. Courtney Wells
F-2
<PAGE>
THE COMMUNITY BANK
O F F I C E R S
Nathan S. Jones, 3rd. President and Chief Executive Officer
Lillian M. Umphlett Vice-President and Cashier
Joseph F. Uzzle Senior Vice-President
Richard F. Ward, Jr. Vice-President
Karl M. Dingledine Assistant 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
D I R E C T O R S
Harold L. Vaughn, Chairman
Lawrence F. DeSouza, 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 Alvin L. Sheffield
F-3
<PAGE>
C 0 N T E N T S
Page
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL
STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS F-5
Consolidated balance sheets F-6
Consolidated statements of income F-7 and F-8
Consolidated statements of stockholders' equity F-9
Consolidated statements of cash flows F-10 and F-11
Notes to consolidated financial statements F-12 - F-34
INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY
INFORMATION F-35
SUPPLEMENTARY INFORMATION
Consolidated schedule of other operating
expenses F-36
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, 1994
and 1993, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1994. 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, 1994 and 1993, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ MITCHELL, WIGGINS & COMPANY
January 12, 1995
Petersburg, Virginia
F-5
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
ASSETS 1994 1993
------ ----------- ----------
Cash and due from banks $ 3,709,432 $ 4,260,608
Federal funds sold 1,017,000 2,480,000
------------ -----------
Total cash and cash
equivalents $ 4,726,432 $ 6,740,608
-----------
Investment securities:
Available for sale 969,213 --
Held to maturity (approximate market
value, $7,103,471 in 1994) 7,598,690 --
Investment securities (approximate
market value, $10,599,718 in 1993) -- 10,437,320
Loans, net 61,488,230 57,161,460
Bank premises and equipment, net 1,167,973 1,081,692
Accrued interest receivable 371,809 329,519
Other assets 1,040,781 1,170,553
------------ -----------
$ 77,363,128 $76,921,152
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 11,506,655 $10,651,496
Interest-bearing demand deposits 24,628,724 24,792,076
Savings deposits 8,555,392 8,051,694
Time deposits, $100,000 and over 4,408,657 4,718,849
Other time deposits 18,981,366 20,701,147
------------ -----------
$ 68,080,794 $68,915,262
Accrued interest payable 335,439 307,859
Other liabilities 351,095 228,253
------------ -----------
$ 68,767,328 $69,451,374
COMMITMENTS AND CONTINGENCIES
(Note 14)
STOCKHOLDERS' EQUITY
Capital stock, par value $3;
authorized 1,000,000 shares;
issued 1994 and 1993 570,000
shares $ 1,710,000 $ 1,710,000
Surplus 988,932 988,932
Retained earnings 5,911,858 4,770,846
Net unrealized losses on available
for sale securities, net of tax (14,990) --
------------ -----------
$ 8,595,800 $ 7,469,778
------------ -----------
$ 77,363,128 $76,921,152
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
---------- ---------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 5,347,803 $4,664,533 $ 4,526,079
Interest on investment
securities:
U.S. Government agencies
and corporations 630,802 657,976 748,266
Other securities 8,282 5,004 6,626
Interest on federal funds sold
and securities purchased
under agreements to resell 28,629 58,798 85,184
----------- ---------- -----------
Total interest income $ 6,015,516 $5,386,311 $ 5,366,155
- --------------------------------------------------------------- ----------- ---------- -----------
Interest expense:
Interest on deposits $ 2,226,620 $2,197,885 $ 2,441,693
Interest on federal funds pur-
chased and securities sold
under agreements to repur-
chase 5,287 763 187
----------- ---------- -----------
Total interest expense $ 2,231,907 $2,198,648 $ 2,441,880
- --------------------------------------------------------------- ----------- ---------- -----------
Net interest income $ 3,783,609 $3,187,663 $ 2,924,275
Provision for loan losses 66,000 120,000 371,800
----------- ---------- -----------
Net interest income
after provision for
loan losses $ 3,717,609 $3,067,663 $ 2,552,475
- --------------------------------------------------------------- ----------- ---------- -----------
Other income:
Service charges, commissions
and fees $ 738,357 $ 794,417 $ 759,650
Security gains (losses) 47,800 16,000 (16,000)
Loss on sale of other real
estate (33,980) -- --
Other operating income 49,036 48,358 50,527
----------- ---------- -----------
Total other income $ 801,213 $ 858,775 $ 794,177
- --------------------------------------------------------------- ----------- ---------- -----------
Other expenses:
Salaries and wages $ 1,063,342 $ 965,690 $ 834,503
Employee benefits 266,228 232,059 206,306
Net occupancy expense 150,818 161,290 155,139
Furniture and equipment
expense 207,114 185,400 217,662
Other operating expenses 859,289 736,531 644,496
Total other expenses $ 2,546,791 $2,280,970 $ 2,058,106
- --------------------------------------------------------------- ----------- ---------- -----------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
---------- ---------- -------
<S> <C> <C> <C>
Income before income taxes $1,972,031 $1,645,468 $1,288,546
--------------------------
Income taxes 660,019 566,553 442,629
---------- ---------- ----------
Net income $1,312,012 $1,078,915 $ 845,917
---------- ========== ========== ==========
Earnings per common and common
equivalent share $ 2.20 $ 1.89 $ 1.48
========== ========== ==========
Earnings per common share,
assuming full dilution $ 2.20 $ 1.89 $ 1.48
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
Guaranteed Unrealized
Capital Retained Debt of Securities
Stock Surplus Earnings ESOT Losses
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 $1,725,000 $1,018,812 $3,051,854 $ (35,000) $ -
Net income for the
year ended December
31, 1992 - - 845,917 - -
Cash dividends
declared, $.16 per
share (based on
574,000 shares out- - - (91,840) - -
standing)
Reduction in debt
guaranteed for the
Employee Stock
Ownership Trust - - - 35,000 -
Purchase of 4,000
shares of common stock (12,000) (22,878) - - -
---------- ---------- ---------- ---------- ----------
Balance, December 31, $1,713,000 $ 995,934 $3,805,931 $ - $ -
1992
Net income for the
year ended December
31, 1993 - - 1,078,915 - -
Cash dividends
declared, $.20 per
share (based on
570,000 shares out- - - (114,000) - -
standing)
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, $.30 per
share (based on
570,000 shares out- - - (171,000) - -
standing)
Net unrealized loss on
available for sale
securities, net of tax - - - - (14,990)
---------- ---------- ---------- ---------- ----------
Balance, December 31,
1994 $1,710,000 $ 988,932 $5,911,858 $ - $ (14,990)
========== ========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH
FLOWS Years Ended December 31, 1994,
1993 and 1992
1994 1993 1992
----- ----- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,312,012 $ 1,078,915 $ 845,917
Adjustments to reconcile net in-
come to net cash provided by
operating activities:
Depreciation 177,190 158,887 197,846
Deferred income taxes (68,367) (8,382) (68,971)
Provision for loan losses 66,000 120,000 371,800
Amortization and accretion of
investment securities 14,453 5,311 (6,059)
(Gain) loss on sale of
securities (47,800) (16,000) 16,000
(Gain) loss on sale of other
real estate 33,980 -- (1,764)
Gain on sale of bank premises
and equipment (14,181) (7,500) (13,582)
Changes in operating assets and
liabilities:
(Increase) decrease in ac-
crued interest receivable (42,290) (8,559) 26,869
Decrease in prepaid expenses 11,596 10,220 2,889
Increase (decrease) in ac-
crued expenses 126,385 94,609 (11,379)
Net change in other oper-
ating assets and
liabilities 23,801 (4,983) 13,938
----------- ----------- -----------
Net cash provided by
operating activities $ 1,592,779 $ 1,422,518 $ 1,373,504
- ------------------------------------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of invest-
ment securities $ 2,884,140 $ 4,280,656 $ 3,169,560
Proceeds from sale of investment
securities 87,800 -- --
Purchase of investment securities (1,091,887) (5,906,570) (2,532,890)
Net increase in loans (4,261,535) (5,206,977) (8,607,482)
Proceeds from the sale of bank
premises and equipment 19,750 7,500 20,250
Capital expenditures (266,074) (88,528) (92,153)
(Increase) decrease in other
assets 26,319 15,897 (28,776)
Purchase of other real estate -- -- (74,562)
----------- ----------- -----------
Net cash used in investing
activities $(2,601,487) $(6,898,022) $(8,146,053)
- ------------------------------------------ ----------- ----------- -----------
</TABLE>
F-10
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH
FLOWS Years Ended December 31, 1994,
1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in $ (834,468) $ 7,195,287 $ 7,712,965
deposits
Dividends paid (171,000) (114,000) (91,840)
Redemption of common stock -- (10,002) (34,878)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities) $(1,005,468) $ 7,071,285 $ 7,586,247
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents $(2,014,176) $ 1,595,781 $ 813,698
Cash and cash equivalents:
Beginning of year 6,740,608 5,144,827 4,331,129
----------- ----------- -----------
End of year $ 4,726,432 $ 6,740,608 $ 5,144,827
----------- =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 2,204,327 $ 2,235,248 $ 2,460,053
=========== =========== ===========
Income taxes $ 663,000 $ 583,601 $ 506,026
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Acquisition of other real estate:
Purchase price $ -- $ -- $ 107,508
Reduction of loans -- -- (32,946)
----------- ----------- -----------
Cash paid to acquire other
real estate $ -- $ -- $ 74,562
=========== =========== ===========
Sale of other real estate:
Sales price, net of closing
cost $ 131,235 $ -- $ 205,000
Increase in loans (131,235) -- (205,000)
----------- ----------- -----------
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
December 31, 1994 and 1993
Note 1. Significant Accounting Policies
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.
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 FASB
Statement 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. Statement 115 requires
that securities be classified as either Held to Maturity,
Available for Sale, or Trading.
F-12
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. (continued)
Securities are classified as held to maturity when
management has the intent and the Bank has the ability at
the time of purchase to hold them until maturity or on a
long-term basis. 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.
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, 1994, 1993,
and 1992.
F-13
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. (continued)
FASB Statement No. 115 does not allow retroactive
restatement, and therefore, the investment securities
portfolio at December 31, 1993 was carried at cost,
adjusted for amortization of premiums and accretions of
discount.
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. Accrual of interest is
discontinued on a loan when management believes, after
considering collection efforts and other factors, that the
borrower's financial condition is such that collection of
interest is doubtful.
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>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. (continued)
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.
Years
Buildings and improvements 5-50
Furniture and fixtures 3-20
Other real estate owned:
Other real estate owned (OREO) represents properties
acquired through foreclosure or other proceedings. OREO is
held for sale and is recorded at the lower of the recorded
amount of the loan or fair value of the properties less
estimated costs of disposal. Any write-down to fair value
at the time of transfer to OREO is charged to the
allowance for loan and lease 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. OREO is included with
other assets on the accompanying balance sheets.
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.
F-15
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. (continued)
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 8 to the
consolidated financial statements, during the year ended
December 31, 1993, the Corporation changed its method of
accounting for deferred income taxes.
Current accounting developments:
The Financial Accounting Standards Board has issued
Statement No. 114, Accounting by Creditors for Impairment
of a Loan, which becomes effective for years beginning
after December 31, 1994. Earlier application is permitted.
The Statement generally required 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 intends to adopt
this Statement for the year beginning January 1, 1995, and
anticipates no material effect on its financial position
and results of operations upon the adoption of this
statement.
F-16
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. (continued)
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 597,513 shares outstanding in 1994, 570,038 shares
outstanding in 1993, and 572,481 shares outstanding in
1992.
Reclassifications:
Various items in the consolidated balance sheet at
December 31, 1993 have been reclassified to conform to the
classifications used at December 31, 1994.
Various items in the consolidated statements of income and
cash flows for the years ended December 31, 1993 and 1992
have been reclassified to conform to the classifications
used at December 31, 1994. 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 $29,000 and $66,000 at December 31, 1994 and
1993, respectively.
F-17
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Investment Securities
The amortized cost and estimated market value of securities
available for sale at December 31, 1994 were:
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
======== ======== ========= ========
The amortized cost and estimated market values of securities
available for sale at December 31, 1994, 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.
Estimated
Amortized Market
Cost Value
Due in one year or less $ -- $ --
Due after one year but less than five years -- --
Due after five years but less than ten years 365,611 345,996
Due after ten years 626,314 623,217
-------- --------
$991,925 $969,213
======== ========
Proceeds from sales of securities available for sale were
$87,800 during 1994, resulting in gross gains of $47,800 and
no losses. There were no proceeds from sale of securities
during 1993 and 1992. No gross gains or losses were realized
during the years ended December 31, 1993 and 1992.
The amortized cost and estimated fair value of securities
being held to maturity at December 31 were:
F-18
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. (continued)
<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 $(503,354) $7,103,471
=========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of:
U. S. govern-
ment agencies $10,263,920 $ 201,926 $ 41,528 $10,424,318
Other 173,400 2,000 - 175,400
----------- --------- --------- -----------
$10,437,320 $ 203,926 $ 41,528 $10,599,718
=========== ========= ========= ===========
</TABLE>
The amortized cost and estimated market values of securities
being held to maturity at December 31, 1994, 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.
Estimated
Amortized Market
Cost Value
Due in one year or less $ -- $ --
Due after one year but less than five years 670,195 671,476
Due after five years but less than ten years 1,300,962 1,220,374
Due after ten years 5,627,533 5,211,621
---------- ----------
$7,598,690 $7,103,471
========== ==========
F-19
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. (continued)
Securities with an amortized cost of $1,632,340 and $2,370,916
at December 31, 1994 and 1993, respectively, and a market
value of $1,500,693 and $2,433,447 at December 31, 1994 and
1993, 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:
December 31,
1994 1993
Commercial $ 6,702,335 $ 6,390,555
Installment 4,524,976 4,669,467
Real estate 52,266,324 47,937,690
------------ ------------
$ 63,493,635 $ 58,997,712
Less unearned discount (1,280,514) (1,228,202)
------------ ------------
$ 62,213,121 $ 57,769,510
Allowance for loan losses (724,891) (608,050)
------------ ------------
Loans, net $ 61,488,230 $ 57,161,460
- ------------------------------------ ============ ============
An analysis of the transactions in the allowance for loan
losses is given below:
Years Ended
December 31,
1994 1993 1992
------------ ------------ --------
Balance, beginning of
year $ 608,050 $ 568,849 $ 500,611
Loans charged off (61,774) (122,452) (365,197)
Recoveries credited to
reserve 112,615 41,653 61,635
Provision charged to
operations 66,000 120,000 371,800
--------- --------- ---------
Balance, end of year $ 724,891 $ 608,050 $ 568,849
========= ========= =========
F-20
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Bank Premises and Equipment
Major classifications of bank premises and equipment are
summarized as follows:
December 31,
1994 1993
Land $ 275,040 $ 275,040
Bank premises 1,079,903 1,071,771
Furniture and equipment 1,484,816 1,380,187
---------- ----------
$2,839,759 $2,726,998
Less accumulated depreciation 1,671,786 1,645,306
---------- ----------
$1,167,973 $1,081,692
========== ==========
Note 6. Other Real Estate
Other real estate carried at $274,710 and $442,892 as of
December 31, 1994 and 1993, respectively, is included in other
assets on the balance sheets.
Note 7. Deposits
Interest expense on deposits was as follows:
Years Ended
December 31,
1994 1993 1992
------------ ------------ --------
Savings deposits $1,075,587 $ 931,164 $ 831,269
Time deposits:
Certificates of
deposit of $100,000
or more 75,265 81,938 159,622
Other 1,075,768 1,184,783 1,450,802
---------- ---------- ----------
$2,226,620 $2,197,885 $2,441,693
========== ========== ==========
F-21
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Income Taxes
Effective January 1, 1993, the Corporation adopted FASB
Statement No. 109, "Accounting for Income Taxes". As explained
in Note 1, Statement 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, Statement 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 FASB Statement 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 income tax provision for the year ended December 31, 1992
includes deferred income taxes determined under FASB Statement
No. 96. The cumulative effect of adopting Statement 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.
The components of the income tax provision for the years ended
December 31, 1994, 1993 and 1992 are as follows:
1994 1993 1992
------------ ------------ --------
Currently payable $ 728,386 $ 574,395 $ 511,600
Deferred (68,367) (8,382) (68,971)
--------- --------- ---------
$ 660,019 $ 566,553 $ 442,629
========= ========= =========
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:
F-22
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. (continued)
Years Ended
December 31,
1994 1993 1992
------------ ------------ --------
Tax provision computed
by applying current
Federal income tax
rates to income
before income taxes $ 670,491 $559,459 $438,106
Other (10,472) 7,094 4,523
--------- -------- --------
$ 660,019 $566,553 $442,629
========= ======== ========
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:
F-23
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. (continued)
<TABLE>
<CAPTION>
Years Ended
December 31,
1994 1993 1992
------------ ------------ --------
<S> <C> <C> <C>
Difference between the
depreciation methods
used for financial
statements and for
income tax purposes $ (3,590) $ (2,812) $ (5,507)
Difference between loan loss provision
charged to operating expense and the bad
debt deduction taken for income tax
purposes (41,966) (11,153) (22,910)
-------- -------- --------
Totals $(45,556) $(13,965) $(28,417)
Accretion of discount
recognized on
financial statements
but not recognized
for income tax
purposes until
realized 749 2,192 (38,848)
Other timing differences -- 3,391 (1,706)
Deferred compensation (23,560) -- --
-------- -------- --------
$(68,367) $ (8,382) $(68,971)
======== ======== ========
</TABLE>
Net deferred tax assets consist of the following components as
of December 31:
F-24
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. (continued)
1994 1993
----------- --------
Deferred tax assets:
Allowance for loan losses $196,460 $ 154,363
Deferred compensation 26,481 20,052
Property and equipment 4,131 541
Unrealized loss on available
for sale securities 7,722 --
Valuation allowance -- (17,000)
-------- ---------
$234,794 $ 157,956
-------- ---------
Deferred tax liabilities:
Investment securities $ 8,961 $ 8,212
-------- ---------
Net deferred tax assets $225,833 $ 149,744
======== =========
Note 9. 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 1994, 1993 and 1992, was
$20,412, $18,168 and $10,200, 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.
F-25
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. 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 current participants in the Employee Stock
Ownership Plan and the Profit-Sharing Plan will continue to
participate in the new Plan. Thereafter, employees will become
eligible to participate based on the eligibility requirements
set forth in the Plan. Contributions under the plan amounted
to $90,000 and $72,000 for the years ended December 31, 1994
and 1993, respectively. At December 31, 1994, 66,726 shares of
the Corporation's common stock were held by the Employee Stock
Ownership Trust, which was established to fund the Plan.
For the year ended December 31, 1992, the contributions under
the Profit-Sharing Plan and the Employee Stock Ownership Plan
amounted to $12,000 and $54,000, respectively.
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, 1994
and 1993 were $146,291 and $105,487, respectively.
F-26
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Under the Plan, 85,000 shares have been reserved for issuance
upon exercise of the above options. The options were granted
at $12.50, the fair market value on date of grant, and are
exercisable over a ten-year period ending July 20, 2003.
On October 18, 1994, the Board of Directors, subject to
stockholder approval, approved the issuance of an additional
Incentive Stock Option of 5,000 shares to an executive officer
of the Bank. The option was granted at $19.50, the fair market
value on the date of grant, and is exercisable over a ten-year
period ending October 18, 2004.
As of December 31, 1994, no options have been exercised.
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, 1994, the cash
surrender value of these policies was $473,317 which is
included in other assets.
F-27
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 13. (continued)
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 loses
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. 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, 1994 and 1993 is as follows:
1994 1993
---- ----
Commitments to extend credit $4,969,000 $5,627,000
Standby letters of credit 1,422,000 1,756,500
---------- ----------
$6,391 000 $7,383,500
========== ==========
F-28
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 14. (continued)
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, property and
equipment, residential real estate and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
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.
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 15. Related Party Transactions
At December 31, 1994, loans to officers and directors and
corporations in which officers and directors own a significant
interest totaled $1,794,763. 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.
F-29
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 15. (continued)
An analysis of these related party transactions is as follows:
Balance Balance
December 31, December 31,
1993 Additions Repayments 1994
------ --------- ---------- -----
Directors $1,473,597 $ 816,600 $ 961,421 $1,328,776
Officers &
Employees 258,071 456,956 249,040 465,987
---------- ---------- ---------- ----------
$1,731,668 $1,273,556 $1,210,461 $1,794,763
========== ========== ========== ==========
Note 16. 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 $2,781,000 to
the Corporation in 1994.
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-weighting assets according to regulatory guidelines. A
comparison of the Bank's actual regulatory capitals as of
December 31, 1994 and 1993, with minimum requirements, as
defined by regulation, is shown below:
Minimum Actual
Requirements 1994 1993
------------ ------ -----
Tier 1 risk-based capital 4.0% 12.63% 12.82%
Total risk-based capital 8.0% 13.70% 13.86%
Leverage ratio 3.0% 11.11% 9.71%
F-30
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17. Parent Corporation
Financial statements for Community Bankshares Incorporated (not
consolidated) are presented below.
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------ -----
<S> <C> <C>
ASSETS
Cash $ 45,361 $ 11,950
Investment in subsidiary 8,505,651 7,402,751
Investment securities available for sale 52,200 -
Investment securities (market value
approximates cost) - 40,000
Other assets 5,000 15,077
---------- ----------
Total assets $8,608,212 $7,469,778
------------ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 12,412 $ -
---------- ----------
Total liabilities $ 12,412 $ -
----------------- ---------- ----------
Stockholder's equity:
Common stock, par value $3 per share,
authorized 1,000,000 shares; issued
and outstanding 1994 and 1993 570,000
shares $1,710,000 $1,710,000
Surplus 988,932 988,932
Retained earnings 5,911,858 4,770,846
Net unrealized losses on available for
sale securities, net of taxes (14,990) -
---------- ----------
Total stockholders' equity $8,595,800 $7,469,778
-------------------------- ---------- ----------
Total liabilities and stockholders'
equity $8,608,212 $7,469,778
------ ========== ==========
</TABLE>
F-31
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17. (continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
------ ------ -----
Income:
Dividends from subsidiary $ 171,000 $ 139,000 $ 130,000
Unrealized gain (loss on
securities) -- 16,000 (16,000)
Gain on sale of securities 47,800 -- --
---------- ----------- ---------
Total income $ 281,800 $ 155,000 $ 114,000
- ---------------------------------- ---------- ----------- ---------
Expenses:
Professional fees $ 12,847 $ 6,095 $ 5,230
Supplies 2,008 1,612 1,463
Taxes, miscellaneous 850 850 850
Other 324 288 829
---------- ----------- ---------
Total expenses $ 16,029 $ 8,845 $ 8,372
- ---------------------------------- ---------- ----------- ---------
Income taxes (credits) $ 10,802 $ (6,827) $ (5,002)
---------- ----------- ---------
Income before equity in
undistributed income
of subsidiary $ 191,969 $ 152,982 $ 110,630
---------
Equity in undistributed
income of subsidiary 1,120,043 925,933 735,287
---------- ----------- ---------
Net income $1,312,012 $ 1,078,915 $ 845,917
- ---------------------------------- ========== =========== =========
F-32
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17. (continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1994, 1993 and 1992
Guaranteed Unrealized
Capital Retained Debt of Securities
Stock Surplus Earnings ESOT Losses
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992 $ 1,725,000 $ 1,018,812 $ 3,051,854 $(35,000) $ --
Net income for the
year ended December
31, 1992 -- -- 845,917 -- --
Cash dividends
declared, $.16 per
share (based on
574,000 shares
outstanding) -- -- (91,840) -- --
Reduction in debt
guaranteed for the
Employee Stock
Ownership Trust -- -- -- 35,000 --
Purchase of 4,000
shares of common
stock (12,000) (22,878) -- -- --
----------- ----------- ----------- -------- --------
Balance, December 31, 1992 $ 1,713,000 $ 995,934 $ 3,805,931 $ -- $ --
Net income for the
year ended December
31, 1993 -- -- 1,078,915 -- --
Cash dividends
declared, $.20 per
share (based on
570,000 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, $.30 per
share (based on
570,000 shares
outstanding) -- -- (171,000) -- --
Net unrealized loss
on available for
sale securities,
net -- -- -- -- (14,990)
----------- ----------- ----------- -------- --------
Balance, December 31, 1994 $ 1,710,000 $ 988,932 $ 5,911,858 $ -- $(14,990)
=========== =========== =========== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 17. (continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
------ ------ -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,312,012 $ 1,078,915 $ 845,917
Adjustments to reconcile net income to
net cash provided by operating
activities:
Gain on sale of securities (47,800) -- --
Unrealized (gain) loss on
securities -- (16,000) 16,000
Undistributed earnings of
subsidiary (1,120,043) (925,933) (735,287)
Changes in operating assets and
liabilities:
(Increase) decrease in other
assets 10,077 (5,075) (5,922)
Increase (decrease) in other
liabilities 11,303 (486) (636)
----------- ----------- ---------
Net cash provided by operating
activities $ 165,549 $ 131,421 $ 120,072
- ---------------------------------------------- ----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment
securities $ 87,800 $ -- $ --
Purchase of investment securities (48,938) -- --
----------- ----------- ---------
Net cash provided by investing
activities $ 38,862 $ -- $ --
- ---------------------------------------------- ----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock $ -- $ (10,002) $ (34,878)
Dividends paid (171,000) (114,000) (91,840)
----------- ----------- ---------
Net cash used in financing
activities $ (171,000) $ (124,002) $(126,718)
- ---------------------------------------------- ----------- ----------- ---------
Increase (decrease) in cash $ 33,411 $ 7,419 $ (6,646)
---------
Cash:
Beginning of year 11,950 4,531 11,177
----------- ----------- ---------
End of year $ 45,361 $ 11,950 $ 4,531
=========== =========== =========
</TABLE>
F-34
<PAGE>
MITCHELL,
WIGGINS &
COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT ON THE SUPPLEMENTARY INFORMATION
Board of Directors
Community Bankshares Incorporated
Petersburg, Virginia
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ MITCHELL, WIGGINS & COMPANY
January 12, 1995
Petersburg, Virginia
F-35
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED SCHEDULE OF OTHER OPERATING EXPENSES
Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992
-------- -------- ------
Advertising $ 33,976 $ 9,821 $ 8,261
Charitable contributions 1,800 1,775 2,177
Data processing services 44,075 37,829 41,138
Directors' fees 98,552 92,131 65,675
Dues and subscriptions 7,277 12,794 9,767
Entertainment 17,482 8,632 10,408
Examination fees 19,022 15,736 14,405
Federal Deposit Insurance
Corporation assessment 150,693 136,789 124,729
Insurance, general 75,675 48,748 49,003
Insurance, installment loans 3,665 810 6,168
Losses on demand deposits 5,591 1,585 3,387
Miscellaneous 54,377 42,248 36,827
Postage 86,491 76,438 65,198
Professional fees 48,703 70,559 50,934
Stationery and supplies 65,310 72,296 58,925
Taxes 98,190 62,619 53,508
Telephone 26,380 25,700 24,691
Travel 22,030 20,021 19,295
-------- -------- --------
$859,289 $736,531 $644,496
======== ======== ========
F-36
<PAGE>
Appendix G
OPINION OF MCKINNON & COMPANY, INC.
January 8, 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>
Page 2
(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
1994 and up through September 30, 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
G-2
<PAGE>
Page 3
and can be evaluated at the date hereof, as well as our experience
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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia permits a
Virginia corporation to indemnify any director or officer for reasonable
expenses incurred in any legal proceeding in advance of final disposition of the
proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
prescribed by the Code, and a determination is made by the board of directors
that such standard has been met. In a proceeding by or in the right of the
corporation, no indemnification shall be made in respect of any matter as to
which an officer or director is adjudged to be liable to the corporation, unless
the court in which the proceeding took place determines that, despite such
liability, such person is reasonably entitled to indemnification in view of all
the relevant circumstances. In any other proceeding, no indemnification shall be
made if the director or officer is adjudged liable to the corporation on the
basis that personal benefit was improperly received by him. Corporations are
given the power to make any other or further indemnity, including advancement of
expenses, to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or any resolution adopted,
before or after the event, by the shareholders, except an indemnity against
willful misconduct or a knowing violation of the criminal law. Unless limited by
its articles of incorporation, indemnification of a director or officer is
mandatory when he entirely prevails in the defense of any proceeding to which he
is a party because he is or was a director or officer.
The Articles of Incorporation of the undersigned Registrant contain
provisions indemnifying the directors and officers of the Registrant in cases
where such individuals are not found liable to the Registrant as a result of
gross negligence or willful misconduct.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
2.1 Agreement and Plan of Reorganization between Commerce Bank of Virginia
and Community Bankshares Incorporated, dated December 12, 1995, filed
as Appendix A to the Joint Proxy Statement included in this
Registration Statement.
3.1 Articles of Incorporation, dated January 18, 1984, as amended, of
Community Bankshares Incorporated.
3.2 Bylaws of Community Bankshares Incorporated.
4 Form of Stock Certificate.
5 Legal opinion of Williams, Mullen, Christian & Dobbins.
II-1
<PAGE>
8 Tax opinion of Williams, Mullen, Christian & Dobbins.
10.1 Community Bankshares, Inc. Incentive Stock Option and Nonstatutory
Stock Option Plan.
10.2 Employment Agreement between Community Bankshares Incorporated and
Nathan S. Jones, 3rd, dated July 1, 1995.
21 Subsidiaries of the Registrant.
23.1 Consent of Williams, Mullen, Christian & Dobbins (included in Exhibits
5 and 8).
23.2 Consent of McKinnon & Company, Inc.
23.3 Consent of Mitchell, Wiggins & Company, L.L.P.
23.4 Consent of BDO Seidman, LLP.
(b) Financial Statement Schedules
Not applicable.
(c) Reports, Opinions or Appraisals.
Not applicable.
Item 22. Undertakings
(a) Undertakings Required by Item 512 of Regulation S-K.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
II-2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party which is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
re-offerings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
II-3
<PAGE>
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Petersburg, Commonwealth
of Virginia, on January 18, 1996.
COMMUNITY BANKSHARES INCORPORATED
By: /s/ Nathan S. Jones, 3rd
Nathan S. Jones, 3rd
President and Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Nathan S. Jones, 3rd President and Chief Executive January 18, 1996
- ----------------------------------------
Nathan S. Jones, 3rd Officer and Director
(Principal Executive Office
/s/ Lillian M. Umphlett Vice President and Chief Financial January 18, 1996
- ----------------------------------------
Lillian M. Umphlett Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ James A. Boyd Director January 18, 1996
- ----------------------------------------
James A. Boyd
/s/ Lawrence F. DeSouza Director January 18, 1996
- --------------------------------------
Lawrence F. DeSouza
II-5
<PAGE>
/s/ B. Glenn Holden Director January 18, 1996
- ----------------------------------------
B. Glenn Holden
/s/ Phillip H. Kirkpatrick Director January 18, 1996
- -----------------------------------------
Phillip H. Kirkpatrick
/s/ Elinor B. Marshall Director January 18, 1996
- -----------------------------------------
Elinor B. Marshall
/s/ Alvin L. Sheffield Director January 18, 1996
- ------------------------------------------
Alvin L. Sheffield
/s/ Louis C. Shell Director January 18, 1996
- ------------------------------------------
Louis C. Shell
/s/ Harold L. Vaughn Director January 18, 1996
- ---------------------------------------
Harold L. Vaughn
/s/ W. Courtney Wells Director January 18, 1996
- ---------------------------------------
W. Courtney Wells
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Document Page No.
<S> <C> <C>
2.1 Agreement and Plan of Reorganization between Commerce Bank
of Virginia and Community Bankshares Incorporated, dated
December 12, 1995, filed as Appendix A to the Joint Proxy
Statement included in this Registration Statement.
3.1 Articles of Incorporation, dated January 18, 1984,
as amended, of Community Bankshares
Incorporated.
3.2 Bylaws of Community Bankshares Incorporated.
4 Form of Stock Certificate.
5 Legal opinion of Williams, Mullen, Christian &
Dobbins.
8 Tax opinion of Williams, Mullen, Christian & Dobbins.
10.1 Community Bankshares, Inc. Incentive Stock Option and
Nonstatutory Stock Option Plan.
10.2 Employment Agreement between Community Bankshares
Incorporated and Nathan S. Jones, 3rd, dated July 1, 1995.
21 Subsidiaries of the Registrant.
23.1 Consent of Williams, Mullen, Christian &
Dobbins (included in Exhibits 5 and 8).
23.2 Consent of McKinnon & Company, Inc.
23.3 Consent of Mitchell, Wiggins & Company, L.L.P.
23.4 Consent of BDO Seidman, LLP.
</TABLE>
Exhibit 3.1
ARTICLES OF INCORPORATION OF
COMMUNITY BANKSHARES INCORPORATED
(restated as of December 31, 1995)
1. Name. The name of the Corporation is
COMMUNITY BANKSHARES INCORPORATED
2. Purpose. The purpose of the Corporation is to transact any or
all lawful business not required to be specifically stated in these
Articles of Incorporation for which corporations may be incorporated under
the Virginia Stock Corporation Act.
3. Authorized Stock. The Corporation shall have authority to issue
4,000,000 shares of Common Stock, par value $3.00 per share. The vote of
the Corporation's Common Stock required to approve an amendment of the
Corporation's Articles of Incorporation shall be a majority of all such
shares.
4. Preemptive Rights. Stockholders shall not have the preemptive
right to acquire unissued shares of Common Stock.
5. Cumulative Voting. Stockholders of the Corporation shall not
have cumulative voting rights.
6. Indemnification of Directors and Officers. Each Director and
Officer shall be indemnified by the Corporation against liabilities, fines,
penalties and claims imposed upon or asserted against him (including
amounts paid in settlement) by reason of having been such a Director or
Officer, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection
therewith, 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 as such
Director or Officer. In the event of any other judgment against such
Director or Officer or in the event of a settlement, the indemnification
shall be made only if the Corporation shall be advised, in case none of the
persons involved shall be or have been a Director of the Corporation, by
the Board of Directors, and otherwise by independent counsel to be appoint-
ed 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 a settlement, that such
settlement was, or if still to be made is, in the best interests of the
Corporation. If the determination is to be made by the Board of Directors,
it may, as to all questions of law, rely on the advice of independent
counsel. Every reference herein to Director or Officer shall include every
Director or Officer or former Director or Officer of the Corporation and
every person who may have served at its request as a director or officer of
another corporation in which the Corporation owned shares of stock or of
which it is a creditor or, in the case of a nonstock corporation, to which
the Corporation contributes and, in all of such cases, his executors and
administrators. The right of indemnification hereby provided shall not be
exclusive of any other rights to which any Director or Officer may be
entitled by Virginia law or otherwise.
7. Registered Office. The Corporation's initial registered office
shall be located in the City of Petersburg at The Marshall Building, 135
South Adams Street, Petersburg, Virginia 23803. The Corporation's initial
registered agent shall be Morton B. Spero, whose address is the same as the
Corporation's registered office and who is a resident of Virginia and a
member of the Virginia State Bar.
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 by
the affirmative vote of holders of 85% of all shares of voting stock of the
Corporation. In the absence of a bylaw, the number of Directors shall be
three. The Corporation's initial Board of Directors shall consist of three
individuals whose names and addresses are as follows:
Name Address
James A. Boyd 200 North Sycamore Street
Petersburg, Virginia 23803
Edward W. Whitlow 200 North Sycamore Street
Petersburg, Virginia 23803
Nathan S. Jones, 3rd 200 North Sycamore Street
Petersburg, Virginia 23803
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 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, with or without cause, but
only by the affirmative vote of the holders of at least 85% of the
outstanding shares of Common Stock.
9. Voting Requirements for Certain Business Combinations.
(1) The affirmative vote of the holders of 85% of all shares of
stock of the Corporation entitled to vote on any business combination (as
hereinafter defined) considered for the purposes of this Article 9 as one
class (herein called "voting stock"), shall be required for the adoption or
authorization of such business combination with any other entity (as
hereinafter defined) if, as of the record date for the determination of
stockholders entitled to notice thereof and to vote thereon, such other
entity is the beneficial owner, directly or indirectly, of more than 20% of
the voting stock of the Corporation; provided that such 85% voting
requirement shall not be applicable if:
(a) The cash, or fair market value of the property,
securities or other consideration to be received per share by
common stockholders of the Corporation in such business combina-
tion:
(i) is not less than the highest per share price
(including brokerage commissions and/or soliciting dealers'
fees) paid by such other entity in acquiring any of its
holdings of the Corporation's Common Stock;
(ii) bears the same or a greater percentage relation-
ship to the market price of the Corporation's Common Stock
immediately prior to the public announcement of such busi-
ness combination as the highest per share price (including
brokerage commissions and/or soliciting dealers' fees) that
such other entity has theretofore paid for any of the shares
of the Corporation's Common Stock already owned by it bears
to the market price of the Common Stock of the Corporation
immediately prior to the public announcement or commencement
of the tender offer or market acquisition of the
Corporation's Common Stock by such other entity; and
(iii) if the public announcement of such business
combination occurs more than one year after the transaction
which resulted in such other entity having a 20% interest,
is not less than the earnings per share of Common Stock of
the Corporation for the four full consecutive fiscal quar-
ters immediately preceding the record date for solicitation
of votes on such business combination, multiplied by the
price-earnings multiple represented by the price referred to
in paragraph (i) in relation to the earnings per share of
Common Stock of the Corporation for the four full consec-
utive fiscal quarters immediately preceding the transaction
which resulted in such other entity having a 20% interest;
(b) After such other entity has acquired a 20% interest and
prior to the consummation of such business combination:
(i) the Corporation's Board of Directors shall have
included at all times representation by continuing direc-
tor(s) (as hereinafter defined) proportionate to the voting
stock of the Corporation not held by such other entity (with
a continuing director to occupy any resulting fractional
board position);
(ii) such other entity shall not have acquired any
newly issued or treasury shares of stock, directly or indi-
rectly, from the Corporation (except upon conversion of
convertible securities acquired by it prior to obtaining a
20% interest or as a result of a pro rata stock dividend or
stock split); and
(iii) such other entity shall not have acquired any
additional shares of the Corporation's outstanding Common
Stock or securities convertible into Common Stock except as
a part of the transaction which results in such other entity
having a 20% interest;
(c) Such other entity shall not have:
(i) received the benefit, directly or indirectly
(except proportionately as a stockholder) of any loans,
advances, guarantees, pledges or other financial assistance
provided by the Corporation, or
(ii) made any major change in the Corporation's
business or capital structure without the unanimous approval
of the directors, in either case prior to the consummation
of such business combination; and
(d) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall be mailed to public
stockholders of the Corporation for the purpose of soliciting
stockholder approval of such business combination and shall
contain at the front thereof, in a prominent place, any recommen-
dations as to the advisability (or inadvisability) of the
business combination which the continuing directors, or any of
them, may choose to state and, if deemed advisable by a majority
of the continuing directors, an opinion of a reputable investment
banking firm as to the fairness (or not) of the terms of such
business combination, from the point of view of the remaining
public stockholders of the Corporation (such investment banking
firm to be selected by a majority of the continuing directors and
to be paid a reasonable fee for its services by the Corporation
upon receipt of such opinion).
The provisions of this Article 9 shall also apply to a business
combination with any other entity which at any time has been the beneficial
owner, directly or indirectly, of more than 20% of the outstanding shares
of voting stock of the Corporation, notwithstanding the fact that such
other entity has reduced its shareholdings below 20% if, as the record date
for the determination of stockholders entitled to notice of and to vote on
the business combination, such other entity is an "affiliate" of the
Corporation (as hereinafter defined).
(2) For the purposes of this Article 9,
(a) the term "other entity" shall include any corporation,
person or other entity and other entity with which it or its
"affiliate" or "associate" (as defined below) has any agreement,
arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of stock of
the Corporation, or which is its "affiliate" or "associate" as
those terms are defined in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934 as in
effect on January 1, 1984, together with the successors and
assigns of such persons in any transaction or series of
transactions not involving a public offering of the Corporation's
stock within the meaning of the Securities Act of 1933;
(b) another entity shall be deemed to be the beneficial
owner of any shares of stock of the Corporation which the other
entity (as defined above) has the right to acquire pursuant to
any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise;
(c) the outstanding shares of any class of stock of the
Corporation shall be deemed to include shares deemed owned
through application of clause (b) above but shall not include any
other shares which may be issuable pursuant to any agreement, or
upon exercise of conversion rights, warrants or options or
otherwise;
(d) the term "business combination" shall include (i) any
merger or consolidation of the Corporation or any Subsidiary with
or into any other entity; (ii) any statutory stock exchange for
cash, property, securities or obligations of any other entity;
(iii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of all or substantially all of the property and
assets of the Corporation or any Subsidiary to any other entity;
(iv) the issuance or transfer by the Corporation or any
Subsidiary of any securities having an aggregate fair market
value greater than $750,000; (v) the adoption of any plan or
proposal for the liquidation or dissolution of the Corporation;
or (vi) any reclassification of securities (including any reverse
stock split) or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries, or any other transaction which has the effect,
directly or indirectly, of increasing the proportion of any class
of securities of the Corporation or any Subsidiary directly or
indirectly owned by any other entity who, prior to such
transaction, owned 20% of the voting stock of the Corporation.
(e) the term "continuing director" shall mean a person who
was a member of the Board of Directors of the Corporation prior
to the time that such other entity acquired in excess of 20% of
the voting stock of the Corporation, or a person designated
(whether before or after election as a director) to be a
continuing director by a majority of continuing directors;
(f) the "fair market value" of property, securities or
other consideration shall be as determined in good faith by the
Board of Directors of the Corporation and concurred in by a
majority of continuing directors;
(g) in the event of a business combination in which the
Corporation is the surviving corporation, the term "other consid-
eration to be received" as used in paragraph 9(a) shall mean
Common Stock of the Corporation retained by its existing public
stockholders;
(h) a "Subsidiary" is any corporation of which a majority
of any class of equity security is owned, directly or indirectly,
by the Corporation.
(3) A majority of the continuing directors shall have the power
and duty to determine for the purposes of this Article 9, on the basis of
information known to them, whether (a) such other entity beneficially owns
more than 20% of the outstanding shares of voting stock of the Corporation,
(b) another entity is an "affiliate" or "associate" of another, (c) another
entity has an agreement, arrangement or understanding with another, or (d)
the assets being acquired by the Corporation, or any subsidiary thereof,
have an aggregate fair market value of less than $750,000.
(4) Nothing contained in this Article 9 shall be construed to
relieve any other entity from any fiduciary obligation imposed by law. The
voting requirements of this Article 9 shall be in addition to the voting
requirements imposed by law or other provisions of these Articles of
Incorporation in favor of certain classes of stock.
10. Voting Requirements for Certain Amendments. No amendment to the
Articles of Incorporation of the Corporation shall change, repeal or make
inoperative any of the provisions of Article 5, Article 8 or Article 9, unless
such amendment receives the affirmative vote of the holders of 85% of all shares
of voting stock of the Corporation, provided that this Article 10 shall not
apply to, and such 85% vote shall not be required for, any such amendment
unanimously recommended to the stockholders by the Board of Directors of the
Corporation (a) at a time when no other entity beneficially owns or to the
knowledge of any director proposes to acquire 20% or more of the Corporation's
voting stock, or (b) if all such directors are "continuing directors" within the
meaning of paragraph (2) of Article 9.
January 18, 1984 /s/ LATHAN M. EWERS, JR.
Lathan M. Ewers, Jr.
Exhibit 3.2
BY-LAWS
OF
COMMUNITY BANKSHARES INCORPORATED
(as of December 31, 1995)
ARTICLE I.
Meeting of Stockholders.
1.1 Places of Meetings. All meetings of the stockholders shall be held
at such place, either within or without the State of Virginia, as from time to
time may be fixed by the Board of Directors.
1.2 Annual Meetings. The annual meeting of the stockholders, for the
election of Directors and transaction of such other business as may come before
the meeting, shall be held in each year on the third Tuesday in April, if that
day is not a legal holiday. If that day is a legal holiday, the annual meeting
shall be held on the next succeeding day not a legal holiday.
1.3 Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the Board of Directors, or by
stockholders together holding at least 25% of the number of shares of capital
stock of the Corporation at the time outstanding and entitled to vote with
respect to the business to be transacted at such meetings. At a special meeting
no business shall be transacted and no corporate action shall be taken other
than that stated in the notice of the meeting.
1.4 Notice of Meetings. Written or printed notice stating the
place, day and hour of every meeting of the stockholders and, in case of a
special meeting, the purpose or purposes for
<PAGE>
which the meeting is called, shall be mailed not less than ten nor more than
fifty days before the date of the meeting to each stockholder of record entitled
to vote at such meeting, at his address which appears in the stock transfer
books of the Corporation. Such further notice shall be given as may be required
by law, but meetings may be held without notice if all the stockholders entitled
to vote at the meeting are present in person or by proxy or if notice is waived
in writing by those not present, either before or after the meeting.
1.5 Quorum. Any number of stockholders together holding at least
one-third of the outstanding shares of capital stock entitled to vote with
respect to the business to be transacted, who shall be present in person or
represented by proxy at any meeting duly called, shall constitute a quorum for
the transaction of business. If less than a quorum shall be in attendance at the
time for which a meeting shall have been called, the meeting may be adjourned
from time to time by a majority of the stockholders present or represented by
proxy without notice other than by announcement at the meeting until a quorum
shall attend. After a meeting is opened, less than a quorum may adjourn any such
meeting from time to time.
1.6 Voting. At any meeting of the stockholders each stockholder of a
class entitled to vote on any matter coming before the meeting shall, as to such
matter, have one vote, in person or by proxy, for each share of capital stock of
such class standing in his or her name on the books of the Corporation on
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the date, not more than fifty days prior to such meeting, fixed by the Board of
Directors, for the purpose of determining stockholders entitled to vote, as the
date on which the stock transfer books of the Corporation are to be closed or as
the record date. Every proxy shall be in writing, dated and signed by the
stockholder entitled to vote or his duly authorized attorney in fact. A majority
of votes cast shall decide each matter submitted to the stockholders at the
meeting, except in cases where by law a larger vote is required.
1.7 Inspectors. An appropriate number of inspectors for any meeting of
stockholders may be appointed by the Chairman of such meeting. Inspectors so
appointed will open and close the polls, will receive and take charge of proxies
and ballots, and will decide all questions as to the qualifications of voters,
validity of proxies and ballots, and the number of votes properly cast.
1.8. Notice of Stockholder Business. At an annual meeting of the
stockholders of the Corporation, only such business shall be conducted as shall
have been properly brought before the meeting. To be brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the
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stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty (60) days nor more than ninety (90) days prior to the date of
the scheduled annual meeting, regardless of any postponements, deferrals, or
adjournments of that meeting to a later date; provided, however, that in the
event that less than seventy (70) days' notice or prior public disclosure of the
date of the scheduled annual meeting is given or made, notice by the
stockholder, to be timely, must be so received not later than the close of
business on the tenth (10th) day following the earlier of the day on which such
notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. Such stockholder's notice shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(a) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business and of any other person or entity who is the
record or beneficial owner of any shares of the Corporation and who, to the
knowledge of the stockholder proposing such business, supports such proposal,
(c) the class and number of shares of the Corporation which are beneficially
owned and owned of record by the stockholder proposing such business on the date
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of his notice to the Corporation and the number of shares so owned by any person
or entity who, to the knowledge of the stockholder proposing such business,
supports such proposal and (d) any material interest (financial or other) of
such stockholder in such proposal. Notwithstanding anything in these Bylaws to
the contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 1.8. The Chairman of an
annual meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this Section 1.8, and if he should so determine, he shall so
declare to the meeting, and any such business not properly brought before the
meeting shall not be transacted.
ARTICLE II.
Directors.
2.1 General Powers. The property, affairs and business of the
Corporation shall be managed by the Board of Directors, and, except as otherwise
expressly provided by law, the Articles of Incorporation or these By-laws, all
of the powers of the Corporation shall be vested in such Board.
2.2 Number of Directors. The number of Directors constituting the Board
of Directors shall be 10. The number of Directors may be increased by no more
than two by the Board of Directors from time to time during the periods between
the annual meetings of stockholders.
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2.3 Election and Removal of Directors; Quorum.
(a) Directors shall be elected at each annual meeting
of stockholders to succeed those Directors whose terms have expired and to fill
any vacancies then existing, as provided in the Articles of Incorporation. Only
persons who are nominated in accordance with the procedures set forth in this
subparagraph shall be eligible for election as Directors. Nominations of persons
for election to the Board of Directors of the Corporation may be made by or at
the direction of the Board of Directors, or by any stockholder of the
Corporation entitled to vote for the election of Directors who complies with the
notice procedures set forth in this subparagraph. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the date of the scheduled annual
meeting, regardless of any postponements, deferrals, or adjournments of that
meeting to a later date; provided, however, that in the event that less than
seventy (70) days' notice or prior pubic disclosure of the date of the scheduled
annual meeting is given or made, notice by the stockholder, to be timely, must
be so received not later than the close of business on the tenth (10th) day
following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on
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which such public disclosure was made. Such stockholder's notice shall set forth
(a) as to each person whom the stockholder proposes to nominate for election as
a Director, (1) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended; and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such stockholder and of any other person or entity who is the record
or beneficial owner of any shares of the Corporation and who, to the knowledge
of the stockholder giving notice, supports such nominee(s) and (ii) the class
and number of shares of the Corporation which are beneficially owned and owned
of record by such stockholder and by any other person or entity who is the
record or beneficial owner of shares of the Corporation and who, to the
knowledge of the stockholder giving the notice, supports such nominee(s). At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a Director shall furnish to the Secretary of the Corporation the
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
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Director of the Corporation unless in accordance with the procedures set forth
in this subparagraph. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 2.3(a), and if should
so determine, he shall so declare to the meeting, and the defective nomination
shall be disregarded.
(b) Directors shall hold their offices for terms of three
years as provided in the Articles of Incorporation and until their successors
are elected. Any Director may be removed from office at a meeting called
expressly for that purpose by the vote of stockholders holding 85% of the shares
entitled to vote at an election of Directors.
(c) Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of the majority of the remaining Directors though
less than a quorum of the board, and the term of office of any Director so
elected shall expire on the date fixed for the expiration of the term of office
of the Director to which such Director was so elected.
(d) A majority of the number of Directors elected and serving
at the time of any meeting shall constitute a quorum for the transaction of
business. The act of a majority of Directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. Less than a quorum
may adjourn any meeting.
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2.4 Meetings of Directors. An annual meeting of the Board of Directors
shall be held as soon as practicable after the adjournment of the annual meeting
of stockholders at such place as the Board may designate. Other meetings,
including regular monthly meetings, of the Board of Directors shall be held at
places within or without the State of Virginia and at times fixed by resolution
of the Board, or upon call of the Chairman of the Board, the President or a
majority of the Directors. The Secretary or officer performing the Secretary's
duties shall give not less than twenty-four hours' notice of the meeting and its
purpose by letter, telegraph or telephone (or in person) of all special meetings
of the Board of Directors. Meetings may be held at any time without notice if
all of the Directors are present, or if those not present waive notice in
writing either before or after the meeting.
2.5 Honorary Directors. The Board may, from time to time, appoint
Honorary Directors who shall serve at the pleasure of the Board. Such Honorary
Directors may be entitled to receive notice of, and to attend, all meetings of
the Board, and to express their views in a purely advisory capacity respecting
all matters coming before said meetings, but they shall not have any vote on any
matter or any other power of decision with respect thereto.
ARTICLE III.
Committees.
3.1 Executive Committee. The Board of Directors, by
resolution adopted by a majority of the number of Directors
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elected and serving, may elect an Executive Committee which shall consist of not
less than three Directors and/or Officers. In the absence of a member of the
Executive Committee, any other director may be designated by the Chairman of the
Board to serve as a member pro tempore of the Executive Committee. When the
Board of Directors is not in session, the Executive Committee shall have all
power vested in the Board of Directors by law, by the Articles of Incorporation,
or by these By-laws, provided that the Executive Committee shall not have power
to approve an amendment to the Articles of Incorporation or a plan of merger or
consolidation, or to take any action prohibited by express resolution of the
Board of Directors. The Executive Committee shall keep the minutes of its
meetings and report at the next regular or special meeting of the Board of
Directors all action which the Executive Committee may have taken on behalf of
the Board since the last regular or special meeting of the Board of Directors.
3.2 Other Committees. The Board of Directors, by resolution duly
adopted, may establish such other standing or special committees of the Board as
it may deem advisable; and the members, terms and authority of such committees
shall be as set forth in the resolutions establishing the same.
3.3 Meetings. Regular and special meetings of any Committee established
pursuant to this Article may be called and held subject to the same requirements
with respect to time, place and notice as are specified in these By-laws for
regular and special meetings of the Board of Directors.
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3.4 Quorum and Manner of Acting. A majority of the members of any
Committee serving at the time of any meeting thereof shall constitute a quorum
for the transaction of business at such meeting. The action of a majority of
those members present at a Committee meeting at which a quorum is present shall
constitute the act of the Committee.
3.5 Term of Office. Members of any Committee shall be elected as above
provided and shall hold office until their successors are elected by the Board
of Directors or until such Committee is dissolved by the Board of Directors.
3.6 Resignation and Removal. Any member of a Committee may resign at
any time by giving written notice of his intention to do so to the Chairman of
the Board of the Corporation, or may be removed, with or without cause, at any
time by such vote of the Board of Directors as would suffice for his election.
3.7 Vacancies. Any vacancy occurring in a Committee resulting from
any cause whatever may be filled by the Board of Directors.
ARTICLE IV.
Officers and Employees.
4.1 Election of Officers; Terms. The officers of the Corporation
shall be elected at an organizational meeting of the Board to be held
immediately following the stockholders' meeting and shall consist of a
Chairman of the Board, a Vice Chairman of the Board, a President, one or more
Vice Presidents (whose seniority and titles, including Executive Vice
Presidents and
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Senior Vice Presidents, may be specified by the Board of Directors), a
Secretary, a Treasurer, one or more Assistant Treasurers and such other
assistant and subordinate officers as may from time to time be elected by the
Board of Directors. All officers shall hold office until the next annual meeting
of the Board of Directors and until their successors are elected. The Chairman
of the Board and the President shall be chosen from among the Directors. Any two
officers may be combined in the same person as the Board of Directors may
determine, except that the President and Secretary may not be the same person.
4.2 Removal of Officers; Vacancies. Any officer of the
Corporation may be removed summarily without or without cause, at any time, by
the Board of Directors. Vacancies may be filled by the Board of Directors.
4.3 Duties. The officers of the Corporation shall have such duties as
generally pertain to their offices, respectively, as well as such powers and
duties as are prescribed by law or are hereinafter provided or as from time to
time shall be conferred by the Board of Directors. The Board of Directors may
require any officer to give such bond for the faithful performance of his duties
as the Board may see fit.
4.4 Duties of the Chairman of the Board. The Chairman of the
Board shall supervise the implementation of policies of the Board of Directors.
Except as otherwise provided in these By- laws or in the resolutions
establishing such committees, he shall be ex officio a member of all Committees
of the Board. He shall
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preside at all corporate meetings. In addition, he shall perform ail duties
incident to the office of Chairman of the Board and such other duties as from
time to time may be assigned to him by the Board of Directors.
4.5 Duties of the Vice Chairman. The Vice Chairman of the Board shall
have such powers as conferred on him by the By-laws and shall further have such
duties and powers assigned to him by the Board. In the absence of the Chairman
of the Board, he shall perform all duties of the Chairman of the Board.
4.6 Duties of the President. Subject to the supervision of the Chairman
of the Board, the President shall have responsibility for the general management
of the business and operations of the Corporation. In the absence of the
Chairman and Vice Chairman of the Board the President shall preside at all
corporate meetings. He may sign and execute in the name of the Corporation stock
certificates, deeds, mortgages, bonds, contracts or other instruments except in
cases where the signing and the execution thereof shall be expressly delegated
by the Board of Directors or by these By-laws to some other officer or agent of
the Corporation or shall be required by law otherwise to be signed or executed.
In addition, he shall perform all duties incident to the office of the President
and such other duties as from time to time may be assigned to him by the Board
of Directors or the Chairman of the Board.
4.7 Duties of the Vice Presidents. Each Vice President, if any,
shall have such powers and duties as may from time to time
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be assigned to him by the Chairman of the Board or President. Any Vice President
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts or other instruments authorized by the Board of Directors, except
where the signing and execution of such documents shall be expressly delegated
by the Board of Directors, the Chairman of the Board or the President to some
other officer or agent of the Corporation or shall be required by law or
otherwise to be signed or executed.
4.8 Duties of the Treasurer. The Treasurer shall have charge of and be
responsible for maintaining adequate financial accounts and records in
accordance with generally accepted principles and for the performance of all
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board of Directors or the Chairman of the
Board.
4.9 Duties of the Secretary. The Secretary shall act as secretary of
all meetings of the Board of Directors and stockholders of the Corporation. When
requested, he shall also act as secretary of the meetings of the Committees of
the Board. He shall keep and preserve the minutes of all such meetings in
permanent books. He shall see that all notices required to be given by the
Corporation are duly given and served; shall have custody of the seal of the
Corporation and shall affix the seal or cause it to be affixed to all stock
certificates of the Corporation and to all documents the execution of which on
behalf
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of the Corporation under its corporate seal is duly authorized in accordance
with law or the provisions of these By-laws; shall have custody of all deeds,
leases, contracts and other important corporate documents; shall have charge of
the books, records and papers of the Corporation relating to its organization
and management as a Corporation; shall see that all reports, statements and
other documents required by law are properly filed; and shall in general perform
all the duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the Board of Directors, the Chairman of
the Board or the President.
ARTICLE V.
Capital Stock.
5.1 Certificates. The shares of capital stock of the Corporation shall
be evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
the stock of the Corporation may be appointed by the Board of Directors and may
be required to countersign certificates representing stock of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a stock certificate shall for any reason cease to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as
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though such person had not ceased to be an officer of the Corpo-
ration.
5.2 Lost, Destroyed and Mutilated Certificates. Holders of the stock of
the Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of the certificate therefor, and the Board of
Directors may in its discretion cause one or more new certificates for the same
number of shares in the aggregate to be issued to such stockholder upon the
surrender of the mutilated certificate or upon satisfactory proof of such loss
or destruction, and the deposit of a bond in such form and amount and with such
surety as the Board of Directors may require.
5.3 Transfer of Stock. The stock of the Corporation shall be
transferable or assignable only on the books of the Corporation by the holders
in person or by a duly authorized attorney-in-fact on surrender of the
certificate for such shares duly endorsed and, if sought to be transferred by
such attorney, accompanied by a written power of attorney to have the same
transferred on the books of the Corporation. The Corporation will recognize,
however, the exclusive right of the person registered on its books as the owner
of shares to receive dividends and to vote as such owner.
5.4 Closing of Transfer Books and Fixing Record Date. For the
purpose of determining stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of stockholders for
any other proper
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purpose, the Board of Directors may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, fifty days. In
lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of stockholders,
such date in any case to be not more than fifty days prior to the date on which
the particular action, requiring such determination of stockholders, is to be
taken. If the stock transfer books are not closed and no record date is fixed
for the determination of stockholders entitled to notice of or to vote at a
meeting of stockholders, or stockholders entitled to receive payment of a
dividend, the date on which notices of the meeting are mailed or the date on
which the resolution of the Board of Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination of
stockholders. When a determination of stockholders entitled to vote at any
meeting of stockholders has been made as provided in this section, such
determination shall apply to any adjournment thereof.
ARTICLE VI.
Miscellaneous Provisions.
6.1 Seal. The seal of the Corporation shall consist of a flat-faced
circular die, of which there may be any number of counterparts, on which there
shall be engraved the word "Seal" and the name of the Corporation.
6.2 Fiscal Year and Accounting. The fiscal year of the
Corporation shall be the calendar year ending December 31. The
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<PAGE>
Board of Directors shall on at least one occasion each fiscal year cause an
examination to be made of the accounts of the monies of the Corporation and a
settlement to be made of the accounts by the Treasurer, a statement of which
examination shall be recorded with the minutes of meetings of the Board.
6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders
for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
6.4 Amendment of By-laws. Unless proscribed by the Articles of
Incorporation, these By-laws may be amended or altered at any meeting of the
Board of Directors by affirmative vote of a majority of the number of Directors
elected and serving.
6.5 Voting of Stock Held. Unless otherwise provided by resolution of
the Board of Directors or of the Executive Committee, if any, the Chairman of
the Board may from time to time appoint an attorney or attorneys or agent or
agents of this Corporation, in the name and on behalf of this Corporation, to
cast the vote which this Corporation may be entitled to cast as a stockholder or
otherwise in any other corporation, any of whose stock or securities may be held
by this Corporation, at meetings of the holders of the stock or other securities
of such other corporation, or to consent in writing to any action by any such
other corporation; and the Chairman of the Board shall instruct the person or
persons so appointed as to the manner of casting
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<PAGE>
such votes or giving such consent and may execute or cause to be executed on
behalf of this Corporation, and under its corporate seal or otherwise, such
written proxies, consents, waivers or other instruments as may be necessary or
proper in the premises. In lieu of such appointment the Chairman of the Board
may himself attend any meetings of the holders of stock or other securities of
any such other corporation and there vote or exercise any or all power of this
Corporation as the holder of such stock or other securities of such other
corporation.
ARTICLE VII.
Emergency By-laws.
The Emergency By-laws provided in this Article VII shall be operative
during any emergency resulting from an attack on the United States or any
nuclear or atomic disaster, notwithstanding any different provision in the
preceding Articles of these Bylaws or in the Articles of Incorporation of the
Corporation or in the Virginia Stock Corporation Act (other than those
provisions relating to emergency by-laws). To the extent not inconsistent with
these Emergency By-laws, the By-laws provided in the preceding articles shall
remain in effect during such emergency and upon the termination of such
emergency the Emergency By-laws shall cease to be operative unless and until
another such emergency shall occur.
During any such emergency:
(a) Any meeting of the Board of Directors may be
called by any officer of the Corporation or by any Director. The
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<PAGE>
notice thereof shall specify the time and place of the meeting. To the extent
feasible, notice shall be given in accord with Section 2.4 above, but notice may
be given only to such of the Directors as it may be feasible to reach at the
time, by such means as may be feasible at the time, including publication or
radio, and at a time less than twenty-four hours before the meeting if deemed
necessary by the person giving notice. Notice shall be similarly given, to the
extent feasible, to the other persons referred to in (b) below.
(b) At any meeting of the Board of Directors, a quorum shall
consist of a majority of the number of Directors fixed at the time by Article II
of the By-laws. If the Directors present at any particular meeting shall be
fewer than the number required for such quorum, other persons present as
referred to below, to the number necessary to make up such quorum, shall be
deemed Directors for such particular meeting as determined by the following
provisions and in the following order of priority:
(i) Vice Presidents not already serving as
Directors, in the order of their seniority of first election to such offices, or
if two or more shall have been first elected to such offices on the same day, in
the order of their seniority in age;
(ii) All other officers of the Corporation in
the order of their seniority of first election to such offices, or if two or
more shall have been first elected to such offices on the same day, in the order
of their seniority in age; and
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<PAGE>
(iii) Any other persons that are designated on a
list that shall have been approved by the Board of Directors before the
emergency, such persons to be taken in such order of priority and subject to
such conditions as may be provided in the resolution approving the list.
(c) The Board of Directors, during as well as before any such
emergency, may provide, and from time to time modify, lines of succession in the
event that during such an emergency any or all officers or agents of the
Corporation shall for any reason be rendered incapable of discharging their
duties.
(d) The Board of Directors, during as well as before any such
emergency, may, effective in the emergency, change the principal office, or
designate several alternative offices, or authorize the officers so to do.
No officer, Director or employee acting in accordance with these
Emergency By-laws shall be liable except for willful misconduct.
These Emergency By-laws shall be subject to repeal or change by further
action of the Board of Directors or by action of the stockholders, except that
no such repeal or change shall modify the provisions of the next preceding
paragraph with regard to action or inaction prior to the time of such repeal or
change. Any such amendment of these Emergency By-laws may make any further or
different provision that may be practical and necessary for the circumstances of
the emergency.
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Exhibit 4
STOCK CERTIFICATE
[FRONT]
COMMUNITY BANKSHARES INCORPORATED
Organized Under the Laws of the Commonwealth of Virginia
This is to certify that is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE
$3.00 PER SHARE, OF Community Bankshares Incorporated, transferable on the
books of the Corporation by the holder hereof in person, or by duly
authorized Attorney, upon surrender of this Certificate properly endorsed.
Witness the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated
[CORPORATE SEAL]
<PAGE>
STOCK CERTIFICATE
[BACK]
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - . . . . Custodian . . . . .
TEN ENT - as tenants by the entireties with (Cust) (Minor)
right of survivorship and not under Uniform Gifts to Minors
as TEN COM Act . . . . . . . . . . .
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated ________________
Exhibits 5 and 23.1
January __, 1996
Board of Directors
Community Bankshares Incorporated
200 N. Sycamore Street
Petersburg, Virginia 23804
Ladies and Gentlemen:
This letter is in reference to the Registration Statement on Form S-4
dated January __, 1996 to be filed by Community Bankshares Incorporated (the
"Company") with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Registration Statement"). The
Registration Statement relates to 741,473 shares of Common Stock, $3.00 par
value per share (the "Shares"), which Shares are proposed to be offered to
shareholders pursuant to an Agreement and Plan of Reorganization (the
"Agreement").
We have examined such corporate proceedings, records and documents as
we considered necessary for the purposes of this opinion. We have relied upon
certificates of officers of the Company where we have deemed it necessary in
connection with our opinion.
Based upon such examination, it is our opinion that the aforementioned
Shares, when issued against payment therefor pursuant to the Agreement, will be
validly issued, fully paid and nonassessable under the laws of the Commonwealth
of Virginia.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Opinion" in the Joint Proxy Statement forming a part of the Registration
Statement.
Very truly yours,
WILLIAMS, MULLEN, CHRISTIAN & DOBBINS
By:
Exhibits 8 and 23.1
January __, 1996
Board of Directors
Community Bankshares Incorporated
200 N. Sycamore Street
Petersburg, Virginia 23804
Re: Tax Opinion - Exchange of Stock
of Commerce Bank of Virginia for
Stock of Community Bankshares Incorporated
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the proposed exchange of shares of common stock (the "Share
Exchange") of Commerce Bank of Virginia ("CBOV") for shares of common stock of
Community Bankshares Incorporated ("CBI") pursuant to the Agreement and Plan of
Reorganization by and between these parties dated December 12, 1995 (the "Share
Exchange Agreement"). Our opinion is given pursuant to Section 6.1(d) of the
Share Exchange Agreement.
FACTS
CBI is a bank holding company headquartered in Petersburg, Virginia.
CBI has one subsidiary, The Community Bank, a Virgin- ia-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. CBOV is a Virginia-chartered bank and member of the
Federal Reserve system which provides commercial and consumer banking services
to customers in and around Richmond, Virginia, through its five banking offices.
CBOV's principal executive offices are located in Richmond, Virginia.
Pursuant to the Share Exchange Agreement, all shares of outstanding
common stock of CBOV will be exchanged for common shares of stock of CBI in
accordance with the provisions of Titles 13.1 of the Code of Virginia. On the
effective date of the Share Exchange each outstanding share of common stock of
CBOV will be exchanged for 1.4044 shares of common stock of CBI and cash in lieu
of any fractional share. After the Share Exchange, CBOV will continue its
existing business and operations as a wholly owned subsidiary of CBI.
In connection with this opinion, we have examined (i) the Share
Exchange Agreement, (ii) the Form S-4 Registration Statement of CBI dated
January __, 1996 (the "Registration Statement"), including the Joint Proxy
Statement contained therein, and (iii) such other documents concerning the Share
Exchange as we have deemed necessary ((i), (ii), and (iii) collectively, the
"Share Exchange Documents"). With respect to the various factual matters
material to our opinions, we have relied upon certificates of management of CBI
and CBOV (the "Officers' Certificates"). We have assumed the correctness of the
factual matters contained in such reliance sources and have made no independent
investigation for the purpose of confirming that such factual matters are
correct.
We have assumed (i) the genuineness of all signatures on the Share
Exchange Documents, (ii) the due authorization, execution, and delivery of all
documents and the validity and binding effect thereof, (iii) the authenticity of
all documents submitted to us as originals, (iv) the conformity to the originals
of all documents submitted to us as copies and the authenticity of the originals
from which the copies were made, and (v) the legal capacity of natural persons.
REPRESENTATIONS
In connection with the proposed Share Exchange, the following
representations have been made to us by the managements of CBI and CBOV,
respectively, in the Officers' Certificates upon which we have been authorized
to rely:
A. The fair market value of the CBI stock received by CBOV shareholders
in the Share Exchange will be approximately equal to the fair market value of
the CBOV stock surrendered by such shareholders in exchange therefore.
B. To the best of the knowledge of the managements of CBI and CBOV,
there is no plan or intention on the part of CBOV's shareholders to sell,
exchange or otherwise dispose of a number of the shares of CBI stock received by
them in the Share Exchange that would reduce such shareholders' ownership of CBI
to a number of shares having a value, as of the date of the Share Exchange, of
less than fifty percent (50%) of the value of all of the formerly outstanding
shares of CBOV, as of the date of the same date. For purposes of this
representation, shares of CBOV stock surrendered by dissenters or exchanged for
cash in lieu of fractional shares of CBI stock will be treated as outstanding
CBOV stock on the date of the transaction. Moreover, shares of CBOV stock and
shares of CBI stock held by CBOV shareholders and otherwise sold, redeemed, or
disposed of before or after the transaction will be considered in making this
representation.
C. CBI has no plan or intention to reacquire any of its stock
issued in the Share Exchange.
D. CBI has no plan or intention to sell or otherwise dispose of
any of the assets of CBOV acquired in the Share Exchange except for dispositions
made in the ordinary course of business.
E. CBI has no plan or intention to liquidate CBOV, to merge CBOV into
another corporation, to sell or otherwise dispose of the stock of CBOV or to
cause CBOV to issue additional shares of stock that would result in CBI losing
control of CBOV within the meaning of Section 368(c) of the Internal Revenue
Code of 1986, as amended (the "Code").
F. At the time of the transaction, CBOV will not have outstanding any
warrants, options, convertible securities, or any other type of rights pursuant
to which any person could acquire stock in CBOV that, if exercised or converted,
would affect CBI's acquisition or retention of control of CBOV, as defined in
Section 368(c) of the Code.
G. CBI does not presently own, nor has it ever owned, directly or
indirectly, any of the stock of CBOV.
H. There is no intercompany indebtedness of CBI or CBOV that was
issued, acquired or will be settled at a discount as a result of the Share
Exchange.
I. The sole consideration to be issued by CBI in the Share Exchange
will be shares of its voting common stock for the voting common stock of CBOV.
For this representation, CBOV stock redeemed for cash or other property
furnished by CBI will be considered as acquired by CBI. Further, no liabilities
of CBOV or its shareholders will be assumed by CBI, nor will any of the CBOV
stock acquired be subject to any liabilities.
J. CBOV will pay its dissenting shareholders the value of their stock
out of its own funds. No funds will be supplied for that purpose, directly or
indirectly, by CBI nor will CBI directly or indirectly reimburse CBOV for any
payments to dissenters.
K. The payment of cash in lieu of fractional shares of CBI stock is
solely for the purpose of avoiding the expense and inconvenience to CBI of
issuing fractional shares and does not represent separately bargained for
consideration.
L. Following the Share Exchange, CBOV will continue its historic
business in a substantially unchanged manner or continue to use a significant
portion of its historic business assets in a business.
M. At the time of the Share Exchange, the fair market value of
the assets of CBOV will exceed the sum of its liabilities, including any
liabilities to which its assets are subject.
N. CBOV is not under the jurisdiction of a court in a case under
Title 11 of the United States Code, as amended, or a similar case within the
meaning of Section 368(a)(3)(A) of the Code.
O. No two parties to the Share Exchange are investment companies
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
P. CBI, CBOV and the shareholders of CBOV will pay their own
expenses, if any, incurred in connection with the Share Exchange.
Q. None of the shares of common stock of CBI received by any
stockholder-employee of CBOV pursuant to the Share Exchange are or will be
consideration for services rendered. Any compensation paid to any
stockholder-employee of CBOV will be for services actually rendered and will be
commensurate with the amounts paid to third parties bargaining at arms length
for similar services.
OPINION
Based on the foregoing and subject to the limitations and
qualifications set forth herein, we give our opinion as follows:
1. The proposed Share Exchange will qualify as a reorganization within
the meaning of Sections 368(a)(1)(B) of the Code, and CBI and CBOV will each
qualify as a "party to a reorganization" within the meaning of Section 368(b) of
the Code.
2. No gain or loss will be recognized for federal tax
purposes by CBI or CBOV as a result of the Share Exchange.
3. No gain or loss will be recognized for federal tax purposes by the
shareholders of CBOV as a result of the exchange of their common stock solely
for the common stock of CBI.
4. Any dissenting shareholder of CBOV who receives solely cash in
exchange for shares of CBOV stock will be treated as receiving a distribution in
redemption of such stock subject to the provisions and limitations of Section
302 of the Code.
5. Any shareholder of CBOV who receives cash in lieu of a fractional
share interest shall be treated as receiving a payment in redemption of such
fractional interest subject to the provisions of section 302 of the Code. Gain
or loss will be realized and recognized to such shareholder measured by the
difference between the redemption price and the portion of the shareholder's
basis in CBOV stock allocable to such fractional share interest.
6. The aggregate tax basis of the shares of CBI stock received by each
shareholder of CBOV will be equal to the aggregate tax basis of such
shareholder's shares of CBOV stock surrendered therefore in the Share Exchange.
7. The holding period under Section 1223 of the Code for the shares of
CBI stock received by each shareholder of CBOV will include the holding period
for the shares of CBOV stock of such shareholder surrendered therefore in the
Share Exchange, provided that the CBOV shareholder held such stock as a capital
asset on the date of the Share Exchange.
8. CBI's basis in each CBOV share received in the exchange
will equal the basis of that share in the hands of the CBOV
shareholder.
9. The holding period under Section 1233 of the Code of each CBOV share
received in the Share Exchange by CBI will include the period during which that
share was held by the CBOV shareholder.
In rendering our opinion, we have considered the applicable provisions
of the Code, Treasury Regulations promulgated thereun- der, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service, and other
authorities as we have considered relevant. Our opinion is limited to the
federal tax law of the United States and is expressed as of the date hereof. We
do not assume any obligation to update or supplement our opinion to reflect any
fact or circumstance which hereafter comes to our attention or any change in law
which hereafter occurs. Our opinions are limited to the matters expressly
stated; no opinion is implied or may be inferred beyond such matters.
Our opinion expressed herein is made in connection with the Share
Exchange and is solely for the benefit of CBI and its Shareholders, and CBOV and
CBOV's shareholders. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement, which has been filed by CBI with the
Securities and Exchange Commission, and to the reference to our firm under the
caption "Certain Federal Income Tax Consequences" in the Joint Proxy Statement
forming a part of the Registration Statement. This opinion may not, without our
prior written consent, be otherwise distributed or relied upon by any other
person, filed with any other government agency or quoted in any other document.
Very truly yours,
WILLIAMS, MULLEN, CHRISTIAN & DOBBINS
By:
Exhibit 10.1
COMMUNITY BANKSHARES, INC.
INCENTIVE STOCK OPTION AND
NONSTATUTORY STOCK OPTION PLAN
1. Purpose and Scope
The purpose of this Plan is to promote the interests of the Company and
its shareholders by strengthening its ability to attract and retain key officers
and directors by furnishing additional incentives whereby such present and
future officers, key employees, and directors may be encouraged to acquire, or
to increase their acquisition of, the Company's common stock, thus maintaining
their personal and proprietary interest in the Company's continued success and
progress. The Plan provides for the grant of Incentive Stock Options and the
grant of Nonstatutory Stock Options and Stock Appreciation Rights in accordance
with the terms and conditions set forth below.
2. Definitions
Unless otherwise required by the context:
2.01. "Board" shall mean the Board of Directors of the
Company.
2.02. "Committee" shall mean the Stock Option Plan Commit-
tee, which consists of three members appointed by the Board.
2.03. "Company" shall mean Community Bankshares, Inc., a
Virginia corporation, and any subsidiary corporation.
2.04. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
2.05. "Incentive Stock Option" shall mean a right to
<PAGE>
purchase stock, granted pursuant to the Plan, which qualifies under Section 422
of the Code and the regulations thereunder.
2.06. "Nonstatutory Stock Option" shall mean a right to
purchase Stock, granted pursuant to the Plan, which does not
qualify under Section 422 of the Code and the regulations thereun-
der.
2.07. "Options" shall mean either an Incentive Stock Option
or Nonstatutory Stock option.
2.08. "Option Price" shall mean the purchase price for Stock
under an Incentive Stock Option or Nonstatutory Stock Option, as
determined in Section 6 below.
2.09. "Participant" shall mean anyone to whom an Incentive
Stock Option or Nonstatutory Stock Option is granted under the
Plan.
2.10. "Plan" shall mean Community Bankshares, Inc. Stock
option Plan.
2.11. "Stock" shall mean the common stock of Community
Bankshares, Inc.
2.12. "Stock Appreciation Right" shall mean a right to
receive cash, granted pursuant to Section 9 of the Plan.
3. Stock to be Optioned
Subject to the provisions of Section 15 of the Plan, the maximum number
of shares of Stock that may be optioned or sold under the Plan is 85,000 shares.
Such shares may be treasury, or authorized, but unissued, shares of Stock of the
Company. If any Incentive Stock Option or Nonstatutory Stock option granted
under
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<PAGE>
the Plan shall expire or terminate for any reason without having been exercised
in full, the shares not purchased shall again be available for purposes of the
Plan.
4. Administration
The Plan shall be administered by the Committee. Two members of the
Committee shall constitute a quorum for the transaction of business. The
Committee shall be responsible to the Board for the operation of the Plan, and
shall make recommendations to the Board with respect to participation in the
Plan by employees and directors of the Company, and with respect to the extent
of that participation. The interpretation and construction of any provision of
the Plan by the Committee shall be final, unless otherwise determined by the
Board. No member of the Board or the Committee shall be liable for any action or
determination made by him in good faith.
5. Eligibility
The Board, upon recommendation of the Committee, may grant Nonstatutory
Stock Options to any director and Incentive Stock Options or Nonstatutory Stock
Options to any officer, key executive, administrative or other employee
(including an employee who is a director of the Company). Options may be awarded
by the Board at any time and from time to time to new Participants, or to then
Participants, or to a greater or lesser number of Participants, and may include
or exclude previous Participants, as the Board, upon recommendation by the
Committee shall determine. Options granted at different times need not contain
similar provisions.
6. Option Price
The purchase price for Stock under each Nonstatutory Stock Option shall
be 100 percent of the fair market value of the Stock
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<PAGE>
at the time the Option is granted, unless the Committee determines otherwise.
The purchase price for stock under each Incentive Stock Option shall not be less
than 100 percent of the fair market value of the Stock at the time the Incentive
Stock Option is granted.
7. Terms and Conditions of Options
Options granted pursuant to the Plan shall be authorized by the Board
and shall be evidenced by a Stock Option Agreement in such form as the Board,
upon recommendation of the Committee, shall from time to time approve. Such
agreements shall comply with and be subject to the following terms and
conditions:
7.01. Employment Agreement. The Board may, in its discretion, include
in any Option granted under the Plan a condition that the Participant shall
agree to remain in the employ of, and to render services to, the Company for a
period of time (specified in the agreement) following the date the Option is
granted. No such agreement shall impose upon the Company, however, any
obligation to employ the Participant for any period of time.
7.02. Noncompetition. The Board may, in its discretion,
include in any Option granted under the Plan a condition that the
Participant agree not to compete with the Company for a specific
period of time and/or within a specific geographic area.
7.03. Time and Method of Payment. The Option Price shall be paid in
cash at the time an Option is exercised under the Plan and/or may be paid for by
tendering of one or more shares of Stock. Upon a tender of Stock, the fair
market value of the Stock at the time of tender shall be used to determine the
value of the Stock as payment. The Committee shall have sole discretion to
determine the fair market value of the shares of Stock taking into consideration
such factors as the most recent appraisal of the Stock for purposes of the
Company's Employee Stock Ownership Plan, the Company's year-
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<PAGE>
to-date earnings, and recent trading prices of the Stock. Promptly after the
exercise of an option and the payment of the full Option Price either in Stock
or cash, the Participant shall be entitled to the issuance of a stock
certificate evidencing his ownership of such share of Stock. A Participant shall
have none of the rights of a shareholder until shares are issued to him, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
7.04. Surrender Rights. The Committee may include in an Option granted
under the Plan the right to surrender all or a portion of the option and receive
in exchange therefor an amount of cash or Stock equal to the difference between
the then fair market value of the shares of stock issuable upon the exercise of
the Option or portion thereof surrendered and the exercise price of the option
or portion thereof surrendered. The fair market value of the Stock shall be
determined in accordance with the provisions under Section 7.03 of the Plan.
7.05. Number of Shares. Each option shall state the total
number of shares of Stock to which it pertains.
7.06. Option Period and Limitations on Exercise of Options. The Board
may, in its discretion, provide that an Option may not be exercised in whole or
in part for any period or periods of time specified in the Option Agreement.
Except as provided in the Option Agreement, an Option may be exercised in whole
or in part at any time during its term. No option may be exercised after the
expiration of ten years from the date it is granted. No Option may be exercised
for a fractional share of Stock.
B. Provisions Applicable to Incentive Stock Options
It is intended that Incentive Stock options granted under the Plan
shall constitute Incentive Stock options within the meaning of
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<PAGE>
Section 422 of the Code. The following provisions are applicable to any
Incentive Stock option granted under the Plan.
8.01. Term of Incentive Stock Option. No Incentive Stock
Option shall be exercisable prior to the date one year, or after
the date ten years, from the date such Incentive Stock Option is
granted.
8.02. Ten Percent Shareholder. Notwithstanding any other provision
herein contained, no Plan Participant may receive an Incentive Stock Option
under the Plan if such Participant, at the time the award is granted, owns (as
defined in Section 424(d) of the Code) stock possessing more than ten percent of
the total combined voting power of all classes of stock of the Company, unless
the option price for such Incentive Stock Option is at least 110 percent of the
fair market value of the Stock subject to such Incentive Stock Option on the
date of the grant and such Incentive Stock Option is not exercisable after the
date five years from the date such Incentive Stock Option is granted.
8.03. Limitation on Amounts. The aggregate fair market value
(determined with respect to each Incentive Stock Option as of the time such
Incentive Stock Option is granted) of the Stock with respect to which Incentive
Stock Options are exercisable for the first time by a Participant during any
calendar year shall not exceed $100,000.
8.04. Grant of Incentive Stock Option. An Incentive Stock
Option granted pursuant to the Plan must be granted within ten
years from the date the Plan is adopted or the date the Plan is
approved by Company shareholders, whichever is earlier.
9. Stock Appreciation Rights
The Board may, upon recommendation of the Committee, grant
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<PAGE>
Stock Appreciation Rights to Participants at the same time as such Participants
are awarded Nonstatutory Stock Options under the Plan. Such Stock Appreciation
Rights shall be evidenced by a Nonstatutory Stock Option and Stock Appreciation
Right Agreement in such form as the Board shall from time to time approve. Such
Agreement shall comply with, and be subject to, the following terms and
conditions:
9.01. Employment Agreement. The Board may, in its discretion, include
in any Stock Appreciation Right granted under the Plan a condition that the
Participant shall agree to remain in the employ of, and to render services to,
the Company or any of its subsidiaries for a period of time (specified in the
agreement) from the date the Stock Appreciation Rights are granted. No such
agreement shall impose upon the Company, however, any obligations to employ the
Participant for any period of time.
9.02. Grant. Each Stock Appreciation Right shall relate to a specific
Nonstatutory Stock Option under the Plan, and shall be awarded to a Participant
concurrently with the grant of such Nonstatutory Stock Option. The Company shall
have sole discretion to grant up to one (1) Stock Appreciation Right for every
2.5 Nonstatutory Stock Options granted under this Agreement.
9.03. Manner of Exercise. A Participant shall exercise a Stock
Appreciation Right by giving written notice of such exercise to the Company. The
date upon which such written notice is received by the Company shall be the
exercise date for the Stock Appreciation Right.
9.04. Appreciation Available. Each Stock Appreciation Right shall
entitle a Participant to the following amount of appreciation -- the excess of
the fair market value of a share of Stock on the exercise date over the
Nonstatutory Stock Option Price per share of the related Nonstatutory Stock
Option. The Committee shall have sole discretion to determine the fair market
value of the shares of
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Stock taking into consideration such factors as the most recent appraisal of the
Stock for purposes of the Company's Employee Stock ownership Plan, the Company's
year-to-date earnings, and recent trading prices of the Stock. The total
appreciation available to a Participant from any exercise of Stock Appreciation
Rights shall be equal to the number of Stock Appreciation Rights being
exercised, multiplied by the amount of appreciation per Right determined under
the preceding sentences.
9.05. Payment of Appreciation. The total appreciation available
to a Participant from an exercise of Stock Appreciation Rights shall be paid to
the Participant in cash. The amount thereof shall be the amount of appreciation
determined under Paragraph 4 above.
9.06. Limitations Upon Exercise of Stock Appreciation
Rights. A Participant may exercise a Stock Appreciation Right for cash only in
conjunction with the exercise of the Nonstatutory Stock Option to which
the Stock Appreciation Right relates. Stock Appreciation Rights may be
exercised only at such times and by such persons as may exercise Nonstatutory
Stock options under the Plan. Adjustment to the number of shares in the Plan and
the price per share pursuant to Section 15 below shall also be made to any Stock
Appreciation Rights held by each Participant. Any termination, amendment, or
revision of the Plan pursuant to Section 15 below shall be deemed a
termination, amendment, or revision of Stock Appreciation Rights to the same
extent.
9.07. Tax Deductibility of Stock Appreciation Rights. The Board
may, in its discretion, include in any Stock Appreciation Right granted under
the Plan a condition that if the Internal Revenue Code is amended such that, at
the time the Participant elects to exercise his Stock Appreciation Right, the
dollar value of the Stock Appreciation Right is not tax deductible, then such
Stock Appreciation Right will become null and void. The Board may
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further provide that such condition may be waived by the Committee at the time
the Participant exercises the Stock Appreciation Right.
10. Exercise of Options
The Committee, in granting options and Stock Appreciation Rights
hereunder, shall have discretion to determine the terms upon which such Options
and Stock Appreciation Rights shall be exercis- able, subject to the applicable
provisions of the Plan. If a Participant is discharged for just cause at any
time, the entire number of shares of Stock and Stock Appreciation Rights granted
to a Participant shall be forfeited. For this purpose, "just cause" shall mean
theft, fraud, embezzlement or willful misconduct causing significant property
damage to the Company or personal injury to any employee of the Company. The
Committee shall have sole discretion in determining "just cause" within the
terms of this Section.
11. Termination of Employment
Following the date of cessation of employment, the Participant may at
any time within three months exercise his options and Stock Appreciation Rights
to the extent that he was entitled to exercise them on the date of cessation of
employment, but in no event shall any option or Stock Appreciation Right be
exercisable more than ten (10) years from the date it was granted. In the sole
discretion of the Committee, the Stock option and Stock Appreciation Rights
Agreement may provide that should the Participant engage in employment or
activities contrary, in the opinion of the Committee, to the best interests of
the Company or any of its subsidiaries, then any Stock and Stock Appreciation
Rights issued or to be issued to the Participant shall become null and void. The
Committee shall determine in each case whether a termination of employment shall
be considered a retirement with the consent of the Company or a subsidiary, and,
subject to applicable law, whether a leave of
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<PAGE>
absence shall constitute a termination of employment. Any such determination of
the Committee shall be final and conclusive, unless overruled by the Board.
12. Rights in Event of Death
If a Participant dies while employed by the Company or any of its
subsidiaries, or within three months after having retired with the consent of
the Company or any of its subsidiaries, without having fully exercised his
options and Stock Appreciation Rights, the executors or administrators, or
legatees or heirs, of his estate shall have the right to exercise such Options
and Stock Appreciation Rights to the extent that such deceased Participant was
entitled to exercise the Options and Stock Appreciation Rights on the date of
his death; provided, however, that in no event shall the options or Stock
Appreciation Rights be exercisable more than ten years from the date they were
granted.
13. No Obligations to Exercise Option or Stock Appreciation Rights
The granting of an Option or Stock Appreciation Right shall impose no
obligation upon the Participant to exercise such Option or Stock Appreciation
Right.
14. Nonassignability
Options and Stock Appreciation Rights shall not be transferable other
than by will or by the laws of descent and distribution, and during a
Participant's lifetime shall be exercisable only by such Participant.
15. Effect of Change in Stock Subject to the Plan
The aggregate number of shares of Stock available for Options under the
Plan, the shares subject to any Option, the price per
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<PAGE>
share, and the number of related Stock Appreciation Rights shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock subsequent to the effective date of the Plan resulting from (1)
a subdivision or consolidation of shares or any other capital adjustment, (2)
the payment of a stock dividend, or (3) other increase or decrease in such
shares effected without receipt of consideration by the Company. If the Company
shall be the surviving corporation in any merger or consolidation, any Option or
Stock Appreciation Right shall pertain, apply, and relate to the securities to
which a holder of the number of shares of Stock subject to the Option would have
been entitled after the merger or consolidation. Upon dissolution or liquidation
of the Company, or upon a merger or consolidation in which the Company is not
the surviving corporation, all Options and Stock Appreciation Rights outstanding
under the Plan shall terminate; provided, however, that each Participant (and
each other person entitled under Section 11 to exercise an Option or Stock
Appreciation Right) shall have the right, immediately prior to such dissolution
or liquidation, or such merger or consolidation, to exercise such Participant's
Options and Stock Appreciation Rights in whole or in part, but only to the
extent that such Options and Stock Appreciation Rights are otherwise exercisable
under the terms of the Plan.
16. Amendment and Termination
Neither the Board nor the Committee may, without the consent of the
holder of an Option, alter or impair any option or Stock Appreciation Right
previously granted under the Plan, except as authorized herein. Unless sooner
terminated, the Plan shall remain in effect for a period of ten (10) years from
the earlier of the date of the Plan's adoption by the Board or approval by the
Company shareholders. Termination of the Plan shall not affect any Option
previously granted.
With respect to any shares of Stock to which Options have not
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been granted under the Plan, the Board, without further action on the part of
the shareholders of the Company, may from time to time alter, amend, or suspend
certain provisions of the Plan except that it may not, without the approval of
the shareholders of the Company: (i) change the number of shares of Stock
available for grant under the Plan, (ii) extend the duration of the Plan, (iii)
increase the maximum term of Incentive Stock Options under the Plan, (iv)
decrease the minimum option price of Incentive Stock options, (v) change the
class of employees eligible to be granted Incentive Stock options under the
Plan, or (vi) effect a change relating to Incentive Stock Options granted under
the Plan which is inconsistent with Code Section 422 or the regulations
thereunder.
17. Agreement and Representation of Employees
As a condition to the exercise of any portion of an Option, or of any
Stock Appreciation Right, the Company may require the person exercising such
Option or Stock Appreciation Right to represent and warrant at the time of such
exercise that any shares of Stock acquired at exercise are being acquired only
for investment and without any present intention to sell or distribute such
shares, if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933 or any other applicable law,
regulation, or rule of any governmental agency.
18. Reservation of Shares of Stock
The Company, during the term of this Plan, will at all times reserve
and keep available, and will seek or obtain from any regulatory body having
jurisdiction any requisite authority necessary to issue and to sell, the number
of shares of Stock that shall be sufficient to satisfy the requirements of this
Plan. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority deemed necessary by counsel for the Company for the
lawful issuance and sale of its Stock hereunder
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<PAGE>
shall relieve the Company of any liability in respect of the failure to issue or
sell Stock as to which the requisite authority has not been obtained.
19. Withholding Taxes
Whenever under the Plan shares are to be issued upon the exercise of
options or Rights thereunder, the Company shall have the right to require the
optionee to remit to the Company an amount sufficient to satisfy federal, state
and local withholding tax requirements, if any, prior to the delivery of any
Stock certificate or certificates for such shares. Whenever under the Plan
payments are made in cash such payment shall be net of an amount sufficient to
satisfy federal, state and local withholding tax requirements.
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Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS IS AN EMPLOYMENT AGREEMENT dated as of July 1, 1995 between The
Community Bank (the "Bank") and Nathan S. Jones, III (the "Executive").
The Bank desires to retain the services of the Executive on the terms
and conditions set forth in this Agreement.
The Executive is the President and Chief Executive Officer of
the Bank.
It is in the best interest of the Bank and the Executive to secure the
continued services of the Executive.
NOW, THEREFORE, to induce the Executive to remain and continue in the
employ of the Bank, the Bank and the Executive agree as follows:
ARTICLE I
1. Employment. Bank hereby employs Executive, and Executive accepts
such employment, for the period beginning as of the date of this Agreement and
ending on June 30, 1998 which period of employment may be extended or terminated
only upon the terms and conditions set forth in this Agreement.
2. Renewal Term. This Agreement shall automatically renew after the
ending date for successive terms of one year. If Bank or Executive elect not to
renew this Agreement, the party making such election must provide the other
party at least 120 days notice in writing of such election. In the event of the
termination of this Agreement by Bank under paragraph 8 of this Article I,
Executive shall be paid the sums and benefits provided in such paragraph.
<PAGE>
3. Executive Duties. Executive agrees that, during the term of his
employment under this Agreement and in his capacity as President and Chief
Executive Officer, he will devote his full business time and energy to the
business, affairs and interests of the Bank, and will serve it diligently and to
the best of his ability. The services and duties to be performed by Executive
shall be those appropriate to his office and title as currently and from time to
time specified in the Bank's by-laws or otherwise specified by its Board of
Directors and shall be limited to the Bank's trade area (the "trade area") as
defined in the Community Reinvestment Act Statement of the Bank in effect on the
date of this Agreement. Moreover, Executive shall not be required to relocate to
an area outside of the trade area.
4. Compensation. Bank agrees to pay Executive, and Executive agrees to
accept, as compensation for all services rendered by him to the Bank during the
period of his employment under this Agreement, base compensation at the annual
rate of $112,500.00 in the first year, which shall be payable in conformity with
Bank's policy relating to salaried employees. Such salary shall be increased in
the sole and absolute discretion of the Bank's Board of Directors.
The Bank shall reimburse the Executive for his reasonable
costs and expenses associated with his membership in the Country Club of
Petersburg.
The Bank shall provide to the Executive, an automobile of
Executive's selection, subject to the approval of the Bank's
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Executive Committee.
The Bank shall continue in effect the existing Incentive
Compensation Plan for the Executive.
5. Participation in Benefit Plans and Reimbursement of
Business Expenses.
(i) During the term of his employment under this Agreement, Executive
shall be entitled to participate in any pension, group insurance,
hospitalization, deferred compensation or other benefit or incentive plans or
benefits of the Bank presently in effect, or adopted by the Bank and generally
available to all employees of senior executive status.
(ii) During the term of this Agreement, to the extent that such
expenditures meet the requirements of the Internal Revenue Code for
deductibility by the Bank for federal income tax purposes and are substantiated
by the Executive as required by the Internal Revenue Service and policies of the
Bank, the Bank shall reimburse the Executive promptly for all expenditures made
in accordance with rules and policies established by the Board of Directors of
the Bank.
6. Illness. In the event Executive is unable to substantially perform
his duties under this Agreement on a full-time basis for a period of six
consecutive months by reason of illness or other physical or mental disability,
and at or before the end of such period he does not return to work on a
full-time basis, the Bank may terminate this Agreement without further
compensation being due the Executive from the Bank pursuant to this Agreement,
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except benefits accrued through the date of such termination under employee
benefit plans of the Bank.
7. Death. In the event of Executive's death during the term of this
Agreement, his estate, legal representative or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's compensation from the Bank at
the rate in effect at the time of Executive's death for a period of one month
from the date of Executive's death.
8. Termination by Bank. Notwithstanding the provisions of paragraph 2
of this Article I, the Board of Directors of the Bank may, in its sole
discretion, terminate the Executive's employment under this Agreement at any
time by giving not less than thirty days written notice to the Executive.
Subject to Section 18(k) of the Federal Deposit Insurance Act, in such event,
unless the Bank terminates the Executive's employment for cause in accordance
with paragraph 9 of ARTICLE I of this Agreement, the Executive shall be paid,
during the six months that follow such termination, the salary and benefits that
the Executive would have been entitled to receive during such period of time had
such termination not occurred. The salary and benefits will be due Executive
regardless of any subsequent employment by Executive which is not in violation
of this Agreement.
Notwithstanding the provisions of this paragraph 8, no termination of
this Agreement shall be made pursuant to this paragraph 8, (a) following a
"Change of Control" of the Bank as defined in paragraph 10 of ARTICLE II of this
Agreement, or (b)
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<PAGE>
during any period of time when the Bank has knowledge that any person, entity or
concern has taken steps reasonably calculated to effect a Change of Control of
the Bank until, in the opinion of its Board of Directors, the person, concern or
entity has abandoned or terminated its efforts to effect a Change of Control.
Any good faith determination by the bank's Board of Directors that the person,
concern or entity has abandoned or terminated its efforts to effect a Change of
Control shall be conclusive and binding on the Executive. Such determination
shall be promptly communicated to the Executive in writing by the Bank's
Secretary.
9. Resignation - Other Termination.
(i) Notwithstanding the provisions of paragraph 2
of this Article I, the Board of Directors of the Bank may, in its sole
discretion, terminate the Executive's employment for cause. For the purposes of
this Agreement, "Cause" shall mean the Executive's gross negligence or willful
misconduct, which is detrimental to the best interests of the Bank's business
operations. For purposes of this paragraph, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his act or
omission was in the best interest of the Bank; provided that any act or omission
to act on the Executive's behalf in reliance upon an opinion of counsel to the
Bank or counsel to the Executive shall not be deemed willful. The Executive
shall not be deemed to have been terminated for Cause unless there shall have
been delivered to him a copy of a certifi-
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cation by a majority of the outside members of the Board of Directors of the
Bank finding that, in the good faith opinion of such majority, the Executive was
guilty of conduct which is deemed to be Cause within the meaning of the first
sentence of this paragraph and specifying the particulars thereof in detail,
after reasonable notice to the Executive and an opportunity for him, together
with his counsel, to be heard before such majority.
(ii) In the event that Executive resigns from or voluntarily
terminates his employment with the Bank at any time, or if the Bank terminates
the Executive's employment for Cause in accordance with paragraph 9(i) of
Article I of this Agreement, this Agreement shall terminate upon the date of
such resignation or other termination of employment, in which event the Bank
shall have no obligation to make any further payment under this Agreement.
However, Executive shall be entitled to receive any benefits that he would
otherwise be eligible to receive under any benefits plans of the Bank.
ARTICLE II
10. Change of Control. The provisions of Article II of this Agreement
shall become operative only when there is a "Change of Control" of the Bank. For
purposes of this Agreement, a Change of Control occurs if, after the date of
this Agreement, (i) any person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934 becomes the owner or beneficial
owner of Bank securities having 20% or more of the combined voting power of the
then outstanding Bank securities that may be cast for
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the election of the Bank's directors other than as a result of the issuance of
securities initiated by the Bank, or open market purchases approved by the Board
of Directors, as long as the majority of the Board of Directors approving the
purchases is a majority at the time the purchases are made; or (ii) as the
direct or indirect result of, or in connection with, a tender or exchange offer,
a merger or other business combination, a sale of assets, contested election, or
any combination of these events, the persons who were directors of the Bank
before such events cease to constitute a majority of the Bank's Board, or any
successor's board, within two years of the last of such transactions. For
purposes of this Agreement, the Control Change Date is the date on which an
event described in (i) or (ii) occurs. If a Change of Control occurs on account
of a series of transactions, the Control Change Date is the date of the last of
such transactions.
11. Termination After Change of Control. If a Change of Control of the
Bank occurs, this Agreement shall continue in force until terminated in
accordance with the provisions of this Article II. If, after a Change of Control
occurs, the Executive's employment is terminated, the Executive shall be
entitled to receive the payments specified in this Article II unless termination
is for cause. However, if such termination is by reason of the disability or
death of the Executive, the provisions of paragraphs 6 or 7 of Article I shall
govern such termination.
(i) The Bank may terminate the Executive's
employment for Cause in accordance with paragraph 9 of Article I of
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<PAGE>
this Agreement.
(ii) The Executive may terminate his employment for
Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
a) The assignment of duties to the Executive by
the Bank which (i) are materially different from the Executive's duties
immediately prior to the Change of Control, or (ii) result in the Executive
having a significantly less authority and/or responsibility than he had prior to
the Change of Control, without his express written consent;
b) The relocation of Executive to an area outside
the trade area.
c) A reduction by the Bank of the Executive's base
salary in effect on the date of the Change of Control, or a failure by the Bank
to increase such salary each year after such Change of Control by an amount
which at least equals, on a percentage basis, the percentage increase, if any,
in the cost of living as set forth in the Consumer Price Index for the area in
which the principal office of the Bank in located (1967=100) published by the
Bureau of Labor Statistics of the United States Department of Labor over the
preceding year, unless the failure to so increase the Executive's salary is
waived in writing by the Executive;
d) The removal of Executive from or the failure to
re-elect Executive to the position of President and Chief Executive Officer of
the Bank, except in connection with a termination of the Executive's employment
by the Bank for Cause or by reason of his
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<PAGE>
disability;
e) The failure of the Bank to provide the
Executive with substantially the same fringe benefits that were provided to him
immediately prior to the Change of Control.
f) The failure of the Bank to obtain the assump-
tion of an agreement to perform this Agreement by any successor as
contemplated in paragraph 13(ii).
(iii) Notwithstanding the provisions of paragraph 11(i) and
11(ii), following a Change of Control, the Bank may terminate the Executive's
employment without cause at any time in any lawful manner, subject to the Bank's
providing to the Executive the payments and benefits specified in paragraph
12(ii).
(iv) The Executive may terminate his employment at any time
after a Change of Control, but if such termination is not for Good Reason, or
Good Reason is alleged but ultimately determined pursuant to paragraph 11(vi)
not to be justifiable, then upon such termination date Executive shall be
entitled to the payments and benefits from the Bank specified in paragraph
12(iii) of this Agreement.
(v) Termination either by the Bank pursuant to paragraph 11(i)
or 11(iii) above, or by the Executive pursuant to paragraph 11(ii) or 11(iv)
above, shall be communicated by written Notice of Termination to the other
party. For purposes of Article II of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision(s)
in this Agreement relied upon except for a termination pursuant to
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<PAGE>
paragraph 11(iii) or 11(iv) which shall set forth in a reasonable detail the
facts and circumstances claimed to provide a basis for termination of employment
under the provision so indicated.
(vi) "Date of Termination" shall mean the date specified in
the Notice of Termination, which shall be not less than thirty nor more than
ninety days after such Notice of Termination is given; provided, that if within
thirty days after any Notice of Termination is given pursuant to paragraph 11(i)
or 11(ii) the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, then pending the
resolution of such dispute the Bank shall continue to pay the Executive the same
base salary and provide him the same or substantially comparable fringe benefits
that he was paid and provided immediately prior to the delivery of the Notice of
Termination. If a termination by the Bank pursuant to paragraph 11(i) above is
challenged by the Executive and the termination is ultimately determined to be
justified, then all sums paid by the Bank to the Executive pursuant to this
paragraph 11(iv), plus the cost to the Bank of providing the Executive such
fringe benefits from the date of termination to the date of the resolution of
such dispute, shall be promptly repaid by the Executive to the Bank. However,
the Bank shall not be relieved of its obligation to make payments to the
Executive pursuant to paragraph 12(iii) in the event that a termination by the
Executive pursuant to paragraph 11(ii) is challenged by the Bank and the
termination is ultimately determined not to be for Good Reason. If it is
ultimately
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<PAGE>
determined that a termination by the Bank pursuant to paragraph 11(i) was not
justified, or that a termination by the Executive pursuant to paragraph 11(ii)
was for Good Reason, the Executive shall be entitled to retain all sums paid to
him pending the resolution of such dispute and he shall also be entitled to
receive the payments and other benefits provided for in paragraph 12(ii), and
the Date of Termination shall be the date on which the dispute is finally
settled.
12. Termination Provisions.
(i) If the Executive's employment is terminated for Cause
pursuant to paragraph 9 of Article I, and if such termination is challenged by
the Executive and the challenge is resolved in favor of the Bank, the Bank shall
be obligated to the Executive according to Article I only, and the Bank shall
have no further obligation to Executive under Article II.
(ii) If within three years after a Change of Control of the
Bank, (1) the Bank terminates the Executive's employment in accordance with the
provisions of paragraph 11(iii), or (2) the Executive terminates his employment
pursuant to paragraph 11(ii) at any time during the period beginning with a
Change of Control and ending three years after the Change of Control, then,
except as provided in Section 14 of this Agreement.
a) On the Executive's last day of employment with
the Bank, the Bank shall pay to the Executive as compensation for services
rendered to the Bank, a cash amount (subject to any applicable payroll or other
taxes required to be withheld) equal to
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2.99 times the compensation paid to the Executive by the Bank for the twelve
months ending with the Executive's termination, provided that, at the option of
the Executive, the amount required to be paid hereby shall be paid by the Bank
in equal monthly installments over the sixty months succeeding the Date of
Termination, payable on the first day of each month. For purposes of this
paragraph 12(ii) compensation shall include only base salary and cash bonuses
paid to Executive.
b) In addition to the benefits to which the
Executive is entitled under the retirement plans or programs of the Bank in
effect as of the date of this Agreement or any successors plans or programs in
effect on the Date of Termination of the Executive's employment, the Bank shall
pay the Executive a cash amount equal to the actuarial equivalent of the
retirement pension to which the Executive would have been entitled under the
terms of such retirement plan or programs, without regard to "vesting"
thereunder, had the Executive accumulated three additional years of continuous
service (after any termination pursuant to this Agreement) at the Executive's
base salary rate in effect on the Date of Termination under such retirement
plans or programs reduced by the single sum actuarial equivalent of any amounts
to which the Executive is entitled pursuant to the provisions of such retirement
plans and programs. For the purposes of this paragraph 12(ii)(b), "actuarial
equivalent" shall be determined using the same methods and assumptions utilized
under the Bank's retirement plans and programs immediately prior to the Change
of Control. The Bank's
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<PAGE>
obligation under this paragraph 12(ii)(b) may be satisfied by a lump sum payment
in cash or by the purchase of an annuity owned by and payable to the Executive,
which annuity shall provide for payment comparable to payments which the
Executive would receive pursuant to such retirement plans or programs. The
payment shall be made or the annuity shall be purchased and delivered to the
Executive within thirty days following termination. However, at the Executive's
option, payment may be deferred until a later time.
(c) The Bank shall maintain in force and effect,
for the continued benefit of the Executive for a three-year period after the
Date of Termination, all employee benefit plans and programs or arrangements in
which the Executive was entitled to participate immediately prior to the Date of
Termination, provided that the Executive's continued participation is permitted
under the terms of such plans and programs. In the event that the Executive's
participation is not permitted, the Bank shall arrange to provide the Executive
with benefits substantially similar to those which the Executive was entitled to
receive under such plans and programs.
(d) Executive shall have the option to purchase
from the Bank or its successor at its then net book value as shown on the Bank's
records, the motor vehicle then assigned by the Bank to the Executive.
(iii) In the event the Executive terminates his employment at
any time after a Change of Control for other than Good Reason, or Good Reason is
alleged but ultimately determined
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<PAGE>
pursuant to paragraph 11(vi) not to be justifiable, then:
(a) On the Executive's last day of employment with
the Bank, the Bank shall pay to the Executive as compensation for services
rendered to the Bank an amount (subject to any applicable payroll or other taxes
required to be withheld) equal to the compensation paid to the Executive for the
six months preceding the Executive's termination, provided that, at the option
of the Executive, the amount required to be paid hereby shall be paid in equal
monthly installments over twelve months succeeding the Date of Termination,
payable on the first day of each such month.
(b) In addition to the benefits to which the
Executive in entitled under the retirement plans or programs of the Bank in
effect as of the date of this Agreement or any successor plans or programs in
effect on the Date of Termination of the Executive's employment, the Bank shall
pay the Executive a cash amount equal to the actuarial equivalent of the
retirement pension to which the Executive would have been entitled under the
terms of such retirement plans or programs, without regard to "vesting"
thereunder, had the Executive accumulated one additional year of continuous
service (after any termination pursuant to this Agreement) at the Executive's
base salary rate in effect on the Date of Termination under such retirement
plans or programs reduced by the single sum actuarial equivalent of any amount
to which the Executive is entitled pursuant to the provisions of such retirement
plans and programs. For purposes of this paragraph 12(iii)(b), "actuarial
equivalent" shall be determined using the same methods
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and assumptions utilized under the Bank's retirement plans and programs
immediately prior to the Change of Control. The Bank's obligation under this
paragraph 12(iii)(b) may be satisfied by a lump sum payment in cash or by the
purchase of an annuity owned and payable to the Executive, which annuity shall
provide for payments comparable to payments which the Executive would receive
pursuant to the retirement plans or programs. The payment shall be made or the
annuity shall be purchased and delivered to the Executive within thirty days
following termination. However, at the Executive's option, payment may be
deferred until a later time.
(c) The Bank shall maintain for the continued
benefit of the Executive, for a one year period after the Date of Termination,
all employee benefit plans and programs in which the Executive was entitled to
participate immediately prior to the Date of Termination provided that continued
participation is possible under the general terms and provisions of such plans
and programs. In the event that the Executive's participation in any such plan
or program is barred, the Bank shall arrange to provide the Executive with
benefits substantially similar to those which the Executive was entitled to
receive under such plans and programs.
13. Litigation - Obligations - Successors. If litigation is instituted
to challenge, enforce or interpret any provision contained in Article II of this
Agreement, and such litigation does not end with judgment in favor of the Bank,
the Bank shall indemnify the Executive for his reasonable attorney's fees and
disbursements incurred in such litigation.
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(i) The Bank's obligation to pay the Executive the
compensation and benefits provided in Article II shall be unconditional and
shall not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Bank may
have against him. All amounts payable by the Bank under Article II shall be paid
without notice or demand except as provided in paragraph 13. Except as provided
in paragraph 11(vi), each payment made by the Bank shall be final and the Bank
will not seek to recover any part of such payment from the Executive. The
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise.
(ii) The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by agreement in
form and substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in its entirety. Failure of the Bank to obtain such
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Bank in
the same amount and on the same terms as he would be entitled under Article II
if he had terminated his employment for Good Reason pursuant to subparagraph
11(ii), except that for purposes of implementation, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
Article II of this Agreement, "Bank" shall mean the Community
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<PAGE>
Bank and any successor to its respective business and/or assets which executes
and delivers the Agreement provided for in this paragraph 13.
14. Limitation of Benefits. It is the intention of the parties that no
payment be made or benefit provided to the Executive pursuant to Article II that
would constitute an "excess parachute payment" within the meaning of Section
28OG of the Internal Revenue Code of 1986, an amended (the Code) and any
regulations thereunder, which result in a loss of an income tax deduction by the
Bank or the imposition of an excise tax on the Executive under Section 4999 of
the Code. If the auditors for the Bank on the date of a Change of Control (or
any other accounting firm designated by the Bank) determine that some or all of
the payments or benefits scheduled under this Agreement, as well as any other
payments or benefits on a Change of Control, would be nondeductible by the payor
under Section 28OG of the Code, then the payments scheduled under this Agreement
will be reduced to one dollar less than the maximum amount which may be paid
without causing any such payment or benefit to be nondeductible. The
determination as to the reduction of benefits or payment by the Bank's
independent accountants shall be binding on the parties. The Executive shall
have the right to designate within a reasonable period, which payments or
benefits will be reduced. However, if no direction is received from the
Executive, the Bank shall implement the reductions in its discretion.
ARTICLE III
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<PAGE>
15. Notices. For the purposes of this Agreement, notices or
other communications provided for in the Agreement shall be in
writing and shall be deemed to have been given when delivered or
mailed by certified mail, return receipt requested, addressed as
follows:
EXECUTIVE:
119 Comstock Drive
Colonial Heights, Virginia 23834
BANK:
c/o Lawrence F. DeSouza, Chairman
P. 0. Box 2166
Petersburg, Virginia 23804
or at such other address as any party may have furnished to the other in
writing, except that notices of the change of address shall be effective only
upon receipt.
16. Modification - Waiver - Applicable Law. No provision of this
Agreement may be modified or waived unless such waiver or modification is agreed
to in writing, signed by the Executive and on behalf of the Bank by such person
as may be specifically designated by the Board of Directors of the Bank. No
waiver by either party of any breach by the other party of, or compliance with,
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition of
this Agreement. No agreement or representation with respect to the subject
matter of this Agreement has been made by either party except as expressly set
forth herein. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Virginia.
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<PAGE>
17. Invalidity - Enforceability. The invalidity or enforce- ability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement. Any provision in this Agreement which
is prohibited or unenforceable shall be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions.
18. Successor Rights. This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal representative, executor,
administrator, heirs, distributees, devisees and legatees. If Executive dies
while any amounts would still be payable to him under either Article I or
Article II, all such amounts, unless otherwise provided in this Agreement, shall
be paid in accordance with the terms of this Agreement to his devisee, legatee
or other designee, or if there is no such designee, to his estate.
/s/ Nathan S. Jones, 3rd
Nathan S. Jones, III
THE COMMUNITY BANK
By: /s/ Lawrence F. DeSouza
Lawrence F. DeSouza
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Exhibit 21
Subsidiary of
Community Bankshares Incorporated
The Community Bank, a Virginia corporation, formed in 1973.
Exhibit 23.2
January 18, 1996
CONSENT OF MCKINNON & COMPANY, INC.
We hereby consent to the inclusions as Exhibits D and G to the Joint
Proxy Statement and Prospectus constituting part of the Registration Statement
on Form S-4 of Community Bankshares Incorporated of our letters to the Boards of
Directors of Commerce Bank of Virginia and Community Bankshares Incorporated and
to the reference made to such letters and to the firm in the Joint Proxy
Statement and Prospectus. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ MCKINNON & COMPANY, INC.
Norfolk, Virginia
Exhibit 23.3
CONSENT OF MITCHELL, WIGGINS & COMPANY, L.L.P.
Board of Directors
Community Bankshares Incorporated
We consent to the use of our report on the statement of financial condition of
Community Bankshares Incorporated as of December 31, 1994 and the related
statements of operations, stockholders' equity and cash flows for the three
years then ended, included in the Registration Statement on Form S-4 of
Community Bankshares Incorporated and to the reference to our firm under the
heading "Experts" in the Prospectus.
/s/ MITCHELL, WIGGINS & COMPANY, L.L.P.
Petersburg, Virginia
January 15, 1996
Exhibit 23.4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Commerce Bank of Virginia
Richmond, Virginia
We do hereby consent to the use in this Registration Statement (Form S-4) and
related Prospectus/Proxy Statement of our report dated January 20, 1995 on the
statements of condition of Commerce Bank of Virginia as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1994, contained therein.
We also consent to the reference to us under the caption "Experts" in the
Prospectus/Proxy Statement.
/s/ BDO Seidman, LLP
Richmond, Virginia
January 17, 1996
