As filed with the Securities and Exchange Commission on April 16, 1997
Registration No. 333-22483
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Community Bankshares Incorporated
(Exact Name of Registrant as Specified in Its Charter)
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23804
(Address and Telephone Number of Registrant's Principal Executive Offices)
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Virginia 6022 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
Community Bankshares Incorporated
200 North 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 bank holding company and there is compliance
with General Instruction G, check the following box. [ ]
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 Facing Page of Registration Statement; Cross
Outside Front Cover of Page of Reference Sheet; Outside Front Cover Page of
Prospectus Prospectus
2. Inside Front and Outside Back Cover Available Information; Table of Contents
Pages of Prospectus
3. Risk Factors, Ratio of Earnings to Summary; Selected Financial Information; Pro
Fixed Charges, and Other Information Forma Condensed Financial Statements; The
Shareholder Meetings; The Reorganization;
County Bank of Chesterfield
4. Terms of the Transaction Summary; The Reorganization; Description of
CBI Capital Stock
5. Pro Forma Financial Information Pro Forma Condensed Financial Statements
6. Material Contacts With the Company Not Applicable
Being Acquired
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to be Underwriters
8. Interests of Named Experts and Counsel Experts; Legal Opinion
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
B. Information About the Registrant
10. Information With Respect to S-3 Not Applicable
Registrants
11. Incorporation of Certain Information by Not Applicable
Reference
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Item Number and Caption Heading or Location in Prospectus
12. Information With Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information With Respect to Registrants Community Bankshares Incorporated; Selected
Other Than S-3 or S-2 Registrants 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 Not Applicable
Companies
16. Information With Respect to S-2 or S-3 Not Applicable
Companies
17. Information With Respect to Companies County Bank of Chesterfield; Selected
Other Than S-2 or S-3 Companies Financial Information ;County Bank of
Chesterfield Management's Discussion and
Analysis of Financial Condition and Results
of Operations
D. Voting and Management Information
18. Information if Proxies, Consents or The Shareholder Meetings; The Reorganization;
Authorizations Are to be Solicited Community Bankshares Incorporated; County
Bank of Chesterfield
19. Information if Proxies, Consents or Not Applicable
Authorizations Are Not to be
Solicited, or in an Exchange Offer
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[LOGO]
Community Bankshares Incorporated
May 5, 1997
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Community Bankshares Incorporated ("CBI") to be held at the Holiday Inn
Select, 1021 Koger Center Boulevard, Richmond, Virginia on June 4, 1997 at 6:00
p.m.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated January 14, 1997 (the "Agreement"), between CBI
and County Bank of Chesterfield ("CBOC"), pursuant to which, among other things,
CBOC will engage in a Share Exchange with CBI (the "Reorganization"). Under the
terms of the Agreement, each share of common stock of CBOC outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.1054 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, CBOC 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 a majority of the shares of
CBI common stock present in person or represented by proxy at the meeting.
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 six (6) Directors
for a term of three years each and one (1) director for a one year term. 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,
Nathan S. Jones, 3rd
President and Chief Executive Officer
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23804
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on June 4, 1997 at 6:00 p.m.
The Annual Meeting of Shareholders of Community Bankshares Incorporated
("CBI") will be held on June 4, 1997 at 6:00 p.m., at the Holiday Inn Select,
1021 Koger Center Boulevard, Richmond, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated
January 14, 1997, between CBI and County Bank of Chesterfield
("CBOC") and a related Plan of Share Exchange (collectively, the
"Reorganization Agreement"), providing for a Share Exchange
between CBOC and CBI (the "Reorganization") upon the terms and
conditions therein, including among other things that each issued
and outstanding share of CBOC Common Stock will be exchanged for
1.1054 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 six (6) directors to serve for a three year term and one
(1) director to serve for a one year term and until their
successors are elected and qualified.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed April 30, 1997 as the record date for
the Meeting, and only holders of record of CBI Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
Nathan S. Jones, 3rd
President and Chief Executive Officer
May 5, 1997
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 THAT SHAREHOLDERS VOTE TO
APPROVE THE REORGANIZATION AGREEMENT.
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[LOGO]
County Bank of Chesterfield
May 5, 1997
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of County Bank of Chesterfield ("CBOC") to be held at the Holiday Inn Select,
1021 Koger Center Boulevard, Richmond, Virginia on June 4, 1997 at 6:00 p.m.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated January 14, 1997 (the "Agreement"), between CBOC
and Community Bankshares Incorporated ("CBI") pursuant to which, among other
things, CBOC will engage in a Share Exchange with CBI (the "Reorganization").
Under the terms of the Agreement, each share of common stock of CBOC outstanding
immediately prior to consummation of the Reorganization will be exchanged for
1.1054 shares of CBI Common Stock, with cash being paid in lieu of issuing
fractional shares. Following the Reorganization, CBOC 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) generally 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 CBOC common stock.
Your Board of Directors unanimously approved the Reorganization and
believes that it is in the best interests of CBOC 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 eight (8)
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,
H. E. Richeson
President and Chief Executive Officer
County Bank of Chesterfield
10400 Hull Street Road
Midlothian, Virginia 23112
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on June 4, 1997 at 6:00 p.m.
The Annual Meeting of Shareholders of County Bank of Chesterfield
("CBOC") will be held on June 4, 1997 at 6:00 p.m., at the Holiday Inn Select,
1021 Koger Center Boulevard, Richmond, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated
January 14, 1997, between CBOC and Community Bankshares
Incorporated. ("CBI") and a related Plan of Share Exchange
(collectively, the "Reorganization Agreement"), providing for a
Share Exchange between CBOC and CBI (the "Reorganization") upon
the terms and conditions therein, including among other things
that each issued and outstanding share of CBOC common stock will
be exchanged for 1.1054 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. Shareholders are entitled to
assert dissenters' rights under Article 15 of the Virginia Stock
Corporation Act, a copy of which is attached to the Joint Proxy
Statement as Appendix D.
2. To elect eight directors to serve for a one year term and until
their successors are elected and qualified.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed April 30, 1997 as the record date for
the Meeting, and only holders of record of CBOC 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
H. E. Richeson
President and Chief Executive Officer
May 5, 1997
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF
COUNTY BANK OF CHESTERFIELD
RECOMMENDS THAT SHAREHOLDERS VOTE TO
APPROVE THE REORGANIZATION AGREEMENT.
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COUNTY BANK OF CHESTERFIELD
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 and option holders of
County Bank of Chesterfield ("CBOC") 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 CBOC for use
at the Annual Meeting of Shareholders (the "CBOC 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 January 14, 1997 between
CBI and CBOC and a related Plan of Share Exchange (collectively, the
"Reorganization Agreement") providing for the exchange of common stock of CBOC
("CBOC Common Stock") for CBI Common Stock (the "Reorganization"). Upon
consummation of the Reorganization, each outstanding share of CBOC Common Stock,
other than shares as to which dissenters' rights have been duly exercised, will
be exchanged for 1.1054 shares of CBI Common Stock and cash in lieu of
fractional shares (the "Exchange Ratio"). All rights to acquire CBOC Common
Stock pursuant to stock options granted by CBOC under any CBOC stock option
plans shall, at the effective time of the Reorganization, be converted into
options for CBI Common Stock, and CBI shall assume each such option in
accordance with the terms of the stock option plan under which it was issued.
The number of CBI option shares shall be rounded up or down to the nearest
number of whole shares, and the exercise price of the CBOC stock options shall
be adjusted to reflect 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 six (6)
Directors of CBI for a three year term and one (1) director for a one year term.
The Reorganization Agreement provides, however, that at the Effective Date of
the Reorganization, the CBI Board of Directors will be reduced from 18 members
to 10 members, seven of whom currently serve as Directors of CBI and three of
whom, H.E. Richeson, Vernon E. LaPrade, Jr. and Jack W. Miller, Jr., are
directors of CBOC. See "Election of CBI Directors" for additional information.
CBOC. At the CBOC Meeting, shareholders of CBOC will be asked to
approve the Reorganization Agreement. Upon consummation of the Reorganization,
each outstanding share of CBOC Common Stock, other than shares as to which
dissenters' rights have been duly exercised, will be exchanged for 1.1054 shares
of CBI Common Stock, with cash being paid in lieu of issuing fractional shares.
IN ORDER FOR A SHAREHOLDER OF CBOC TO PERFECT DISSENTERS' RIGHTS, A NOTICE MUST
BE SENT TO CBOC BEFORE THE VOTE IS TAKEN ON THE REORGANIZATION AGREEMENT AT THE
CBOC MEETING, AND THE SHAREHOLDER MUST NOT VOTE IN FAVOR OF THE REORGANIZATION
BY PROXY OR OTHERWISE. See "Summary - The Reorganization - Rights of Dissent and
Appraisal." In addition, all rights to acquire to CBOC Common Stock pursuant to
stock options granted by CBOC under a CBOC stock option plan shall, at the
effective time of the Reorganization, be converted into options for CBI Common
Stock, and CBI shall assume each such option in accordance with the terms of the
stock option plan under which it was issued, and the number of CBI option shares
and the exercise price of the CBOC stock options shall be adjusted to reflect
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the Exchange Ratio, with the number of option shares rounded up or down to the
nearest number of whole shares. On April 11, 1997, CBI Common Stock closed at
$17.50 per share. See "The Reorganization" for a more complete description of
the Reorganization. A copy of the Reorganization Agreement is enclosed as
Appendix A.
At the CBOC Meeting shareholders also will vote to elect eight (8)
Directors of CBOC for a one year term. If the Reorganization is consummated,
H.E. Richeson, Vernon E. LaPrade, Jr. and Jack W. Miller, Jr., directors of
CBOC, will serve on the CBI Board as well. See "Election of CBOC Directors" for
additional information.
This Joint Proxy Statement also serves as the prospectus of CBI
relating to approximately 876,776 shares of CBI Common Stock issuable to the
shareholders of CBOC upon consummation of the Reorganization, and approximately
99,486 shares of CBI Common Stock issuable to holders of CBOC options upon
exercise.
This Joint Proxy Statement is first being mailed to shareholders of
CBI and CBOC on or about May 5, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF CBI COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
The date of this Joint Proxy Statement is May 5, 1997.
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AVAILABLE INFORMATION
Community Bankshares Incorporated's ("CBI's") principal executive
offices are located at 200 North Sycamore Street, Petersburg, Virginia 23804,
and its telephone number is (804) 861-2320. CBI is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, 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 regional offices of the Commission at the following locations: Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and World Trade Center, New York, New York 10048. 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. In addition, the
Commission maintains a Web site (address: http://www.sec.gov) that contains
reports, proxy statements and other information regarding CBI.
CBI has filed with the Commission a Registration Statement, as amended,
on Form S-4 under the Securities Act of 1933, as amended, with respect to the
shares of CBI Common Stock issuable in the Reorganization. This Joint Proxy
Statement does not contain all of the information set forth in the Registration
Statement, certain items of which have been omitted in accordance with the rules
and regulations of the Commission. For further information pertaining to CBI and
the shares of CBI Common Stock issuable in the Reorganization, reference is made
to the Registration Statement and amendments and exhibits thereto, which may be
inspected and copied as described above.
This Joint Proxy Statement is accompanied by CBI's 1996 Audited
Financial Statements. Copies of CBI's Annual Report on Form 10-K for the year
ended December 31, 1996 (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 North 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 May 15, 1997.
-------------------------
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 CBOC or the information set forth herein
since the date of this Joint Proxy Statement.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
both CBI and CBOC. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressure in the banking industry
increases significantly; (2) changes in the interest rate environment reduce
margins; (3) general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality; (4) changes occur in the regulatory environment; (5) changes
occur in business conditions and inflation; and (6) changes occur in the
securities markets.
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TABLE OF CONTENTS
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Introduction....................................................................................................1
Available Information...........................................................................................3
Forward-Looking Statements......................................................................................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
CBOC Selected Historical Financial Information...............................................................15
CBI and CBOC Selected Historical Pro Forma Combined Financial Information....................................16
The Shareholder Meetings.......................................................................................17
The Reorganization.............................................................................................21
Investment Advisor Opinions....................................................................................36
County Bank of Chesterfield....................................................................................44
County Bank of Chesterfield Election of Directors; Management..................................................47
County Bank of Chesterfield's Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................53
Independent Auditors...........................................................................................70
Shareholder Proposals..........................................................................................70
Other Business.................................................................................................70
Community Bankshares Incorporated..............................................................................71
Community Bankshares Incorporated Election of Directors; Management............................................74
Community Bankshares Incorporated Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................84
Relationship with Independent Certified Public Accountants....................................................101
Description of CBI Capital Stock..............................................................................102
Comparative Rights of Security Holders........................................................................104
Supervision and Regulation....................................................................................109
Cost and Means of Proxy Solicitation..........................................................................114
Shareholder Nominations and Proposals.........................................................................114
Annual Report and Financial Statements........................................................................114
Other Matters.................................................................................................115
Experts .....................................................................................................115
Legal Opinion.................................................................................................115
Pro Forma Condensed Financial Information (Unaudited).........................................................115
Pro Forma Condensed Balance Sheets (Unaudited)..............................................................116
Pro Forma Condensed Statements of Income (Unaudited)........................................................118
Notes to Pro Forma Condensed Financial Information (Unaudited)..............................................122
Appendices
General
A. Agreement and Plan of Reorganization.................................................................A-1
County Bank of Chesterfield
B. County Bank of Chesterfield Financial Statements (including the
audited December 31, 1996 Financial Statements)......................................................B-1
C. Opinion of McKinnon & Company, Inc...................................................................C-1
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D. Excerpts from the Virginia Stock Corporation Act Relating
to Dissenting Shareholders...........................................................................D-1
Community Bankshares Incorporated
E. Community Bankshares Incorporated Financial Statements (including the
audited December 31, 1996 Financial Statements)......................................................E-1
F. Opinion of McKinnon & Company, Inc...................................................................F-1
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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 two subsidiaries, The Community Bank and Commerce Bank of
Virginia, each a Virginia-chartered bank. The Community Bank and Commerce Bank
of Virginia operate a total of nine banking offices which offer a full range of
banking services principally to individuals and to small and medium sized
businesses in the Richmond-Petersburg, Virginia area. CBI was formed in 1984 to
serve as the parent holding company for The Community Bank. Commerce Bank of
Virginia became a wholly-owned subsidiary of CBI on July 1, 1996. At December
31, 1996, CBI had total assets of $172.0 million, deposits of $152.0 million,
and total stockholders' equity of $18.7 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.
CBOC. CBOC is a Virginia-chartered bank and member of the Federal
Reserve System which provides commercial and consumer banking services to
customers in Chesterfield County, Virginia, through its three banking offices.
At December 31, 1996, CBOC had total assets of $79.5 million, deposits of $70.4
million, and stockholders' equity of $8.6 million. The principal executive
offices of CBOC are located at 10400 Hull Street Road, Midlothian, Virginia
23112, and its telephone number is (804) 745-2274. See "County Bank of
Chesterfield" and "CBOC Management's Discussion and Analysis of Financial
Condition and Results of Operation."
THE SHAREHOLDER MEETINGS
CBI. The CBI Meeting will be held at the Holiday Inn Select, 1021 Koger
Center Boulevard, Richmond, Virginia, on June 4, 1997 at 6:00 p.m. Only holders
of record of CBI Common Stock at the close of business on April 30, 1997, will
be entitled to vote at the CBI Meeting. See "The Shareholder Meetings - The CBI
Meeting."
CBOC. The CBOC Meeting will be held at the Holiday Inn Select, 1021
Koger Center Boulevard, Richmond, Virginia on June 4, 1997 at 6:00 p.m. Only
holders of record of CBOC Common Stock at the close of business on April 30,
1997, will be entitled to vote at the CBOC Meeting. See "The Shareholder
Meetings - The CBOC Meeting."
THE REORGANIZATION
The Reorganization provides for the exchange of each outstanding share
of CBOC Common Stock for 1.1054 shares CBI Common Stock. CBI will then serve as
the parent bank holding company for CBOC, which will continue to carry on its
banking business in substantially the same manner as before the Reorganization
and with no change in its management.
At the effective date of the Reorganization, each outstanding share of
CBOC Common Stock, except for shares as to which dissenters' rights have been
duly exercised, shall be exchanged for 1.1054 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 CBOC shareholders will receive as a result
of the Reorganization. Conversely, the
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higher the price of CBI Common Stock at the effective date of the
Reorganization, the higher the dollar value of CBI Common Stock CBOC
shareholders will receive as a result of the Reorganization.
As of April 11, 1997, CBI's closing price on the OTC Bulletin Board
was $17.50, which calculates to a price for CBOC Shareholders of $19.34 per
share of CBOC Common Stock. See "The Reorganization - Terms of the
Reorganization - CBOC Common Stock."
All rights with respect to CBOC Common Stock pursuant to stock options
granted by CBOC under a CBOC stock option plan ("CBOC Options") shall, at the
effective time of the Reorganization, be converted into options for CBI Common
Stock, and CBI shall assume each CBOC 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. After the consummation of the Reorganization, (i) each
CBOC Option assumed by CBI may be exercised solely for shares of CBI Common
Stock, (ii) the number of shares of CBI Common Stock subject to each CBOC Option
shall be equal to the number of shares of CBOC Common Stock subject to each
option immediately prior to the Reorganization multiplied by the Exchange Ratio
and (iii) the per share exercise price under each such CBOC 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. The number of shares of
CBI Common Stock available pursuant to each CBOC option shall be adjusted up or
down to the nearest whole share. The exercise prices of the various CBOC Options
range from $8.19 to $13.50 per share. The exercise prices of the CBOC Options
after the Reorganization in terms of CBI shares, adjusted to reflect the
Exchange Ratio, will range from $7.41 to $12.21 per share of CBI Common Stock.
Based on the price of CBI Common Stock as of April 11, 1997 set forth in the
preceding paragraph, the CBOC Options to be converted would have been in the
money on such date. See "The Reorganization - Terms of the Reorganization - CBOC
Options."
Recommendation of the Board of Directors
CBOC. The Board of Directors of CBOC 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 CBOC and recommends a VOTE FOR the Reorganization.
CBI. The Board of Directors of CBI has unanimously approved
the Reorganization, including the Reorganization Agreement. The Board of
Directors believes that the Reorganization is fair to and in the best interests
of shareholders of CBI and recommends a VOTE FOR the Reorganization. See "The
Reorganization."
Interests of CBOC Directors and Officers
Holders of voting stock of CBOC should be aware that certain members of
CBOC's Board of Directors and senior management have certain interests in the
Reorganization that are in addition to the interests of shareholders of CBOC
generally. The Board of Directors of CBOC was aware of these interests and
considered them, among other factors, in approving the Reorganization. See "The
Reorganization - Interests of Certain Persons in the Reorganization." The
potential number of shares of CBI Common Stock that CBOC Directors and executive
officers may receive in the aggregate pursuant to the Reorganization, assuming
the immediate exercise of all options, is 195,188 shares, which would have had a
value of approximately $3.41 million as of April 11, 1997. H.E. Richeson,
Vernon E. LaPrade, Jr. and Jack W. Miller, Jr., Directors of CBOC will become
Directors of CBI on the Effective Date and will serve for terms that expire in
2000, 1999 and 1998, respectively. Such individuals will continue to receive
fees for serving as Directors of CBOC. However, Directors of CBI receive no
additional compensation for serving as Directors of CBI.
All options to purchase CBOC Common Stock held by Directors and
executive officers of CBOC will be converted into options to purchase CBI Common
Stock.
-7-
<PAGE>
H. E. Richeson, Zirkle Blakey, III, and Larry D. McCoy, executive
officers of CBOC have employment contracts with CBOC. Such contracts will
continue after the Reorganization without any change to the terms of such
contracts. All three contracts expire on June 1, 1997. All three contracts also
provide for automatic renewals for successive terms of one year at a time,
unless the contract is terminated by CBOC or the employee. Mr. Richeson's
contract provides for annual base compensation of $96,750, while the contracts
of Messrs. Blakey and McCoy provide for annual base compensation of $50,500 and
$48,600, respectively. All contracts provide for enhanced severance benefits if
the officer's employment terminates within three years after a change of
control. As of January 1, 1997, the cash amounts payable to Messrs. Richeson,
Blakey and McCoy, in the event of a termination of employment after a change of
control, would have been $312,327, $65,000 and $59,000, respectively. See
"County Bank of Chesterfield Election of Directors; Management - Employment
Contracts."
Opinion of Financial Advisor
CBOC. McKinnon & Company, Inc. has served as financial advisor to CBOC
in connection with the Reorganization and has rendered its opinion to the Board
of Directors of CBOC 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 CBOC shareholders. A copy of the opinion of McKinnon & Company,
Inc. is attached as Appendix C 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
"The Reorganization - Background and Reasons for the Reorganization" and "-
Opinion of Financial Advisor of CBOC."
CBI. McKinnon & Company, Inc. 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 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 F 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 "The Reorganization -
Background and Reasons for the Reorganization" and "- Opinion of Financial
Advisor of CBI."
Vote Required
CBOC. Approval of the Reorganization requires the affirmative vote of
the holders of more than two-thirds of the outstanding shares of CBOC Common
Stock. As of the record date for the CBOC Meeting, directors and executive
officers of CBOC and their affiliates owned beneficially an aggregate of 88,381
outstanding shares of CBOC Common Stock, or approximately 11.14% of the shares
of CBOC Common Stock outstanding on such date. Directors and executive officers
hold presently exercisable options to purchase 88,200 shares of CBOC Common
Stock, but such options were not exercised before the record date and,
therefore, the shares underlying such options may not be voted at the CBOC
Meeting. The directors and executive officers of CBOC have indicated their
intention to vote their shares of CBOC Common Stock in favor of the
Reorganization. See "The CBOC Meeting - Vote Required."
CBI. Approval of the Reorganization requires the affirmative vote of
the holders of a majority of the shares of CBI Common Stock present in person or
represented by proxy at the meeting. As of the record date for the CBI Meeting,
directors and executive officers of CBI and their affiliates owned beneficially
an aggregate of 637,077 shares of CBI Common Stock, or approximately 31.8% of
the shares of CBI Common Stock outstanding on such date. The directors and
executive officers of CBI have indicated their intention to vote their shares of
CBI Common Stock in favor of the Reorganization. See "The CBI Meeting - Vote
Required."
-8-
<PAGE>
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of CBOC and CBI, and the applications of CBI to acquire CBOC
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 July 1, 1997, or as soon thereafter as
practicable. Under the Reorganization Agreement, either party may terminate the
agreement if the transaction is not consummated by August 31, 1997.
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 CBOC 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 CBOC Common Stock in exchange for certificates
representing shares of CBI Common Stock. Cash (without interest) will be paid to
CBOC 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. See "The Reorganization - Surrender of Stock Certificates."
Certain Federal Income Tax Consequences
Williams, Mullen, Christian & Dobbins, counsel for CBI, has delivered
an opinion that, among other things, (i) no gain or loss will be recognized by
CBOC 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
CBOC shareholder will equal the aggregate tax basis of the CBOC 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 CBOC stock surrendered if the CBOC Common Stock is held as
a capital asset at the Effective Date. Any cash received by shareholders as a
result of an exercise of their dissenters' rights will be treated as a sale or
exchange of the stock resulting in capital gain or loss. For a more complete
description of the federal income tax consequences of the Reorganization, see
"The Reorganization - Certain Federal Income Tax Consequences." Due to the
individual nature of the tax consequences of the Reorganization, it is
recommended that each CBOC shareholder consult his or her own tax advisor
concerning the tax consequences of the Reorganization.
No gain or loss will be recognized by the holders of options to
purchase CBOC Common Stock solely as a result of the conversion of such options
into options to acquire CBI Common Stock.
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 CBOC and CBI solicited hereby; (ii) receipt of an opinion of counsel as to
the tax-free nature of the Reorganization for CBOC's shareholders (except for
cash received in lieu of fractional shares or upon the exercise of dissenters'
rights); and (iii) approval of the Federal Reserve under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), and the SCC. 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,
-9-
<PAGE>
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 CBOC or (ii) by either CBI or CBOC if the
Effective Date has not occurred by August 31, 1997 or if certain specified
events occur. See "The Reorganization - Waivers, Amendment and Termination."
Effects of the Reorganization on the Rights of CBOC Shareholders
Upon consummation of the Reorganization, CBOC shareholders shall become
shareholders of CBI. The rights of the former shareholders of CBOC, 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 CBOC
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 CBOC. See "Comparative Rights of Shareholders."
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 CBOC
for their approval. See "The Reorganization - Accounting Treatment."
Rights of Dissent and Appraisal
Each holder of CBOC 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 D 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 under the symbol
"CBIV" since May 1994. CBOC common stock has traded on the NASDAQ SmallCap
Market under the symbol "CBOC" since October 1995.
The information below provides the price per share of CBI Common Stock
and CBOC Common Stock prior to the public announcement of the Reorganization on
January 14, 1997 and as of a recent date. The historical price of CBI Common
Stock, $18.625, is based on the reported closing price on January 13, 1997, the
last trading day preceding the announcement of the Reorganization, as reported
on the OTC Bulletin Board.
The historical price of CBOC common stock, $14.00, is based on the
reported closing price on January 13, 1997, the last trading day preceding the
announcement of the Reorganization, as reported on the NASDAQ SmallCap Market.
-10-
<PAGE>
Trading Price CBI CBOC Equivalent
Per Share at Common Stock Common Stock Per Share Price*
------------ ------------ ------------ ----------------
January 13, 1997 $18.625 $14.00 $20.59
April 11, 1997 $17.50 $17.75 $19.34
- --------------------
* CBOC Shareholders will receive 1.1054 shares of CBI Common Stock for
each share of CBOC 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.
Shareholders are advised to obtain current market quotations for CBI
Common Stock and CBOC 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 CBOC, 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.
-11-
<PAGE>
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 CBOC
on a historical basis and on a pro forma equivalent basis.
CBI AND CBOC
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Common Share:
Net Income:
CBI-historical (3) $ 1.55 $ 1.27 $ 1.00 $ 0.79 $ 0.69
CBOC-historical 1.05 1.03 0.96 0.59 0.23
Pro forma combined. . 1.37 1.18 0.97 0.73 0.57
CBOC pro forma equivalent (1) 1.51 1.30 1.07 0.81 0.63
Cash Dividends Declared:
CBI-historical (3) $ 0.12 $ 0.11 $ 0.10 $ 0.07 $ 0.05
CBOC-historical 0.06 0.05 - - -
Pro forma combined (2) 0.10 0.08 0.07 0.05 0.04
CBOC pro forma equivalent (1)(2) 0.11 0.09 0.08 0.06 0.04
</TABLE>
Book Value: At December 31,
1996:
CBI-historical (3) $ 9.86
CBOC-historical 10.83
Pro forma combined 9.84
CBOC pro forma equivalent 10.88
- --------------------
(1) CBOC pro forma equivalent amounts represent pro forma combined
information multiplied by the Exchange Ratio of 1.1054 shares of CBI
Common Stock for each share of CBOC Common stock.
(2) Pro forma combined dividends per share represent historical dividends
per share paid by CBI and CBOC divided by pro forma shares outstanding.
See "The Reorganization - CBI and CBOC 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 CBOC 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 CBOC and the
respective notes thereto included elsewhere in this Joint Proxy Statement. See
"Available Information." The selected historical financial information for CBI
has been restated to reflect the acquisition of Commerce Bank of Virginia in
1996.
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>
Community Bankshares Incorporated
Selected Historical Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income....................... $ 8,537 $ 7,585 $ 6,489 $ 5,373 $ 4,795
Provision for loan losses................. 401 442 266 195 499
-------- -------- -------- -------- --------
Net interest income after.................
provision for loan losses............... $ 8,136 $ 7,143 $ 6,223 $ 5,178 $ 4,296
Noninterest income........................ 1,214 1,135 1,231 1,123 1,035
Noninterest expense....................... 4,872 4,699 4,770 4,275 3,582
-------- -------- -------- -------- --------
Income before income taxes................ $ 4,478 $ 3,579 $ 2,684 $ 2,026 $ 1,749
Income taxes.............................. 1,422 1,224 886 669 583
-------- -------- -------- -------- --------
Net income................................ $ 3,056 $ 2,355 $ 1,798 $ 1,357 $ 1,166
======== ======== ======== ======== ========
Per Share Data (1):
Net income................................ $ 1.55 $ 1.27 $ 1.00 $ 0.79 $ 0.69
Cash dividends............................ $ 0.12 $ 0.11 $ 0.10 $ 0.07 $ 0.05
Book value at period end.................. $ 9.86 $ 8.57 $ 7.36 $ 6.44 $ 5.91
Balance Sheet Data:
Total assets.............................. $172,014 $161,077 $138,449 $134,129 $110,440
Loans, net................................ $115,135 $107,405 $100,290 $87,940 $77,144
Securities................................ $36,223 $34,257 $23,733 $23,817 $16,796
Deposits.................................. $152,006 $143,571 $123,892 $122,213 $98,530
Stockholder's equity (1).................. $18,748 $15,893 $12,855 $11,230 $9,985
Shares outstanding (1).................... 1,901,080 1,853,975 1,745,610 1,742,520 1,688,094
Performance Ratios:
Return on average assets.................. 1.86% 1.53% 1.31% 1.10% 1.09%
Return on average equity.................. 17.24% 16.38% 14.85% 12.78% 12.34%
Net interest margin (2)................... 5.58% 5.35% 5.18% 4.80% 4.98%
Average loans to deposits................. 78.67% 78.07% 78.77% 75.86% 75.70%
Asset Quality Ratios:
Allowance for loan losses to
period end loans........................ 1.07% 1.14% 1.08% 1.04% 1.10%
Allowance for loan losses to
nonaccrual loans........................ 5.19X 5.61X 20.35X 42.64X 6.26X
Nonperforming assets to period end
loans and other real estate owned ...... 1.77% 1.72% 0.87% 0.92% 1.04%
Net chargeoffs
to average loans........................ 0.35% 0.29% 0.11% 0.15% 0.56%
</TABLE>
- --------------------
(1) All per share information has been restated to reflect a 2 for 1 stock
split effected in the form of a 100% stock dividend paid August 31,
1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
-14-
<PAGE>
County Bank of Chesterfield
Selected Historical Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income.......................... $ 3,175 $ 2,688 $ 2,555 $ 2,232 $ 2,033
Provision for loan losses.................... 130 50 245 240 453
----- ----- ----- ----- -----
Net interest income after provision for
loan losses................................ $ 3,045 $ 2,638 $ 2,310 $ 1,992 $ 1,580
Noninterest income........................... 468 469 434 350 358
Noninterest expense.......................... 2,392 2,292 2,074 1,917 1,813
----- ----- ----- ----- -----
Income before income taxes................... $ 1,121 $ 815 $ 670 $ 425 $ 125
Income taxes................................. 290 190 155 43 28
----- ----- ----- ----- -----
Net income before extraordinary item and
cumulative effect of accounting change..... $ 831 $ 625 $ 515 $ 382 $ 97
Extraordinary item-reduction in income
taxes from use of net operating loss
carryforwards.............................. - - - - 28
Cumulative effect of change in method of
accounting for income taxes................ - - - (65) -
----- ----- ----- ----- -----
Net income................................... $831 $ 625 $ 515 $ 317 $ 125
==== ====== ====== ====== ======
Per Share Data:
Net income................................... $1.05 $1.03 $.96 $.59 $.23
Cash dividends............................... .06 .05 - - -
Book value at period end..................... 10.83 10.09 8.46 7.95 7.35
Balance Sheet Data:
Total assets................................. $79,496 $73,568 $63,977 $60,546 $57,270
Loans, net................................... $47,726 $42,010 $37,172 $34,846 $33,274
Securities (1)............................... $19,392 $22,453 $18,337 $14,729 $11,399
Deposits..................................... $70,402 $65,069 $59,162 $56,086 $53,125
Stockholders' equity......................... $8,591 $8,002 $4,519 $4,245 $3,928
Shares outstanding........................... 793,175 793,175 534,100 534,100 534,100
Performance Ratios:
Return on average assets..................... 1.11% .92% .84% .54% .23%
Return on average equity..................... 10.03% 11.18% 11.91% 7.78% 3.16%
Net interest margin (2)...................... 4.75% 4.50% 4.72% 4.27% 4.32%
Average loans to average deposits............ 69.75% 64.77% 66.90% 65.02% 69.22%
Asset Quality Ratios:
Allowance for loan losses to period end loans 1.56% 1.44% 1.54% 1.63% 1.45%
Allowance for loan losses to nonaccrual
loans...................................... 100% 230% 1,761% 80% 103%
Nonperforming assets to period end loans
and other real estate owned (3)............ 3.22% 2.36% 2.18% 4.48% 4.39%
Net charge-offs (recoveries) to average loans (.02%) .04% .64% .44% 2.61%
</TABLE>
- --------------------
(1) Includes as of December 31, 1996 and December 31, 1995, and December
31, 1994, $18.0 million, $21.1 million and $3.9 million, respectively,
of securities classified as available for sale.
(2) 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.
(3) Non-performing assets consist of nonaccrual loans, loans delinquent
greater than 90 days and still accruing interest, foreclosed
properties, and one property purchased by the Bank in 1989 for future
expansion that has subsequently been placed on the market for resale.
-15-
<PAGE>
Community Bankshares Incorporated
and County Bank of Chesterfield
Selected Historical Pro Forma Combined Financial Information
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income........................ $ 11,712 $ 10,273 $ 9,044 $ 7,605 $ 6,828
Provision for loan losses.................. 531 492 511 435 952
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses.............. $ 11,181 $ 9,781 $ 8,533 $ 7,170 $ 5,876
Noninterest income......................... 1,682 1,604 1,665 1,473 1,393
Noninterest expense....................... 7,264 6,991 6,844 6,192 5,395
-------- -------- -------- -------- --------
Income before income taxes................ $ 5,599 $ 4,394 $ 3,354 $ 2,451 $ 1,874
Income taxes............................... 1,712 1,414 1,041 712 611
-------- -------- -------- -------- --------
Net income before extraordinary item and
cumulative effect of accounting change... $ 3,887 $ 2,980 $ 2,313 $ 1,739 $ 1,263
Extraordinary item - reduction in income
taxes from use of net operating loss
carryforward............................. - - - - 28
Cumulative effect of change in method of
accounting for income taxes.............. - - - (65) -
-------- -------- -------- -------- --------
Net income................................. $ 3,887 $ 2,980 $ 2,313 $ 1,674 $ 1,291
======== ======== ======== ======== ========
Per Share Data (1):
Net income................................. $ 1.37 $ 1.18 $ 0.97 $ 0.73 $ 0.57
Cash dividends............................. $ 0.10 $ 0.08 $ 0.07 $ 0.05 $ 0.04
Book value at period end................... $ 9.84 $ 8.75 $ 7.44 $ 6.63 $ 6.11
Balance Sheet Data:
Total assets............................... $251,011 $234,645 $202,426 $194,675 $167,710
Loans, net................................. $162,861 $149,415 $137,462 $122,786 $110,418
Securities................................. $55,875 $56,711 $42,070 $38,546 $28,195
Deposits................................... $221,908 $208,641 $183,054 $178,299 $151,655
Stockholder's equity (1)................... $27,339 $23,895 $17,374 $15,475 $13,913
Shares outstanding (1)..................... 2,777,856 2,730,751 2,336,004 2,332,914 2,278,488
Performance Ratios:
Return on average assets .................. 1.63% 1.35% 1.17% 0.92% 0.81%
Return on average equity................... 14.94% 14.92% 14.07% 11.39% 9.63%
Net interest margin (2).................... 5.36% 5.09% 5.03% 4.59% 4.76%
Average loans to deposits.................. 75.69% 73.95% 75.06% 72.36% 73.89%
Asset Quality Ratios:
Allowance for loan losses to
period end loans......................... 1.21% 1.22% 1.21% 1.22% 1.22%
Allowance for loan losses to
nonaccrual loans......................... 2.00X 3.80X 19.31X 2.03X 2.21X
Nonperforming assets to period end
loans and other real estate owned........ 2.20% 1.90% 1.37% 1.96% 2.09%
Net chargeoffs
to average loans......................... 0.24% 0.20% 0.26% 0.23% 1.21%
</TABLE>
- --------------------
(1) All per share information has been restated to reflect a 2 for 1 stock
split effected in the form of a 10% stock dividend paid August 31,
1995.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the net yield on its
earning assets.
-16-
<PAGE>
THE SHAREHOLDER MEETINGS
The CBOC Meeting
Date, Place and Time. The CBOC Meeting will be held at the Holiday Inn
Select, 1021 Koger Center Boulevard, Richmond, Virginia on County Bank of
Chesterfield June 4, 1997 at 6:00 p.m.
Record Date. The Board of Directors of CBOC has fixed the close of
business on April 30, 1997 as the record date (the "CBOC Record Date") for the
determination of the holders of CBOC Common Stock entitled to receive notice of
and to vote at the CBOC Meeting. At the close of business on the CBOC Record
Date, there were 793,175 shares of CBOC Common Stock outstanding held by ___
shareholders of record.
Vote Required. Each share of CBOC Common Stock outstanding on the CBOC
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the CBOC Meeting. The affirmative vote of the holders of more than
two-thirds of the shares of CBOC Common Stock outstanding, as of the CBOC 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 CBOC Record Date, directors and executive officers of CBOC
and their affiliates, persons and entities as a group, owned of record and
beneficially a total of 88,381 outstanding shares of the Common Stock or
approximately 11.14% of the shares of CBOC Common Stock outstanding on such
date. Directors and executive officers hold presently exercisable options to
purchase 88,200 shares of CBOC Common Stock, but such options were not exercised
before the record date and, therefore, the shares underlying such options may
not be voted at the CBOC Meeting. Directors and executive officers of CBOC have
indicated an intention to vote their shares of CBOC 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 shareholder may abstain or (only with respect to the election of CBOC
directors) withhold his vote (collectively, "abstentions") with respect to each
item submitted for shareholder 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 CBOC
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 shareholders 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 CBOC of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum, but also will be counted as not voting in favor of
the particular matter. Since the CBOC election of directors is determined by a
plurality vote, broker nonvotes, if any, will not have any effect on the
outcome. 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.
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Voting and Revocation of Proxies. Shareholders of CBOC are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
CBOC 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 CBOC 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 CBOC Meeting has one vote per share owned at
the CBOC Record Date. CBOC 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 CBOC 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 CBOC, by executing and delivering a substitute proxy to
CBOC or by attending the CBOC Meeting and voting in person. If a CBOC
shareholder desires to revoke a proxy by written notice, such notice should be
mailed or delivered on or prior to the meeting date to Zirkle Blakey, III,
Assistant Secretary, County Bank of Chesterfield, 10400 Hull Street Road,
Midlothian, Virginia 23112. If a proxy is signed and returned without indicating
any voting instructions, shares of CBOC 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 CBOC by the
time scheduled for the CBOC 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 CBOC Meeting will be proposed only if the
Board of Directors of CBOC 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. CBOC 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 CBOC, none of whom will
receive additional compensation for performing such services. CBOC shall pay all
of its expenses incurred in preparing, printing and mailing the Joint Proxy
Statement.
The Board of Directors of CBOC recommends a vote FOR the Reorganization
and FOR the election of the nominees named on the enclosed proxy.
The CBI Meeting
Date, Place and Time. The CBI Meeting will be held at the Holiday Inn
Select, 1021 Koger Center Boulevard, Richmond, Virginia on Community Bankshares
Incorporated June 4, 1997 at 6:00 p.m.
Record Date. Only shareholders of record at the close of business on
April 30, 1997, (the "CBI Record Date") are entitled to notice of and to vote
at the CBI Meeting or any adjournment thereof. At the close of business on the
CBI Record Date, CBI had outstanding 1,901,080 shares of CBI Common Stock
outstanding held by ___ shareholders of record.
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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. The affirmative vote of the holders of a majority
of the shares of CBI Common Stock represented at the meeting, 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 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 637,077 shares of CBI Common Stock or approximately
31.8% of the shares of CBI Common Stock outstanding on such date. Directors and
executive officers of CBI have indicated an intention to vote their shares of
CBI Common Stock FOR the Reorganization and FOR the election of the nominees set
forth on the enclosed proxy.
A shareholder may abstain or (only with respect to the election of CBI
directors) withhold his vote (collectively, "abstentions") with respect to each
item submitted for shareholder 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 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. A shareholder may abstain with respect to each
item submitted for shareholder 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 shareholders 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 Thomas H. Caffrey, Jr., Chief
Financial Officer, Community Bankshares Incorporated, 200 North 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, 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 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
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CBI believes that additional time to solicit proxies might permit the receipt of
sufficient votes to approve the Reorganization, or at the request of CBOC. 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 preparing, printing and mailing the Joint Proxy
Statement.
The Board of Directors of CBI recommends a vote FOR the Reorganization
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
CBOC or CBI Common Stock are urged to read the Reorganization Agreement in its
entirety.
Background and Reasons for the Reorganization
General. As community banks operating in contiguous markets, CBI and
CBOC each has generally been aware of the other's operations and performance
since CBOC opened for business in 1986. The Presidents of CBI and CBOC have been
in the banking business in the Richmond/Petersburg, Virginia area for many years
and have known each other for over 13 years. The Board of Directors of CBOC has
believed for several years that the trend in Virginia and nationally is toward
greater consolidation in the banking industry and that the best interests of its
shareholders ultimately might be best served by combining with a larger banking
organization.
Beginning in the summer of 1996, the Presidents of CBI and CBOC held
intermittent, informal discussions about a possible affiliation. In November
1996, the parties entered into serious negotiations about an affiliation. The
negotiations were initiated by the President of CBI. He proposed a transaction
in which the Exchange Ratio would be based on the book values of CBI Common
Stock and CBOC Common Stock at September 30, 1996, with CBOC also receiving
significant representation on the Board of CBI and continuing to operate as a
separate bank. The proposal was not intended as a sale of control transaction
with respect to CBOC, but instead as a "merger of equals" in which the present
directors of CBOC not only would continue to operate CBOC, but also would have
significant influence over the management and future direction of CBI. The
President of CBOC agreed to the Exchange Ratio proposed by the President of CBI,
subject to approval by the CBOC Board. Negotiations focused on the proposed
composition of the Board of Directors of CBI. It was agreed that the CBI Board
would be reduced to 10 members, three of whom would be selected from the CBOC
Board. Of the remaining seven members, it was agreed that four would be chosen
from the Board of The Community Bank and three from the Board of Commerce Bank
of Virginia. The intent of the proposed arrangement is that each of CBI's
subsidiary banks have approximately equal representation on the CBI Board of
Directors, so that decisions taken by the CBI Board reflect a consensus of
representatives of its subsidiary banks.
CBI and CBOC each decided on its own to engage McKinnon & Company, Inc.
("McKinnon") at approximately the same time. McKinnon was not requested to, nor
did McKinnon, participate in the negotiation of the Exchange Ratio or other
material terms of the Reorganization. McKinnon was requested to mathematically
calculate the Exchange Ratio, based on the relative book values of CBI and CBOC
at September 30, 1996, taking into account the number of stock options that CBI
and CBOC had outstanding. McKinnon also was asked to advise CBI and CBOC, each,
whether or not the proposed transaction was fair to it and its shareholders from
a financial point of view. Each party selected McKinnon to perform the work
because McKinnon was familiar with each institution as a result of previous
engagements and because of its confidence that McKinnon would render reliable
advice. McKinnon has substantial experience over a nine year period valuing
community based financial institutions throughout Virginia and in providing
other investment banking services to such institutions. If McKinnon had advised
either CBI or CBOC that the Reorganization was not fair from a financial point
of view, the transaction either would not have proceeded, or would have been
renegotiated. McKinnon's fees from CBI and CBOC were earned upon the delivery of
the opinions and were not contingent on the conclusions McKinnon reached or on
the consummation of the Reorganization. See "Investment Advisor Opinions."
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On November 29, 1996 McKinnon prepared a preliminary analysis of CBOC
and CBI, regarding the value of each alone and combined, and an exchange ratio
of shares of CBI for each share of CBOC common stock and each option of CBOC
outstanding based on reported financial information as of September 30, 1996.
After separate conversations with management of CBI and CBOC in November and
December 1996, and a review of relevant public and private information, McKinnon
determined that the Exchange Ratio was fair to each of CBI and CBOC, from a
financial point of view. McKinnon's opinions are not intended to, and do not,
assure either CBI or CBOC that the Reorganization represents the best possible
terms that could have been obtained by either institution. Rather, McKinnon's
opinions are that the transaction is fair, from a financial point of view, to
each of CBI and CBOC, based on McKinnon's analysis of the financial condition,
operating results and future prospects of each and an analysis of the
consideration given and received in other transactions, considered by McKinnon
to be comparable.
On December 23, 1996, Messrs. Huffman, Beale, Sheffield, Holden and
Jones, directors of CBI, met with Messrs. Richeson, Miller and LaPrade,
directors of CBOC. At that meeting, the potential advantages of an affiliation
were reviewed and the representatives of CBOC and CBI each indicated their
support of a transaction in which CBI Common Stock would be issued to CBOC
shareholders, with an Exchange Ratio based on the book values of CBI Common
Stock and CBOC Common Stock at September 30, 1996. The representatives of CBOC
also indicated their agreement with the proposal that the Board of CBI would
consist of seven current directors of CBI and three current directors of CBOC.
Following that meeting, each party retained counsel to draft a definitive
agreement.
The Boards of CBI and CBOC met on January 13, 1997 and January 14,
1997, respectively. At CBI's meeting, counsel for CBI reviewed the
Reorganization Agreement and responded to questions concerning the composition
of the CBI Board following the Reorganization. Prior to such meetings, McKinnon
& Company, Inc. advised each Board that in the opinion of McKinnon & Company,
Inc., the Reorganization was fair to the shareholders of CBI and CBOC from a
financial point of view.
The Reorganization Agreement was approved by the CBI Board on January
13, 1997. The CBOC Board approved the Reorganization Agreement on January 14,
1997, and it was executed on that date.
CBOC. In deciding to enter into the Reorganization Agreement, the CBOC
Board considered a number of factors. The CBOC Board did not assign any relative
or specific weight to the factors considered. However, there were two principal
factors that led the CBOC Board to approve the Reorganization. First, based on
the market values of CBOC Common Stock and CBI Common Stock immediately before
the announcement of the Reorganization ($14.00 per share and $18.625 per share
respectively), the Exchange Ratio results in CBOC shareholders receiving a
premium of approximately 47% for their shares of CBOC Common Stock.
Additionally, based on the dividends paid by CBI in 1996, the Reorganization is
expected to result in a substantial percentage increase in the dividends
receivable by holders of CBOC Common Stock. See "Comparative Per Share
Information" and "Supervision and Regulation - Limits on Dividends and Other
Payments". Second, the Reorganization would allow CBOC to become the third bank
in the CBI organization, with a significant voice in the future direction of
CBI.
Notwithstanding the structure of the transaction, management of CBOC
views the Reorganization as a "merger of equals." Today, CBI reflects the 1996
combination of CBI and Commerce Bank of Virginia, two financial institutions of
approximately the same size as CBOC, operating in markets contiguous to CBOC.
CBOC would join as the third bank in the group. The Board of CBI will be
composed of four representatives from The Community Bank and three
representatives from each of CBOC and Commerce Bank of Virginia.
CBOC does not view the Reorganization as a pure acquisition where a
seller relinquishes control of its operations, but rather as an opportunity to
be part of a combined effort to provide banking services to the
Richmond/Petersburg market through three successful community banks. CBOC
believes that the combination will ultimately increase the value of the
franchise because of the increase in the size and scope
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of CBI's operations. CBOC believes that, together, the combined institutions
will have the ability to seek other possible acquisitions and to compete more
effectively in the Richmond/Petersburg market. CBOC's Board and CBI's Board are
compatible, and the Chief Executive Officers are familiar with each other and
believe that they can work together to further the organization. Accordingly,
CBOC's management does not view the Reorganization as a sale of control, but
rather an opportunity to join forces and to build a strong institution. If the
goal of CBOC's management had been to sell control, then CBOC's management would
have solicited other bids, and it may have been able to obtain a higher value.
However, CBOC's management believes that the combination of CBOC with CBI will
ultimately yield a higher value for CBOC's shareholders in the future and,
accordingly, the CBOC Board did not solicit other bids. During the past few
years, CBOC was approached by one other community banking organization
concerning a similar "merger of equals" transaction, but that transaction did
not come to fruition.
Other material factors considered were: the market price and earnings
per share of CBI Common Stock, compared to CBOC Common Stock; the exchange ratio
offered for CBOC Common Stock; the dividend paid on the CBI Common Stock; the
financial condition and history of performance of CBI and CBOC; the well
capitalized position and earnings of CBI and CBOC; the operational benefits of a
combination, including the management resources and greater economic resources
available to CBOC 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 CBOC, Commerce Bank of Virginia and The Community Bank to
participate in loans originated by each other; the compatibility of the
management of the two organizations; the ability of CBOC to remain a separate
entity with the same Board managing its affairs; and the tax-free nature of the
Reorganization to the shareholders of CBOC to the extent they receive CBI Common
Stock in exchange for their shares of CBOC Common Stock. The CBOC Board and the
CBI Board each believes that the addition of resources resulting from the
Reorganization could enable CBOC 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 974 record holders of CBI Common Stock and 706 record
holders of CBOC Common Stock on December 31, 1996. CBI had 1,901,080 shares of
common stock outstanding on that date. If the Reorganization had been
consummated on December 31, 1996, CBI would have had 2,694,255 shares of common
stock outstanding and 1,680 record holders. Because CBI will have more
shareholders and more shares outstanding after the Reorganization, CBOC believes
that the market for CBI common stock after the Reorganization will be more
liquid than the market for either CBI Common Stock or CBOC Common Stock is
today. CBI has applied to have its common stock quoted on the NASDAQ National
Market. However, there is no guarantee that such application will be approved or
that an active trading market will develop or be sustained.
The CBOC Board has concluded that the terms of the Reorganization
Agreement, which were determined on the basis of arms-length negotiations, are
fair to CBOC shareholders. As explained below, this conclusion is supported by
the opinion of CBOC's financial advisor.
Following the Effective Date, Messrs. Richeson, LaPrade and Miller are
expected to serve as directors of CBI. However, pursuant to the Reorganization
Agreement, the directors, officers and employees of CBOC will not change as a
result of the Reorganization. The Reorganization Agreement notwithstanding, CBI
will have the power after the Effective Date to elect the entire Board of
Directors of CBOC.
The Board of Directors of CBOC believes that the Reorganization is in
the best interests of CBOC and its shareholders. The CBOC directors unanimously
recommend that CBOC shareholders vote FOR the approval of the Reorganization
Agreement.
CBI. Until it acquired Commerce Bank of Virginia in July 1996, CBI
operated one bank, The Community Bank, the market area of which consists of
Petersburg, Virginia, the neighboring community of
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Colonial Heights and the adjacent counties of Prince George, Dinwiddie and
Chesterfield. In connection with its acquisition of Commerce Bank of Virginia,
CBI disclosed that, though it had been more profitable than Commerce Bank of
Virginia, The Community Bank operated in a market that is less affluent and
presents more limited opportunities for growth. In contrast, Commerce Bank of
Virginia operates primarily in areas of the suburban Richmond, Virginia market
that are experiencing more rapid growth and are more affluent than the markets
that The Community Bank serves. CBI believed that its shareholders would benefit
from the growth potential of the market area of Commerce Bank of Virginia.
Operations in 1996 tended to validate CBI's strategy, as the earnings of The
Community Bank increased 14.46% over 1995, while the earnings of Commerce Bank
of Virginia increased 71.57% over 1995. A second purpose of the 1996 combination
between CBI and Commerce Bank of Virginia was to attempt to create a banking
organization that would be more attractive to a potential acquiror than either
entity would have presented on its own.
The proposed acquisition of CBOC is an extension of the same strategy
that led CBI to acquire Commerce Bank of Virginia in 1996. CBOC operates in
areas of Chesterfield County, Virginia that are situated between the areas in
which The Community Bank and Commerce Bank of Virginia operate. CBI believes
that CBOC's operations should continue to grow and that CBOC can become
substantially more profitable than it has been in the past. However, there is no
assurance if or when the desired increase in the earnings of CBOC will occur. In
considering the Reorganization, the Board of Directors of CBI understood that
the Reorganization would result in some dilution to the earnings per share of
CBI, but concluded that the Reorganization, nevertheless, was in the best
interests of CBI because it believed that the earnings dilution will not be
permanent and that with the addition of CBOC's assets, deposits and branch
locations, CBI might be a more attractive acquisition candidate. However, it is
not the intention of CBI to seek to be acquired in the immediate future and
there can be no assurance that the Reorganization will increase the value of
either CBI or CBOC as an acquisition candidate.
The Board of Directors of CBI believes that the Reorganization is in
the best interests of CBI and its shareholders. The CBI directors unanimously
recommend that CBI shareholders vote FOR the approval of the Reorganization
Agreement.
Terms of the Reorganization
CBOC Common Stock. At the Effective Date, each outstanding share of
CBOC Common Stock (other than shares held by shareholders who perfect their
dissenters' rights) will be exchanged for 1.1054 shares of CBI Common Stock and
cash in lieu of any fractional shares. CBOC shareholders will thereby become
shareholders of CBI. The amount of cash which may be paid to a CBOC 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 CBOC are entitled to exercise their dissenters' rights
with respect to the Reorganization. See "The Reorganization - Rights of
Dissenting Shareholders."
CBOC Options. All CBOC Options shall, at the effective time of the
Reorganization, be converted into options for CBI Common Stock, and CBI shall
assume each CBOC 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. After the consummation of the Reorganization, (i) each CBOC Option
assumed by CBI may be exercised solely for shares of CBI Common Stock, (ii) the
number of shares of CBI Common Stock subject to each CBOC Option shall be equal
to the number of shares of CBOC Common Stock subject to each option immediately
prior to the Shares Exchange multiplied by the Exchange Ratio and rounded up or
down to the nearest whole share of CBI Common Stock, and (iii) the per share
exercise price under each such CBOC 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. The exercise prices of the various CBOC Options
range from $8.19 to $13.50 per share. The exercise prices of the CBOC Options
after the Reorganization
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in terms of CBI shares, adjusted to reflect the Exchange Ratio, will range from
$7.41 to $12.21 per share of CBI Common Stock. On April 30, 1997 there were CBOC
Options outstanding representing the right to purchase 90,000 shares of CBOC
Common Stock. All CBOC Options are held by CBOC Directors and officers and were
granted under a plan approved by the CBOC shareholders in 1994. All CBOC options
are fully vested and exercisable and expire between 2004 and 2006.
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of CBOC 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 July 1,
1997, 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 CBOC Common Stock a letter of
transmittal and instructions relating to the exchange of their CBOC 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.
CBOC SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for CBOC 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.
The process of surrendering certificates representing shares of CBOC
Common Stock and receiving certificates representing shares of CBI Common Stock
is expected to take two to three weeks, during which the market value of shares
of CBI Common Stock, as publicly-traded securities, may change. Former holders
of CBOC Common Stock may be unable to trade their shares of CBI Common Stock
immediately following the Effective Date until they receive the certificates
representing such shares.
All CBI Common Stock issued as a result of the conversion of CBOC Stock
pursuant to the Reorganization will be deemed issued as of the Effective Date.
After the Effective Date, CBOC shareholders will be entitled to vote the number
of shares of CBI Common Stock for which their CBOC Common Stock has been
exchanged, regardless of whether they have surrendered their CBOC 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 CBOC certificate until such
holder physically surrenders such certificate, promptly after which time all
such dividends or distributions will be paid (without interest).
Representations and Warranties; Conditions to the Reorganization
The Reorganization Agreement contains representations and warranties by
CBI and CBOC, including representations and warranties with respect to their
respective organizations, authorizations to enter into the Reorganization
Agreement, capitalization, financial statements and pending and threatened
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litigation. These representations and warranties (except as otherwise provided
in the Reorganization Agreement) will not survive the Effective Date.
The obligations of CBI and CBOC to consummate the Reorganization are
subject to the following conditions: approval and adoption of the Reorganization
Agreement and Plan of Share Exchange by the requisite shareholder votes; receipt
of all regulatory approvals necessary to consummate the Reorganization, not
conditioned or restricted in a manner that, in the judgment of the Boards of
Directors of CBI and CBOC, 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 CBOC; the receipt of an opinion
of counsel as to certain Federal income tax consequences of the Reorganization;
and the qualification of the Reorganization for pooling-of-interests accounting
treatment. Also, under the terms of the Reorganization Agreement, CBI agreed
that, following the Effective Date, it will indemnify those persons associated
with CBOC and its subsidiaries 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 CBOC pursuant to the Reorganization is subject to
approval by the Federal Reserve under the BHC Act, which requires that the
Federal Reserve take into consideration the financial and managerial resources
and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. The BHC Act prohibits the
Federal Reserve from approving the Reorganization if it would result in a
monopoly or if it would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect may be substantially to lessen competition
or to tend to create a monopoly, or if it would be in any other manner a
restraint of trade, unless the Federal Reserve finds that the anti-competitive
effects of the Reorganization are clearly outweighed in the public interest by
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. The Reorganization may not be consummated for 15
days after such approval, pursuant to federal law, in order to provide a period
for the Reorganization to be challenged under the antitrust laws.
The BHC Act provides for the publication of notice and the opportunity
for administrative hearings relating to the applications, and it authorizes the
regulatory agency to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could
substantially delay the regulatory approvals required for consummation of the
Reorganization.
The Reorganization is further subject to the approval of the SCC. To
obtain such approval, the SCC must conclude that the Reorganization will not
affect detrimentally the safety or soundness of a Virginia bank.
Applications for approval of the Reorganization have been filed with
the Federal Reserve and the SCC. None of the agencies has yet approved the
applications. CBI and CBOC 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.
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<PAGE>
Business Pending the Reorganization
Until consummation of the Reorganization (or termination of the
Reorganization Agreement), each of CBOC 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) CBOC may not, without the consent of CBI, and CBI may
not, without the consent of CBOC, among other things: (a) declare or pay
dividends on its capital stock, except that CBI may pay dividends not to exceed
$.20 per share and CBOC may pay dividends not to exceed $.08 per share; (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 CBOC and
CBI Meetings (except that the Exchange Ratio shall not be changed after approval
of the Reorganization Agreement by the CBOC and CBI shareholders). Any material
change in a material term of the Reorganization Agreement after this Joint Proxy
Statement is mailed to shareholders of CBOC and CBI would require a
resolicitation of CBOC's and CBI's shareholders. Such a material change would
include, but not be limited to, a change in the tax consequences to CBOC's
shareholders.
The Reorganization Agreement may be terminated by CBI or CBOC, 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, 1997; 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 CBOC. 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 CBOC 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
CBOC may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the 1933 Act. For purposes of Rule 144 as applied
to CBOC, the directors and executive officers of CBOC 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 CBOC
with respect to the Reorganization, holders of voting stock should be aware that
certain members of CBOC's Board of Directors and senior management have certain
interests in the Reorganization that are in addition to the interest of
shareholders of CBOC generally. The Board of Directors of CBOC was aware of
these interests and considered them, among other factors, in approving the
Reorganization. These interests are as follows:
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<PAGE>
Board of Directors. The Board of Directors of CBI after the Effective
Date will consist of ten members, seven of whom will be current directors of CBI
and three of whom will be current directors of CBOC. The CBI Board of Directors
currently has eighteen members. Eleven CBI directors will resign on the
Effective Date. The parties anticipate that Mrs. Marshall and Messrs. Beale,
Hudgins, Huffman, Jones, Sheffield and Holden will remain directors of CBI after
the Effective Date. Messrs. Richeson, LaPrade and Miller, currently directors of
CBOC, are expected to become directors of CBI on the Effective Date and will
serve for terms that expire in 2000, 1999 and 1998, respectively. After the
Effective Date, the parties anticipate that Sam T. Beale will remain the
Chairman of the Board of CBI. Nathan S. Jones, 3rd will remain the President and
Chief Executive Officer of CBI. Directors of CBI receive no compensation for
serving as directors of CBI. After the Effective Date, Messrs. Richeson, LaPrade
and Miller will receive no additional compensation for serving as directors of
CBI. See "Community Bankshares Incorporated Election of Directors; Management -
Attendance and Compensation."
Options. The members of the CBOC Board of Directors hold options to
acquire CBOC Common Stock.
On the Effective Date, all rights with respect to CBOC Common Stock
pursuant to stock options ("CBOC Options") granted by CBOC under a CBOC 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 CBOC 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. See "Terms of the Reorganization."
Projected CBI Common Stock Ownership. The number of potential shares of
CBI Common Stock that CBOC Directors and Executive Officers may receive in the
aggregate pursuant to the Reorganization, assuming the immediate exercise of all
options, is 195,191 shares, which would have had a value of approximately $3.44
million as of February 24, 1997. The table below sets forth (i) the projected
holdings of CBI Common Stock by all CBOC Directors and executive officers, both
individually and in the aggregate, upon the Reorganization, assuming the
immediate exercise of all options; (ii) the percentage of ownership in CBI such
shares would represent; and (iii) the estimated value of such shares.
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<PAGE>
<TABLE>
<CAPTION>
No. of Projected Post-Share
CBI Exchange Percent of
Shares (1) CBI Common Stock (2) Value($) (3)
---------- -------------------- ------------
<S> <C> <C> <C>
Zirkle Blakey, III 8,069 0.29 141,208
Louis A. Farmer 16,359 0.59 286,283
Gary W. Fenchuk 7,737 0.28 135,398
G. Waddy Garrett 3,371 0.12 58,993
Thomas L. Gordon 12,655 0.45 221,463
Vernon E. LaPrade, Jr. 42,005 1.50 735,088
Larry D. McCoy 8,959 0.32 156,783
Jack W. Miller, Jr. 18,073 0.65 316,278
H. E. Richeson 40,214 1.44 703,745
Earle Spencer, Jr. 37,746 1.35 660,555
All present executive officers and
directors as a group (10 persons) 195,188 6.99 3,415,790
</TABLE>
- --------------------
(1) Includes shares of CBI Common Stock currently owned by CBOC Directors
and Executive Officers.
(2) Based on 793,175 shares of CBOC Common Stock outstanding on April 11,
1997 and 1,901,080 shares of CBI Common Stock outstanding on April 11,
1997.
(3) Based on the closing price of $17.50 per share of CBI Common Stock on
the OTC Bulletin Board on April 11, 1997, without adjustment for
either the costs of exercising options or any holder's investment basis
in CBOC Common Stock.
Employment Agreements. H. E. Richeson, Zirkle Blakey, III, and
Larry D. McCoy, Executive Officers of CBOC have employment contracts with CBOC.
Such contracts will continue after the Reorganization without any change to the
terms of such contracts. Mr. Richeson's contract expires on June 1, 1997. The
employment contracts of Messrs. Blakey and McCoy also expire on June 1, 1997.
All three contracts provide for automatic renewals for successive terms of one
year at a time, unless the contract is terminated by CBOC or the employee. Mr.
Richeson's contract provides for annual base compensation of $96,750, while the
contracts of Messrs. Blakey and McCoy provide for annual base compensation of
$50,500 and $48,600, respectively. All contracts provide for enhanced severance
benefits if the officer's employment terminates within three years after a
change of control. As of January 1, 1997, the cash amounts payable to Messrs.
Richeson, Blakey and McCoy, in the event of a termination of employment after a
change of control, would have been $312,327, $65,000 and $59,000,
respectively. See "County Bank of Chesterfield Election of Directors; Management
- - Employment Contracts."
Accounting Treatment
It is anticipated that the Reorganization will be accounted for as a
pooling of interests for accounting and financial reporting purposes. Under this
method of accounting, recorded assets and liabilities of CBI and CBOC are
carried forward at their previously recorded amounts; income of the combined
corporations will include income of CBI and CBOC 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 CBOC Common Stock held by dissenting shareholders, may not exceed 10% of
the value of the CBOC Common Stock at the Effective Date. Affiliates of CBI and
CBOC
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<PAGE>
have agreed that, among other things, they will not sell any CBI Common Stock or
CBOC 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 CBOC 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 interest 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 CBOC for
their approval. See "Summary" and "Pro Forma Condensed Financial Information."
Federal Income Tax Matters
Set forth below is a discussion of all material federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code") to
CBOC shareholders who receive CBI Common Stock solely in exchange for CBOC
Common Stock as a result of the Reorganization and CBOC 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 CBOC shareholders. In view
of the individual nature of tax consequences, CBOC 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 CBOC 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 CBOC 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 CBOC as a result
of the Reorganization;
2 No gain or loss will be recognized by the CBOC 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
CBOC shareholder will be the same as the aggregate basis of the CBOC 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 CBOC shareholder in exchange for CBOC Common Stock will generally
include the period for which such shareholder held the CBOC Common Stock
exchanged therefor, provided such CBOC 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. However, the receipt
of such cash may be treated as a dividend and taxed as ordinary income in
certain limited situations. Such situations are generally instances when there
is not a complete termination of the dissenting shareholder's interest after
considering shares retained by a shareholder related to the dissenting
shareholder or shares otherwise constructively owned by the dissenting
shareholder.
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<PAGE>
The receipt of cash in lieu of fractional shares will be treated as a
sale or exchange of the stock, resulting in capital gain or loss. In the case of
cash payments in lieu of fractional shares, however, such payments will be small
in amount and are not a material concern to CBOC shareholders.
It is recommended that each CBOC shareholder also consult his or her
own tax advisor to determine whether or not there are any tax consequences of
the Reorganization that might be of particular concern due to a shareholder's
individual tax situation.
No gain or loss will be recognized by the holders of options to
purchase CBOC 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 CBOC 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 CBOC prior to the CBOC
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 H. E. Richeson, President, County Bank of
Chesterfield, 10400 Hull Street Road, Midlothian, Virginia 23112. 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 CBOC 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 CBOC 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 CBOC Common Stock may assert dissenters' rights as to shares held
on his behalf by a shareholder of record only if (i) he submits to CBOC 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, CBOC 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 CBOC 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 January 14, 1997. CBOC will specify the Announcement Date in
the Dissenter's Notice.
Except with respect to shares acquired after the Announcement Date,
CBOC shall pay a Dissenting Shareholder the amount CBOC estimates to be the fair
value of his or her shares, plus accrued interest.
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<PAGE>
Such payment shall be made within 30 days of receipt of the Dissenting
Shareholder's Payment Demand. As to shares acquired after the Announcement Date,
CBOC 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
CBOC is less than the fair value of his or her shares, or that the interest due
is incorrectly calculated, that Dissenting Shareholder may notify CBOC 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 CBOC of the Estimate and Demand within 30 days after the date CBOC
makes or offers to make payment to the Dissenting Shareholder.
Within 60 days after receiving the Estimate and Demand, CBOC 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 CBOC
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 CBOC, 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 attorney. No further notice of the events giving rise to
dissenters' rights or any steps associated therewith will be furnished to CBOC
shareholders, except as indicated above or otherwise required by law.
Any Dissenting Shareholder who perfects his 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-Certain Federal Income Tax Consequences."
Certain Differences in Rights of Security Holders
CBI is a corporation subject to the provisions of the Virginia SCA, and
CBOC also is a corporation subject to the provisions of the Virginia SCA.
Shareholders of CBOC, whose rights are governed by CBOC's Articles of
Incorporation and Bylaws, will, upon consummation of the Reorganization, become
shareholders of CBI. The rights of the former CBOC 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 CBOC
shareholder under CBOC's Articles of Incorporation and Bylaws and the Virginia
SCA, on the one hand, and the rights of a CBI shareholder under the Articles of
Incorporation and Bylaws of CBI and the Virginia SCA, on the other hand, except
as disclosed in the section "Comparative Rights of Shareholders."
Expenses of the Reorganization
Whether or not the Reorganization is consummated, CBOC 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
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<PAGE>
willful breaches of certain provisions of the Reorganization Agreement. In
general, the Reorganization Agreement provides for each party to pay its own
expenses in this regard.
If, however, 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 CBI in the event that CBOC receives a subsequent acquisition offer
and the Board of Directors at CBOC does not confirm its unanimous support of the
Reorganization, CBOC must pay CBI's costs. If the Reorganization is not
consummated, and CBOC is not liable to CBI for expenses, in most cases CBI must
pay one half of CBOC's outside legal, accounting and financial advisory fees. 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 $37,500.
CBOC and CBI have incurred and will continue to incur expenses related
to the Reorganization, which expenses include, among other things, legal fees,
filing fees, accounting fees, investment banking fees, printing charges and
costs of mailing.
CBI and CBOC Market Prices and Dividends
CBOC. Since October 1995 CBOC Common Stock has traded on the Nasdaq
SmallCap Market under the symbol "CBOC." Before October 1995, CBOC Common Stock
traded infrequently on a local basis.
CBOC Market Price and Dividends
Sales Price (a) Dividends ($)
----------------------------- -------------
High Low
1995:
4th quarter 13.75 11.50
1996:
1st quarter 13.375 12.50
2nd quarter 13.75 12.75 .06
3rd quarter 13.75 12.875
4th quarter 13.75 13
1997:
1st quarter 19 13.25
2nd quarter 18.75 17.25
(through April 11, 1997)
- --------------------
(a) The future payment of dividends is solely in the discretion of the
Board of Directors of CBOC and is dependent upon certain legal and
regulatory considerations and upon the earnings and financial condition
of CBOC and such other factors as CBOC's Board of Directors may, from
time to time, deem relevant.
CBOC is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay shareholders, and will be subject to the same
restrictions upon consummation of the Reorganization. Dividends are generally
restricted to net profits, as defined by Federal Reserve regulations, for the
current year plus retained net profits for the preceding two years. At December
31, 1996, dividends were so limited to approximately $1.456 million.
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<PAGE>
CBI. Since May 1994 CBI Common Stock traded on the OTC Bulletin Board
under the symbol "CBIV." On January 13, 1997, the last day on which CBI Common
Stock traded prior to the announcement of the Reorganization, the closing price
for CBI Common Stock was $18.625 per share. In the year preceding the date of
these materials, the closing price for CBI Common Stock has varied from a low of
$13.25 per share to a high of $19.50 per share.
The following table sets forth, for the quarters indicated, the high
and low sales prices for CBI common stock on the OTC Bulletin Board from May
1994 to present and the high and low bid prices of trades known to CBI on the
over-the-counter market for stock prices reported locally through the regional
quotation system before May 1994 and per share dividends paid during the
respective periods. The actual stock value and dividend pay out to CBOC
shareholders over time as a result of the Reorganization could vary depending on
fluctuations of the market price of CBI common stock and changes in CBI's
dividend payment practice.
CBI Market Price and Dividends
Sales Price (a) Dividends ($) (b)
---------------------- -----------------
High Low
1994:
1st quarter 8.625 8.00 .10
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 .11
2nd quarter 11.50 10.50
3rd quarter 11.25 10.50
4th quarter 13.25 10.50
1996:
1st quarter 15.50 12.25 .12
2nd quarter 17.00 14.00
3rd quarter 18.50 15.50
4th quarter 19.50 17.00
1997:
1st quarter 19.50 17.25
2nd quarter 18.25 17.00
(through April 11, 1997)
- --------------------
(a) All prices and dividends are adjusted for a 100% stock dividend paid
on August 31, 1995.
(b) All dividends are adjusted to reflect the additional shares of CBI
Common Stock that became outstanding upon the consummation of a Share
Exchange between CBI and Commerce Bank of Virginia on July 1, 1996.
On April 11, 1997, the closing price of CBI Common Stock on the OTC
Bulletin Board was $17.50. As of April 30, 1997, there were _____ record
holders of CBI Common Stock and _____ record holders of CBOC 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, principally, its subsidiary banks, the
financial condition of CBI and other factors, including general economic
conditions and applicable
-34-
<PAGE>
governmental regulations and policies. CBI or its predecessor has paid regular
cash dividends for 16 consecutive years.
CBI is a legal entity separate and distinct from its subsidiaries, and
its revenues depend primarily on the payment of dividends from its subsidiary
banks. The Community Bank and Commerce Bank of Virginia are subject to certain
legal restrictions on the amount of dividends they are, together, permitted to
pay to CBI. At December 31, 1996, The Community Bank and Commerce Bank of
Virginia had available for distribution as dividends to CBI approximately $6.136
million.
-35-
<PAGE>
INVESTMENT ADVISOR OPINIONS
Both CBI and CBOC management relied upon the advice of a qualified
investment advisor in analyzing the Reorganization and Share Exchange and
recommending it to CBI's and CBOC's respective shareholders. CBI and CBOC relied
on the advice of McKinnon & Company, Inc., an investment banking firm
headquartered in Norfolk, Virginia ("McKinnon"). McKinnon determined that the
Share Exchange and Reorganization is in the best interests of CBI and CBOC
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 CBOC's
financial advisor, follows.
CBI - Opinion of Financial Advisor
McKinnon has been engaged by CBI as its financial advisor with respect
to the Reorganization contemplated by the Reorganization Agreement dated January
14, 1997 and the Plan of Share Exchange attached thereto as Exhibit A whereby,
each share of CBOC Common Stock shall be converted into and become 1.1054 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 F 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 $20,000 plus $1,000 in expenses for its services, including the fairness
opinion. CBI has agreed to indemnify McKinnon against liabilities that it might
incur as a result of any inaccurate information provided to McKinnon, or filed
or disseminated to the public, by CBI.
Financial Advisor Background. McKinnon is an investment banking firm
that specializes in Virginia community banks. In nine years McKinnon has been
lead managing underwriter in approximately twenty-four 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,
including CBOC and CBI. 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 CBOC 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 CBOC's Boards of Directors or Management on the
investigations made or procedures followed by it in rendering its opinion.
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 F 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, but all
material analyses have been summarized. The preparation
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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 management of CBI and CBOC as to the
future financial performance. McKinnon did not make an independent evaluation or
appraisal of the assets or liabilities of CBI and CBOC nor was it furnished any
such appraisals.
In rendering its opinion, McKinnon (i) reviewed the Reorganization
Agreement, dated as of January 14, 1997 among CBI and CBOC, including the Plan
of Share Exchange attached thereto as Exhibit A, certain publicly available
business and financial information concerning CBI and CBOC and certain internal
financial analyses and forecasts for CBI and CBOC prepared by CBI's and CBOC's
management; (ii) held discussions with members of executive management of CBI
and CBOC regarding past and current business operations, financial condition and
future prospects of CBI and CBOC; (iii) reviewed the reported price and trading
activity of CBI and CBOC Common Stock and compared financial and stock market
information for CBI and CBOC 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 CBOC.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, McKinnon, using publicly available information, compared selected
financial information, including book value, tangible book value, recent
earnings, estimated earnings, asset quality ratios and loan loss reserve levels,
compared growth rates in assets, loans and deposits in recent periods, returns
and performance ratios and market capitalization to total assets for CBI, CBOC
and CBI and CBOC on a pro forma basis, and two groups of selected comparable
financial institutions. The larger bank group was composed of nineteen selected
banking institutions located in the states of Virginia, Maryland, North
Carolina, Pennsylvania and the District of Columbia and included: larger
regional bank holding companies - NationsBank Corporation; First Union
Corporation; Southern National 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 Banks, Inc.; Mercantile Bankshares, Inc.; Keystone Financial;
Citizens Bancorp; and Susquehanna Bancshares; and smaller regional holding
companies and community banks primarily located in Virginia - Jefferson
Bankshares; F&M National Corporation; MainStreet BankGroup, Inc.; and George
Mason Bankshares. The second group of comparables consisted of four banks
located in Virginia, including: Jefferson Bankshares; F&M National Corporation;
MainStreet BankGroup, Inc.; and George Mason Bankshares. Using the last reported
and recent trading prices of CBI and CBOC as of November 20, 1996 McKinnon
compared the multiples of CBI, CBOC and the average of each of the two
comparable bank groups to such selected September 30, 1996 financial data for:
stated book value; trailing twelve months earnings per share; and estimated 1996
earnings per share; as well as equity to assets and the nine months annualized
return on average equity and average assets.
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The multiple of price to stated book value, to trailing twelve months
earnings and to estimated 1996 earnings was: 202.5%, 15.2 times and 14.1 times
respectively for the nineteen Virginia, Maryland, North Carolina, D.C. and
Pennsylvania banks; 179.8%, 14.1 times and 14.0 times respectively for the four
Virginia regional banks; 190.9%, 12.2 times and 11.6 times respectively for CBI;
and 131.5%, 15.6 times and 12.5 times respectively for CBOC. The ratio of equity
to assets and the annualized nine months 1996 return on average equity and
assets was: 8.9%, 14.31% and 1.28% respectively for the nineteen comparable
banks; 9.2%, 12.7% and 1.25% respectively for the four Virginia regional banks;
11.0%, 16.35% and 1.80% respectively for CBI; and 10.9%, 10.20% and 1.11%
respectively for CBOC.
McKinnon concluded that CBI has significantly higher profitability
levels as measured by return on equity and assets than the comparable groups
despite having a higher capital base as measured by equity-to-assets and that
its relative multiple of earnings is lower than comparable banks while its
multiple of book was in line with comparables. McKinnon also concluded that
CBOC's profitability levels are slightly lower than comparables due to its stock
issue in October, 1995. As a result of the issue its equity-to-assets ratio is
higher than the comparable groups. Its multiple of earnings level is in line
with or lower than comparable groups, particularly based on estimated 1996
earnings. CBOC's period of maximum dilution from its stock offering ended
September 30, 1996. McKinnon also concluded that both CBI and CBOC have higher
capital levels than comparables and that CBOC has not had time to absorb the
dilution from its stock offering in 1995. The 1996 actual earnings per share
were not materially different than the estimated 1996 earnings for either the
comparable financial institutions or CBI or CBOC.
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, 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, Maryland and North Carolina in 1995 and 1996, and Hanover Bank, the
most recent bank merger of a peer bank in the same market as CBI and CBOC, with
the Exchange Ratio and with an estimated sell-out value of CBI and CBOC based
upon these mean multiples. McKinnon also did the comparable analysis with a
group of 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.
For all known completed and pending bank mergers and acquisitions in
Virginia alone in 1995 and 1996, the multiple of price to stated book, latest
twelve months earnings, total assets and premium to deposits were 241.1%, 18.5x,
22.6% and 26.3%, respectively. For all known completed and pending bank mergers
and acquisitions in Virginia, Maryland and North Carolina in 1995 and 1996, the
multiple of price to stated book, latest twelve months earnings, total assets
and premium to deposits were 225.0%, 22.5x, 21.9% and 25.6%, respectively. For
Hanover Bank, the most recent merger of a peer bank in the same market as CBI
and CBOC, the multiple of price to stated book, latest twelve months earnings,
total assets and premium to deposits were 283.1%, 18.9x, 24.6% and 27.1%,
respectively. For all merger of equals to transactions nationally in the period
1992 through 1995, the multiple of price to stated book and total assets were
139.0% and 12.0%, respectively.
Based primarily upon the equally weighted mean multiples of price to
stated book, latest twelve months earnings, total assets and premium to deposits
for Virginia in 1995 and 1996, for Virginia, Maryland and North Carolina in 1995
and 1996, and Hanover Bank in 1996, and applying these to CBI and CBOC, the
estimated merger values of CBI and CBOC and CBI and CBOC on a pro forma basis,
assuming no merger synergies or cost savings, were determined to be $19 1/2 - 21
1/2 for CBOC, $22 1/2 - 23 1/2 per share for CBI and $21 1/2 - 23 1/2 for CBI
and CBOC pro forma, or $23 1/2 - 26 for CBOC based on the Exchange Ratio.
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<PAGE>
Contribution Analysis. McKinnon analyzed the historical (September 30,
1996) contribution of each of CBI and CBOC to, among other things, the total
assets, total equity and net income of the pro forma combined company, as well
as the same for the three separate banks - Community Bank, Commerce Bank and
CBOC. This analysis did not include any merger synergies.
McKinnon concluded that the proposed transaction regarding relative
contribution analysis was consistent with merger of equals transactions
nationally for assets and equity and that the relative contribution of CBI for
net income was slightly higher than typical for merger of equals transactions.
Discounted Cash Flow Analysis. Using discounted cash flow analysis
McKinnon estimated the present value of the future stream of earnings and
dividends that CBI and CBOC could generate through 2000. McKinnon concluded
that, based on the relative present values per share of each, the Exchange Ratio
is fair from a financial point of view to the CBI shareholders.
McKinnon analyzed the present value of the future stream of earnings
that CBI and CBOC could generate through 2000 under different assumptions as to
required equity levels, if CBI and CBOC performed in accordance with management
forecasts and certain variants thereof. Among other things McKinnon considered a
range of asset and earnings growth of between 7% and 8% for CBI and between 7%
and 9% for CBOC. McKinnon estimated the terminal values for CBI and CBOC at the
end of the period by applying multiples of earnings ranging from 10 to 14 times.
A range of discount rates of 10% to 14% were applied to these scenarios and
terminal values chosen to reflect different assumptions regarding the required
rates of return of holders or prospective buyers of CBI and CBOC Common Stocks
and the inherent risks surrounding the underlying projections. Based upon these
analyses, McKinnon developed, for purposes of its opinion, a reference range for
the value of CBOC Common Stock of $11.35 to $20.02 per share.
Dilution Analysis. Based upon publicly available information, McKinnon
considered the effect of the transaction on the book value, earnings and market
value of CBI, CBOC 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.
Using estimated earnings for 1996 and 1997 for CBI and CBOC, without
consideration of any merger synergies or cost savings, and based upon the Share
Exchange from the Exchange Ratio, McKinnon determined that CBI would have
dilution to earnings per share of 11.7% in 1996 and 10.7% in 1997, and that CBOC
would have earnings accretion of 40.2% in 1996 and 38.9% in 1997.
Compensation of Financial Advisor. Pursuant to terms of its engagement
letter, CBI has paid McKinnon a fee of $20,000 for its services, including the
fairness opinion, plus $1,000 for out-of-pocket expenses.
Certain Relationships. In the normal course of business McKinnon is a
market maker in the common stock of CBI listed on the OTC Bulletin Board and in
CBOC common stock listed on the NASDAQ Small Cap Market. 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. McKinnon acted as the financial advisor of CBI in its 1996
acquisition of Commerce Bank of Virginia. In October 1995 McKinnon was the
managing underwriter of a public offering of 258,750 shares of CBOC common stock
at $11.00 per share. A principal of McKinnon beneficially owns 7,548 shares of
CBI Common Stock and 907 shares of CBOC Common Stock.
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<PAGE>
CBOC - Opinion of Financial Advisor
McKinnon has been engaged by CBOC as its financial advisor with respect
to the Reorganization contemplated by the Reorganization Agreement dated January
14, 1997 and the Plan of Share Exchange attached thereto as Exhibit A whereby,
each share of CBOC Common Stock shall be converted into and become 1.1054 shares
of CBI Common Stock, at the Effective Date. McKinnon has rendered its opinion to
the shareholders of CBOC that the Reorganization and Share Exchange is fair,
from a financial point of view, to the shareholders of CBOC. 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. CBOC has paid
McKinnon a fee of $20,000 plus $1,000 in expenses for its services, including
the fairness opinion. CBOC has agreed to indemnify McKinnon against liabilities
that it might incur as a result of any inaccurate information provided to
McKinnon, or filed or disseminated to the public, by CBOC.
Financial Advisor Background. McKinnon is an investment banking firm
that specializes in Virginia community banks. In nine years McKinnon has been
lead managing underwriter in approximately twenty-four 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,
including CBOC and CBI. McKinnon believes it has a thorough working knowledge of
the banking industry throughout Virginia.
CBOC Fairness Opinion. McKinnon did not assist CBOC 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 CBOC's Boards of Directors or Management on the
investigations made or procedures followed by it in rendering its opinion.
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 CBOC 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 CBOC
Annual Meeting. McKinnon was not requested to give an opinion to, and its
opinion does not in any manner, address CBOC'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, but all
material analyses have been summarized. 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 CBOC'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.
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<PAGE>
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 management of CBI and CBOC as to the
future financial performance. McKinnon did not make an independent evaluation or
appraisal of the assets or liabilities of CBI and CBOC nor was it furnished any
such appraisals.
In rendering its opinion, McKinnon (i) reviewed the Reorganization
Agreement, dated as of January 14, 1997 among CBI and CBOC, including the Plan
of Share Exchange attached thereto as Exhibit A, certain publicly available
business and financial information concerning CBI and CBOC and certain internal
financial analyses and forecasts for CBI and CBOC prepared by CBI's and CBOC's
management; (ii) held discussions with members of executive management of CBI
and CBOC regarding past and current business operations, financial condition and
future prospects of CBI and CBOC; (iii) reviewed the reported price and trading
activity of CBI and CBOC Common Stock and compared financial and stock market
information for CBI and CBOC 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 CBOC.
Analysis of Selected Publicly Traded Companies. In preparing its
opinion, McKinnon, using publicly available information, compared selected
financial information, including book value, tangible book value, recent
earnings, estimated earnings, asset quality ratios and loan loss reserve levels,
compared growth rates in assets, loans and deposits in recent periods, returns
and performance ratios and market capitalization to total assets for CBI, CBOC
and CBI and CBOC on a pro forma basis, and two groups of selected comparable
financial institutions. The larger bank group was composed of nineteen selected
banking institutions located in the states of Virginia, Maryland, North
Carolina, Pennsylvania and the District of Columbia and included: larger
regional bank holding companies - NationsBank Corporation; First Union
Corporation; Southern National 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 Banks, Inc.; Mercantile Bankshares, Inc.; Keystone Financial;
Citizens Bancorp; and Susquehanna Bancshares; and smaller regional holding
companies and community banks primarily located in Virginia - Jefferson
Bankshares; F&M National Corporation; MainStreet BankGroup, Inc.; and George
Mason Bankshares. The second group of comparables consisted of four banks
located in Virginia, including: Jefferson Bankshares; F&M National Corporation;
MainStreet BankGroup, Inc.; and George Mason Bankshares. Using the last reported
and recent trading prices of CBI and CBOC as of November 20, 1996 McKinnon
compared the multiples of CBI, CBOC and the average of each of the two
comparable bank groups to such selected September 30, 1996 financial data for:
stated book value; trailing twelve months earnings per share; and estimated 1996
earnings per share; as well as equity to assets and the nine months annualized
return on average equity and average assets.
The multiple of price to stated book value, to trailing twelve months
earnings and to estimated 1996 earnings was: 202.5%, 15.2 times and 14.1 times
respectively for the nineteen Virginia, Maryland, North Carolina, D.C. and
Pennsylvania banks; 179.8%, 14.1 times and 14.0 times respectively for the four
Virginia regional banks; 190.9%, 12.2 times and 11.6 times respectively for CBI;
and 131.5%, 15.6 times and 12.5 times respectively for CBOC. The ratio of equity
to assets and the annualized nine months 1996 return on average equity and
assets was: 8.9%, 14.31% and 1.28% respectively for the nineteen comparable
banks; 9.2%, 12.7% and 1.25% respectively for the four Virginia regional banks;
11.0%, 16.35% and 1.80% respectively for CBI; and 10.9%, 10.20% and 1.11%
respectively for CBOC.
McKinnon concluded that CBI has significantly higher profitability
levels as measured by return on equity and assets than the comparable groups
despite having a higher capital base as measured
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by equity-to-assets and that its relative multiple of earnings is lower than
comparable banks while its multiple of book was in line with comparables.
McKinnon also concluded that CBOC's profitability levels are slightly lower than
comparables due to its stock issue in October, 1995. As a result of the issue
its equity-to-assets ratio is higher than the comparable groups. Its multiple of
earnings level is in line with or lower than comparable groups, particularly
based on estimated 1996 earnings. CBOC's period of maximum dilution from its
stock offering ended September 30, 1996. McKinnon also concluded that both CBI
and CBOC have higher capital levels than comparables and that CBOC has not had
time to absorb the dilution from its stock offering in 1995. The 1996 actual
earnings per share were not materially different than the estimated 1996
earnings for either the comparable financial institutions or CBI or CBOC.
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, 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, Maryland and North Carolina in 1995 and 1996, and Hanover Bank, the
most recent bank merger of a peer bank in the same market as CBI and CBOC, with
the Exchange Ratio and with an estimated sell-out value of CBI and CBOC based
upon these mean multiples. McKinnon also did the comparable analysis with a
group of 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.
For all known completed and pending bank mergers and acquisitions in
Virginia alone in 1995 and 1996, the multiple of price to stated book, latest
twelve months earnings, total assets and premium to deposits were 241.1%, 18.5x,
22.6% and 26.3%, respectively. For all known completed and pending bank mergers
and acquisitions in Virginia, Maryland and North Carolina in 1995 and 1996, the
multiple of price to stated book, latest twelve months earnings, total assets
and premium to deposits were 225.0%, 22.5x, 21.9% and 25.6%, respectively. For
Hanover Bank, the most recent merger of a peer bank in the same market as CBI
and CBOC, the multiple of price to stated book, latest twelve months earnings,
total assets and premium to deposits were 283.1%, 18.9x, 24.6% and 27.1%,
respectively. For all merger of equals to transactions nationally in the period
1992 through 1995, the multiple of price to stated book and total assets were
139.0% and 12.0%, respectively.
Based primarily upon the equally weighted mean multiples of price to
stated book, latest twelve months earnings, total assets and premium to deposits
for Virginia in 1995 and 1996, for Virginia, Maryland and North Carolina in 1995
and 1996, and Hanover Bank in 1996, and applying these to CBI and CBOC, the
estimated merger values of CBI and CBOC and CBI and CBOC on a pro forma basis,
assuming no merger synergies or cost savings, were determined to be $19 1/2 - 21
1/2 for CBOC, $22 1/2 - 23 1/2 per share for CBI and $21 1/2 - 23 1/2 for CBI
and CBOC pro forma, or $23 1/2 - 26 for CBOC based on the Exchange Ratio.
Contribution Analysis. McKinnon analyzed the historical (September 30,
1996) contribution of each of CBI and CBOC to, among other things, the total
assets, total equity and net income of the pro forma combined company, as well
as the same for the three separate banks - Community Bank, Commerce Bank and
CBOC. This analysis did not include any merger synergies.
McKinnon concluded that the proposed transaction regarding relative
contribution analysis was consistent with merger of equals transactions
nationally for assets and equity and that the relative contribution of CBI for
net income was slightly higher than typical for merger of equals transactions.
Discounted Cash Flow Analysis. Using discounted cash flow analysis
McKinnon estimated the present value of the future stream of earnings and
dividends that CBI and CBOC could generate through 2000. 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.
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<PAGE>
McKinnon analyzed the present value of the future stream of earnings
that CBI and CBOC could generate through 2000 under different assumptions as to
required equity levels, if CBI and CBOC performed in accordance with management
forecasts and certain variants thereof. Among other things McKinnon considered a
range of asset and earnings growth of between 7% and 8% for CBI and between 7%
and 9% for CBOC. McKinnon estimated the terminal values for CBI and CBOC at the
end of the period by applying multiples of earnings ranging from 10 to 14 times.
A range of discount rates of 10% to 14% were applied to these scenarios and
terminal values chosen to reflect different assumptions regarding the required
rates of return of holders or prospective buyers of CBI and CBOC Common Stocks
and the inherent risks surrounding the underlying projections. Based upon these
analyses, McKinnon developed, for purposes of its opinion, a reference range for
the value of CBOC Common Stock of $11.35 to $20.02 per share.
Dilution Analysis. Based upon publicly available information, McKinnon
considered the effect of the transaction on the book value, earnings and market
value of CBI, CBOC 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.
Using estimated earnings for 1996 and 1997 for CBI and CBOC, without
consideration of any merger synergies or cost savings, and based upon the Share
Exchange from the Exchange Ratio, McKinnon determined that CBI would have
dilution to earnings per share of 11.7% in 1996 and 10.7% in 1997, and that CBOC
would have earnings accretion of 40.2% in 1996 and 38.9% in 1997.
Compensation of Financial Advisor. Pursuant to terms of its engagement
letter, CBI has paid McKinnon a fee of $20,000 for its services, including the
fairness opinion, plus $1,000 for out-of-pocket expenses.
Certain Relationships. In the normal course of business McKinnon is a
market maker in the common stock of CBI listed on the OTC Bulletin Board and in
CBOC common stock listed on the NASDAQ Small Cap Market. 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. McKinnon acted as the financial advisor of CBI in its 1996
acquisition of Commerce Bank of Virginia. In October 1995 McKinnon was the
managing underwriter of a public offering of 258,750 shares of CBOC common stock
at $11.00 per share. A principal of McKinnon beneficially owns 7,548 shares of
CBI Common Stock and 907 shares of CBOC Common Stock.
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COUNTY BANK OF CHESTERFIELD
Business
County Bank of Chesterfield is a full service commercial bank operating
in Chesterfield County, Virginia. CBOC opened for business in September 1986
with one location at 10400 Hull Street Road. In July 1988 it opened a second
location at 6435 Ironbridge Road. A third branch office, located at 13241
River's Bend Boulevard, opened in March 1997. CBOC expects to continue to
provide the banking services described herein.
In October 1995, CBOC sold 258,750 shares of common stock in a public
offering. In 1994 and the first six months of 1995, CBOC's total assets were
expanding and, additionally, it was considering a third branch location. The
purpose of the offering was to support continued asset growth and the investment
in a third branch office.
Principal Market Area. The primary service areas of CBOC consist of the
major traffic corridors upon which its three banking facilities are located,
10400 Hull Street Road (Route 360), 6435 Ironbridge Road (Route 10) and 13241
River's Bend Boulevard. According to deposit statistics reported as of June 30,
1994, CBOC had deposits of approximately $63.9 million in Chesterfield County,
or approximately 3.7% of all deposits maintained by financial institutions
within the County. CBOC solicits business from individuals and small- to
medium-sized businesses in these primary service areas. CBOC's present intention
is to continue to concentrate its activities in its current service area, which
CBOC believes is an attractive area in which to operate.
Banking Services. CBOC provides a wide range of banking and related
services, including checking and savings accounts, certificates of deposit and
other depository services and loan services to individuals and businesses. No
material portion of CBOC's deposits has been obtained from a single or small
group of customers and the loss of deposits of any one customer or of a small
group of customers would not have a material adverse effect on the business of
CBOC. During 1993 CBOC formed CBC Insurance Agency Inc., a wholly-owned
subsidiary. CBC Insurance Agency Inc. owns a 6.0% interest in Bankers Title
Inc., a title agency owned by financial institutions in central Virginia.
Lending Activities
CBOC's primary focus is on making loans to individuals in its market
area. CBOC's lending activities are centralized within Chesterfield County.
CBOC's legal lending limit to any one customer was approximately $1,280,000 at
December 31, 1996. CBOC had $2,493,446 in loan commitments outstanding at
December 31, 1996.
Commercial Business Lending. CBOC's commercial loans are made primarily
to service, retail and wholesale businesses, a number of whom are involved in
the real estate development business sector in CBOC's primary market area. Loans
to these types of developers are generally in the form of loans collateralized
by real estate development, personal guarantees and other collateral when deemed
necessary by CBOC. Real estate development, primarily the construction of
one-family residences, continues to account for a major portion of the
commercial loan demand within the area served by CBOC.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but also offer commensurately higher yields. Pricing
of commercial business loans is tied to the prevailing interest rate, at a
factor over prime. Pricing decisions in individual cases are based on perceived
credit risk and anticipated administrative costs. To the extent permissible,
pricing on commercial loans also takes into account any depository relationship
between the borrower of CBOC, which in many cases, can provide for both a stable
lending and depository relationship. Although CBOC typically looks to the
borrower's cash flow as the principal source of repayments of these types of
loans, the large majority of CBOC's commercial loans are secured by assets, such
as real estate, accounts receivable and other forms of collateral.
-44-
<PAGE>
In addition, CBOC's commercial loans are personally guaranteed by the principals
of the business as necessary under CBOC's credit standards.
Real Estate Construction Loans. CBOC's construction loans for
residential purposes are generally limited to situations where the purchaser has
a preapproved, take-out commitment for permanent financing. CBOC also obtains a
first lien on the security property as collateral for its construction loans.
CBOC limits loan amounts to 80% of the appraised value on presold homes in
addition to its usual credit analysis of its borrowers. CBOC primarily limits
its lending activities to borrowers with demonstrated financial strength and
makes speculative construction loans only on a limited basis to local builders.
As a result of strict underwriting standards, CBOC has experienced modest losses
involving its construction loan portfolio.
Residential Mortgage Lending. The residential mortgage loans made by
CBOC have a fixed interest rate, generally for not more than 36 months and are
limited to single family, owner-occupied residences within CBOC's market area.
Its lending and asset/liability strategies currently do not allow CBOC to
maintain conventional 30 year fixed rate mortgage loans. However, CBOC has
established a relationship with a correspondent for placement of loan requests
for this type, for which CBOC earns a portion of the origination fees associated
with these types of loans.
Consumer Lending. CBOC currently offers most types of consumer
installment loans and consumer credit through its Visa credit card. The
performance of the consumer loan portfolio is directly tied to and dependent
upon the general economic conditions in CBOC's market area.
Credit Policies and Loan Administration. CBOC has adopted a
comprehensive lending policy which includes stringent underwriting standards for
all types of loans and pricing guidelines, as well as the "New Standards for
Prudent Real Estate Lending" set forth in a recent FFIEC opinion statement.
CBOC's policy specifies "permitted" loans, as well as "undesirable and
prohibited" loans. Collateral requirement and maturity limits also are
addressed. In an effort to manage risk, all credit decisions are made according
to prescribed lending authorities for each loan officer and the Loan Committee
of the Board. These lending authorities are approved by the full Board.
Employees
On December 31, 1996, CBOC had 38 full-time and 5 part-time employees.
The relationship between CBOC and its employees is good.
Competition
CBOC's primary market is generally defined as Chesterfield County and,
more specifically, those areas within a three mile radius of its branch
locations. CBOC is subject to intense competition from various other financial
institutions and other companies that offer financial services. Among financial
institutions, the primary method of competition is the efficient delivery of
quality services at competitive prices. CBOC believes its delivery of financial
services is equal or superior to that of its competitors and that its lending,
deposit and services prices are highly competitive.
-45-
<PAGE>
CBOC Appointees
The following table lists the names, ages and principal occupations of
the CBOC 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.
Name and Principal Occupation at Present
and for Past Five Years; Directorships Age
H.E. Richeson 55
President of County Bank of Chesterfield
since 1989
Vernon E. LaPrade, Jr. 64
President, Model Realty, Inc.
Jack W. Miller, Jr. 65
Chairman and Chief Executive Officer,
Roller Bearing Industries, Inc.
The CBOC Board currently consists of eight (8) directors: Louis A.
Farmer, Gary W. Fenchuk, G. Waddy Garrett, Thomas L. Gordon, Vernon E. LaPrade,
Jr., Jack W. Miller, Jr., H. E. Richeson, and Earle Spencer, Jr.
-46-
<PAGE>
COUNTY BANK OF CHESTERFIELD ELECTION
OF DIRECTORS; MANAGEMENT
Eight (8) Directors are to be elected at the Annual Meeting to serve
until the next Annual Meeting, and until the election and qualification of their
respective successors.
It is intended that unless otherwise directed by the Shareholder on the
Proxy, the shares represented by the enclosed Proxy will be voted for the
election as Directors of the nominees named within. All such nominees have
consented to be named and to serve if elected, and the Board of Directors has no
reason to believe that any nominee will be unable to serve as a Director.
However, if for any reason any nominee should not be able to serve, it is
intended that the shares represented by the enclosed Proxy will be voted for a
new nominee to be selected by the Board of Directors.
The following table sets forth the names, ages and business experience
of nominees for election to the Board of Directors as well as the dates each was
first elected to the Board of Directors. Unless otherwise indicated, the
business experience shown for each nominee has extended five or more years.
<TABLE>
<CAPTION>
NAME AND AGE NAME AND AGE
AND YEAR PRINCIPAL AND YEAR PRINCIPAL
BECAME DIRECTOR OCCUPATION BECAME DIRECTOR OCCUPATION
<S> <C> <C> <C>
Louis A. Farmer Owner, Vernon E. LaPrade, Jr. President,
Age 73 Louis A. Farmer Age 64 Model Realty, Inc.
Director since 1986 Brick Contractor Director since 1986
Thomas L. Gordon Attorney, Jack W. Miller, Jr. Chairman and Chief
Age 42 Gordon Dodson & Gordon Age 65 Executive Officer,
Director since 1987 Director since 1986 Roller Bearing
Industries, Inc.
H.E. Richeson President and Chief Earle Spencer, Jr. Vice President,
Age 55 Executive Officer, Age 56 Spencer Brothers, Inc.
Director since 1989 County Bank of Director since 1986 Fuel Oil Distributor
Chesterfield
Gary W. Fenchuk President, G. Waddy Garrett Chief Executive Officer,
Age 50 East West Partners of Age 55 Alliance Agronomics,
Director since 1995 Va. Director since 1995 Inc.
</TABLE>
The Board of Directors recommends that you vote FOR the election of the
above-named nominees as Directors.
-47-
<PAGE>
Security Ownership of Management
The following table sets forth information as of April 30, 1997
regarding the number of shares of Common Stock beneficially owned by all
directors and nominees, by the executive officer named in the Summary
Compensation Table herein and by all directors and executive officers as a
group. 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 (the "Exchange Act"), as amended, under which, in general,
a person is deemed to be a beneficial owner of a security if he has or shares
the power to vote or direct the voting of the security or the power to dispose
or direct disposition of the security, or if he has the right to acquire
beneficial ownership of the security within 60 days.
Common Stock
Name Beneficially Owned Percent of Class
Director
Louis A. Farmer 14,800 1.85
Thomas L. Gordon 11,449 1.43
H. E. Richeson 36,380 4.42
Gary W. Fenchuk 7,000 0.88
Vernon E. LaPrade, Jr. 38,000 4.74
Jack W. Miller, Jr. 16,350 2.04
Earle Spencer, Jr. 34,147 4.26
G. Waddy Garrett 3,050 0.38
All present executive officers
and directors as a group
(10 persons) 176,581 20.03
Executive Officers Who Are Not Directors
The following table sets forth the names, ages and all positions held
with CBOC by those Executive Officers of CBOC who do not serve on its Board of
Directors, as well as the year each first become an officer of CBOC.
NAME AND AGE AND
YEAR BECAME OFFICER POSITIONS WITH CBOC
Zirkle Blakey, III Senior Vice President, Cashier & Assistant Secretary
Age 38
1986
Larry D. McCoy Senior Vice President & Senior Credit Officer
Age 47
1989
-48-
<PAGE>
Remuneration
The following table sets forth the annual compensation paid or accrued
by CBOC to H. E. Richeson, President and Chief Executive Officer of CBOC for the
last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------------------------ ------------------------
Securities
Name and Other Annual Underlying Options(#)
Principal Position Year Salary($) Bonus($) Compensation($)
<S> <C> <C> <C> <C> <C>
H. E. Richeson 1996 112,702 8,000 (1) 10,000
President and CEO 1995 108,549 4,900 (1) -0-
1994 100,933 -0- (1) 20,000
</TABLE>
- -----------------
(1) The value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of total annual salary and bonus.
The Executive Officers of CBOC participate in other benefit plans which
are provided to all full-time employees of CBOC who meet eligibility
requirements, including group life insurance, hospitalization and major medical
insurance, as well as a long term disability plan.
Options Grants in Last Fiscal Year
During 1994, CBOC adopted a stock option plan that provided for the
granting of options to key executives and directors of CBOC to purchase shares
of CBOC Common Stock at the greater of book value or fair market value at the
date of grant. The plan provided for the granting of stock options for 90,000
shares of the CBOC Common Stock.
-49-
<PAGE>
The following table sets forth for the fiscal year ended December 31,
1996, the grants of stock options by CBOC to its Chief Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
Assumed Annual Rates
of Stock Price Appreciation
Individual Grants (a) for Option Term
--------------------- ---------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employee in Price Expiration
Name Granted (#) Fiscal Year (b) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- --------------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
H.E. Richeson 10,000 71.4% 13.50 9/10/06 219,901 350,155
President and Chief
Executive Officer
</TABLE>
- --------------------
(a) Stock options were awarded at the market value of the shares of CBOC
Common Stock at the date of award and are immediately exercisable.
(b) Options to purchase 14,000 shares of CBOC Common Stock were granted to
employees of CBOC during the fiscal year ended December 31, 1996.
Option Exercises and Holdings
No options were exercised by the President and Chief Executive Officer
of CBOC during the fiscal year ended December 31, 1996. The following table sets
forth information with respect to unexercised options held by him as of the end
of the fiscal year.
<TABLE>
<CAPTION>
Fiscal Year End Options
Value of unexercised
Number of unexercised options at in-the-money options
December 31, 1996 (#) at fiscal year end ($)(1)
------------------- ------------------- ------------------ -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
H. E. Richeson 30,000 -0- $113,700 -0-
President and CEO
</TABLE>
- ----------------
(1) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between the fair market value
of the Common Stock of CBOC underlying the options on December 31, 1996
($13.75) per share and the exercise price of the options.
Employment Contracts and Compensation Plans
The Executive Officers of CBOC are covered by an incentive compensation
plan that was approved by the Board of Directors in 1988. The plan is based upon
overall performance of CBOC as measured by its return on average assets, as well
as an evaluation of each individual officer's performance. Payments from the
plan totaled $18,000 during 1996. CBOC also provides the President with an
-50-
<PAGE>
automobile including the beneficial use of said automobile at night and on
weekends. The value of personal benefits derived from use of said vehicle is
included in the Salary column of the table above.
The Executive Officers of CBOC are provided with other benefit plans
provided to all full-time employees of CBOC who meet eligibility requirements;
specifically, group life insurance, hospitalization and major medical insurance,
as well as a long-term disability plan. CBOC implemented a 401(k) Plan effective
July 1, 1994. Under the Plan, all full-time employees over 21 years who have
completed 90 days of service may elect to contribute up to 19% of their
salaries. Executive Officers of CBOC are allowed to participate under the same
rules and requirements as other employees. CBOC contributed an amount equal to
50% of the participant's contribution limited to 6% of the employee's
compensation in 1996.
Mr. Richeson has a written employment agreement with CBOC. The
agreement covers a term of employment beginning June 1, 1994 and ending June 1,
1997, and provides for annual renewals thereafter. Pursuant to the agreement,
Mr. Richeson's base compensation is set in the sole discretion of the Board of
Directors, but may not be decreased without his consent. Such base compensation
is in addition to other compensation plans maintained by CBOC, and pension,
group insurance and other benefits offered to CBOC's employees generally. The
agreement provides that Mr. Richeson can be terminated by CBOC with or without
"cause" (generally defined as conduct involving willful misconduct or gross
negligence), and upon permanent disability. If he is terminated without cause,
Mr. Richeson would receive continued salary and benefits for six months. If such
a termination without cause were to occur upon a "change of control" of CBOC, as
defined in the agreement, or if Mr. Richeson resigned for "good reason" (e.g.,
diminution of duties, reduction of salary) after a change in control, then Mr.
Richeson would receive (i) a cash payment equal to 2.99 times annual salary and
bonus and continued coverage under benefits plans for a period of three years.
Mr. Richeson's employment contract also provides for deferred compensation of
$5,000 per month for a period of five years, beginning at age 65. As long as Mr.
Richeson remains an employee of CBOC, one-half of the deferred compensation
benefit shall accrue ratably over a 24 month period, beginning November 1, 1996
and the remaining one-half shall accrue ratably over the following 36 months. If
Mr. Richeson's employment terminates for any reason other than cause, he, or his
representative, may elect to receive a lump sum payment equal to the present
value of the accrued benefit. If Mr. Richeson's employment is terminated for
cause, the deferred compensation is not payable.
CBOC also has employment agreements with Zirkle Blakey, III and
Larry D. McCoy. The Agreements are identical in form to Mr. Richeson's contract,
except that Mr. Blakey and Mr. McCoy each is entitled to one year's salary if
his employment terminates after a change of control and neither Mr. Blakey's nor
Mr. McCoy's contract provides for any deferred compensation. Mr. Blakey's base
salary is $50,500, while Mr. McCoy's is $48,600.
As of January 1, 1997, the cash amounts payable to Messrs. Richeson,
Blakey and McCoy in the event of a termination of employment after a change of
control would have been $312,327, $65,000 and $59,000, respectively. The
Agreement provides, as a condition to closing, that the employment contracts
between CBOC and Messrs. Richeson, Blakey and McCoy shall be amended to provide
that the Reorganization will not be considered a change of control that would
entitle any of them to any special severance payments after the Effective Date.
Compensation of Directors
Prior to August 1989, Directors received a fee of $250 for attending
monthly Board meetings. Payment of such fees was suspended effective August 1989
and was not reinstated during 1994. In January 1995, the Board of Directors
voted to begin paying directors fees of $200 per month. Effective February 1996,
Directors of CBOC receive an annual retainer of $2,500 and $100 for each monthly
board meeting attended.
-51-
<PAGE>
In addition, in 1994, each Director was granted an option to purchase
8,000 shares of CBOC Common Stock at a price of $8.19 per share. These options
expire on August 9, 2004. In 1996, Messrs. Fenchuk and Garrett, who were not
Directors in 1994, each were granted an option to purchase 2,000 shares of CBOC
Common Stock at a price of $13.50 per share. These options expire on September
10, 2006.
Meetings of the Board of Directors and Committees
The Board of Directors met 12 times during 1996. No director attended
fewer than 75 percent of the total number of meetings of the Board and of the
total number of meetings held by all Committees of the Board on which he served.
CBOC has an Audit Committee to provide oversight of CBOC's financial
reporting and internal control structure and to serve as a line of
communications between it independent auditors and the Board of Directors.
Membership includes Messrs. LaPrade, Miller, Spencer and Gordon. The committee
held two meetings during 1996.
CBOC does not have nominating and compensation committees.
Transactions with Management
In the normal course of business, loans are made to Directors and
Executive Officers of CBOC, as well as certain business organizations and
individuals associated with them. These loans are made on substantially the same
terms as those prevailing at the time for comparable loans with other persons
and do not involve more than the normal risk of collectibility or present other
unfavorable features. CBOC's executive officers and directors, and their
associates, have not had any material direct or indirect interest in any
business transaction to which CBOC is or was a party outside the ordinary course
of CBOC's business and have not received any payment from CBOC where the rates
or charges involved in the transaction were not determined by competitive bids.
Changes in Control
Except for the Reorganization, Management is not aware of any
arrangements which may at a subsequent date result in a change in control of
CBOC.
Adverse Proceedings
Management of CBOC is not aware of any material proceedings to which
any Director, officer or affiliate of CBOC, any owner of record or beneficial
owner of more than five percent of CBOC's Common Stock, or any associate of any
such Director, officer, affiliate of CBOC, or the shareholder is a party adverse
to CBOC or has a material interest adverse to CBOC.
-52-
<PAGE>
COUNTY BANK OF CHESTERFIELD'S
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 of CBOC. This
discussion and analysis should be read in conjunction with CBOC's consolidated
financial statements and accompanying notes.
Overview
In 1996 CBOC experienced asset growth of $5.928 million (8.0%) compared
to asset growth of $9.591 million in 1995. In 1996 CBOC earned a profit of
$830,517 or $1.05 per share, compared to a profit of $625,273, or $1.03 per
share in 1995. Asset growth was due to increased loan balances, which were
funded by increased deposits and decreased balances within CBOC's investment
securities. Increased earnings resulted primarily from increased net interest
income.
Net Income
Net income for the year ended December 31, 1996 of $830,517 was an
increase of 32.8% over the year ended December 31, 1995. The increase in net
income during 1996 reflects primarily an increase in the lending volume and
improvement in the rates earned on interest-earning assets. Earnings per share
for the year ended December 31, 1996 was $1.05, up from $1.03 for the year ended
December 31, 1995. Weighted average shares outstanding increased significantly
in 1996 due to CBOC's capital offering in September 1995. Weighted average
shares outstanding for the year ended December 31, 1996 equaled 793,175 shares,
an increase of 30.1% over the weighted average shares outstanding for the year
ended December 31, 1995. CBOC has shown an increase of 564% in net income over
the five years ended December 31, 1996, from $125,000 in 1992 to $830,517 during
1996. The increase in income over the past five years is attributable to the 43%
growth in the loan portfolio and the 71% decrease in provision for loan losses
when comparing the expense for the year ended December 31, 1992 to the year
ended December 31, 1996. As total assets grew from $57.270 million as of
December 31, 1992 to $79.496 million as of December 31, 1996, net loans
increased from $33.274 million to $47.726 million.
CBOC increased net income 21.4% to $625,000 during 1995 over 1994. This
increase was attributable to an increase in the net interest yield and a
decrease in the provision for loan losses. Net income during 1994 of $515,000
was a 62.5% increase over 1993. On a per share basis, net income was $.96 in
1994.
CBOC's return on average equity decreased for the year ended December
31, 1996 when compared to the year ended December 31, 1995. The return on
average equity was 10.03% for the year ended December 31, 1996 and was affected
by the significant increase in equity due to CBOC's capital offering in 1995.
CBOC's return on average assets has increased over the past five years. The
return on average assets amounted to 1.11%, .92%, and .84% for the three years
ended December 31, 1996, 1995, and 1994, respectively.
CBOC is not aware of any current recommendations by the bank regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital reserve or results of operations. There are no agreements
between CBOC and either the Federal Reserve or the SCC, nor has either
regulatory agency made any recommendations concerning the operations of CBOC
that could have a material effect on its liquidity, capital reserves or results
of operations.
-53-
<PAGE>
Net Interest Income
Net interest income is the difference between interest income and
interest expense and represents CBOC's gross profit margin. For comparative
purposes, the income from tax-exempt securities and loans is adjusted to a
tax-equivalent basis. This adjustment, based on the statutory federal corporate
tax rate of 34 percent, causes tax exempt income and resultant yields to be
presented on a basis comparable with income and yields from fully taxable
earning assets. The net interest margin represents tax-equivalent net interest
income divided by average earning assets. It reflects the average effective rate
earned by CBOC on its average earning assets. Net interest income and the net
interest margin are influenced by fluctuations in market rates and changes in
both the volume and mix of average earning assets and the liabilities used to
fund those assets.
Table 1 presents average balances, related interest income and expense,
and average yield/cost rate for each of the last three years. Table 2 reflects
changes in interest income and interest expense resulting from changes in
average volume and changes due to rates.
-54-
<PAGE>
Table 1
<TABLE>
<CAPTION>
Average Balances, Interest Income and Expenses, and Average Yields and Rates
Years Ended December 31,
---------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- --------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $21,385 $1,421 6.64% $19,907 $1,338 6.72% $17,133 $1,123 6.55%
Federal funds sold 1,987 109 5.49 2,682 158 5.89 935 42 4.49
Loans (net) 46,067 4,746 10.30 40,065 4,117 10.28 37,646 3,594 9.55
Interest-bearing deposits
in other banks 855 53 6.20 786 47 5.98 1,008 64 6.35
--- -- --- -- ----- --
Total earning assets 70,294 6,329 9.00 63,440 5,660 8.92 56,722 4,823 8.50
Non-interest earning assets:
Cash and due from banks 2,344 2,101 2,221
Premises and equipment 1,462 1,322 1,411
Other assets 1,279 1,627 1,456
Less: allowance for loan
losses 673 674 630
--- --- ---
Total assets $74,706 $67,816 $61,180
======= ======= =======
Liabilities and Stockholders'
Equity
Interest-bearing deposits:
Money Market and NOW
accounts $10,491 $291 2.77% $10,108 $299 2.96% $9,931 $278 2.80%
Regular savings 3,631 101 2.78 3,520 105 2.98 3,876 117 3.02
Time deposits 35,542 2,105 5.92 34,133 2,006 5.88 28,588 1,412 4.94
Large denomination deposits 8,406 495 5.89 6,584 396 6.01 6,184 336 5.43
------ ----- ------ ----- ------ -----
Total interest-bearing
deposits 58,070 2,992 5.15 54,345 2,806 5.16 48,579 2,143 4.41
Short-term borrowings 7 - - - 112 4 3.57
Total interest-bearing
liabilities 58,077 2,992 5.15 54,345 2,806 5.16 48,691 2,147 4.41
Non-interest bearing liabilities:
Demand deposits 7,980 7,517 7,697
Other liabilities 360 363 468
---- ----- -----
Total liabilities 66,417 62,225 56,856
Stockholders' equity $8,289 $5,591 $4,324
------ ------ ------
Total liabilities and
stockholders' equity $74,706 $67,816 $61,180
======= ======= =======
Net interest income $3,337 $2,854 $2,676
====== ====== ======
Interest rate spread (2) 3.85% 3.76% 4.09%
Interest expense as a
percent of average earning assets 4.26% 4.42% 3.79%
Net interest margin (3) 4.75% 4.50% 4.72%
</TABLE>
- --------------------
(1) Income and yields are reported on a tax equivalent basis assuming a
federal tax rate of 34%.
(2) Interest spread is the average yield earned on earning assets,
calculated on a fully taxable equivalent basis, less the average rate
incurred on interest-bearing liabilities.
(3) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal income tax rate of 34%, expressed as a
percentage of average earning assets.
-55-
<PAGE>
Table 2
Volume and Rate Analysis
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------- ------------- -------------
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
------ ---- ----- ------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Earning Assets:
Securities $ 98 $ (15) $ 83 $ 186 $ 29 $ 215 $ 293 $ 41 $ 334
Federal funds sold (38) (11) (49) 103 13 116 (100) 46 (54)
Interest-bearing
deposits in other
banks 4 2 6 (13) (4) (17) (82) 5 (77)
Loans 618 11 629 249 274 523 247 30 277
--- -- --- --- --- --- --- -- ---
Total $ 683 $ (14) $ 669 $ 525 $ 312 $ 837 $ 358 $ 122 $ 480
------ ------ ------ ------ ------ ------ ------ ------ ------
Interest expense:
Savings and time
deposits $ 192 $ (6) $ 186 $ 298 $ 365 $ 663 $ 88 $ 1,626 $ 1,714
Federal funds
purchased - - - - (4) (4) 4 - 4
- - - - --- --- - - -
Total $ 192 $ (6) $ 186 $ 298 $ 361 $ 659 $ 92 $ 1,626 $ 1,718
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- --------------------
* 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.
Tax-equivalent income from earning assets increased 11.8% in 1996 to
$6.329 million from $5.660 million in 1995. The net interest margin increased to
4.75% in 1996 from 4.50% in 1995. This increase was due to an increase in CBOC's
yields on it's earning assets.
Net interest income and the net interest margin benefited in 1996 from
a 10.8% increase in average earning assets. The loan portfolio experienced
growth throughout 1996, and average loans increased 15.0% during the year.
Securities, on average, increased 7.4% in 1996.
Influenced by interest rate trends, competitive factors, and
management's efforts to stabilize CBOC's expenses associated with obtaining and
maintaining deposits, its cost of funds remained relatively unchanged in 1996 at
5.15% compared to 5.16% in 1995. By comparison, the yield on earning assets was
8 basis points higher in 1996 as tax-equivalent interest income increased 11.8%.
Future changes in interest rates may result in fluctuations in the net
interest margin and net interest income. The level of growth in the loan
portfolio and pricing competition for deposits will be two key influences on net
interest income in 1997.
Comparing 1995 with 1994, tax-equivalent net interest income increased
17.3%, and the net interest margin decreased to 4.50% in 1995 from 4.72% in
1994. This decrease was due to larger increase in the cost of interest bearing
liabilities compared to the increase in yields on earning assets experienced in
1995. Net interest income and the net interest margin benefited in 1995 from a
11.8% increased in average earning assets when compared to 1994. The loan
portfolio experienced growth in 1995, and average loans increased 6.4% over the
average in 1994. Securities also experienced growth in 1995, increasing 16.2%.
-56-
<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. This 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.
CBOC 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. CBOC
uses computer simulations to measure the effect on net interest income of
various interest rate scenarios. This modeling reflects interest rate changes
and the related impact on net income over specified time horizons.
The following table presents CBOC's interest sensitivity position at
December 31, 1996. This is a one-day position which continually is changing and
is not necessarily indicative of CBOC's position at any other time.
Table 3
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1996 (1)
------------------------------------------------------------------
Within 90 - 365 1 to 5 Over
90 days days Years 5 Years Total
------- ---- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans (net) $ 3,323 $ 24,062 $ 17,610 $ 3,485 $48,480
Investment securities, at amortized cost 250 -- 399 750 1,399
Securities available for sale, at fair value -- 221 2,962 14,810 17,993
Federal funds sold 4,418 -- -- -- 4,418
Interest-bearing deposits in other banks 500 95 480 95 1,170
-------- -------- -------- ------- -------
Total earning assets 8,491 24,378 21,451 19,140 73,460
-------- -------- -------- ------- -------
Interest Bearing Liabilities:
Deposits:
Demand 12,198 -- -- -- 12,198
Savings 3,791 -- -- -- 3,791
Time deposits, $100,000 and over 1,875 3,507 3,430 -- 8,812
Other time deposits 5,596 11,937 17,456 -- 34,989
-------- -------- -------- ------- -------
Total interest-bearing liabilities 23,460 15,444 20,886 -- 59,790
-------- -------- -------- ------- -------
Period Gap ($14,969) $ 8,934 $ 565 $19,140 $13,670
Cumulative Gap ($14,969) ($ 6,035) ($ 5,470) $13,670 --
Ratio of cumulative gap to total earning
assets (20.38%) (8.22%) (7.45%) 18.61% --
</TABLE>
- -----
(1) The repricing dates may differ from maturity dates for certain assets
due to prepayment assumptions.
-57-
<PAGE>
As of December 31, 1996 CBOC had a $14.969 million more in liabilities
than assets subject to repricing within three months or less and was, therefore,
in a liability-sensitive position. The cumulative gap at the end of one year was
a negative $6.035 million and, therefore in a liability-sensitive position. The
one year negative gap position reflects a deposit base weighted predominantly in
short term demand, savings, and short term certificates of deposits.
Approximately $38.9 million, or 65% of CBOC's interest-bearing liabilities,
matures or reprices within one year or less. A liability-sensitive institution's
net interest margin generally will be impacted favorably by declining interest
rates, while that of a asset sensitive institutions will be impacted favorably
by rising interest rates. To reduce the impact of shifts in prevailing rates, a
significant portion of CBOC's loan portfolio is either short-term or based upon
a floating rate.
Noninterest Income
Noninterest income includes service charges and other income from
services rendered by CBOC. In addition, other operating income includes gains
and losses realized from the sales and calls of investment securities and other
income items.
Noninterest income decreased slightly from $468,751 in 1995 to $468,345
in 1996. The relatively small decrease was attributable to the lack of growth in
products producing fee income, such as retail and commercial checking accounts
and rental of safe deposit boxes, as well as the decrease in net gains on sales
of securities, which decreased from $8,656 in 1995 to $2,978 in 1996.
Noninterest income increased from $433,541 in 1994 to $468,751 in
1995 or 8.1%. The increase was attributable to increases associated with service
charges on deposit accounts which increased from $287,592 in 1994 to $328,723 in
1995.
Table 4
Noninterest Income
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts $337 $329 $288
Other fees and commissions 128 131 141
---- ---- ----
Non-interest income 465 460 429
Securities gains, net 3 9 5
---- ---- ----
Total noninterest income $468 $469 $434
==== ==== ====
</TABLE>
Management intends to concentrate future efforts towards increasing
noninterest income. Due to the continued competitive pressure on net interest
margins, it necessitates that CBOC seek additional earnings from this category.
Noninterest Expense
Noninterest expense increased from $2.292 million in 1995 to $2.392
million 1996 or 4.4%. The category with the largest increase over 1995 was
salaries and employee benefits, which increased 17.1% in 1996. Factors involved
in this change include the addition of personnel as CBOC prepared for the
opening of an additional office in early 1997, and increases in the cost of
providing employee benefits. The cost of providing deposit insurance from the
Federal Deposit Insurance Corporation ("FDIC") reflected a significant decrease
from the $69,439 expenses incurred in 1995 to $2,000 in 1996. This decrease was
due to reductions in FDIC insurance premiums as a result of the
re-capitalization of the FDIC's insurance fund.
-58-
<PAGE>
Noninterest expenses increased from $2.074 million in 1994 to $2.292
million in 1995 or 10.5%. The category with the largest increase over 1994 was
other expenses, which increased $165,519 or 26.9% in 1995. Factors involved in
this change included a $120,000 provision for possible losses on other real
estate owned. There was no such provision in 1994. Salaries and employee
benefits increased from $1.053 million in 1994 to $1.121 million in 1995 or
6.5%. The addition of a 401(k) plan to the benefit package provided to
employees, which began on July 1, 1994, along with normal salary increases
contributed to the increases. The cost of providing deposit insurance from the
FDIC continued to be a significant portion of noninterest expense, although it
declined from $125,614 in 1994 to $69,439 in 1995 due to the reductions in FDIC
premiums as a result of the re-capitalization of the FDIC's insurance fund.
Noninterest expense increased to $2.074 million in 1994 from $1.917
million in 1993 or 8.2%. The category with the largest increase over 1993 was
salaries and employee benefits, which increased $96,791 or 10% in 1994. Factors
involved in this change were increased costs of providing health insurance
benefits to employees of CBOC, as well as the addition of a 401(k) plan to the
benefit package provided to employees.
Table 5
Noninterest Expenses
Years Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Salaries and employee benefits $1,313 $1,121 $1,052
Occupancy expenses 309 320 280
FDIC assessments 2 69 126
Other expenses 768 782 616
------ ------ ------
Total noninterest expenses $2,392 $2,292 $2,074
====== ====== ======
Income Taxes
Reported income tax expense for the year ended December 31, 1996 was
$290,000, a 52.6% increase from the $190,000 for the year end December 31, 1995.
The effective tax rate increased slightly to 25.9% in 1996 compared to 23.3% in
1995. The increase in income tax expense in 1996 was due to the increase in
taxable income. Reported income tax expense for the year ended December 31, 1994
was $155,000 or a 23.2% effective tax rate. Note 6 to the consolidated financial
statements provides (i) a reconciliation between the amount of income tax
expense computed using the federal statutory income tax rate and the Bank's
actual income tax expense and (ii) information regarding the principal items
giving rise to deferred taxes as of December 31, 1996 and 1995.
Loan Portfolio
CBOC's loan portfolio is comprised of commercial loans, real estate
loans, home equity loans, consumers loans, and other miscellaneous types of
credit. The primary markets in which CBOC makes loans are generally areas
contiguous to its branch locations in Chesterfield County. The philosophy is
consistent with CBOC's focus on providing community-based financial services.
As of December 31, 1996, the loan portfolio was $48.480 million, net of
unearned income, an increase from the prior year of 13.7% or $5.855 million.
This increase was due in part to the improved local economy as well as
management's increased efforts to grow the portfolio. Commercial lending
continues to be major portion of the portfolio, with loans from that category
totaling $35.110 million or 72.4% of the entire loan portfolio. During 1996
loans to individuals increased by $2.323 million as
-59-
<PAGE>
management attempted to diversify the portfolio and increase it's emphasis on
providing competitive consumer lending products.
Total loans increased 12.9% from year-end 1994 to year-end 1995. The
composition of CBOC's portfolio continued to shift to the commercial category,
increasing from $29.996 million at year-end 1994 to $32.143 million at year-end
1995, an increase of 7.1%. Real estate construction loans increased
significantly, from $1.741 million at year-end 1994 to $3.119 million at
year-end 1995, an increase of 79.1%. Management strategies to increase volumes
in this category as well as improved economy in the construction industry were
factors contributing to this increase. The installment category increased from
$3.993 million at year-end 1994 to $4.105 million at year-end 1995. A detailed
analysis of the loan portfolio for the most recent three years is included in
the following table:
Table 6
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------- ------------------------
% to Total % to % to Total
Loans Total Loans Loans
----- ----------- -----
Amount Amount Amount
------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Commercial $35,110 72.41% $32,162 75.42% $30,020 79.47%
Real estate construction 3,400 7.01% 3,119 7.31% 1,741 4.61%
Real estate mortgage:
Residential (1-4 family) 2,885 5.95% 2,702 6.34% 1,594 4.22%
Home equity lines 325 .67% 218 .51% 111 .29%
---- ---- ----
Real estate mortgage subtotal 3,210 6.62% 2,920 6.85% 1,705 4.51%
Real estate, total 6,610 13.63% 6,039 14.16% 3,446 9.12%
Loans to individuals:
Consumer 6,384 13.17% 4,106 9.63% 3,993 10.57%
Credit card 381 .79% 336 .79% 318 .84%
----- ----- -----
Loans to individuals subtotal 6,765 13.95% 4,442 10.42% 4,311 11.41%
Total loans 48,485 100.00% 42,643 100.00% 37,777 100.00%
Less: Unearned income 5 18 24
------- ------- -------
$48,480 $42,625 $37,753
======= ======= =======
</TABLE>
Consistent with its focus on providing community-based financial
services, CBOC generally does not make loans outside its principal market areas.
CBOC maintains a policy not to originate or purchase loans classified by
regulators as highly leveraged transactions or loans to foreign entities or
individuals.
CBOC's management expects continued loan demand in 1997 comparable to
the levels experienced in 1996. Stable interest rates coupled with increased
marketing efforts of CBOC's loan products and related services, lead management
to forecast increased loan balances in 1996.
CBOC's unfunded loan commitments (excluding unused home equity lines of
credit and credit card lines) were approximately $2,493,000 at December 31, 1996
compared to $2,604,000 at December 31, 1995.
Included in Table 7 is a maturity schedule of selected loans within the
portfolio. Actual maturities may differ from those shown in the table as loans
are refinanced prior to maturity. A significant portion of CBOC's loans have a
variable rate feature which allows CBOC to change rates as "prime rates" change,
thus reducing CBOC's interest rate risk.
-60-
<PAGE>
Table 7
Loan Maturity Schedule
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Maturing
-----------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $21,929 $11,111 $2,065 $35,105
Installment 361 5,732 291 6,384
Bank Card 381 - 381
Real Estate 4,714 767 1,129 6,610
----- ----- ----- -----
Total $27,385 $17,610 $ 3,485 $48,480
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates $15,386 $3,278
Variable interest rates 2,224 207
------ ----
Total $17,610 $3,485
======= ======
</TABLE>
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 those
risks are influenced by general economic trends as well as conditions affecting
individual borrowers, management's judgment of the allowance is necessarily
approximate and imprecise. 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.
CBOC is examined at different times by the Federal Reserve Bank of Richmond and
the State Corporation Commission's Bureau of Financial Institutions. The last
examination of CBOC was conducted by the Federal Reserve Bank of Richmond as of
December 31, 1996. As of December 31, 1996, the amount of CBOC's allowance for
loan losses exceeded the levels recommended by the regulatory agencies.
The provision for loan losses for the year ended December 31, 1996 was
$130,000, an increase of $80,000 over the previous year. Management charged
income for the provision deemed necessary based on its analysis of the loan
portfolio. After reviewing the increase in nonperforming loans and specifically
nonaccrual loans, management feels the current year provision increases the
allowance for loan losses to the appropriate level to cover potential losses.
CBOC had recoveries, net of loans charged off, of $9,000 during 1996, compared
to charge-offs, net of recoveries of $16,000 in 1995. These relatively
insignificant recoveries and charge-offs reflect management's belief that the
overall quality of CBOC's loan portfolio has improved.
-61-
<PAGE>
Table 8
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance, beginning of period $615 $581 $576
Loans charged off:
Commercial 64 111 5
Installment 33 31 265
Credit card 24 8 -
-- -- --
Total loans charged off 121 148 270
Recoveries of loans previously charged off:
Commercial 118 20 27
Installment 7 114 3
Credit card 5 - -
-- - --
Total recoveries 130 132 30
--- --- --
Net loans recovered (charged off) 9 (16) (240)
Provision for loan losses 130 50 245
Balance, end of period $754 $615 $581
==== ===== ====
Average total loans $46,067 $40,065 $37,646
Total loans (net of unearned income) $48,480 $42,625 $37,753
Selected Loan Loss Ratios:
Net charge-offs (recoveries) to average loans (0.02%) 0.04% 0.64%
Provisions for loan losses to average loans 0.28% 0.12% 0.65%
Provision for loan losses to net charge-offs - (312.50%) (102.08%)
Allowance for loan losses to year-end loans 1.56% 1.44% 1.54%
Loan loss coverage
</TABLE>
Total loans charged off, net of recoveries, when compared to 1994,
decreased significantly in 1995, a result of improved asset quality within the
loan portfolio. Net charge-offs decreased from $240,000 in 1994 to $16,000 in
1995. Also included in Table 8 is the ratio of net charge-offs to average loans
outstanding during the period. This ratio decreased to 0.04% for 1995 compared
to 0.64% in 1994. Management believes the ratio should remain at approximately
the same levels experienced in 1995 due to improved overall quality of CBOC's
loan portfolio.
The allowance for loan losses at year-end 1996 was $754,000 compared to
a year-end 1995 balance of $615,000. Management believes the allowance for loan
losses is adequate as of December 31, 1996.
Effective January 1, 1995, CBOC adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure). The effect of adopting this new
accounting standard was immaterial to the operating results of CBOC for the year
ended December 31, 1995.
Under the new accounting standard, a loan is considered to be impaired
when it is probable that CBOC will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
loan is not considered to be impaired if (a) there is an insignificant delay in
or shortfall in the amounts of payments, or (b) CBOC expects to collect all
amounts due, including interest accrued at the contractual interest rate for the
period of delay. CBOC does not aggregate loans for risk classification.
-62-
<PAGE>
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 this 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.
At December 31, 1996 and 1995, the recorded investment in loans which had been
identified as impaired loans, in accordance with SFAS No. 114, totaled $755,919
and $266,850 respectively. Of this amount at December 31, 1996, $110,852 related
to loans with no valuation allowance and $645,067 related to loans with a
corresponding valuation allowance of $73,300. At December 31, 1995 $30,000
related to loans with no valuation allowance and $236,850 related to loans with
a corresponding valuation allowance of $24,185.
Presented in Table 9 are details of the allocation of the allowance for
loan losses. The allocation for loan losses has remained relatively constant
over the past five years. Management has worked to improve the quality of the
existing loans and continues to utilize prudent lending criteria for all new
loans.
Table 9
Allocation for Allowance for Loan Losses in Dollars
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- ------------------------
% of Loans % of Loans % of Loans
in each in each in each
category category category
to total to total to total
loans loans loans
----- ----- -----
Amount Amount Amount
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $569 72.41% $460 75.42% $450 79.47%
Real Estate 30 13.63% 20 14.16% 15 9.12%
Installment 140 13.17% 128 9.63% 116 10.57%
Bank Card 15 .79% 7 .79% - 0.84%
---- ---- ----
Total allowance for loan losses $754 100.00% $615 100.00% $581 100.00%
==== ==== ====
</TABLE>
Nonperforming Assets
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, loans 90 days or more past due, and other real estate owned
were $1.580 million at December 31, 1996. An increase of $558,000 from one year
earlier. Total nonperforming assets were $1.022 million at December 31, 1995
compared to $1.025 million at December 31, 1994. Table 10 indicates that as of
December 31, 1996 CBOC had a total of $261,000 of loans that were 90 days past
due and still accruing interest and as of December 31, 1995 CBOC did not have
any loans in that category. Sales of foreclosed properties totaled $159,278 for
the year ended December 31, 1996, compared to $62,188 for the year ended
December 31, 1995. A significant portion of the total of nonperforming assets is
composed of one property totaling $497,321, which is property CBOC acquired in
1989 for future expansion and which has subsequently been placed on the market
for re-sale. Currently CBOC has the aforementioned property under a lease
agreement which will provide CBOC annual lease income of approximately $36,000.
Regulatory accounting guidelines require CBOC to report this asset as
nonperforming. The ratio of nonperforming assets to period-end loans and
foreclosed properties is also detailed within Table 10.
-63-
<PAGE>
Table 10
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $756 $267 $33
Loans past due 90 days accruing interest $261 - $185
Troubled debt restructuring - - -
----- ---- ---
Total nonperforming loans $1,017 $267 $218
Other real estate owned:
Foreclosed properties 135 331 293
Other nonperforming assets (1) 497 501 514
Less: allowance for losses (69) (77) -
----- ---- ---
Other real estate owned, net 563 755 807
----- ---- ---
Total nonperforming assets $1,580 $1,022 $1,025
====== ====== ======
Nonperforming assets to period-end
total loans and other real estate 3.22% 2.36% 2.65%
Foregone interest income on nonaccrual
loans $44 $20 $36
Interest income recorded on non-
accrual loans during the year - - -
</TABLE>
------------------
(1) This total represents one property acquired in 1989 for future
branch expansion, which in 1991 was placed on the market for
resale and has subsequently been reclassified as a
nonperforming asset.
The following table summarizes all nonperforming loans, by loan type as
of December 31, 1996:
Number
of Principal
Loans Balance
(Dollars in thousands)
Residential mortgage 2 $371
Installment loans 1 30
Bank card 1 1
Commercial loans 5 615
- -----
9 $1,017
-64-
<PAGE>
Nonaccrual loans increased from $267,000 as of year-end 1995 to
$756,000 as of year-end 1996. Loans are placed on nonaccrual status when
collection of interest and principal is doubtful, generally when loans become 90
days past due. There are three negative implications for earnings when a loan is
placed on nonaccrual status. All interest accrued but unpaid at the date the
loan is placed on nonaccrual status is either deducted from interest income or
written off as a loss. Second, accruals of interest are discontinued until it
becomes certain that both principal and interest can be repaid. Third, there may
be actual losses which necessitate additional provisions for loan losses charged
against earnings.
During 1996, approximately $43,900 in additional interest would have
been recorded if CBOC's nonaccrual loans had been current and performing in
accordance with their original terms.
CBOC closely monitors loans that are deemed to be potential problem
loans. Loans are viewed as potential problem loans when possible credit problems
of the borrowers or industry trends cause management to have doubts as to the
ability of such borrowers to comply with current repayment terms. Those loans
are subject to constant management attention, and their status is reviewed on a
regular basis.
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 CBOC and current
yields and other market conditions.
When securities are purchased, they are classified as investment
securities when management has the positive intent and CBOC 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 discounts.
Unrealized losses in the portfolio are not recognized unless management believes
that other than a temporary decline 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. 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.
In December 1995, upon issuance of implementation guidance for SFAS No.
115 by the Financial Accounting Standards Board, CBOC transferred investment
securities with an amortized cost of $12,845,033 and fair value of $12,932,782
to securities available for sale. Utilization of this one time reclassification
opportunity allows CBOC greater flexibility in meeting future liquidity and loan
funding needs.
The carrying value of investment securities amounted to $1.399 million
at December 31, 1996 compared to $1.398 million at December 31, 1995. The
comparison of book value to fair value is shown in note 3 of the notes to the
consolidated financial statements. Note 3 also provides an analysis of gross
unrealized gains and losses of investment securities. Securities available for
sale are used as part of CBOC's interest rate risk management strategy and may
be sold in response to changes in interest rates, changes in prepayment risk,
liquidity needs, the need to increase regulatory capital and other factors. The
fair value of securities available for sale totaled $17.993 million at December
31, 1996 compared to $21.055 million at December 31, 1995. The comparison of
fair value to book value is shown in Note 3 of the notes to the consolidated
financial statements. Note 3 also provides an analysis of gross unrealized gains
and losses of securities available for sale. Included in Table 11 are the
carrying values and fair values of investment securities and securities
available for sale as of December 31, 1996 and 1995.
-65-
<PAGE>
Table 11
Securities Portfolio
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Agencies
Mortgage backed securities - - $7,478 $7,263
Other Agencies $1,399 $1,321 4,229 4,222
Total Federal Agencies 1,399 1,321 11,707 11,485
State and political subdivision - - 5,550 5,602
Other securities - - 918 906
Total $1,399 $1,321 $18,175 $17,993
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
Federal Agencies
<S> <C> <C> <C> <C>
Mortgage backed securities - - $8,080 $7,997
Other Agencies $1,398 $1,295 4,054 4,123
Total Federal Agencies 1,398 1,295 12,134 12,120
State and political subdivision - - 7,196 7,325
Other securities - - 1,613 1,610
Total $1,398 $1,295 $20,943 $21,055
</TABLE>
Table 12 provides an analysis of maturities of investment securities
and securities available for sale at December 31, 1996 and 1995.
Table 12
Maturities of Investments
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Held to Maturity Available for Sale
--------------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less $250 $250 2.80% $221 $221 7.83%
After one year to five years 399 390 6.34% 2,973 2,962 6.14%
After five years to ten years 500 432 4.95% 8,180 8,109 6.38%
After ten years 250 249 9.38% 6,801 6,701 6.60%
--- --- ----- -----
Total $1,399 $1,321 5.75% $18,175 $17,993 6.44%
====== ====== ======= =======
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Held to Maturity Available for Sale
--------------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less - - - $215 $215 6.00%
After one year to five years $648 $615 3.64% $3,487 $3,493 6.14%
After five years to ten years 500 430 4.15% 7,968 8,076 6.84%
After ten years 250 250 7.10% 9,273 9,271 7.14%
--- --- ----- -----
Total $1,398 $1,295 4.44% $20,943 $21,055 6.85%
====== ====== ======= =======
</TABLE>
Deposits
Deposits provide funds for CBOC's investments in loans and securities,
and the interest paid for deposits must be managed carefully to control the cost
of funds. The table below presents a three year history of total deposits and
the rates paid on interest-bearing deposit accounts, beginning with the year
ended December 31, 1994.
Table 13
<TABLE>
<CAPTION>
Deposit Analysis
For the Years Ended December 31,
--------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Rate Rate Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing accounts $10,612 - $8,165 - $8,046 -
Interest-bearing liabilities:
Money market and NOW accounts 12,198 2.77% 10,453 2.96% 10,209 2.80%
Savings deposits 3,791 2.78% 3,622 2.98% 3,738 3.02%
Large denomination deposits 8,812 5.92% 8,196 5.88% 6,935 5.43%
Time Deposits 34,989 5.89% 34,633 6.01% 30,234 4.94%
Large denomination deposits - - -
Total interest-bearing accounts 59,790 5.15% 56,904 5.16% 51,116 4.41%
Total $70,402 $65,069 $59,162
======= ======== =======
</TABLE>
Table 14
Maturity of CDs $100,000 and Over
<TABLE>
<CAPTION>
Within Six to Percent of
Three Three to Twelve Total
Months Six Months Months Over One Year Total Deposits
------ ---------- ------ ------------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 $1,875 $1,703 $1,804 $3,430 $8,812 12.52%
</TABLE>
-67-
<PAGE>
Deposits at December 31, 1996 were $70.402 million, up $5.333 million
from December 31, 1995, or 8.2%. The growth in deposits was led by demand
deposits which increased to $10.612 million at December 31, 1996, up $2.447
million from year end 1995, or 30.0%. Interest-bearing transaction accounts also
increased, to a total of $12.198 million at December 31, 1996, for an increase
of $1.745 million from year-end December 31, 1995, an increase of 16.7%.
Deposits at December 31, 1995 were $65.069 million, a 10.0% increase
from 1994. Certificates of deposit of under $100,000 increased from $30.234
million at December 31, 1994 to $34.633 million at December 31, 1995, or an
increase of 14.5%. Similarly, Certificates of deposit of $100,000 and more
increased from $6.935 million at December 31, 1994 to $8.196 million at December
31, 1995, an increase of 18.1%.
Capital Resources
Capital represents funds, earned or obtained, over which financial
institutions can exercise great or longer control in comparison with deposits
and borrowed funds. The adequacy of CBOC's capital is reviewed by management on
an ongoing basis with reference to the size, composition, and quality of CBOC's
resources and consistency with regulatory requirements and industry standards.
Management seeks to maintain a capital structure that will support anticipated
asset growth and absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, recently adopted new capital guidelines
to supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the new guidelines categorize
assets and off-balance-sheet items into four risk-weighted categories. After the
transition period which ended December 31, 1992, 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. CBOC
had a ratio of risk-weighted assets to total capital of 16.17% on December 31,
1996 and a ratio of risk-weighted assets to Tier 1 capital of 11.47%. Both of
these exceed the fully phased-in capital requirements.
Table 15 labeled Analysis of Capital contains a three year summary,
beginning with 1994, of the breakdown between Tier 1 capital, Tier 2 capital,
risk-weighted assets, as well as the ratios discussed above.
-68-
<PAGE>
Table 15
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995 1994
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Tier 1 Capital
Common stock $3,966 $3,966 $2,671
Surplus 2,610 2,610 1,335
Retained earnings (deficit) 2,135 1,352 754
Less: Goodwill - - -
----- ----- -----
Total Tier 1 capital 8,711 7,928 4,760
Tier 2 Capital
Allowance for loan losses 730 615 581
Allowance for long-term debt - - -
----- ----- -----
Total Tier 2 capital 730 615 581
Total risk-based capital $9,441 $8,543 $5,341
====== ====== ======
Risk weighted assets $58,384 $50,782 $47,021
Capital Ratios:
Tier 1 risk-based capital ratio 14.92% 15.61% 10.12%
Total risk based capital ratio 16.17% 16.82% 11.36%
Tier 1 capital to average adjusted total assets 11.47% 11.60% 7.77%
</TABLE>
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 banks, federal funds sold,
investments and loans maturing within one year. CBOC's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of CBOC's management of liquid assets and the ability to
generate liquidity through liability funding, management believes that CBOC
maintains overall liquidity that is sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
Additional sources of liquidity available to CBOC include the capacity
to borrow additional funds when the need arises. CBOC has obtained federal funds
lines with three of its correspondents banks totaling approximately $7,000,000.
CBOC has no long term debt.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
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<PAGE>
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. In addition, a transfer of financial
assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in exchange. SFAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively.
Management does not expect the application of this pronouncement to have a
material effect on the financial statements of CBOC.
INDEPENDENT AUDITORS
The Board of Directors of CBOC selected the accounting firm of KPMG
Peat Marwick LLP, independent auditors, to be CBOC's independent auditors for
the year ended December 31, 1996. A representative of KPMG Peat Marwick LLP is
expected to be present at the CBOC 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 auditors for the year
ending December 31, 1997. Under CBOC's Certificate of Incorporation and Bylaws,
shareholders are not required to ratify or confirm the selection of independent
auditors made by the Board of Directors.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next annual
meeting, which will be held on or about May 27, 1998 must be received in writing
by the Secretary of CBOC no later than January 31, 1998, in order to be included
in the proxy materials for the next annual meeting.
OTHER BUSINESS
If any other matters come before the meeting, not referred to in the
enclosed Proxy, including matters incident to the conduct of the meeting, the
Proxies will vote the shares represented by the proxies in accordance with their
best judgment. Management is not aware of any other business to come before the
meeting as of the date of the preparation of this Proxy Statement.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED
General
CBI is a two-bank holding company headquartered in Petersburg,
Virginia, with total assets of $172.0 million at December 31, 1996. Organized in
1984, CBI through its two affiliate banks (the "Banks"), engages in a general
banking business and provides a broad spectrum of banking services to consumers
and businesses, including accepting demand, savings and time deposits; making
commercial, personal, installment, mortgage and construction loans; issuing
letters of credit; and providing bankcard and mortgage banking services. The
Banks do not provide discount brokerage, trust or investment services.
The Banks seek customers whose total financial requirements they can
serve. As a result, most of the Banks' business customers are small and
medium-sized entities. Principal markets served are the cities of Richmond,
Petersburg and Colonial Heights and the Counties of Prince George, Dinwiddie,
Chesterfield, Henrico, Goochland and Hanover. CBI's Banks operate a total of
nine offices.
CBI does not employ a centralized management approach. CBI permits the
Banks to operate as separately incorporated banks with their historical names
and boards of directors. CBI believes that this philosophy maintains community
loyalty. The Banks are responsible for their own compliance, data processing,
financial management, human resources, investment, accounting, marketing and
audit areas. There is no central credit administration and each Bank is
responsible for approving its own loans and investments.
The Banks
The Community Bank. The Community Bank was incorporated in 1973 under
the laws of Virginia. Its main banking and administrative office is in
Petersburg, Virginia and it has branch offices in Colonial Heights, Virginia and
in the Village of Chester in Chesterfield County, Virginia. Its primary service
area, consisting of the cities of Petersburg and Colonial Heights and
Chesterfield County had a population of approximately 287,000 at December 31,
1993. The Community Bank is insured by the FDIC and is supervised and examined
by the Federal Reserve and the SCC. It engages in a general commercial banking
business and offers a range of banking services that can be expected of a
banking organization of its size. Total assets of the Community Bank were $91.8
million at December 31, 1996.
Commerce Bank of Virginia. Commerce Bank of Virginia commenced business
as a commercial bank in 1986. Its main banking office is in Henrico County,
Virginia. It operates four branch offices in Richmond and the Counties of
Hanover and Goochland. Its primary service area had a population of
approximately 516,000 at December 31, 1993. Commerce Bank of Virginia is insured
by the FDIC and is supervised and examined by the Federal Reserve and the SCC.
It also engages in a general commercial banking business and offers a range of
banking services that can be expected of a banking organization its size. Its
total assets at December 31, 1996 were $80.645 million.
Competition
CBI encounters strong competition for its banking services within its
primary market area. There are 15 commercial banks actively engaged in business
in its market area, including approximately eight major statewide banking
organizations. Finance companies, mortgage companies, credit unions and savings
and loan associations also compete with the Banks for loans and deposits. In
addition, in some instances, the Banks must compete for deposits with money
market mutual funds that are marketed nationally. CBI's competitors have
substantially greater resources than CBI.
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<PAGE>
Employees
As of December 31, 1996, CBI and its subsidiaries had 68 full-time and
19 part-time employees. Management considers its relations with employees to be
excellent. No employees are represented by a union or any similar group, and CBI
has never experienced any strike or labor dispute.
Properties
The Community Bank. 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.
Commerce Bank of Virginia. Commerce Bank of Virginia'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,
Commerce Bank of Virginia currently operates four branch offices in Hanover
County, Goochland County (2) and in the City of Richmond. Branch designations
and addresses 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.
Commerce Bank of Virginia holds the real property at its principal
office pursuant to a ground lease and owns the improvements that have been
constructed thereon. The Hanover County branch is owned by the Atlee Station
Co., of which Sam T. Beale, Chairman of the Board of CBI and a Director of
Commerce Bank of Virginia, is the principal shareholder. See "Commerce Bank of
Virginia - Election of Directors; Management - Interest of Directors and
Officers in Certain Transactions." Commerce Bank of Virginia also leases the
space where the Riverfront Tower branch is located. Commerce Bank of Virginia
owns the property for its two other branches.
-72-
<PAGE>
The primary service area of Commerce Bank of Virginia consists of the
city of Richmond, Virginia and the counties of Goochland, Hanover, and Henrico.
-73-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
ELECTION OF DIRECTORS; MANAGEMENT
The CBI Board of Directors is divided into three classes. At the CBI
Meeting, six directors are expected to be elected to Class III to hold office
for a term of three years and one director is expected to be elected to Class
III to hold a office for a term of one year, 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.
-74-
<PAGE>
NOMINEES
Class III (to serve until the 2000 Annual Meeting of Shareholders,
except as indicated)
<TABLE>
<CAPTION>
Principal Occupation or
Employment During Last Director
Name Five Years Since Age
- ---- ---------- ----- ---
<S> <C> <C> <C>
Dr. B. Glenn Holden (1) Physician, Petersburg, Virginia; Director, The 1984 66
Community Bank, Petersburg, Virginia
Nathan S. Jones, 3rd President and Chief Executive Officer, 1984 51
Community Bankshares Incorporated, Petersburg,
Virginia; President and Chief Executive
Officer and Director, The Community Bank,
Petersburg, Virginia
Harold L. Vaughn President, Southern Hardware and Building 1984 67
Supply Corporation, Incorporated, Petersburg,
Virginia; Director of The Community Bank,
Petersburg, Virginia
W. Courtney Wells Owner, Wells Realty and Insurance, 1992 63
Chester, Virginia; Vice-Chairman of the Board
of Community Bankshares Inc., Petersburg,
Virginia; Director, The Community Bank,
Petersburg, Virginia
Richard C. Huffman President and Chief Executive 1996 56
Officer - Commerce Bank of Virginia
David E. Hudgins David E. Hudgins and Associates, 1996 63
Inc. - Insurance and Real Estate
Appraiser
Sam T. Beale Attorney - Beale, Balfour, Davidson 1996 58
& Etherington, P.C.; Chairman of the Board of
Community Bankshares Inc., Petersburg, Virginia
</TABLE>
- ---------------
(1) Dr. Holden is nominated to serve a one year term, in order that each
Class will have six members.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
NOMINEES SET FORTH ABOVE.
Directors Continuing in Office
There are eleven 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.
-75-
<PAGE>
Class II (to serve until the 1999 Annual Meeting of Shareholders)
<TABLE>
<CAPTION>
Principal Occupation or
Employment During Last Director
Name Five Years Since Age
- ---- ---------- ----- ---
<S> <C> <C> <C>
James A. Boyd Retired Orthodontist; Director, The Community 1984 67
Bank, Petersburg, Virginia
Dr. Phillip H. Kirkpatrick Retired, Department of Army; Civilian, Owner 1984 64
of Quality Now, Petersburg, Virginia;
Secretary, Community Bankshares, Inc.;
Director, The Community Bank, Petersburg,
Virginia
Louis C. Shell Attorney-at-Law, Firm of Shell, Johnson, 1993 71
Andrews, Baskervill, and Baskervill, P.C.,
Petersburg, Virginia; Director, The Community
Bank, Petersburg, Virginia
Barry M. Kornblau Sr. Vice President and Director - United 1996 46
Dominion Real Estate Investment Trust
James R. V. Daniel Consultant; formerly President and CEO - RP 1996 62
Industries, Inc.
James E. Bloom Communications Consultant 1996 53
Class I (to serve until the 1998 Annual Meeting of Shareholders)
Principal Occupation or
Employment During Last Director
Name Five Years Since Age
- ---- ---------- ----- ---
Lawrence F. DeSouza Retired, Life Insurance Corporation of 1984 67
Virginia, Chester, Virginia; Chairman and
Director, The Community Bank, Petersburg,
Virginia
Elinor B. Marshall Private investor, Petersburg, Virginia; 1992 60
Secretary and Director, The Community Bank,
Petersburg, Virginia
Alvin L. Sheffield Retired President, L.A. Sheffield Transfer and 1984 65
Storage Incorporated, Petersburg, Virginia;
Vice-Chairman and Director, The Community
Bank, Petersburg, Virginia
John D. Seal, III President and Chairman - Virginia 1996 57
Reproduction & Supply, Inc.
Lawrence B. Nuckols Real Estate Developer and Investor 1996 55
</TABLE>
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<PAGE>
Effect of Reorganization
The Reorganization Agreement provides that, if the Reorganization is
consummated, the CBI Board of Directors will be reduced from 18 members to 10
members and that the three classes of the CBI Board of Directors will have the
following members:
CLASS I CLASS II CLASS III
Dr. B. Glenn Holden Elinor B. Marshall Sam T. Beale
Nathan S. Jones, 3rd Richard C. Huffman David E. Hudgins
Jack W. Miller, Jr. Vernon E. LaPrade, Jr. H.E. Richeson
Alvin L. Sheffield
Board of Directors and Certain Committees
CBI. There were 8 meetings of the Board of Directors of CBI in 1996.
Each director attended greater than 75% of the total number of meetings of the
Board of Directors in 1996. CBI currently has no standing committees.
The Community Bank. There were 12 meetings of the Board of Directors
of The Community Bank in 1996.
The Board of Directors of The Community Bank has one standing
committee, the Audit Committee, consisting of Messrs. Boyd, Kirkpatrick and
Sheffield. The Audit Committee 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. Committee members serve at the pleasure of The Community
Bank's Board. There was one meeting of the Audit Committee of The Community Bank
in 1996. The Community Bank does not have a standing nominating or compensation
committee.
Each director attended greater than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by the Audit Committee, if applicable, in 1996.
Commerce Bank of Virginia. There were 12 meetings of the Board
of Directors of Commerce Bank of Virginia in 1996.
Commerce Bank of Virginia has a standing Audit Committee, consisting of
Messrs. Nuckols and Seal. The Audit Committee retains an independent auditor to
perform internal audits of Commerce Bank of Virginia's financial affairs on an
ongoing basis. The independent auditor reports to the committee, which, in turn,
reports to the Board of Directors. There were three meetings of the Audit
Committee of Commerce Bank of Virginia in 1996. In addition, Commerce Bank of
Virginia has a standing Compensation Committee, consisting of Messrs. Bloom,
Daniel and Kornblau. The Compensation Committee reviews salaries and benefits of
all officers and employees. Commerce Bank of Virginia does not have a standing
nominating committee.
Each director attended greater than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by the committees on which he served in 1996.
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<PAGE>
Executive Officers
Set forth below is certain information with respect to each executive
officer of CBI. Messrs. Jones and. Huffman have held their present positions for
more than five years.
<TABLE>
<CAPTION>
Name and Position Age Experience
<S> <C> <C>
Nathan S. Jones, 3rd 51 President and CEO of CBI, 1984 to present;
President and Chief Executive Officer of CBI and The President of The Community Bank, 1976 to
Community Bank present
Richard C. Huffman 57 President and CEO, Commerce Bank of
President and Chief Executive Officer Virginia, 1986 to present
of Commerce Bank of Virginia
</TABLE>
Compensation
Directors of CBI receive no compensation from CBI. However, at present,
all directors of CBI also are directors of either The Community Bank or Commerce
Bank of Virginia, which do compensate their 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 1996 for attendance at meetings were $60,525.
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, 1996, each director received $4,038 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.
As compensation for their services, each member of the Board of
Directors of Commerce Bank of Virginia receives a monthly fee of $150 and $500
for each meeting of the Board attended. In addition, directors receive $125 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 1996, Directors of
Commerce Bank of Virginia received $38,875 in the aggregate as compensation for
their services as directors.
Commerce Bank of Virginia also maintains a Deferred Compensation Plan
for the benefit of its Directors. Contributions amounted to approximately
$23,700, $38,900 and $24,000 for the years ended December 31, 1996, 1995 and
1994, respectively. The Deferred Compensation Plan provides each director with
an annual benefit payment upon attaining 70 years of age. In addition, benefit
payments are available upon early retirement, termination and death as defined
by the Plan.
Security Ownership of Certain Beneficial Owners and Management
The table below presents certain information as of April 30, 1997
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
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<PAGE>
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.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) Percent of Class (2)
------------------------ ----------------------- --------------------
Directors and Executive Officers
- --------------------------------
James A. Boyd 5,856 *
Lawrence F. DeSouza 17,940 *
B. Glenn Holden 30,100 1.58
Nathan S. Jones, 3rd 128,100 6.67
P.O. Box 2166
Petersburg, VA 23804
Phillip H. Kirkpatrick 23,718 1.24
Elinor B. Marshall 33,828 1.77
Alvin L. Sheffield 54,540 2.85
Louis C. Shell 13,612 *
Harold L. Vaughn 27,918 1.46
W. Courtney Wells 16,000 *
Sam T. Beale 83,775 4.40
James E. Bloom 12,203 *
James R. V. Daniel 15,588 *
David E. Hudgins 29,679 1.56
Richard C. Huffman 48,708 2.56
Barry M. Kornblau 29,884 1.57
Lawrence B. Nuckols 47,206 2.48
John D. Seal 18,422 *
All executive officers and
directors as a group (18 persons) 637,077 31.84
Others
- ------
Community Bankshares Incorporated 177,806 9.35
Employee Stock Ownership Plan
P.O. Box 2166
Petersburg, VA 23804
- --------------------
* Indicates that holdings amount to less than 1% of the issued and
outstanding CBI Common Stock.
(1) 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 1,901,080 shares of Common Stock issued and outstanding as
of April 30, 1997 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, 1996, the
last date for which information is available to CBI, 177,806 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, and to Richard C. Huffman,
President and Chief Executive Officer of Commerce Bank of Virginia for the three
fiscal years ended December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Number of
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary Bonus Compensation Options (4)(5)
------------------ ---- ------ ----- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Nathan S. Jones, 3rd 1996 $139,807(1) $27,846(2) (3) -0- $142,180
President and Chief 1995 $129,513(1) $27,846(2) (3) -0- $ 23,531
Executive Officer 1994 $117,341(1) $27,846(2) (3) -0- $ 19,070
Richard C. Huffman 1996 $100,000 $32,800 (3) -0- $ 18,663
President/CEO of Commerce 1995 $ 95,000 $14,000 (3) -0- $ 17,650
Bank of Virginia 1994 $ 85,000 $10,000 (3) -0- $ 6,537
</TABLE>
- --------------------
(1) Includes directors' fees of $10,348, $10,348 and $9,123 in 1996, 1995,
and 1994, respectively.
(2) Amounts represent cash incentive payments based on an increase in
return on assets pursuant to the Executive Incentive Compensation Plan
adopted in July 1993.
(3) The value of perquisites and other personal benefits did not exceed
the lesser of $50,000 or ten percent of total annual salary and bonus.
(4) For Mr. Jones includes: (i) $26,000, $14,000 and $11,995, in
contributions by The Community Bank to the KSOP, and (ii) $1,180,
$1,059 and $673 paid by The Community Bank on Mr. Jones' behalf for
term life insurance; in each of 1996, 1995, 1994, respectively. Also
includes $8,472 and $6,402 accrued in connection with an Executive
Supplemental Income Plan in 1995 and 1994, respectively, and $115,000
paid in 1996 in consideration of the termination of such Plan.
(5) For Mr. Huffman includes Commerce Bank of Virginia's contribution for
the benefit of Mr. Huffman under Commerce Bank of Virginia's employee
stock ownership plan ($6,250, $5,005 and $4,719 in 1996, 1995 and 1994,
respectively) and under Commerce Bank of Virginia's employee 401(k)
plan ($2,500, $1,818 and $1,818 in 1996, 1995 and 1994, respectively).
For Mr. Huffman includes: $10,827 and $9,913 accrued in connection with
an executive supplemental retirement agreement for 1996 and 1995,
respectively.
Supplemental Retirement Agreement
Commerce Bank of Virginia and Mr. Huffman are parties to an Agreement
dated December 23, 1994, which provides benefits in the event of retirement or
death prior to retirement. Under the Agreement, Mr. Huffman will be entitled to
an annual benefit of $22,396 for a period of 10 years if he retires after
attaining age 65. All benefits under the Agreement are conditioned upon Mr.
Huffman's continuous employment by Commerce Bank of Virginia.
During 1995, Commerce Bank of Virginia adopted a Deferred Compensation
Plan for the benefit of certain of its officers, including Mr. Huffman.
Contributions of approximately $29,200 and $28,000
-80-
<PAGE>
were made to the Plan during the years ended December 31, 1996 and 1995,
respectively. This Deferred Compensation Plan provides each covered officer with
an annual benefit payment upon retirement. In addition, benefit payments are
available upon death or early termination as defined by the Plan.
Employment Contracts
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, 1997, the cash amount payable to Mr. Jones if his employment
terminated after a change of control would be $465,000. 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.
CBI 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 of Commerce Bank of
Virginia. 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 of Commerce Bank of Virginia. The contract
will continue to renew for successive terms of one year each if it is not
expressly terminated by Mr. Huffman or Commerce Bank of Virginia. If, during the
term of the contract, Commerce Bank of Virginia terminates Mr. Huffman's
employment without cause, it 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 CBI. 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, 1997, the
cash amount payable to Mr. Huffman if his employment terminated after a change
of control would be $397,072. Mr. Huffman and CBI have agreed that the
Reorganization will not be considered a change of control for purposes of
interpreting or applying his employment contract.
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<PAGE>
Option Exercises and Holdings
All options held by the named executive officers at December 31, 1996
were exercisable. The following tables sets forth information with respect to
exercised and unexercised options held by such officers as of the end of the
fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares
Underlying Value of Unexercised
Shares Unexercised In-The-Money Options
Acquired on Value Options at
Name Exercise (#) Realized ($) December 31, 1996 December 31, 1996 (2)
---- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Nathan S. Jones, 3rd 10,000 $60,000 20,000 $ 230,000
Richard C. Huffman 15,448 (1) $106,370 -0- $ 0
</TABLE>
- --------------------
(1) This number reflects the exercise by Mr. Huffman of options covering
11,000 shares of Commerce Bank of Virginia Common Stock on April 10,
1996. On July 1, 1996, the effective date of a Share Exchange between
CBI and Commerce Bank of Virginia, each outstanding share of Commerce
Bank of Virginia Common Stock was exchanged for 1.4044 shares of CBI
Common Stock.
(2) 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 CBI Common Stock at December 31, 1996 ($17.75) and the per
share exercise price of the options. Fair market value reflects
published prices on the OTC Bulletin Board December 31, 1996.
Interest of Management in Certain Transactions
Certain directors and officers and their associates were customers of
and had transactions with CBI and its subsidiaries during 1996, and up to the
present time. All loans and commitments to loan by CBI and its subsidiaries 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 or present other
unfavorable features. CBI 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 its subsidiaries and their
associates was $6.208 million (33% of Shareholders' Equity) on December 31,
1996.
In addition, the real property at the location of Commerce Bank of
Virginia's Hanover County branch is owned by the Atlee Station Co., of which Sam
T. Beale, a Director of CBI, is the principal shareholder. This lease has a term
of ten years and expires on December 31, 1998, at which time the lease is
automatically renewed with renegotiated rent terms. 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. Commerce Bank of Virginia owns the
improvements to the real property at that location.
Section 16 Beneficial Ownership Reporting Compliance
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.
-82-
<PAGE>
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, 1996.
-83-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of Community Bankshares Incorporated. This discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements.
Overview
Net income for the year ended December 31, 1996 of $3.056 million was
an increase of 29.8% over the year ended December 31, 1995. The increase in net
income during 1996 reflects primarily an increase in the lending volume and an
improvement in the rates earned on interest-earning assets. Earnings per share
for the year ended December 31, 1996 were $1.55, up from $1.27 for the year
ended December 31, 1995. CBI has shown an increase of 162% in net income over
the five years ended December 31, 1996, from $1.166 million in 1992 to $3.056
million during 1996. The increase in income over the past five years is
attributable to the 49% growth in the loan portfolio. As total assets grew from
$110.440 million in 1992 to $172.014 million as of December 31, 1996, net loans
grew from $77.144 million to $115.135 million.
CBI increased net income 31.0% to $2.355 million during 1995 over 1994.
This increase was attributable to an increase in the net interest yield and a
decrease in the provision for loan losses. Net income during 1994 of $1.798
million was a 31.8% increase over 1993. On a per share basis, net income was
$1.00 in 1994.
CBI's return on average equity and average assets has increased over
the past five years. The return on average equity was 17.24% for the year ended
December 31, 1996. The return on average equity was 16.38% in 1995, compared to
14.85% for 1994. The return on average assets amounted to 1.86%, 1.53% and 1.31%
for the three years ended December 31, 1996, 1995, and 1994, respectively.
Net Interest Income
Net interest income represents the principal source of earnings for
CBI. Net interest income equals the amount by which interest income exceeds
interest expense. Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.
Net interest income increased 12.6% to $8.537 million in 1996. This
increase was attributable to a 7.9% growth in average earning assets. The
increase in interest-earning assets was due primarily to increases in the
securities and lending volume. During the three years ended December 31, 1996,
CBI has had a consistent increase in loan demand. It is management's belief that
the increase in the lending volume is a result of competitive pricing and, most
importantly, responsiveness to loan demands. The ability to make a timely loan
decision is an operating characteristic that often allows CBI the opportunity to
meet the needs of borrowers before its competitors. Rates earned on average
interest earning assets were 9.14% during 1996 as compared to 8.96% one year
earlier. This return was a result of increased rates earned on loans. CBI is
competitive with rates and origination fees charged on loans. However, since
76.3% of CBI's loan portfolio may be repriced in one year or less, CBI may
respond quickly to market changes in rates.
Interest expense for the year ended December 31, 1996 increased
slightly, by 5.1%, to $5.355 million from $5.097 million for the year ended
December 31, 1995. This increase was due to an increase of 6.07% in average
interest bearing liabilities from $114.247 million during 1995 to $121.181
million in
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<PAGE>
1996. The interest rate paid on interest-bearing liabilities remained fairly
constant for the year, at 4.42% for 1996 compared to 4.46% in 1995.
Net interest income was $7.585 million for the year ended December 31,
1995, an increase of 16.9% over the $6.489 million reported in 1994. This
increase was partially due to the 13.1% increase in interest-earning assets.
Again, the increase in the lending volume was the most significant portion of
the increase in average interest earning assets with a 10.26% increase. Also
contributing to the rise in net interest income was the 9.54% increase in the
yield on interest-earning assets, which increased from 8.18% to 8.96%. During
1995 interest expense increased by $1.37 million to $5.097 million. This
increase was a result of an increase in rates and deposit volume. As the rates
declined during 1994, many depositors elected not to invest in time deposits and
opted for short-term interest-bearing demand deposits which paid a lower rate.
This trend reversed itself in 1995 as average certificates of deposit and large
denomination deposits increased 33.77% or $12.034 million, at the same time
demand interest-bearing liabilities increased 5.9% or $2.124 million. This
change in the mix of deposits caused CBI to increase its cost of funds for 1995
to 4.46% from 3.62% for 1994.
Interest income increased 14.83% or $1.324 million from $8.926 million
in 1993 to $10.220 million during 1994. This increase was primarily due to an
increase in average loans of 14.03% or $11.983 million to $97.419 million during
1994. This increase in loan volume took place at a time when average rates on
loans increased only slightly to 8.84% for 1994 from 8.72% during 1993. Interest
expense increased 5.93%, from $3.523 million in 1993 to $3.71 million in 1994.
The net interest yield for 1994 was 5.18%, up slightly from 4.80% during 1993.
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.
-85-
<PAGE>
Average Balance Sheets, Interest Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance(6) Interest Rate (1) Balance(6) Interest Rate Balance(6) Interest Rate (1)
---------- -------- -------- ---------- -------- ----- ---------- -------- --------
(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 34,277 $ 2,367 6.92% $ 28,645 $ 1,767 6.17% $ 24,572 $ 1,487 6.05%
Federal funds sold 4,810 266 5.53% 5,746 376 6.54% 3,369 148 4.39%
Loans (5) 113,963 11,349 9.96% 107,413 10,564 9.83% 97,419 8,615 8.84%
-------- ------- ----- -------- ------- ----- ------- ------ -----
Total interest-earning
assets $ 153,000 $ 13,982 9.14% $ 141,804 $ 12,707 8.96% $ 125,360 $ 10,250 8.18%
Noninterest-earning
assets:
Cash and due from banks 6,874 8,039 7,969
Premises and equipment 2,756 2,691 2,668
Other assets 2,787 2,280 2,211
Less allowance for loan
losses (1,251) (1,216) (1,033)
Total 164,166 153,598 137,175
======== ======== =======
Liabilities and
Stockholders'
Equity
Interest-bearing
liabilities:
Money market and NOW
accounts $ 40,039 $ 1,245 3.11% $ 38,007 $ 1,322 3.48% $ 35,883 $ 1,117 3.11%
Savings deposits 25,765 956 3.71% 28,049 918 3.27% 30,997 872 2.81%
Time deposits 45,409 2,580 5.68% 37,189 2,266 6.09% 28,511 1,449 5.08%
Large denomination
deposits 9,351 548 5.86% 10,481 575 5.49% 7,125 285 4.00%
Federal funds purchased 617 26 4.21% 521 16 3.07% 592 9 1.52%
---- --- ----- ---- --- ----- ---- -- -----
$ 121,181 $ 5,355 4.42% $ 114,247 $ 5,097 4.46% $ 103,108 $ 3,732 3.62%
-------- -------- --------
Noninterest-bearing
liabilities:
Demand deposits 24,307 23,845 21,154
Other liabilities 956 1,130 803
---- ------ ----
$ 146,444 $ 139,222 $ 125,065
Stockholders' Equity 17,722 14,376 12,110
------- ------- -------
Total $ 164,166 $ 153,598 $ 137,175
========= ========= =========
Net interest earnings $ 8,627 $ 7,610 $ 6,518
Less tax equivalent
adjustment 90 25 29
-- -- --
Net Interest income/
yield (2) (3) $ 8,537 5.58% $ 7,585 5.35% $ 6,489 5.18%
======== ===== ======== ===== ======== =====
Interest Spread (4) 4.72% 4.50% 4.56%
</TABLE>
- ---------------
(1) Computed on an annualized fully taxable equivalent basis.
(2) Net interest income is the difference between income from earning
assets and interest expense.
(3) Net interest yield is net interest income divided by total average
earning assets.
(4) Interest spread is the difference between the average interest rate
received on earning assets and the average interest rate paid for
interest-bearing liabilities.
(5) Average loan balances include non-accrual loans.
(6) Average balances are computed on monthly balances and management
believes such balances are representative of the operations of the
Bank.
-86-
<PAGE>
Interest income and interest expense are affected by changes in both
average interest rates and average volumes of interest-earning assets and
interest-bearing liabilities. The following table analyzes changes in net
interest income attributable to changes in the volume of interest-bearing assets
and liabilities compared to changes in interest rates. Nonaccruing loans are
included in average loans outstanding. The change in interest due to both rate
and volume has been allocated to change due to volume and change due to rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
Volume and Rate Analysis
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------- ------------- -------------
Increase (decrease) Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in: Due to changes in:
------------------ ------------------ ------------------
Volume Rate Total(1) Volume Rate Total(1) Volume Rate Total(1)
------ ---- -------- ------ ---- -------- ------ ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Investment securities,
taxable $ 369 $ 231 $ 600 $ 250 $ 30 $ 280 $ 355 $ (88) $ 267
Federal funds sold (56) (54) (110) 135 93 228 (188) 81 (107)
Loans 644 141 785 933 1,016 1,949 1,060 104 1,164
--- --- --- --- ----- ----- ----- --- -----
$ 957 $ 318 $ 1,275 $ 1,318 $ 1,139 $ 2,457 $ 1,227 $ 97 $ 1,324
-------- -------- ------- ------- ------- -------- -------- -------- --------
Interest expense:
Savings and time
deposits $ 305 $ (57) $ 248 $ 433 $ 925 $ 1,358 $ 355 $ (154) $ 201
Federal funds
purchased 3 7 10 (1) 8 7 8 - 8
- - -- --- - - - - -
$ 308 $ (50) $ 258 $ 432 $ 933 $ 1,365 $ 355 $ (154) $ 209
-------- -------- -------- -------- -------- -------- ------ -------- --------
Net interest earnings $ 649 $ 368 $ 1,017 $ 886 $ 206 $ 1,092 $ 864 $ 251 $ 1,115
======== ======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------
(1) Computed on an annualized fully taxable equivalent basis.
Interest Sensitivity
An important element of both earnings performance and the maintenance
of sufficient liquidity is management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest-sensitive assets and
interest-sensitive liabilities in a specific time interval. The gap can be
managed by repricing assets or liabilities, by replacing an asset or liability
at maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
interval helps to hedge the risk and minimize the impact on net interest income
in periods of rising or falling interest rates.
The objective of interest sensitivity management is to provide
flexibility in controlling the response of both rate-sensitive assets and
liabilities to wide and frequent fluctuations in market rates of interest so
that the effect of such swings on net interest income is minimized. The most
important part of this objective is to maximize earnings while keeping risks
within defined limits. To reduce the impact of changing interest rates as much
as possible, CBI attempts to keep a large portion of its interest-sensitive
assets and liabilities in generally shorter maturities, usually one year or
less. This allows CBI the opportunity to adjust interest rates as needed to
react to the loan and deposit market conditions.
-87-
<PAGE>
Management evaluates interest sensitivity through the use of a static
gap model on a monthly basis and then formulates strategies regarding asset
generation and pricing, funding sources and pricing, and off-balance sheet
commitments in order to decrease sensitivity risk. These strategies are based on
management's outlook regarding interest rate movements, the state of the
regional and national economies and other financial and business risk factors.
In addition, CBI establishes prices for deposits and loans based on local market
conditions and manages its securities portfolio with policies set by itself.
The following tables present CBI's Interest Rate Sensitivity Analysis
as of December 31, 1996:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1996
----------------------------------------------------------
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 $ 5,392 $ -- $ -- $ -- $ 5,392
Investment securities 529 1,851 6,260 27,600 36,240
Loans 48,591 36,641 30,311 841 116,384
-------- -------- -------- ------- --------
Total interest earning-assets $ 54,512 $ 38,492 $ 36,571 $28,441 $158,016
- ----------------------------- -------- -------- -------- ------- --------
Interest-Bearing Liabilities:
Deposits:
Demand $ 54,693 $ -- $ -- $ -- $ 54,693
Savings 27,478 -- -- -- 27,478
Time deposits, $100,000 and over 8,501 14,178 11,332 -- 34,011
Other time deposits 8,583 9,179 5,056 -- 22,818
-------- -------- -------- ------- --------
Total interest-bearing liabilities $ 99,255 $ 23,357 $ 16,388 $ -- $139,000
- ---------------------------------- -------- -------- -------- ------- --------
Period gap $(44,743) $ 15,135 $ 20,183 $28,441 $ 19,016
========= ======== ======== ======= ========
Cumulative gap $(44,743) $(29,608) $ (9,425) $19,016
========= ========= ========= =======
Ratio cumulative gap to total
interest-earning assets (28.32%) (18.74%) (5.96%) 12.03%
======== ======== ======= ======
</TABLE>
The December 31, 1996 results of the rate sensitivity analysis show CBI
had $44.743 million more in liabilities than assets subject to repricing within
three months or less and was, therefore, in a liability-sensitive position. The
cumulative gap at the end of one year was a negative $29.608 million, and,
therefore in a liability-sensitive position. The one year negative gap position
reflects a loan portfolio that is weighted predominantly in shorter maturities.
Approximately $88.9 million, or 76.3% of the total loan portfolio, matures or
reprices within one year or less. 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.
-88-
<PAGE>
Noninterest Income
For the year ended December 31, 1996 noninterest income increased by
$79,000, or 6.96% to $1.214 million. This increase resulted primarily from a
gain on the sale of other real estate in the amount of approximately $55,000.
Noninterest income for the year ended December 31, 1995 was $1.135
million, a decrease of $96,000 or 7.8% from 1994. This decline is partially
attributable to a 5.0% or $50,375 decrease in service charges. CBI marketed
"Free Checking" in order to increase deposits, to increase name recognition in
the community, and at the same time, reduce the cost of funds.
Noninterest income for 1994 increased 9.67% or $108,458 from 1993.
Service charges, commissions and fees, the largest single item of noninterest
income, increased by $32,778 for 1994, up 3.3% from 1993.
Noninterest Expense
Noninterest expense of $4.872 million for the year ended December 31,
1996 was an increase of 7.7%. Salaries and employee benefits, the largest single
component of noninterest expense, had an increase of 8.2% for the year. Due to
regulatory rate reductions, FDIC assessments declined by 97% or $130,857, from
the previous year. In addition, general insurance decreased by $19,633 due to a
1995 change to a new carrier on the general liability policy that offered more
competitive rates. Other taxes increased 18.63% or $38,676.
For 1995, noninterest expense decreased by $70,532 or 1.48% over 1994.
Salaries and employee benefits increased by $157,610 or 6.45% due to normal wage
increases and increased costs associated with various benefit plans sponsored by
CBI. Furniture and equipment expense decreased by $111,296 or 24.86% partially
due to the closing of one branch office. General insurance expenses declined by
$48,802 or 46.64% due to a new carrier on the general liability policy that
offered more competitive rates and an increase in the cash surrender value in
excess of premiums paid on the lives of executives. Professional fees increased
$99,444 or 96.7% largely associated with merger costs. Due to regulatory rate
reductions, FDIC assessments declined by $133,176 or 46.69%.
During the year ended December 1994, noninterest expenses increased by
11.56% or $494,203 from $4.275 million during 1993 to $4.770 million in 1994.
The majority of the increase was due to an increase in salaries and employee
benefits of 14.37% or $316,279 from $2.200 million to $2.517 million. This
increase was largely associated with the continuation of various incentive and
bonus plans adopted by CBI during prior years. Furniture and equipment expenses
increased by 16.84% or $62,706. Almost 100% of this increase was attributable to
increased depreciation due to the acquisition of operations equipment.
Income Taxes
The provision for income taxes for the year ended December 31, 1996 was
$1,422,297 a 16.2% increase from the previous year. The increase in the
provision was due to the increase in taxable income.
The income tax provision for the year ended December 31, 1995 was
$1,223,892, up from $885,619 for the year ended December 31, 1994.
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
-89-
<PAGE>
credit. The primary markets in which CBI makes loans are generally in areas
contiguous to its branch locations. The philosophy is consistent with CBI's
focus on providing community-based financial services.
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
% to Total % to Total % to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 15,830 13.49% $ 14,500 13.21% $ 12,022 11.71%
Real estate construction 5,584 4.76% 3,745 3.41% 4,280 4.17%
Real estate mortgage:
Residential (1-4 family) 43,366 36.97% 43,439 39.57% 40,082 39.04%
Multifamily 3,667 3.13% 1,563 1.41% 224 0.22%
Nonfarm,
nonresidential 40,511 34.53% 36,194 32.97% 33,606 32.73%
------- ------ ------- ------ ------- ------
Real estate mortgage,
subtotal 87,543 74.63% 81,196 73.95% 73,912 71.99%
------- ------ ------- ------ ------- ------
Real estate, total 93,126 79.39% 84,941 77.36% 78,192 76.16%
------- ------ ------- ------ ------- ------
Consumer installment 8,355 7.12% 10,348 9.43% 12,455 12.13%
------ ----- ------- ----- ------- ------
Total loans 117,311 100.00% 109,789 100.00% 102,669 100.00%
======= ======= =======
Less unearned income 932 1,149 1,280
--- ------ -----
$ 116,381 $ 108,640 $ 101,389
========== ========== =========
</TABLE>
-90-
<PAGE>
The following table shows the maturity of loans outstanding as of
December 31, 1996. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates. Loans are classified
based upon the period in which the payments are due.
Loan Maturity Schedule
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Maturing
----------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 11,337 $ 4,475 $ 18 $ 15,830
Installment 2,653 5,170 202 8,025
Real estate 52,763 31,098 8,665 92,526
------- ------- ------ -------
Total $ 66,753 $ 40,743 $ 8,885 $ 116,381
========== ========= ========= ===========
Loans maturing after one year with:
Fixed interest rates $ 27,438 $ 74
Variable interest rates 13,305 8,811
------- ------
Total $ 40,743 $ 8,885
========= =========
</TABLE>
As of December 31, 1996, the loan portfolio was $116.381 million, net
of unearned income, an increase from the prior year of 7.1% or $7.741 million.
Real estate lending continues to be the growth of the portfolio with loans
secured by real estate comprising 79.39% of total loans.
Loans, net of unearned income, were $108.640 million at December 31,
1995, up $7.3 million or 7.1% from $101.389 million at December 31, 1994. The
growth in real estate loans, which increased $6.75 million or 8.63%, accounted
for 92% of the growth.
Loans secured by real estate comprise 77.36% of total loans at
December 31, 1995 and 76.16% at December 31, 1994.
CBI's unfunded loan commitments amounted to $21.911 million as of
December 31, 1996, up from $18.122 million at December 31, 1995. This increase
is attributable to customer loan demands at a specific point in time. Fixed rate
commitments were $4.851 million and $4.438 million as of December 31, 1996 and
1995, respectively. The average rates charged on the fixed rate commitments were
8.5% - 10.5% for the years then ended.
Analysis of the Allowance for Loan Losses
The allowance for loan losses is an estimate of an amount adequate to
provide for potential losses in the loan portfolio. The level of loan losses is
affected by general economic trends, as well as conditions affecting individual
borrowers. The allowance is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer companies identified by regulatory agencies.
The provision for loan losses for the year ended December 31, 1996 was
$401,500, a decrease of $40,500 over the previous year. Management charged
income for the provision deemed necessary based on its analysis of the loan
portfolio. After reviewing the nonperforming loans and specifically nonaccrual
loans, management believes the current year provision increases the allowance
for loan losses to the desired level to cover potential losses. CBI had
charge-offs, net of recoveries, of $391,000 during 1996, an increase of $85,000
over the previous year. This increase was the result of normal changes in the
loan
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<PAGE>
portfolio and local economic conditions. Management does not anticipate any
abnormal changes in the delinquency rates or charge-offs and recoveries in
connection with its normal loan operations procedures. It is management's
opinion that the allowance for loan losses is adequate to absorb any future
losses that may occur.
The provision for loan losses totaled $442,000 for the year ended
December 31, 1995, an increase of $176,162 from the previous year. CBI had
charge-offs, net of recoveries, of $306,000 during 1995, an increase of $201,000
over the previous year. This increase was primarily the result of a complete
charge off of one real estate loan in the amount of $103,000 and partial
charge-offs on three additional real estate loans in the amount of $85,000.
After consideration of these factors, management recorded a provision for loan
losses that would provide coverage for potential losses.
The provision in 1994 increased to $266,000 as compared to $195,000 in
1993. This increase of $71,000 reflected management's review of the loan
portfolio and the amount needed to maintain the reserve at acceptable levels to
cover potential losses.
As of December 31, 1996, the allowance for loan losses was $1.246
million up slightly from $1.235 million at December 31, 1995. The allowance as
of December 31, 1995 was up $136,000 over the $1.099 million at December 31,
1994. The ratio of the allowance for loan loss to total loans, net of unearned
income, has remained relatively constant over the last three years; 1.07% at
December 31, 1996, 1.14% at December 31, 1995, and 1.08% at December 31, 1994.
The multiple of the allowance for loan losses to nonperforming assets
was .60x at December 31, 1996, .65x at December 31, 1995 and 1.24x at December
31, 1994. Management continually evaluates nonperforming loans relative to their
collateral value and makes appropriate reductions in the carrying value of those
loans based on that review.
Effective January 1, 1995, CBI adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure). The effect of adopting this new
accounting standard was immaterial to the operating results of CBI for the year
ended December 31, 1995. Prior financial statements have not been restated to
apply the provision of the new standard.
Under the new accounting standard, a loan is considered to be impaired
when it is probable that CBI will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
loan is not considered impaired if (a) there is an insignificant delay in or
shortfall in amounts of payments, or (b) CBI expects to collect all amounts due,
including interest accrued at the contractual interest rate for the period of
delay. CBI does not aggregate loans for risk classification.
The allowance for loan losses related to loans identified as impaired
is primarily based on the excess of the loan's current outstanding principal
balance over the estimated fair market value of the related collateral. For a
loan that is not collateral-dependent, the allowance is recorded at the amount
by which the outstanding principal balance exceeds the current best estimate of
the future cash flows on the loan discounted at the loan's effective interest
rate. As of December 31, 1996, CBI had six loans with a carrying amount of
$736,000 that were considered to be impaired. The amount of impairment based on
present value of future cash flows or collateral values, if applicable, was
approximately $51,000 and $685,000, respectively. The amount provided in the
allowance for loan losses for these impaired loans was $184,000. The following
table summarizes changes in the allowance for loan losses.
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<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses at beginning
of year $ 1,235 $ 1,099 $ 938
--------- --------- ---------
Loans charged off:
Commercial $ 226 $ 113 $ 153
Installment 39 46 56
Real estate 304 199 43
--------- --------- ---------
Total $ 569 $ 358 $ 252
--------- --------- ---------
Recoveries of loans previously charged off:
Commercial $ 82 $ 18 $ 34
Installment 16 26 9
Real estate 80 8 104
--------- --------- ---------
Total $ 178 $ 52 $ 147
--------- --------- ---------
Net loans recovered (charged off) $ (391) $ (306) $ (105)
Provision for loan losses 402 442 266
--------- --------- ---------
Allowance for loan losses at end of year $ 1,246 $ 1,235 $ 1,099
========= ========= =========
Average total loans (net of unearned
income) $ 112,712 $ 106,197 $ 96,386
Total loans (net of unearned income) $ 116,381 $ 108,640 $ 101,389
Selected Loan Loss Ratios:
Net charge-offs to average loans 0.35% 0.29% 0.11%
Provision for loan losses to average
loans 0.36% 0.42% 0.28%
Provision for loan losses to net
charge-offs 102% 144% 253%
Allowance for loan losses to year-end
loans 1.07% 1.14% 1.08%
Loan loss coverage (1) 782% 1,314% 2,810%
</TABLE>
- --------------------
(1) Income before income taxes plus provision for loan losses, divided by
net chargeoffs.
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<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 the Bank 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>
December 31,
-----------------------------------------------------------------------------
Balance at End of 1996 1995 1994
---- ---- ----
Period Applicable to:
---------------------
% of Loans % of Loans % of Loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 168 13.49% $ 163 13.21% $ 129 11.71%
Installment 89 7.12% 116 9.43% 133 12.13%
Real estate 989 79.39% 956 77.36% 837 76.16%
--- ----- --- ----- --- -----
$ 1,246 100.00% $ 1,235 100.00% $ 1,099 100.00%
========= ====== ======== ====== ========== ======
</TABLE>
Management has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred. The allocation of the allowance as shown in the table above should not
be interpreted as an indication that loan losses in future years will occur in
the same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories since the
total allowance is a general allowance applicable to the entire portfolio.
Nonperforming Assets
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, loans 90 days or more past due, and other real estate owned
were $2.070 million at December 31, 1996 an increase of $183,000 from one year
earlier. Total nonperforming assets were $1.887 million at December 31, 1995, an
increase of $998,000 over December 31, 1994. Nonperforming assets increased
$265,000 during 1994 over 1993.
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<PAGE>
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $ 240 $ 220 $ 54
Loans contractually past due 90 days or more
and still accruing 1,063 882 560
Troubled debt restructuring -- -- --
------ ------ ----
Total nonperforming loans $1,303 $1,102 $614
Other real estate owned 767 785 275
------ ------ ----
Total nonperforming assets $2,070 $1,887 $889
====== ====== ====
Nonperforming assets to period-end total
loans and other real estate 1.77% 1.72% 0.87%
===== ===== =====
Foregone interest income on nonaccrual
loans $ 6 $ 12 $ 2
===== ====== ====
Interest income recorded on nonaccrual
loans during the year $ 4 $ 8 $--
====== ====== ====
</TABLE>
The following table summarizes all nonperforming loans, by loan type as
of December 31, 1996:
Number
of Principal
(Dollars in thousands) Loans Balance
---------------------- ----- -------
Residential mortgage 13 $ 1,189
Installment loans 3 27
Commercial loans 4 87
-- ----
20 $ 1,303
== ========
Loans, including impaired loans, are generally placed in nonaccrual
status when loans are delinquent in principal and interest payments greater than
90 days and the loan is not well secured and in process of collection. Accruals
of interest are discontinued until it becomes certain that both principal and
interest can be repaid. As shown in the above table, CBI does have loans that
are contractually past due greater than 90 days that are not in nonaccrual
status; however, those loans are still accruing because they are well secured
and in the process of collection. A loan is well secured if collateralized by
liens on real or personal property, including securities, that have a realizable
value sufficient to discharge the debt in full or by the guarantee of a
financially responsible party. Approximately 65% of these loans are
collateralized by residential real estate.
As of December 31, 1996, nonaccrual loans and loans contractually past
due greater than 90 days have increased $20,000 and $181,000 over the December
31, 1995 levels, respectively. While the increase is significant, there are only
five loans in nonaccrual status. The largest two loans, $119,000 and $69,000,
are mortgage real estate loans secured by residential real estate. Often, CBI
will not immediately proceed
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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 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 collection practices enable it to compete with larger and less flexible
institutions that are not based in the community.
If foreclosure of property is required, the property is generally sold
at a public auction in which CBI may participate as a bidder. If CBI is the
successful bidder, the acquired real estate property is then included in CBI's
real estate owned account until it is sold.
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 is based on the needs of CBI and current
yields and other market conditions.
Securities are classified as held-to-maturity when management has the
positive intent and CBI has the ability at the time of purchase to hold them
until maturity. These securities are carried at cost adjusted for amortization
of premium and accretion of discount.
Securities to be held for indefinite periods of time and not intended
to be held-to-maturity or on a long-term basis are classified as
available-for-sale and accounted for at fair market value on an aggregate basis.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. CBI 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.
The book value of the investment portfolio as of December 31, 1996
was $36.443 million compared to $34.127 million at December 31, 1995.
The following tables show the amortized cost, fair market value,
maturity distribution, and yield of the investment portfolio as of December
31, 1996 and 1995:
Securities Portfolio
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 2,449 $ 2,434 $12,134 $11,955
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 13,028 12,929 5,933 5,887
Securities issued by states and
political subdivisions 1,009 1,027 1,179 1,184
Other securities 400 403 311 311
------- ------- ------- -------
$16,886 $16,793 $19,557 $19,337
======= ======= ======= =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Cost Market Cost Market
---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 7,990 $ 8,029 $ 5,253 $ 5,301
Mortgage-backed securities:
Guaranteed or issued by
GNMA, FNMA or FHLMC 12,900 12,957 5,318 5,401
Securities issued by states and
political subdivisions 1,136 1,175 -- --
Other securities 1,256 1,270 274 273
------- ------- ------- -------
$23,282 $23,431 $10,845 $10,975
======= ======= ======= =======
</TABLE>
The maturity distribution, book value, market value, and yield of the
total investment securities portfolio at December 31, 1996 and 1995 are
presented as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Book Market Book Market
Value Value Yield Value Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ 1,877 $ 1,886 7.56% $ 426 $ 426 5.84%
Over 1 year through 5 years 1,173 1,163 6.50% 5,880 5,826 6.18%
Over 5 years through 10 years 2,054 2,041 7.26% 7,894 7,769 7.30%
Over 10 years 11,782 11,703 7.06% 5,357 5,316 6.83%
------- ------- ----- ------ ------ -----
$ 16,886 $ 16,793 7.07% $ 19,557 $ 19,337 6.80%
======== ======== ===== ========= ======== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------------------
Held -to-Maturity Available-for-Sale
----------------- ------------------
Book Market Book Market
Value Value Yield Value Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 12 months $ 5,455 $ 5,457 5.39% $ 499 $ 500 6.68%
Over 1 year through 5 years 4,143 4,190 6.59% 2,451 2,472 5.93%
Over 5 years through 10 years 1,525 1,550 7.37% 2,847 2,873 7.15%
Over 10 years 12,159 12,234 7.04% 5,047 5,130 6.82%
------- ------- ----- ------ ------ -----
$ 23,282 $ 23,431 6.89% $ 10,844 $ 10,975 6.70%
======== ======== ===== ======== ======== =====
</TABLE>
Deposits
Deposits at December 31, 1996 were $152.006 million, up $8.434 million
from 1995, an increase of 5.87%. The growth in deposits was led by the 21.1%
increase in noninterest-bearing demand deposits, which increased from $23.532
million at December 31, 1995 to $28.498 million at December 31, 1996.
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<PAGE>
Noninterest-bearing deposits were 18.75% of total deposits at December 31, 1996.
At December 31, 1996, savings deposits had grown by $3.092 million, an increase
of 12.68% over December 31, 1995 levels.
Deposits at December 31, 1995 were $143.571 million, a 15.88% increase
from 1994. Certificates of deposit increased by $13.412 from 1994 levels.
Similarly, certificates of deposit of $100,000 or more increased $4.277 million
from 1994 levels. Noninterest-bearing deposits were 16.39% of total deposits at
December 31, 1995 compared to 16.57% at December 31, 1994.
Deposits Analysis
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $ 28,498 $ 23,532 $ 20,526
--------- --------- ---------
Interest-bearing liabilities:
Money market and NOW 39,865 3.11% 40,568 3.48% 36,614 3.11%
accounts
Savings deposits 27,479 3.71% 24,387 3.27% 29,358 2.81%
Time deposits 45,413 5.68% 44,103 6.09% 30,691 5.08%
Large denomination deposits 10,751 5.86% 10,980 5.49% 6,703 4.00%
------- ----- ------- ----- ------ -----
Total interest-bearing accounts $ 123,508 4.42% $ 120,038 4.47% $ 103,366 3.63%
--------- ----- --------- ----- --------- -----
Total deposits $ 152,006 $143,571 $ 123,892
========= ========= =========
</TABLE>
Maturity of CDs of $100,000 and Over
<TABLE>
<CAPTION>
Within Three Six to Over Percent
Three to Six Twelve One of Total
Months Months Months Year Total Deposit
------ ------ ------ ---- ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 $ 2,653 $ 2,412 $ 2,137 $ 3,549 $ 10,751 7.07%
</TABLE>
Capital Resources
The adequacy of CBI's capital is reviewed by management on an ongoing
basis with reference to the size, composition and quality of CBI'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 23.27% in 1996 over 1995.
Similarly, average stockholders' equity increased 18.71% in 1995 over 1994. The
following table highlights certain ratios for the periods indicated:
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<PAGE>
Return on Equity and Assets
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------- ---------------------- ---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before securities gains and losses to:
Average total assets 1.86% 1.51% 1.28%
Average stockholders' equity 17.21% 16.17% 14.46%
Net income to:
Average total assets 1.86% 1.53% 1.31%
Average stockholders' equity 17.24% 16.38% 14.85%
Dividend payout ratio (dividends
declared per share divided by net
income per share) 7.74% 8.66% 10.00%
Average stockholders' equity to average
total assets ratio 10.80% 9.36% 8.83%
</TABLE>
The FDIC has adopted capital guidelines to supplement the existing
definitions of capital for regulatory purposes and to establish minimum capital
standards. Specifically, the guidelines categorize assets and off-balance sheet
items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1
capital, composed of common equity, retained earnings and a limited amount of
perpetual preferred stock, less certain goodwill items. CBI had a ratio of total
capital to risk-weighted assets of 17.03% at December 31, 1996 and a ratio of
Tier 1 capital to risk-weighted assets of 15.98%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
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<PAGE>
Analysis of Capital
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tier 1 Capital:
Common stock $ 5,703 $ 5,562 $ 3,219
Surplus 1,712 1,688 2,230
Retained earnings 11,716 8,886 7,421
Unearned ESOP shares (238) (330) -
----- ----- ----
Total Tier 1 Capital $ 18,893 $ 15,806 $ 12,870
---------- ---------- ----------
Tier 2 Capital
Allowance for loan losses 1,246 1,235 1,099
------ ------ ------
Total Tier 2 Capital $ 1,246 $ 1,235 $ 1,099
--------- --------- ---------
Total risk-based capital $ 20,139 $ 17,041 $ 13,969
========== ========== ==========
Risk weighted assets $ 118,233 $ 112,918 $100,382
Capital Ratios:
Tier 1 risk-based capital 15.98% 14.00% 12.82%
Total risk based capital 17.03% 15.09% 13.92%
Tier 1 capital to average total assets 11.51% 10.29% 9.38%
</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 CBI's management of liquid assets and the ability to generate
liquidity through liability funding, management believes that CBI maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.
For the year ended December 31, 1996 CBI provided cash or liquidity
from operations in the amount of $3.290 million. This increase in funds in
addition to an $8.435 million increase in deposits has given CBI approximately
$11.617 million in funds available for investment during 1996. In determining
investment strategies management considers objectives for the composition of the
loan and investment portfolio, such as type, maturity distribution, and fixed or
variable interest rate characteristics of investment opportunities. Management's
use of funds has included the funding of an $8.391 million increase in net loans
and the purchase of $14.927 million of securities. With 57% of the loan
portfolio repricing or maturing in the next twelve months CBI has enough asset
liquidity to meet the needs of maturing deposits.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of the financial position and
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<PAGE>
operating results of CBI in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Virtually all of the assets of CBI are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as prices
of goods and services.
Current Accounting Developments
In June 1996, the Financial Standards Board issued its Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. Management does not expect
the application of this pronouncement to have a material effect on the financial
statements of CBI.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Mitchell, Wiggins and Company LLP has been CBI's independent certified
public accountants since 1984. CBI's consolidated financial statements for the
year ended December 31, 1996 were examined by Mitchell, Wiggins and Company
LLP.
Although it has not yet selected auditors for the current year, CBI
anticipates that Mitchell, Wiggins and Company LLP will be selected as CBI's
auditors for 1997. A representative of Mitchell, Wiggins and Company LLP is
expected to be present at the Annual Meeting.
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<PAGE>
DESCRIPTION OF CBI CAPITAL STOCK
Authorized and Outstanding Capital Stock
CBI is authorized to issue up to 4,000,000 shares of Common Stock, par
value $3.00 per share. CBI had 1,901,080 shares of Common Stock outstanding at
April 30, 1997, held by ___ shareholders 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 shareholders.
Article 9 of CBI's Articles of Incorporation is intended to provide
that a minimum price be offered to CBI's shareholders 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 shareholders. 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 shareholder.
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.
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
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<PAGE>
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, shareholders 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 shareholders 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 shareholders 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 shareholders 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 CBOC, would beneficially own or control 832,268 shares of CBI's
Common Stock, or approximately 30.9% if the Reorganization had been consummated
on December 31, 1996. 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 shareholders may be
called by the Board of Directors or by shareholders 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.
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
shareholders, 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.
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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. CBOC is a Virginia corporation
organized as a state bank and is also subject to the provisions of the Virginia
SCA. Shareholders of CBOC, whose rights are governed by the Articles of
Incorporation and Bylaws of CBOC 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 CBOC shareholder under the Articles of Incorporation and Bylaws
of CBOC 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 CBOC, the Articles of
Incorporation and Bylaws of CBI and the Virginia SCA.
Authorized Capital
CBOC. CBOC's Articles of Incorporation (the "CBOC Articles") authorize
the issuance of up to 3,000,000 shares of CBOC Common Stock, par value $5.00 per
share, of which 793,175 shares were issued and outstanding as of April 30, 1997.
CBOC is not authorized to issue shares of preferred stock.
CBI. CBI's Articles of Incorporation (the "CBI Articles") authorize the
issuance of up to 4,000,000 shares of CBI Common Stock, par value $3.00 per
share, of which 1,901,080 shares were issued and outstanding as of April 30,
1997. CBI is not authorized to issue shares of preferred stock. 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 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.
CBOC. The CBOC Articles do not address amendments, so CBOC is governed
by the provisions of the Virginia SCA. Accordingly, amendments to the CBOC
Articles must be approved by more than two-thirds of all votes entitled to be
cast by each voting group.
CBOC's Bylaws generally may be amended by the affirmative vote of a
majority of the directors then holding office at any regular or special meeting
of the Board of Directors. 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
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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 of CBI
Common Stock.
Size and Classification of Board of Directors
CBOC. CBOC's Bylaws provide that its Board of Directors shall consist
of no more than nineteen (19) individuals and that the initial Board of
Directors shall consist of ten (10) individuals. Under Virginia banking laws, a
majority of the directors must be residents of Virginia, and each director must
own CBOC 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
eighteen (18) 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
CBOC. CBOC's Bylaws provide that any vacancy on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors.
CBOC's Bylaws provide that shareholders holding a majority of the outstanding
shares entitled to vote at an election of directors may remove directors with or
without cause at any time.
CBI. The CBI 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. The CBI 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.
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.
In addition, the Virginia SCA 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 conducted himself in good faith and that he believed that his
conduct was in the best interests of the corporation, 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
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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 by 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.
CBOC. CBOC's Bylaws provide that a director, as described above, shall
not be liable to CBOC or its shareholders for any monetary damages in excess of
$100,000. CBOC's Bylaws further provide that a director shall be indemnified by
CBOC to the full extent required or permitted and in the manner prescribed by
the Virginia SCA.
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
CBOC. CBOC's Bylaws provide that special meetings of shareholders may
be called at any time by the President, the secretary, the Board of Directors or
by any shareholder pursuant to the written request of shareholders holding not
less than 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 shareholders together holding at least
25% of the number of shares of stock entitled to vote on the business to be
transacted at the meeting.
Director Nominations
CBOC. CBOC's Bylaws provide that nominations for election to the Board
of Directors may be made by the Board of Directors or by any shareholder of any
outstanding class of CBOC stock entitled to vote for the election of directors.
Nominations made by any such shareholder must be made in writing and must be
delivered or mailed to the President not less than 14 nor more than 50 days
prior to any meeting of shareholders called for the election of directors. Such
notification must contain the name and address of the proposed nominee, the
principal occupation of the proposed nominee, the number of shares of CBOC stock
that will be voted for the proposed nominee, the name and address of the
shareholder and the number of shares of CBOC stock owned by the shareholder.
CBI. CBI's Bylaws do not prescribe procedures for directors'
nominations.
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Shareholder Proposals
The Articles of Incorporation and Bylaws of neither CBI nor CBOC
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."
CBOC. CBOC'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
CBOC are Virginia corporations, the provisions of the Virginia SCA described
below apply to CBI and CBOC 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.
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
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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. CBOC has
not adopted such an amendment. Currently, no shareholder of CBOC owns or
controls 10% or more of CBOC 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 voting rights. Disinterested Shares do not
include shares owned by the Acquiring Person or by officers and inside directors
of the CBOC 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 CBOC 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.
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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 CBOC 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
has two subsidiary banks, Commerce Bank of Virginia and The Community Bank,
Virginia chartered banks which are 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"). CBOC 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 CBOC 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 CBI's subsidiary banks and CBOC.
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.
Bank Holding Companies
As a result of the Reorganization, CBOC 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
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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
shareholders 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 shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
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, CBI's bank
subsidiaries and CBOC 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 CBI and CBOC on a pro forma
combined basis following the Reorganization as of December 31, 1996 are 15.63%
and 16.75%, exceeding the minimums required. Based upon the applicable Federal
Reserve regulations, at December 31, 1996, CBI, CBI's bank subsidiaries and CBOC
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 CBOC as of December 31, 1996, was 11.56%, 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
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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 CBOC 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 examination process,
require either CBI or CBOC 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 CBOC at December 31, 1996,
and also the pro forma combined capital ratios as of December 31, 1996.
<TABLE>
<CAPTION>
Capital Ratios
Regulatory CBI CBOC Pro Forma Combined
Minimum Current Current CBI and CBOC
<S> <C> <C> <C> <C>
Risk-based capital (1)
Tier 1 (2)(4) . . . . . . . . . . 4.00% 15.98% 14.92% 15.63%
Total (2)(4) . . . . . . . . . . . 8.00% 17.03% 16.17% 16.75%
Leverage (2)(3)(4) . . . . . . . . 4.00% 11.51% 11.47% 11.56%
Total shareholders' equity
to total assets . . . . . . . . . N/A 10.90% 10.81% 10.89%
</TABLE>
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(1) The pro forma risk-based capital ratios have been computed using pro
forma combined historical data for CBI and CBOC at December 31, 1996.
(2) Risk-based capital ratios and leverage ratios are applicable only to
CBI and CBOC.
(3) Leverage ratio is calculated by Tier 1 capital as a percentage of
quarterly period end assets.
(4) Calculated in accordance with the OTS and Federal Reserve's capital
rules, with adjustment for net unrealized depreciation on securities
available for sale.
Limits on Dividends and Other Payments
Certain state law restrictions are imposed on distributions of
dividends to shareholders of CBI. CBI shareholders are entitled to receive
dividends as declared by the CBI Board of Directors. However, no such
distribution may be made if, after giving effect to the distribution, it would
not be able to pay its debts as they become due in the usual course of business
or its total assets would be less than its total liabilities. There are similar
restrictions with respect to stock repurchases and redemptions.
CBOC and CBI's subsidiary banks 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
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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 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 CBI's subsidiary banks and CBOC. Based on the CBI
subsidiary banks' and CBOC's current financial conditions, CBI expects that the
above-described provisions will have no impact on CBI's ability to obtain
dividends from CBI's subsidiary banks or CBOC 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, CBI's subsidiary banks and CBOC are subject to extensive
regulation as well. The following discussion addresses certain primary
regulatory considerations affecting CBI's subsidiary banks and CBOC.
CBOC and CBI's subsidiary banks are regulated extensively under both
federal and state law. CBOC and CBI's subsidiary banks all are organized as
Virginia chartered banking corporations and are regulated and supervised by the
Bureau of Financial Institutions of the Virginia SCC. As members of the Federal
Reserve System as well, CBOC and CBI's subsidiary banks all are regulated and
supervised by the Federal Reserve Bank of Richmond. The Virginia SCC and the
Federal Reserve Bank of Richmond conduct regular examinations of CBOC and CBI's
subsidiary banks, 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, CBOC and CBI's subsidiary banks 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 CBI subsidiary banks' and CBOC's deposits are insured up to
$100,000 per insured depositor (as defined by law and regulation) through the
BIF. The BIF is administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by BIF-insured
institutions. The actual assessment to be paid by each BIF member is based on
the institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns. In 1996, deposit insurance assessments paid by CBOC and
CBI's subsidiary banks were $2,000 and $4,000, respectively.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution 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
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from six months to two years, as determined by the FDIC. Management is aware of
no existing circumstances that could result in termination of deposit insurance
of CBOC or the CBI subsidiary banks.
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
CBI's subsidiary banks and CBOC. 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 CBOC, each
is meeting its obligations under the CRA. The CRA rating of CBOC is
"satisfactory," and the CRA rating of The Community Bank is "satisfactory" and
the CRA rating of Commerce Bank of Virginia is "satisfactory."
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<PAGE>
COST AND MEANS OF PROXY SOLICITATION
The cost of the solicitation of proxies will be borne by CBOC and CBI,
respectively. In addition to solicitation by use of the mails, some officers and
employees of CBOC and CBI (who will not be compensated in addition to their
regular salaries) may solicit proxies from their respective shareholders
personally or by telephone. CBOC 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 CBOC Common Stock and
CBI Common Stock.
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 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 January
5, 1998, 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.
ANNUAL REPORT AND FINANCIAL STATEMENTS
A copy of CBI's Annual Report to Shareholders for the year ended
December 31, 1996 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.
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 SHAREHOLDERS, 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, 1996 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 PHILLIP H. KIRKPATRICK,
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<PAGE>
SECRETARY, COMMUNITY BANKSHARES INCORPORATED, 200 NORTH SYCAMORE STREET,
PETERSBURG, VIRGINIA 23803. THE FORM 10-K IS NOT PART OF THE PROXY SOLICITATION
MATERIALS.
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors knows of no
matter to come before the meeting other than those stated in the notice of the
meeting. As to other matters, if any, that may properly come before the meeting
, it is intended that proxies in the accompanying form will be voted in
accordance with the best judgment of the person or persons named therein.
EXPERTS
The consolidated financial statements of CBI included in this Joint
Proxy Statement have been so included in reliance on the report of Mitchell,
Wiggins & Company LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of CBOC as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
included in this Joint Proxy Statement have been audited by KPMG Peat Marwick
LLP, independent auditors, 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.
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 of CBI and the historical balance sheets
of CBOC on the assumption that the Share Exchange had been effective as of
December 31, 1996 and 1995, 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 the historical financial statements of CBOC, including the
respective notes thereto, included elsewhere in this Joint Proxy Statement or in
documents delivered herewith or incorporated herein by reference.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS CBI CBOC ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash and due from banks $ 9,337,968 $ 3,552,843 $ 12,890,811
Federal funds sold 5,392,000 4,418,000 9,810,000
----------------- ------------------ ----------------- -----------------
Total cash and cash equivalents 14,729,968 7,970,843 - 22,700,811
Interest-bearing deposits in other
depository institutions - 1,170,024 (500,000) 670,024
Investment securities:
Available for sale 19,337,299 17,992,834 37,330,133
Held to maturity (approximate market
value, $18,114,056) 16,885,814 1,398,813 18,284,627
Loans, net 115,135,240 47,725,730 162,860,970
Bank premises and equipment, net 2,652,610 1,802,213 4,454,823
Accrued interest receivable 1,081,163 564,832 1,645,995
Other real estate owned 766,579 563,265 1,329,844
Other assets 1,425,417 307,935 1,733,352
----------------- ------------------ ----------------- -----------------
$ 172,014,090 $ 79,496,489 $(500,000) $251,010,579
================= ================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 28,498,042 $ 10,612,482 39,110,524
Interest bearing demand deposits 39,864,913 12,197,589 52,062,502
Savings deposit 27,478,841 3,791,319 31,270,160
Time deposits, $100,000 and over 10,751,753 8,812,277 (500,000) 19,064,030
Other time deposits 45,412,749 34,988,425 80,401,174
----------------- ------------------ ----------------- -----------------
Total Deposits 152,006,298 70,402,092 (500,000) 221,908,390
Accrued interest payable 478,090 297,352 775,442
Other liabilities 541,583 206,513 748,096
Guaranteed debt of Employee
Stock Ownership Trust 240,000 - 240,000
----------------- ------------------ ----------------- -----------------
Total Liabilities 153,265,971 70,905,957 (500,000) 223,671,928
----------------- ------------------ ----------------- -----------------
Commitments and Contingencies
Stockholders' Equity
Capital stock, par value $3 5,703,240 - 2,630,327 8,333,567
Capital stock, par value $5 - 3,965,875 (3,965,875) -
Surplus 1,712,201 2,609,615 1,335,548 5,657,364
Retained earnings 11,716,193 2,135,348 13,851,541
Net unrealized losses on available for
sale securities, net of tax (144,982) (120,306) ` (265,288)
----------------- ------------------ ----------------- -----------------
18,986,652 8,590,532 - 27,577,184
Unearned ESOP shares (238,533) - (238,533)
----------------- ------------------ ----------------- -----------------
18,748,119 8,590,532 - 27,338,651
----------------- ------------------ ----------------- -----------------
$ 172,014,090 $ 79,496,489 $(500,000) $ 251,010,579
================= ================== ================= =================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS CBI CBOC ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash and due from banks $ 7,608,418 $ 2,282,871 $ 9,891,289
Federal funds sold 6,044,000 3,228,000 9,272,000
----------------- ------------------ ----------------- -----------------
Total cash and cash equivalents 13,652,418 5,510,871 - 19,163,289
Interest-bearing deposits in other
depository institutions - 865,226 865,226
Investment securities:
Available for sale 10,975,301 21,055,076 32,030,377
Held to maturity (approximate market
value, $24,725,785) 23,282,101 1,398,371 24,680,472
Loans, net 107,405,161 42,009,600 149,414,761
Bank premises and equipment, net 2,847,981 1,285,274 4,133,255
Accrued interest receivable 982,274 576,053 1,558,327
Other real estate owned 784,443 755,543 1,539,986
Other assets 1,147,439 112,460 1,259,899
----------------- ------------------ ----------------- -----------------
$ 161,077,118 $ 73,568,474 $ - $ 234,645,592
================= ================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 23,532,250 $ 8,165,116 31,697,366
Interest bearing demand deposits 40,568,447 10,452,624 51,021,071
Savings deposit 24,387,463 3,622,058 28,009,521
Time deposits, $100,000 and over 10,979,834 8,196,133 19,175,967
Other time deposits 44,103,097 34,632,957 78,736,054
----------------- ------------------ ----------------- -----------------
Total Deposits 143,571,091 65,068,888 - 208,639,979
Accrued interest payable 489,824 301,649 791,473
Other liabilities 793,782 196,101 989,883
Guaranteed debt of Employee
Stock Ownership Trust 330,000 - 330,000
----------------- ------------------ ----------------- -----------------
Total Liabilities 145,184,697 65,566,638 - 210,751,335
----------------- ------------------ ----------------- -----------------
Commitments and Contingencies
Stockholders' Equity
Capital stock, par value $3 5,561,925 - 2,630,327 8,192,252
Capital stock, par value $5 - 3,965,875 (3,965,875) -
Surplus 1,688,322 2,609,615 1,335,548 5,633,485
Retained earnings 8,885,976 1,352,421 10,238,397
Net unrealized gains on available for
sale securities, net of tax 86,198 73,925 160,123
----------------- ------------------ ----------------- -----------------
16,222,421 8,001,836 - 24,224,257
Unearned ESOP shares (330,000) - (330,000)
----------------- ------------------ ----------------- -----------------
15,892,421 8,001,836 - 23,894,257
----------------- ------------------ ----------------- -----------------
$ 161,077,118 $ 73,568,474 $ - $ 234,645,592
================= ================== ================= =================
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
Pro Forma Condensed Statements of Income
The following unaudited pro forma condensed statements of income for
the three years ended December 31, 1996 present the combined statements of
income of CBI and CBOC assuming that CBI and CBOC 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 CBOC, including the respective notes thereto, included
elsewhere in this Joint Proxy Statement or in documents delivered 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 Share Exchange 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 COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOC ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,348,077 $ 4,746,354 $ - $ 16,094,431
Interest on investment securities:
U. S. Government agencies and
corporations 2,129,199 909,923 - 3,039,122
Other securities 90,200 62,478 - 152,678
States and political subdivisions 59,384 339,521 - 398,905
Interest on federal funds sold and
securities purchased under agreements
to resell 265,570 108,905 - 374,475
----------------- ------------------ ----------------- -----------------
Total interest income 13,892,430 6,167,181 - 20,059,611
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 5,350,688 2,991,920 - 8,342,608
Interest on federal funds purchased
and securities sold under
agreements to repurchase 4,732 410 - 5,142
----------------- ------------------ ----------------- -----------------
Total interest expense 5,355,420 2,992,330 - 8,347,750
----------------- ------------------ ----------------- -----------------
Net interest income 8,537,010 3,174,851 - 11,711,861
Provision for loan losses 401,500 130,000 - 531,500
----------------- ------------------ ----------------- -----------------
Net interest income after
provision for loan losses 8,135,510 3,044,851 - 11,180,361
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 1,024,546 337,535 - 1,362,081
Security gains 6,047 2,978 - 9,025
Gain on sale of other real estate 54,975 - 54,975
Other operating income 128,910 127,832 - 256,742
----------------- ------------------ ----------------- -----------------
Total other income 1,214,478 468,345 - 1,682,823
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 2,800,070 1,313,249 - 4,113,319
Net occupancy expense 357,811 155,454 - 513,265
Furniture and equipment expense 387,227 153,546 - 540,773
Other operating expenses 1,326,469 770,430 - 2,096,899
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,871,577 $ 2,392,679 $ - $ 7,264,256
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 4,478,411 $ 1,120,517 $ - $ 5,598,928
Income taxes 1,422,297 290,000 - 1,712,297
----------------- ------------------ ----------------- -----------------
Net income $ 3,056,114 $ 830,517 $ - $ 3,886,631
================= ================== ================= =================
Earnings per share (based on 1,964,894
shares outstanding CBI; 793,175 shares
outstanding CBOC) $ 1.55 $ 1.05 $ 1.37
======= ======= =======
Earnings per share (based on 1,964,894
shares outstanding CBI; 793,175 shares
outstanding CBOC), assuming full dilution $ 1.55 $ 1.02 $ 1.36
======= ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOC ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 10,563,448 $ 4,116,700 $ - $ 14,680,148
Interest on investment securities:
U. S. Government agencies and
corporations 1,561,989 1,171,622 - 2,733,611
Other securities 132,603 47,034 - 179,637
States and political subdivisions 47,513 - - 47,513
Interest on federal funds sold and securities
purchased under agreements to resell 376,581 158,456 - 535,037
----------------- ------------------ ----------------- -----------------
Total interest income 12,682,134 5,493,812 - 18,175,946
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 5,080,578 2,805,575 - 7,886,153
Interest on federal funds purchased and
securities sold under agreements to
repurchase 16,624 - - 16,624
----------------- ------------------ ----------------- -----------------
Total interest expense 5,097,202 2,805,575 - 7,902,777
----------------- ------------------ ----------------- -----------------
Net interest income 7,584,932 2,688,237 - 10,273,169
Provision for loan losses 442,000 50,000 - 492,000
----------------- ------------------ ----------------- -----------------
Net interest income after provision
for loan losses 7,142,932 2,638,237 - 9,781,169
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 977,388 328,723 - 1,306,111
Security gains (losses) 29,763 8,656 - 38,419
Other operating income 127,446 131,372 - 258,818
----------------- ------------------ ----------------- -----------------
Total other income 1,134,597 468,751 - 1,603,348
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 2,599,266 1,051,299 - 3,650,565
Net occupancy expense 337,260 98,190 - 435,450
Furniture and equipment expense 336,420 205,048 - 541,468
Other operating expenses 1,426,029 937,178 - 2,363,207
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,698,975 $ 2,291,715 $ - $ 6,990,690
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 3,578,554 $ 815,273 $ - $ 4,393,827
Income taxes 1,223,892 190,000 - 1,413,892
----------------- ------------------ ----------------- -----------------
Net income $ 2,354,662 $ 625,273 $ - $ 2,979,935
================= ================== ================= =================
Earnings per share (based on 1,853,627
shares outstanding CBI; 609,741 shares
outstanding CBOC) $ 1.27 $ 1.03 $ 1.18
======= ======= =======
Earnings per share (based on 1,853,627
shares outstanding CBI; 609,741 shares
outstanding CBOC), assuming full dilution $ 1.27 $ 1.03 $ 1.18
======= ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
COMMUNITY BANKSHARES INCORPORATED AND COUNTY BANK OF CHESTERFIELD
PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1994
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CBI CBOC ADJUSTMENTS COMBINED
- ------------------------------------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 8,614,800 $ 3,593,865 $ - $ 12,208,665
Interest on investment securities:
U. S. Government agencies and
corporations 1,235,943 1,002,433 - 2,238,376
Other securities 157,465 63,602 - 221,067
States and political subdivisions 64,655 - - 64,655
Interest on federal funds sold and securities
purchased under agreements to resell 147,321 42,158 - 189,479
----------------- ------------------ ----------------- -----------------
Total interest income 10,220,184 4,702,058 - 14,922,242
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits 3,722,487 2,146,941 - 5,869,428
Interest on federal funds purchased and
securities sold under agreements to
repurchase 8,961 - - 8,961
----------------- ------------------ ----------------- -----------------
Total interest expense 3,731,448 2,146,941 - 5,878,389
----------------- ------------------ ----------------- -----------------
Net interest income 6,488,736 2,555,117 - 9,043,853
Provision for loan losses 265,838 245,000 - 510,838
----------------- ------------------ ----------------- -----------------
Net interest income after provision
for loan losses 6,222,898 2,310,117 - 8,533,015
----------------- ------------------ ----------------- -----------------
Other income:
Service charges, commissions and fees 1,027,763 287,592 - 1,315,355
Security gains (losses) 47,800 4,706 - 52,506
Loss on sale of other real estate (33,980) - - (33,980)
Other operating income 189,486 141,243 - 330,729
----------------- ------------------ ----------------- -----------------
Total other income 1,231,069 433,541 - 1,664,610
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries and employee benefits 2,441,656 988,046 - 3,429,702
Net occupancy expense 350,682 89,385 - 440,067
Furniture and equipment expense 447,716 171,287 - 619,003
Other operating expenses 1,529,453 825,322 - 2,354,775
----------------- ------------------ ----------------- -----------------
Total other expenses $ 4,769,507 $ 2,074,040 $ - $ 6,843,547
----------------- ------------------ ----------------- -----------------
Income before income taxes $ 2,684,460 $ 669,618 $ - $ 3,354,078
Income taxes 885,619 155,000 - 1,040,619
----------------- ------------------ ----------------- -----------------
Net income $ 1,798,841 $ 514,618 $ - $ 2,313,459
================= ================== ================= =================
Earnings per share (based on 1,798,073
shares outstanding CBI: 534,100 shares
outstanding CBOC) $ 1.00 $ 0.96 $ 0.97
======= ======= =======
Earnings per share (based on 1,798,073
shares outstanding CBI: 534,100 shares
outstanding CBOC), assuming full dilution $ 1.00 $ 0.96 $ 0.97
======= ======= =======
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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Notes to Pro Forma Consolidated Financial Information
(1) The pro forma information presented is not necessarily indicative of
the results of operations or the financial position that would gave
resulted had the Share Exchange 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 Merger 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 1.1054 shares of stock for each share of CBOC common stock.
As a result, as of December 31, 1996, information was appropriately
adjusted for the Share Exchange by the (a) addition of 876,776 shares
of CBI common stock amounting to $2,630,327; (b) elimination of 793,175
shares of CBOC common stock amounting to $3,965,875; and (c)
recordation of the remaining amount of $1,335,548 as a increase in
capital surplus.
As a result, as of December 31, 1995, information was appropriately
adjusted for the Share Exchange by the (a) addition of 876,776 shares
of CBI common stock amounting to $2,630,327; (b) elimination of 793,175
shares of CBOC common stock amounting to $3,965,875; and (c)
recordation of the remaining amount of $1,335,548 as a increase in
capital surplus.
(3) Per share data has been computed based on the combined historical
income applicable to common shareholders of CBI and CBOC using the
historical weighted average shares outstanding of CBI and the weighted
average shares, adjusted to equivalent shares of CBI stock, of CBOC, as
of the earliest period presented.
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<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
COUNTY BANK OF CHESTERFIELD
AND
COMMUNITY BANKSHARES INCORPORATED
-------------------------
JANUARY 14, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
The Reorganization and Related Matters
Page
<C> <C> <C>
1.1 The Reorganization ......................................................................... 5
1.2 Management of CBOC and CBI.................................................................. 5
1.3 The Closing and Effective Date.............................................................. 6
1.4 Definitions................................................................................. 6
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of Shares........................................................................ 7
2.2 Manner of Exchange.......................................................................... 7
2.3 No Fractional Shares........................................................................ 7
2.4 Dividends................................................................................... 7
2.5 Dissenting Shares........................................................................... 8
ARTICLE 3
Representations and Warranties
3.1 Representations and Warranties of CBOC...................................................... 8
(a) Organization, Standing and Power................................................... 8
(b) Authority.......................................................................... 8
(c) Capital Structure.................................................................. 9
(d) Ownership of the CBOC Subsidiaries; Capital Structure of the CBOC .................
Subsidiaries; and Organization of the CBOC Subsidiaries............................ 9
(e) Financial Statements............................................................... 9
(f) Absence of Undisclosed Liabilities................................................. 10
(g) Legal Proceedings; Compliance with Laws............................................ 10
(h) Regulatory Approvals............................................................... 10
(i) Labor Relations.................................................................... 10
(j) Tax Matters........................................................................ 11
(k) Property........................................................................... 11
(l) Reports............................................................................ 11
(m) Employee Benefit Plans............................................................. 11
(n) Investment Securities.............................................................. 12
(o) Certain Contracts.................................................................. 12
(p) Insurance.......................................................................... 12
(q) Absence of Material Changes and Events............................................. 13
(r) Loans, OREO and Allowance for Loan Losses.......................................... 13
(s) Statements True and Correct........................................................ 14
(t) Brokers and Finders................................................................ 14
(u) Repurchase Agreements.............................................................. 14
(v) Administration of Trust Accounts................................................... 14
(w) Environmental Matters.............................................................. 14
3.2 Representations and Warranties of CBI....................................................... 16
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<PAGE>
(a) Organization, Standing and Power................................................... 16
(b) Authority.......................................................................... 17
(c) Capital Structure.................................................................. 17
(d) Ownership of the CBI Subsidiaries; Capital Structure
of the CBI Subsidiaries; and Organization of the CBI Subsidiaries.................. 17
(e) Financial Statements............................................................... 18
(f) Absence of Undisclosed Liabilities................................................. 18
(g) Legal Proceedings; Compliance with Laws............................................ 18
(h) Regulatory Approvals............................................................... 19
(i) Labor Relations.................................................................... 19
(j) Tax Matters........................................................................ 19
(k) Property........................................................................... 19
(l) Reports............................................................................ 19
(m) Employee Benefit Plans............................................................. 20
(n) Investment Securities.............................................................. 20
(o) Certain Contracts.................................................................. 20
(p) Insurance.......................................................................... 21
(q) Loans, OREO and Allowance for Loan Losses.......................................... 21
(r) Absence of Material Changes and Events............................................. 22
(s) Statements True and Correct........................................................ 22
(t) Brokers and Finders................................................................ 22
(u) Repurchase Agreements.............................................................. 22
(v) Administration of Trust Accounts................................................... 22
(w) Environmental Matters.............................................................. 23
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties............................................................ 24
4.2 Confidentiality............................................................................. 24
4.3 Registration Statement, Proxy Statement and Shareholder Approval............................ 24
4.4 Operation of the Business of CBOC and CBI................................................... 25
4.5 Dividends................................................................................... 26
4.6 No Solicitation............................................................................. 26
4.7 Regulatory Filings.......................................................................... 26
4.8 Public Announcements........................................................................ 26
4.9 Notice of Breach............................................................................ 26
4.10 Accounting Treatment........................................................................ 26
4.11 Reorganization Consummation................................................................. 27
4.12 Employment Contracts........................................................................ 27
ARTICLE 5
Additional Agreements
5.1 Conversion of Stock Options................................................................. 27
5.2 Registration of Shares...................................................................... 27
5.3 Benefit Plans............................................................................... 27
5.4 Indemnification............................................................................. 28
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ARTICLE 6
Conditions to the Reorganization
6.1 Conditions to Each Party's Obligations to Effect the Reorganization......................... 28
(a) Shareholder Approvals.............................................................. 28
(b) Regulatory Approvals............................................................... 28
(c) Registration Statement............................................................. 28
(d) Tax Opinion........................................................................ 28
(e) Accountants' Letter................................................................ 29
(f) Opinions of Counsel................................................................ 29
(g) Legal Proceedings.................................................................. 29
(h) Employment Contracts ......................................................... 29
(i) Director Resignations.............................................................. 29
6.2 Conditions to Obligations of CBI............................................................ 29
(a) Representations and Warranties..................................................... 29
(b) Performance of Obligations......................................................... 29
(c) Affiliate Letters.................................................................. 29
(d) Investment Banking Letter.......................................................... 30
6.3 Conditions to Obligations of CBOC........................................................... 30
(a) Representations and Warranties..................................................... 30
(b) Performance of Obligations......................................................... 30
(c) Investment Banking Letter.......................................................... 30
ARTICLE 7
Termination
7.1 Termination................................................................................. 30
7.2 Effect of Termination....................................................................... 31
7.3 Non-Survival of Representations, Warranties and Covenants................................... 32
7.4 Expenses.................................................................................... 32
ARTICLE 8
General Provisions
8.1 Entire Agreement............................................................................ 33
8.2 Waiver and Amendment........................................................................ 33
8.3 Descriptive Headings........................................................................ 33
8.4 Governing Law............................................................................... 33
8.5 Notices..................................................................................... 33
8.6 Counterparts................................................................................ 34
8.7 Severability................................................................................ 34
8.8 Brokers and Finders......................................................................... 34
8.9 Subsidiaries................................................................................ 34
</TABLE>
Exhibit A - Plan of Share Exchange between County Bank of Chesterfield and
Community Bankshares Incorporated
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of January 14, 1997 by and between County Bank of Chesterfield,
a Virginia state bank with its principal office located in Midlothian, Virginia
("CBOC"), and Community Bankshares Incorporated, a Virginia corporation with its
principal office located in Petersburg, Virginia ("CBI").
WITNESSETH:
WHEREAS, CBOC and CBI desire to combine their respective businesses;
and
WHEREAS, CBOC and CBI have agreed to the affiliation of their two
companies through a Share Exchange under Virginia law, as a result of which CBOC
would become a wholly-owned subsidiary of CBI and the shareholders of CBOC 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 CBOC 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, CBOC shall
become a wholly-owned subsidiary of CBI through the exchange of each outstanding
share of common stock of CBOC 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 of CBOC and CBI. The directors, officers and employees
of CBOC will not change as a result of the Reorganization. CBI's Board of
Directors presently has eighteen (18) members. On the Effective Date, eleven
(11) members of such Board of Directors shall resign and the board of Directors
of CBI shall consist of the following ten (10) individuals, who will be members
of the Classes of Director indicated: Class I, Dr. B. Glenn Holden, Nathan S.
Jones, 3rd and Jack W. Miller, Jr.; Class II, Elinor B. Marshall, Richard C.
Huffman and Vernon E. LaPrade, Jr.; Class III, Sam T. Beale, David E. Hudgins,
Alvin L. Sheffield and H. E. Richeson. Members of Class I shall serve for a term
that expires at the 1998 annual meeting of shareholders. Members of Class II
shall serve for a term that expires at the 1999 annual meeting of shareholders.
Members of Class III shall serve for a term that expires at the 2000 annual
meeting of shareholders. If any individual named above who is a member of CBOC
Board of Directors is not a member of such Board of Directors on the Effective
Date, a replacement shall be designated by the CBOC Board of Directors. If any
individual named above who is a member of the CBI Board of Directors is not a
member of the CBI Board of Directors on the Effective Date, a replacement shall
be designated by the CBI Board of Directors. It is the intention of CBI
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<PAGE>
and CBOC that after the Effective Date, Directors of CBOC, or individuals
designated by Directors of CBOC, shall continue to constitute three-tenths
(3/10) 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.
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 CBOC, 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 the Effective Date. Prior to the Reorganization Closing, CBI and CBOC
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
representation or warranty by such party) which (a) has or is reasonably likely
to have a material adverse effect on the financial position, results of
operations or business of the party and its subsidiaries, taken as a whole, or
(b) would materially impair the party's ability to perform its obligations under
this Agreement or the consummation of the Reorganization and the other
transactions contemplated by this Agreement; provided, however, that solely for
purposes of measuring whether an event, occurrence or circumstance has a
material adverse effect on such party's results of operations, the term "results
of operations" shall mean net interest income plus non-interest income (less
securities gains) less gross expenses (excluding provisions for possible loan
and lease losses, write-downs of other real estate and taxes); and 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 "Disclosed in Writing" by a party shall mean
information set forth in one or more written disclosure letters delivered by
that party to the other party on or prior to January 21, 1997 and specifically
designated as information "Disclosed in Writing" pursuant to this Agreement.
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<PAGE>
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 CBOC, and stock
shall be issued and allocated as follows:
(a) Each share of common stock, par value $5.00 per
share, of CBOC ("CBOC Common Stock") issued and outstanding immediately prior to
the Effective Date shall, by operation of law, be automatically exchanged for
1.1054 (the "Exchange Ratio") shares of common stock of CBI, par value $3.00 per
share ("CBI Common Stock"). Each holder of a certificate representing any shares
of CBOC Common Stock upon the surrender of his CBOC 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 CBOC 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 CBOC Common Stock issued and outstanding
shall, by virtue of the Reorganization, continue to be issued and outstanding
shares held by CBI.
2.2 Manner of Exchange. As promptly as practicable after the Effective
Date, CBI shall cause The Community Bank, acting as the exchange agent
("Exchange Agent"), to send to each former shareholder of record of CBOC
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of CBOC 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 CBOC shareholder
shall be entitled to receive in exchange for such shareholder's shares of CBOC
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 CBOC 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.
2.3 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 CBOC
Common Stock issued and outstanding at the Effective Date until such
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<PAGE>
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 CBOC shall have the right to
demand and receive payment of the fair value of their shares of CBOC 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 CBOC 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 CBOC. CBOC represents and
warrants to CBI as follows:
(a) Organization, Standing and Power. (1) CBOC 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. CBOC 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. CBOC is a
member of the Federal Reserve System, and except as Disclosed in Writing 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) CBOC is an "insured bank" as defined in the Federal
Deposit Insurance Act and applicable regulations thereunder. All of the shares
of capital stock of CBOC 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 CBOC, except the approval of shareholders. The Agreement
represents the legal, valid, and binding obligations of CBOC, enforceable
against CBOC 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 CBOC
with any of the provisions hereof will: (i) conflict with or result in a breach
of any provision of CBOC's Articles of Incorporation or Bylaws; (ii) except as
Disclosed in Writing, 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 the
CBOC Companies (as hereafter defined) pursuant to (A) any note, bond, mortgage,
-8-
<PAGE>
indenture known to CBOC, or (B) any material license, agreement, lease, or other
instrument or obligation known to CBOC, to which any of the CBOC Companies is a
party or by which it or any of its properties or assets may be bound, or (iii)
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 CBOC Companies or any or their properties or assets.
(c) Capital Structure. The authorized capital stock of
CBOC consists of 3,000,000 shares of common stock, par value $5.00 per share, of
which, as of the date hereof, 793,175 shares are issued, outstanding, fully paid
and nonassessable, not subject to shareholder preemptive rights and, to the
knowledge of CBOC, were not issued in violation of any agreement to which CBOC
is a party or otherwise bound, or of any registration or qualification
provisions of any federal or state securities laws. Except for options held by
officers and directors of CBOC to purchase 90,000 shares of CBOC Common Stock,
there are no outstanding understandings or commitments of any character pursuant
to which CBOC or any of the CBOC Companies could be required or expected to
issue shares of capital stock.
(d) Ownership of the CBOC Subsidiaries; Capital Structure
of the CBOC Subsidiaries; and Organization of the CBOC Subsidiaries. (1) CBOC
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 Disclosed in Writing (collectively the
"CBOC Subsidiaries" and each individually a "CBOC Subsidiary"). CBOC and the
CBOC Subsidiaries are referred to herein collectively as the "CBOC Companies".
All of the shares of capital stock of the CBOC Subsidiaries held by CBOC are
duly and validly issued, fully paid and non-assessable, and all such shares are
owned by CBOC or a CBOC Subsidiary, free and clear of any claim, lien, pledge or
encumbrance of any kind, and were not issued in violation of the pre-emptive
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 Disclosed in Writing, neither CBOC nor any CBOC Subsidiary owns any
equity securities of any other corporation or entity. No rights are authorized,
issued or outstanding with respect to the capital stock of any CBOC Subsidiary
and there are no agreements, understandings or commitments relating to the right
of CBOC to vote or dispose of said shares.
(2) Each CBOC Subsidiary is a duly organized corporation, validly
existing and in good standing under applicable laws. Each CBOC 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 CBOC 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 so qualify
would have a material adverse effect on the financial condition, results of
operations or business of CBOC on a consolidated basis. Each CBOC 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 CBOC Subsidiary.
(e) Financial Statements. CBOC's Annual report on form
10-K for the fiscal year ended December 31, 1995, and all other documents filed
or to be filed subsequent to December 31, 1995 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 Board of Governors of the Federal Reserve System (in each such case, the
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<PAGE>
"CBOC Financial Statements") did not and will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the CBOC 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 CBOC
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 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,
1996, none of the CBOC Companies had any obligation or liability (contingent or
otherwise) of any nature which was not reflected in the CBOC Financial
Statements, except for those which in the aggregate are immaterial or are
Disclosed in Writing.
(g) Legal Proceedings; Compliance with Laws. Except as
Disclosed in Writing, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of CBOC's management, threatened or probable
of assertion against any of the CBOC 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 CBOC on a consolidated basis or that are reasonably expected to
threaten or impede the consummation of the Reorganization. None of the CBOC
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 CBOC on a consolidated basis. Except as Disclosed in
Writing, as of the date of this Agreement, none of the CBOC 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 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
proports to restrict in any material respect the conduct of its business or its
properties, or in any manner relates to the capital, liquidity, credit policies
or management of it; and except as Disclosed in Writing, none of the CBOC
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
CBOC, the CBOC 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. CBOC 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 CBOC Companies is a
party to or bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
the subject of a proceeding asserting that it has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel it to
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<PAGE>
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. The CBOC 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 CBOC Financial Statements or are being contested
in good faith and shall be Disclosed in Writing. Except to the extent that
liabilities therefor are specifically reflected in the CBOC Financial
Statements, there are no federal, state or local tax liabilities of the CBOC
Companies other than liabilities that have arisen since September 30, 1996, all
of which have been properly accrued or otherwise provided for on the books and
records of the CBOC Companies. Except as Disclosed in Writing, no tax return or
report of any of the CBOC 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 CBOC Companies by any taxing
authority.
(k) Property. Except as disclosed or reserved against in
the CBOC Financial Statements, the CBOC Companies have good and marketable title
free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the material properties and assets,
tangible or intangible, reflected in the CBOC Financial Statements as being
owned by the CBOC Companies as of the date thereof. To the best knowledge of
CBOC, 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 CBOC 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 CBOC Companies are in good
operating condition and in a state of good maintenance and repair, and to the
best knowledge of CBOC (i) comply with applicable zoning and other municipal
laws and regulations, and (ii) there are no latent defects therein.
(l) Reports. Since January 1, 1991, the CBOC 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 SCC, the
Federal Reserve, and to the best knowledge of CBOC, any other governmental or
regulatory authority or agency having jurisdiction over its operations.
(m) Employee Benefit Plans. (1) CBOC 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
CBOC for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "CBOC Benefit Plans"). Any of the CBOC 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 "CBOC ERISA Plan." No CBOC
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(2) Except as Disclosed in Writing, all CBOC Benefit
Plans are in compliance with the applicable terms of ERISA and the Internal
Revenue Code of 1986, as amended (the "IRC")
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and any other applicable laws, rules and regulations, the breach or violation of
which could result in a material liability to CBOC on a consolidated basis.
(3) No CBOC 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 CBOC has sold securities subject to an obligation to
repurchase, none of the investment securities reflected in the CBOC 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.
(o) Certain Contracts. (1) Except as Disclosed in
Writing, neither CBOC nor any CBOC 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 CBOC or any CBOC
Subsidiary or the guarantee by CBOC or any CBOC 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 CBOC or any CBOC Subsidiary and any director of officer of CBOC or any
CBOC Subsidiary, or any member of the immediate family or affiliate of any of
the foregoing, or (v) any agreement between CBOC or any CBOC Subsidiary and any
5% or more shareholder of CBOC; in each case other than agreements entered into
in the ordinary course of the banking business of CBOC or any CBOC Subsidiary
consistent with past practice.
(2) Neither CBOC or any CBOC Subsidiary, nor to the
knowledge of CBOC, 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 CBOC or any CBOC Subsidiary in the ordinary course of its
business.
(3) Since September 30, 1996 CBOC has not incurred or
paid any obligation or liability that would be material to CBOC, except
obligations incurred or paid in connection with transactions in the ordinary
course of business of CBOC consistent with its practice and, except as Disclosed
in Writing, from September 30, 1996 to the date hereof, CBOC 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 CBOC Companies shall be Disclosed in
Writing 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 CBOC. The CBOC 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 CBOC Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the CBOC
Companies has
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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. None of the CBOC 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) Absence of Material Changes and Events. Except as
Disclosed in Writing to CBI prior to the execution of this Agreement, since
September 30, 1996, there has not been any material adverse change in the
condition (financial or otherwise), aggregate assets or liabilities, cash flow,
earnings or business of CBOC, and CBOC has conducted its business only in the
ordinary course consistent with past practice.
(r) Loans, OREO and Allowance for Loan Losses. (1) Except
as Disclosed in Writing, and except for matters which individually or in the
aggregate do not have a material adverse effect on the Reorganization or the
financial condition of CBOC, to the best knowledge of CBOC, each loan reflected
as an asset in the CBOC 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 CBOC and the CBOC Subsidiaries
comply therewith.
(2) The classification on the books and records of CBOC
and each CBOC 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 CBOC 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 CBOC nor any CBOC
Subsidiary has received any notice of denial of any such claim.
(4) CBOC and each CBOC Subsidiary 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/or each CBOC Subsidiary is
diligently pursuing such eviction or summary proceedings or such rental
arrangements. Except as Disclosed in Writing, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of CBOC and each CBOC 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 Disclosed in Writing, all loans made by the
CBOC Companies to facilitate the disposition of OREO are performing in
accordance with their terms.
(6) The allowance for possible loan losses shown on the
CBOC Financial Statements was, and the allowance for possible loan losses shown
on the financial statements of CBOC
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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 CBOC Companies
and other extensions of credit (including letters of credit and commitments to
make loans or extend credit) by CBOC.
(s) Statements True and Correct. None of the information
supplied or to be supplied by CBOC 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
CBOC 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 CBOC 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 CBOC Shareholders' Meeting or the CBI
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 CBOC Shareholders' Meeting or the CBI
Shareholders' Meeting.
(t) Brokers and Finders. Neither CBOC nor any CBOC
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 McKinnon & Company, Inc..
(u) Repurchase Agreements. With respect to all agreements
pursuant to which CBOC or any CBOC Subsidiary has purchased securities subject
to an agreement to resell, if any, CBOC or such CBOC Subsidiary 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. CBOC and the CBOC
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 CBOC and the CBOC Subsidiaries, all accounts for which it
acts as a fiduciary including but not limited to accounts for which it serves as
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither CBOC nor
a CBOC Subsidiary, nor any director, officer or employee of CBOC or any CBOC
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 consolidated financial condition of CBOC, 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 Disclosed in
Writing, to the best of CBOC's knowledge, none of the CBOC Companies 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 the CBOC
Companies 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 CBOC, the premises on which the leasehold is situated.
None of the CBOC Companies has received any Communication alleging that it
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is not in such compliance and, to the best knowledge of CBOC, 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 any of the CBOC Companies
of any liability arising under any Environmental Laws pending or, to the best
knowledge of CBOC, threatened against (A) any of the CBOC Companies, (B) any
person or entity whose liability for any Environmental Claim any of the CBOC
Companies has or may have retained or assumed either contractually or by
operation of law, or (C) any real or personal property which any of the CBOC
Companies 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 CBOC. None of the CBOC Companies is 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 CBOC, 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 any of the CBOC Companies
of any liability arising under any Environmental Laws pending or threatened
against any real or personal property in which any of the CBOC Companies 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 CBOC. None of the CBOC Companies is
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 any of the CBOC Companies, other than OREO, CBOC 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 any of
the CBOC Companies and all real or personal property which any of the CBOC
Companies has been or is judged to have managed or to have supervised or
participated in the management of, CBOC has made available to CBI the
information relating to such OREO available to CBOC. Each of the CBOC Companies
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 any of the CBOC Companies or
against any person or entity whose liability for any Environmental Claim any of
the CBOC Companies 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 CBOC or any CBOC
Subsidiary on the one hand or to CBI or any CBI
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<PAGE>
Subsidiary on the other hand, or (B) orally to a senior officer of CBOC or any
CBOC Subsidiary or of CBI or any CBI Subsidiary, whether from a governmental
authority or a third party.
(ii) "Environmental Claim" means any Communication from any
governmental authority or third party alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from the
presence, or release into the environment, of any Material of Environmental
Concern.
(iii) "Environmental Laws" means all applicable federal, state
and local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata). This definition includes, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
(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 CBOC 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 and Commerce Bank of
Virginia each is a wholly owned subsidiary of CBI and each is a Virginia
corporation and a Virginia state bank, duly organized, validly existing and in
good standing under the laws of Virginia, and except as Disclosed in Writing, 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 Disclosed in Writing 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, is a member of the Federal Reserve and,
except as Disclosed in Writing, is in compliance in all material respects with
all rules and regulations promulgated by the Federal Reserve, the SCC and any
other relevant regulatory authority. 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
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securities laws. Except as Disclosed in Writing, none of the CBI Companies owns
any equity securities of any other corporation or entity. Except as Disclosed in
Writing, each of the CBI Companies is in good standing as a foreign corporation
in each jurisdiction where the properties owned, leased or operated, or the
business conducted, by it require such qualification and where failure to so
qualify either singly or in the aggregate would have a material adverse effect
on the financial condition, properties, businesses or results of operations of
the CBI Companies.
(b) Authority. (1) The execution and delivery of this
Agreement and the Plan of Share Exchange and the consummation of the
Reorganization have been duly and validly authorized by all necessary corporate
action on the part of CBI, except the approval of shareholders. The 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 the Agreement,
the consummation of the transactions contemplated therein, nor the compliance by
CBI with any of the provisions thereof will (i) conflict with or result in a
breach of any provision of the Articles of Incorporation or Bylaws of CBI, (ii)
except as Disclosed in Writing, 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) 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
("CBI Common Stock), of which 1,901,080 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 CBOC 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 for options held by officers and directors of CBI
to purchase 146,000 shares of CBI Common Stock, there are no outstanding
understandings or commitments of any character pursuant to which CBI or 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 the 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 Disclosed in Writing (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
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the right of CBI to vote or to dispose of said shares. None of the shares of
capital stock of any CBI Subsidiary has been issued in violation of the
preemptive rights of any person.
(2) Each CBI Subsidiary is a duly organized corporation,
validly existing and in good standing under applicable laws. Each CBI Subsidiary
(i) has full corporate power and 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 so 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, 1995, and all other documents filed
or to be filed subsequent to December 31, 1995 under Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act, in the form filed with the Securities and Exchange
Commission (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,
1996, none of the CBI Companies 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 are
Disclosed in Writing.
(g) Legal Proceedings; Compliance with Laws. Except as
Disclosed in Writing, 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 Reorganization. None of the CBI
Companies is a party to any agreement or instrument or subject to any judgment,
order, writ, injunction, decree or rule that might reasonably be expected to
have a material adverse effect on the condition (financial or otherwise),
business or prospects of CBI on a consolidated basis. Except as Disclosed in
Writing, 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
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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 of it or any of its
subsidiaries or properties, or in any manner relates to the capital, liquidity,
credit policies or management of it; and except as Disclosed in Writing, 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 shall be Disclosed in Writing. 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, 1996, all of which have
been properly accrued or otherwise provided for on the books and records of the
CBI Companies. Except as Disclosed in Writing, no tax return or report of any of
the CBI Companies is under examination by any taxing authority or the subject of
any administrative or judicial proceeding, and no unpaid tax deficiency has been
asserted against any of the CBI Companies by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the CBI Financial Statements, all of the CBI Companies have good and marketable
title free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the material properties and assets,
tangible or intangible, reflected in the CBI Financial Statements as being owned
by the CBI Companies as of the date 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, 1991, the CBI Companies
have filed all reports and statements, together with any amendments required to
be made with respect thereto, that were
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required to be filed with the 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
CBOC'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 Disclosed in Writing, all CBI Benefit Plans
are in compliance with the applicable terms of ERISA and the Internal Revenue
Code of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations the breach or violation of which could result in a material
liability to CBI on a consolidated basis.
(3) No CBI ERISA Plan which is a defined benefit pension
plan has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) Investment Securities. Subject to FASB 115 and except
for pledges to secure public and trust deposits and obligations under agreements
pursuant to which any of the CBI Companies has sold securities subject to an
obligation to repurchase, none of the investment securities reflected in the CBI
Financial Statements is subject to any restriction, contractual, statutory, or
otherwise, which would impair materially the ability of the holder of such
investment to dispose freely of any such investment at any time.
(o) Certain Contracts. (1) Except as Disclosed in
Writing, 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.
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(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 shall be Disclosed in
Writing to CBOC 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. The CBI Companies are not in
default with respect to any provision contained in any such policy or binder and
have not failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. None of the CBI Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the CBI
Companies has knowledge of any inaccuracy in any application for such policies
or binders, any failure to pay premiums when due or any similar state of facts
or the occurrence of any event that is reasonably likely to form the basis for
any 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 Disclosed in Writing, and except for matters which individually or in
the aggregate, do not have a material adverse effect on 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 Disclosed in Writing, 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.
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(5) Except as Disclosed in Writing, all loans made
by any of the CBI Companies to facilitate the disposition of OREO are performing
in accordance with their terms.
(6) The allowance for possible loan losses shown on the
CBI Financial Statements was, and the allowance for possible loan losses shown
on the financial statements of CBI as of dates subsequent to the execution of
this Agreement will be, in each case as of the 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. Except as
Disclosed in Writing to CBOC prior to the execution of this Agreement, since
September 30, 1996, 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 CBOC 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 CBOC Shareholders' Meeting or the CBI 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 CBOC Shareholders' Meeting or the CBI
Shareholders' Meeting. All documents that CBI is responsible for filing with the
SEC or any other regulatory authority in connection with the transactions
contemplated, hereby will comply as to form in all material respects with the
provisions of applicable law, including applicable provisions of federal and
state securities law.
(t) Brokers and Finders. Neither CBI nor any CBI
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with the transactions contemplated herein,
except for the McKinnon & Company, Inc..
(u) Repurchase Agreements. With respect to all agreements
pursuant to which CBI or any CBI Subsidiary has purchased securities subject to
an agreement to resell, if any, CBI or such CBI Subsidiary, as the case may be,
has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. CBI and CBI
Subsidiaries have properly administered, in all respects material and which
could reasonably be expected to be material to the business, operations or
financial condition of CBI and CBI Subsidiaries, taken as a whole, all accounts
for which they act as fiduciaries including but not limited to accounts for
which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither CBI nor a CBI Subsidiary, nor any director, officer or
employee
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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 Disclosed in
Writing, to the best of CBI's knowledge, neither CBI nor any CBI Subsidiary owns
or leases any properties affected by toxic waste, radon gas or other hazardous
conditions or constructed in part with the use of asbestos. Each of CBI and the
CBI Subsidiaries is in substantial compliance with all Environmental Laws
applicable to real or personal properties in which it has a direct fee ownership
or, with respect to a direct interest as lessee, applicable to the leasehold
premises or, to the best knowledge of CBI and the CBI Subsidiaries, the premises
on which the leasehold is situated. Neither CBI nor any CBI Subsidiary has
received any Communication alleging that CBI or such CBI Subsidiary is not in
such compliance and, to the best knowledge of CBI and the CBI Subsidiaries,
there are no present circumstances (including Environmental Laws that have been
adopted but are not yet effective) that would prevent or interfere with the
continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on CBI and the CBI
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of CBI and the CBI Subsidiaries, threatened against (A)
CBI or any CBI Subsidiary, (B) any person or entity whose liability for any
Environmental Claim, CBI or any CBI Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C)any real or personal
property which CBI or any CBI Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of CBI. CBI and the CBI
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of CBI and the CBI
Subsidiaries, there are no legal, administrative, arbitral or other proceedings,
or Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on CBI or any CBI Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which CBI or any CBI Subsidiary holds a security interest in connection with
a loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of CBI. CBI
and the CBI Subsidiaries are not subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
(4) With respect to all real and personal property owned
or leased by CBI or any CBI Subsidiary, other than OREO, CBI has made available
to CBOC 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 CBOC 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).
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(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. CBOC will keep CBI, and CBI will
keep CBOC 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 CBOC 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 CBOC each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and not use to the detriment of the other party, any written, oral or other
information obtained in confidence from the other party or a third party in
connection with this Agreement or the transactions contemplated hereby unless
such information is already known to such party or to others not bound by a duty
of confidentiality or unless such information becomes publicly available through
no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Reorganization is not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested.
4.3 Registration Statement, Proxy Statement and Shareholder Approval.
The Board of Directors of CBOC, 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 "CBOC
Shareholders' Meeting" and the "CBI Shareholders' Meeting", respectively) and,
subject to the fiduciary duties of the Board of Directors of CBOC and of CBI (as
advised in writing by their respective counsel), CBOC 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; no member of the Board of
Directors of CBOC or CBI shall advise or encourage shareholders not to vote in
favor of the Reorganization; and CBOC 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 CBOC will prepare jointly the proxy
statement/prospectus to be used in connection with the CBOC 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-
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effective amendment or supplement thereto shall become effective, and at all
times subsequent to such effectiveness, up to and including the dates of the CBI
and CBOC Shareholders' Meetings, such Registration Statement and all amendments
or supplements thereto, with respect to all information set forth therein
furnished or to be furnished by CBOC relating to the CBOC Companies 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 CBOC and CBI. CBOC 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, CBOC and CBI each agrees that it will
not, without the prior written consent of the other:
(a) Make any change in its authorized capital stock, or
issue or sell any additional shares of, securities convertible into or
exchangeable for, or options, warrants or rights to purchase, its capital stock,
nor shall it purchase, redeem or otherwise acquire any of its outstanding shares
of capital stock, provided that CBI and CBOC 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, except as required by
this Agreement;
(c) Make any change in the compensation or title of any
Executive Officer (as defined in Regulation O) or any director or make any
change in the compensation or title of any other employee, other than in
accordance with past employment policies and practices 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;
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(i) Alter, amend or repeal its Bylaws or Articles of
Incorporation, except as required by this Agreement; 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 may declare and pay cash dividends not to exceed
$.20 per share of CBI Common Stock from the date of this Agreement through the
Effective Date. CBOC may declare and pay cash dividends not to exceed $.08 per
share of CBOC Common Stock 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 CBOC 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
CBOC, (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. CBOC 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 CBOC 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 CBOC the terms of
any proposal which it may receive in respect to any of the foregoing
transactions.
4.7 Regulatory Filings. CBI and CBOC 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 CBOC 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 CBOC 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 CBOC shall each use their best
efforts to ensure that the Reorganization qualifies for pooling-of-interests
accounting treatments.
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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 CBOC 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 Employment Contracts. CBI and CBOC 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. On the Effective Date, all rights with
respect to CBOC Common Stock pursuant to stock options ("CBOC Options") granted
by CBOC under a CBOC stock option plan which are outstanding on the Effective
Date, whether or not they are exercisable, shall be converted into and become
rights with respect to CBI Common Stock, and CBI shall assume each CBOC 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 CBOC 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
CBOC Option shall be equal to the number of shares of CBOC 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 CBOC
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 CBOC 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 Registration of Shares. The shares of CBI Common Stock to be issued
to shareholders of CBOC pursuant to this Agreement (including shares issued upon
the exercise of outstanding options for CBOC Common Stock) will be registered
under the Securities Act of 1933, as amended.
5.3 Benefit Plans. Upon consummation of the Reorganization, as soon as
administratively practicable and subject to CBI's best efforts, employees of
CBOC 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 CBOC as if such service were with
CBI. Alternatively, subject to applicable law, CBOC may maintain any or all of
the CBOC 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 Disclosed in Writing and executed in writing by CBOC on
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the one hand and any individual current or former director, officer or employee
thereof on the other hand, copies of which have previously been delivered by
CBOC 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 CBOC, to the same extent and on the same conditions as such person is
entitled to indemnification pursuant to Virginia law and CBOC'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 CBOC'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 CBOC 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 CBOC to effect the
Reorganization and the other transactions 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 CBOC 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 CBOC.
(c) Registration Statement. The Registration Statement
shall have been declared effective and shall not be subject to a stop order or
any threatened stop order.
(d) Tax Opinion. CBI and CBOC shall have received an
opinion of Williams, Mullen, Christian & Dobbins, or other counsel reasonably
satisfactory to CBI and CBOC, 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
CBOC to the extent they receive CBI Common Stock solely in exchange for their
CBOC Common Stock in the Reorganization.
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(e) Accountants' Letter. CBI and CBOC 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 CBOC, that the
Reorganization will qualify for pooling-of-interests accounting treatment under
generally accepted accounting principles.
(f) Opinions of Counsel. CBOC shall have delivered to CBI
and CBI shall have delivered to CBOC 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 CBOC 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 CBOC 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 CBOC to any special severance payments after the Effective Date.
(i) Director Resignations. Eleven directors of CBI shall
have tendered their resignations, as contemplated by Section 1.2.
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 CBOC 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 CBOC dated the Effective Date, to such effect.
(b) Performance of Obligations. CBOC 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 CBOC to that effect.
(c) Affiliate Letters. Each shareholder of CBOC who may
be deemed by counsel for CBI to be an "affiliate" of CBOC 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.
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(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, 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 CBOC. The obligations of CBOC 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 CBOC 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 CBOC shall have received a
certificate signed by Chief Executive Officer of CBI to that effect.
(c) Investment Banking Letter. CBOC shall have received a
written opinion in form and substance satisfactory to CBOC from McKinnon &
Company, Inc. addressed to CBOC and dated the date the Proxy
Statement/Prospectus is mailed to shareholders of CBOC, to the effect that the
terms of the Reorganization, including the Exchange Ratio, are fair, from a
financial point of view, to CBOC. At its option, CBOC may require that such
fairness opinion be updated as of the Effective Date and, in such event, it
shall also be a condition to CBOC's obligation to consummate the Reorganization
that CBOC receive such updated opinion.
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 CBOC, 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 CBOC;
(b) By the respective Boards of Directors of CBI or
CBOC if the conditions set forth in Section 6.1 have not been met or waived by
CBI and CBOC;
(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;
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(d) By the Board of Directors of CBOC if the conditions
set forth in Section 6.3 have not been met or waived by CBOC;
(e) By the respective Boards of Directors CBI or CBOC
if the Reorganization is not consummated by August 31, 1997.
(f)(i) By the Board of Directors of CBI if the Board of
Directors of CBOC receives a subsequent offer to acquire CBOC 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 CBOC supports the
Reorganization, will vote his shares of CBOC Common Stock in favor of the
Reorganization, and will recommend to the shareholders of CBOC that they approve
the Reorganization.
(ii) By the Board of Directors of CBOC 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
CBOC that each member of the Board of Directors of CBI supports the
Reorganization, will vote his shares of CBI Common Stock in favor of the
reorganization, and will recommend to the shareholders of CBI that they approve
the Reorganization.
(g) By the Board of Directors of CBOC if, before the
Effective Date, CBI (i) 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 or (ii) 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 any other
insured depository institution.
(h)(i) By a vote of a majority of the Board of Directors of
CBI at any time during the 30 day period following the date of this Agreement if
CBI determines in its sole good faith judgment that the financial condition,
business, prospects or regulatory status of CBOC is materially and adversely
different from what was reasonably expected by CBI, based on the CBOC Financial
Statements and other information Disclosed in Writing by CBOC prior to the
execution of this Agreement; provided that CBI shall inform CBOC upon any such
termination as to the reasons for CBI's determination, and provided further,
that this Section 7.1(h)(i) shall not limit in any way the due diligence
investigation of CBOC which CBI may perform, or otherwise affect any other
rights which CBI has after the date hereof and after the expiration of such 30
day period following the date hereof, under the terms of this Agreement;
(ii) By a vote of a majority of the Board of Directors of CBOC
at any time during the 30 day period following the date of this Agreement, if
CBOC determines in its sole good faith judgment that the financial condition,
business, prospects or regulatory status of CBI is materially adversely
different from what was reasonably expected by CBOC, based on the CBI Financial
Statements and other information Disclosed in Writing by CBI prior to the
execution of this Agreement; provided that CBOC shall inform CBI upon any such
termination as to the reasons for CBOC's determination; and, provided further,
that this Section 7.1(h)(ii) shall not limit in any way the due diligence
investigation of CBI which CBOC may perform, or otherwise affect any other
rights which CBOC has after the date hereof and after the expiration of such 30
day period following the date hereof, under the terms of this Agreement;
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
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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 CBOC (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 CBOC.
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 CBOC
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 CBOC shall pay all of the costs and expenses incurred by
CBI relating to the Reorganization including, fees and expenses of consultants,
investment bankers, accountants, counsel, printers and persons involved in the
transactions contemplated by this Agreement, including the preparation of the
Registration Statement and the Joint Proxy Statement.
(ii) If this Agreement is terminated by CBOC pursuant to
Section 7.1(f)(ii) or 7.1(g), then CBI shall pay all of the costs and expenses
incurred by CBOC 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.
(iii) If the transactions contemplated by this Agreement
are not consummated solely because the condition to Closing set forth in Section
6.1(i) is not satisfied, then CBI shall pay all of the costs and expenses
incurred by CBOC 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.
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(e) Any liability to the other incurred by CBOC or CBI
pursuant to this Section 7.4 shall not exceed a total of $37,500.
(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 CBOC 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 CBOC and CBI shareholders referred
to in Section 6.1(a) hereof, except statutory requirements and requisite
approvals of shareholders and regulatory authorities.
8.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
8.4 Governing Law. Except as required otherwise or otherwise indicated
herein, this Agreement shall be construed and enforced according to the laws of
the Commonwealth of Virginia.
8.5 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows:
If to CBI:
Nathan S. Jones, 3rd, President
Community Bankshares Incorporated
200 N. 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)
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If to CBOC:
H. E. Richeson, President
County Bank of Chesterfield
10400 Hull Street Road
Midlothian, Virginia 23112
(Tel.(804)-745-2274)
Copy to:
Jody M. Wagner
Kaufman & Canoles
One Commercial Place
P. O. Box 3037
Norfolk, Virginia 23514
(Tel. (757)-624-3294
8.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
8.7 Severability. In the event any provisions of this Agreement shall
be held invalid or unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
8.8 Brokers and Finders. Except for McKinnon & Company, Inc. as to each
of CBI and CBOC, 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 CBOC, CBI or CBOC, 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 date first written
above.
COMMUNITY BANKSHARES INCORPORATED
By:
---------------------------------------
Nathan S. Jones, 3rd
President and Chief Executive Officer
ATTEST:
- ------------------------------
- ---------------------
Secretary
COUNTY BANK OF CHESTERFIELD
By:
----------------------------------------
H. E. Richeson
President and Chief Executive Officer
ATTEST:
- ------------------------------
- ---------------------
Secretary
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EXHIBIT A
to the
Agreement and Plan
of Reorganization
PLAN OF SHARE EXCHANGE
BETWEEN
COUNTY BANK OF CHESTERFIELD
AND
COMMUNITY BANKSHARES INCORPORATED
Pursuant to this Plan of Share Exchange ("Plan of Share Exchange"),
County Bank of Chesterfield ("CBOC"), 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 January 14, 1997 between CBOC
and CBI, at the Effective Date, CBOC shall become a wholly-owned subsidiary of
CBI through the exchange of each outstanding share of common stock of CBOC 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 of CBOC and CBI. The directors, officers and employees
of CBOC will not change as a result of the Reorganization. CBI's Board of
Directors presently has eighteen (18) members. On the Effective Date, eleven
(11) members of such Board of Directors shall resign and the board of Directors
of CBI shall consist of the following ten (10) individuals, who will be members
of the Classes of Director indicated: Class I, Dr. B. Glenn Holden, Nathan S.
Jones, 3rd and Jack W. Miller, Jr.; Class II, Elinor B. Marshall, Richard C.
Huffman and Vernon E. LaPrade, Jr.; Class III, Sam T. Beale, David E. Hudgins,
Alvin L. Sheffield and H. E. Richeson. Members of Class I shall serve for a term
that expires at the 1998 annual meeting of shareholders. Members of Class II
shall serve for a term that expires at the 1999 annual meeting of shareholders.
Members of Class III shall serve for a term that expires at the 2000 annual
meeting of shareholders. If any individual named above who is a member of CBOC
Board of Directors is not a member of such Board of Directors on the Effective
Date, a replacement shall be designated by the CBOC Board of Directors. If any
individual named above who is a member of the CBI Board of Directors is not a
member of the CBI Board of Directors on the Effective Date, a replacement shall
be designated by the CBI Board of Directors. It is the intention of CBI and CBOC
that after the Effective Date, Directors of CBOC, or individuals designated by
Directors of CBOC, shall continue to constitute three-tenths (3/10) 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.
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ARTICLE 2
Manner of Exchanging Shares
2.1 Exchange 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 CBOC, and stock
shall be issued and allocated as follows:
(a) Each share of common stock, par value $5.00 per
share, of CBOC ("CBOC Common Stock")issued and outstanding immediately prior to
the Effective Date shall be entitled to the exchange rights set forth in this
Section 2.1 or to their rights under Article 15 of the Virginia Stock
Corporation Act as set forth in Section 2.5 below. On the Effective Date, each
shareholder of CBOC immediately prior to the Effective Date shall be entitled to
exchange each such share of CBOC Common Stock held for 1.1054 shares of CBI
Common Stock (the "Exchange Ratio"). Each holder of a certificate which
immediately prior to the Effective Date represented shares of CBOC Common Stock,
upon the surrender of his CBOC 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 such CBOC stock certificates shall entitle him
to pursuant to the Exchange Ratio. After the Effective Date, each such former
holder of CBOC Common Stock shall have the right to receive (i) any dividend or
such distribution payable at or as of any time after the Effective Date to
holders of record of CBI Common Stock at or as of any time after the Effective
Date, and (ii) 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 dividend,
reclassification, 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 proportionally adjusted.
(b) Shares of CBOC Common Stock issued and outstanding
shall, by virtue of the Share Exchange, continue to be issued and outstanding
shares shall be denoted on the books and records of CBOC as held of record by
CBI.
2.2 Conversion of Stock Options. On the Effective Date, all rights with
respect to CBOC Common Stock pursuant to stock options ("CBOC Options") granted
by CBOC under a CBOC 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 CBOC 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 CBOC Option assumed by CBI may be exercised solely for shares
of CBI Common Stock, (ii) the number of shares of CBI Common Stock subject to
each CBOC Option shall be equal to the number of shares of CBOC 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 CBOC
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 CBOC 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."
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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 CBOC
immediately prior to the Effective Date transmittal materials for use in
exchanging such shareholder's certificates of CBOC 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 CBOC shareholder
shall be entitled to receive in exchange for such shareholder's shares of CBOC
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 CBOC 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 of fractional shares, 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 CBOC
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).
2.6 Rights of Dissenting Shareholders. Shareholders of CBOC 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 January 14, 1997, between the parties.
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Appendix B
COUNTY BANK OF CHESTERFIELD
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
Suite 1900
1021 East Cary Street
Richmond, VA 23219-4023
Independent Auditors' Report
The Board of Directors
County Bank of Chesterfield:
We have audited the consolidated balance sheets of County Bank of Chesterfield
and subsidiary (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of the Company'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 County Bank of
Chesterfield and subsidiary as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 14, 1997
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1996 and 1995
- -----------------------------------------------------------------------------------------------
Assets 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (notes 2 and 11) $ 3,552,843 2,282,871
Federal funds sold (note 11) 4,418,000 3,228,000
Interest-bearing deposits in other depository institutions (note 11) 1,170,024 865,226
Investment securities, at amortized cost (fair value of
$1,320,854 in 1996 and $1,295,000 in 1995) (notes 3 and 11) 1,398,813 1,398,371
Securities available for sale, at fair value (notes 3 and 11) 17,992,834 21,055,076
Loans (notes 4 and 11) 48,480,067 42,624,204
Less allowance for loan losses (note 4) 754,337 614,604
- -----------------------------------------------------------------------------------------------
Net loans 47,725,730 42,009,600
- -----------------------------------------------------------------------------------------------
Premises and equipment, net (note 5) 1,802,213 1,285,274
Accrued interest receivable 564,832 576,053
Other real estate owned, net 563,265 755,543
Deferred income tax benefit (note 6) 201,150 8,743
Prepaid expenses and other assets 106,785 103,717
- -----------------------------------------------------------------------------------------------
Total assets $79,496,489 73,568,474
- -----------------------------------------------------------------------------------------------
</TABLE>
(continued)
2
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Balance Sheets, Continued
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits (note 11):
Demand $ 10,612,482 8,165,116
Interest-bearing transaction accounts 12,197,589 10,452,624
Savings 3,791,319 3,622,058
Consumer certificates 34,988,425 34,632,957
- -------------------------------------------------------------------------------------------------------------
Certificates of deposit $100,000 and over 8,812,277 8,196,133
Total deposits 70,402,092 65,068,888
Accrued interest and other liabilities 503,865 497,750
- -------------------------------------------------------------------------------------------------------------
Total liabilities 70,905,957 65,566,638
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 7 and 9):
Common stock, $5 par value. Authorized 3,000,000
shares; issued and outstanding 793,175 shares 3,965,875 3,965,875
Surplus 2,609,615 2,609,615
Retained earnings 2,135,348 1,352,421
Netunrealized gain (loss) on securities available for sale (net of income
tax benefit of $61,976 in 1996
and income tax expense of $38,083 in 1995) (120,306) 73,925
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 8,590,532 8,001,836
Commitments and contingencies (notes 8 and 10)
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 79,496,489 73,568,474
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from earning assets:
Interest and fees on loans (note 4) $4,746,354 4,116,700 3,593,865
Interest on deposits in other institutions 53,341 47,034 63,602
Interest on federal funds sold 108,905 158,456 42,158
Interest on investment securities and securities available
for sale 1,258,581 1,171,622 1,002,433
- ---------------------------------------------------------------------------------------------------
Total income from earning assets 6,167,181 5,493,812 4,702,058
- ---------------------------------------------------------------------------------------------------
Interest expense:
Interest on savings and other time deposits 2,497,143 2,409,835 1,810,512
Interest on certificates of deposit $100,000 and over 495,187 395,740 336,429
- ---------------------------------------------------------------------------------------------------
Total interest expense 2,992,330 2,805,575 2,146,941
- ---------------------------------------------------------------------------------------------------
Net interest income from earning assets 3,174,851 2,688,237 2,555,117
Provision for loan losses (note 4) 130,000 50,000 245,000
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,044,851 2,638,237 2,310,117
- ---------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 337,535 328,723 287,592
Other fees and commissions 127,832 131,372 141,243
Gain on sales of securities, net (note 3) 2,978 8,656 4,706
- ---------------------------------------------------------------------------------------------------
Total other operating income 468,345 468,751 433,541
- ---------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,313,249 1,120,649 1,052,698
Occupancy expenses 309,002 320,092 279,712
FDIC assessments 2,000 69,439 125,614
Other expenses 768,428 781,535 616,016
- ---------------------------------------------------------------------------------------------------
Total other operating expenses 2,392,679 2,291,715 2,074,040
- ---------------------------------------------------------------------------------------------------
Income before income taxes 1,120,517 815,273 669,618
Income tax expense (note 6) 290,000 190,000 155,000
- ---------------------------------------------------------------------------------------------------
Net income $ 830,517 625,273 514,618
- ---------------------------------------------------------------------------------------------------
Net income per share $ 1.05 1.03 .96
- ---------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 793,175 609,741 534,100
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss)
Common stock on securities
-------------------- Retained available
Shares Amount Surplus earnings for sale Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 534,100 $ 2,670,500 1,335,287 239,235 -- 4,245,022
Cumulative effect of change in
accounting for securities available
for sale, net of income taxes of
$49,265 -- -- -- -- 95,631 95,631
Net income -- -- -- 514,618 -- 514,618
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $173,445 -- -- -- -- (336,687) (336,687)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 534,100 2,670,500 1,335,287 753,853 (241,056) 4,518,584
Cash dividends declared on common
stock ($.05 per share) -- -- -- (26,705) -- (26,705)
Sale of common stock (note 7) 259,075 1,295,375 1,274,328 -- -- 2,569,703
Net income -- -- -- 625,273 -- 625,273
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $162,263 -- -- -- -- 314,981 314,981
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 793,175 3,965,875 2,609,615 1,352,421 73,925 8,001,836
Cash dividends declared on common
stock ($.06 per share) -- -- -- (47,590) -- (47,590)
Net income -- -- -- 830,517 -- 830,517
Change in net unrealized gain (loss)
on securities available for sale, net
of income taxes of $100,059 -- -- -- -- (194,231) (194,231)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 793,175 $ 3,965,875 2,609,615 2,135,348 (120,306) 8,590,532
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 830,517 625,273 514,618
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation of premises and equipment 139,911 143,672 141,853
Amortization of purchased software 19,955 21,865 21,569
Provision for loan losses 130,000 50,000 245,000
Provision for losses on other real estate owned 33,000 120,000 -
Provision for deferred income tax expense (benefit) (92,348) (70,234) 31,740
Gains on sales of securities, net (2,978) (8,656) (4,706)
(Increase) decrease in accrued interest receivable 11,221 (115,153) (94,361)
Loss on sales of other real estate owned - - 5,000
(Increase) decrease in prepaid expenses and other assets (11,791) 112,237 (64,143)
Increase (decrease) in accrued interest and other liabilities 6,115 201,432 81,910
Other, net 16,074 11,742 3,274
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 249,159 466,905 367,136
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents provided by operating activities 1,079,676 1,092,178 881,754
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of interest-bearing deposits in other depository institutions (595,000) (285,886) (289,782)
Maturities of interest-bearing deposits in other depository institutions 295,000 99,000 730,000
Sales of interest-bearing deposits in other depository institutions - 96,819 297,823
Purchases of investment securities - - (6,382,797)
Maturities and repayments of investment securities - 147,814 1,682,361
Purchase of securities available for sale (5,540,708) (6,421,806) (1,496,190)
Proceeds from sales of securities available for sale 6,927,717 2,011,599 1,896,084
Maturities and repayments of securities available for sale 1,362,607 615,258 331,631
Net increase in loans (5,846,130) (5,017,560) (2,571,099)
Purchases of premises and equipment (656,850) (67,653) (38,930)
Proceeds from the disposition of other real estate owned 159,278 62,188 90,939
Purchases of software (11,232) (9,437) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents used in investing activities (3,905,318) (8,769,664) (5,749,960)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
6
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts $ 4,361,592 246,956 (1,897,026)
Net increase in certificates of deposit 971,612 5,659,534 4,973,241
Proceeds from issuance of stock, net - 2,569,703 -
Dividends paid (47,590) (26,705) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents provided by financing activities 5,285,614 8,449,488 3,076,215
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,459,972 772,002 (1,791,991)
Cash and cash equivalents at the beginning of year 5,510,871 4,738,869 6,530,860
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 7,970,843 5,510,871 4,738,869
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 2,967,083 2,717,708 2,104,741
Income taxes paid 255,000 143,825 61,900
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of non-cash investing activities:
Increase in other real estate owned as a result of loan
foreclosures $ - 130,000 -
Increase in securities available for sale as a result of
transfers from investment securities - 12,845,033 -
Loans charged off 120,387 148,279 270,155
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
===============================================================================
(1) Summary of Significant Accounting Policies
County Bank of Chesterfield ("the Bank") and subsidiary (together "the
Company") was incorporated on September 27, 1985 and opened for
business on September 8, 1986. The Bank provides a full range of
banking services to individuals and corporate customers and is subject
to competition from other financial institutions. The Bank is also
subject to the regulations of the Federal Reserve System and the State
Corporation Commission of Virginia, and it undergoes periodic
examinations by these regulatory authorities. The most recent
regulatory examination was conducted as of September 30, 1995. During
1993, County Bank of Chesterfield formed CBC Insurance Agency, Inc., a
wholly-owned subsidiary. CBC Insurance Agency, Inc. owns a 6% interest
in Bankers Title Inc., a title agency owned by financial institutions
in central Virginia.
Use of Estimates
The consolidated financial statements of the Company have been prepared
in conformity with generally accepted accounting principles which
require management to make estimates and assumptions when preparing the
consolidated financial statements. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans. These areas and other
significant accounting policies affecting the consolidated financial
statements are discussed below.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand, amounts due from banks with original maturities
of three months or less, and federal funds sold. Generally, federal
funds are sold for one day periods.
Investment Securities and Securities Available for Sale
Effective January 1, 1994, the Company 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
the Company has the ability at the time of purchase to hold them until
maturity. Investment securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Unrealized losses
in this portfolio are not recognized unless management believes that
other than a temporary decline in value has occurred.
(Continued)
8
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(1) Continued
Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are classified as
available for sale. 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. Costs of securities sold are
determined on the basis of specific identification.
Loans
Loans are stated at the amount of unpaid principal reduced by an
allowance for loan losses. Interest on loans is computed by methods
that generally result in level rates of return on outstanding principal
balances. The accrual of interest on loans is discontinued when the
collection of principal or interest is legally barred or considered by
management to be highly unlikely. When interest accruals are
discontinued, interest credited to income in the current year is
reversed and interest accrued in prior years and uncollected is charged
to the allowance for loan losses.
Certain loan fees and related direct costs of loan origination are
netted and amortized as a component of interest income on loans over
the life of the related loans in accordance with Statement of Financial
Accounting Standards No. 91.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses through a provision for
loan losses charged to expense. Loans are charged against the allowance
when management believes that the collectibility of the principal is
unlikely. Recoveries of amounts previously charged off are credited to
the allowance. The charge to expense is based on management's periodic
evaluation of the loan portfolio with consideration given to the
overall loss experience, delinquency data, financial condition of the
borrowers, impairment analysis of certain specific loans, and general
economic conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions, particularly those affecting real
estate values.
(Continued)
9
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(1) Continued
In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan
(SFAS 114), as amended by SFAS 118. SFAS 114, as amended by SFAS 118,
requires that impaired loans within the scope of the statements be
presented in the Company's financial statements at the present value of
expected future cash flows or at the fair value of the loan's
collateral. A valuation allowance is required to the extent that the
measure of the impaired loans is less than the recorded investment.
SFAS 114 does not apply to larger groups of homogeneous loans such as
real estate mortgage, installment, home equity and card loans, which
are collectively evaluated for impairment. The impact of adopting SFAS
114, as amended, was immaterial to the Bank's consolidated financial
statements as of and for the year ended December 31, 1995.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
charged to expense over the estimated useful lives of the assets and
are computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes. The costs of major
improvements are capitalized, while the costs of ordinary maintenance
and repairs are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Other Real Estate Owned
Other real estate owned consists of real estate held for resale which
was acquired through foreclosure on loans secured by real estate and
land previously held for future branch development. Other real estate
owned is initially recorded at the lower of the recorded investment in
the loan or fair market value of the property less estimated selling
costs. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses. Subsequent declines in
market value of foreclosed property held in other real estate are
recognized through an allowance for losses and a charge to earnings.
(Continued)
10
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(1) Continued
Expenses incurred in connection with operating the properties and gains
or losses upon sale are included in other expenses.
Earnings Per Share
Earnings per share have been computed on the basis of the weighted
average number of shares outstanding during the year. The assumed
exercise of stock options has not been included in the computations
because the resulting dilution is not material.
(2) Cash and Due from Banks
As a member of the Federal Reserve System, the Bank is required to
maintain certain daily reserve balances. The average reserve balances
maintained in accordance with such requirements for the weeks including
December 31, 1996 and 1995 were approximately $103,600 and $94,300,
respectively.
(3) Investment Securities and Securities Available for Sale
The following table shows amortized cost, gross unrealized gains and
losses and fair value of investment securities as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities - U.S. Government
and agencies $ 1,398,813 2,243 80,202 1,320,854
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities - U.S. Government
and agencies $ 1,398,371 1,629 105,000 1,295,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
11
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(3) Continued
The following table shows amortized cost, gross unrealized gains and
losses and fair value of securities available for sale as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 11,706,771 2,871 224,463 11,485,179
States and political subdivisions 5,550,490 79,852 28,658 5,601,684
Federal Reserve Bank stock 197,250 - - 197,250
Other securities 720,605 61 11,945 708,721
- -----------------------------------------------------------------------------------------------------------
Total securities available for sale $ 18,175,116 82,784 265,066 17,992,834
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $ 12,133,557 91,583 104,674 12,120,466
States and political subdivisions 7,196,079 156,872 28,326 7,324,625
Federal Reserve Bank stock 120,150 - - 120,150
Other securities 1,493,282 16,388 19,835 1,489,835
- -----------------------------------------------------------------------------------------------------------
Total securities available for sale $ 20,943,068 264,843 152,835 21,055,076
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale were $6,927,717,
$2,011,599 and $1,896,084 in 1996, 1995 and 1994, respectively. These
sales resulted in gross gains of $45,184, $8,656 and $5,270 in 1996,
1995 and 1994, respectively, and gross losses of $42,206 and $564 in
1996 and 1994, respectively.
As a member of the Federal Reserve System, the Bank is required to hold
capital stock of the Federal Reserve Bank of Richmond. The amount
required to be held is based on six percent of qualifying capital and
surplus.
In December 1995, upon issuance of implementation guidance for SFAS No.
115 by the Financial Accounting Standards Board, the Company
transferred investment securities with an amortized cost of $12,845,033
and fair value of $12,932,782 to securities available for sale.
Securities available for sale having a fair value of $992,499 at
December 31, 1996 and 1995 were pledged to secure deposits and to meet
other legal requirements.
(Continued)
12
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(3) Continued
The amortized cost and fair value of investment securities and
securities available for sale at December 31, 1996, by contractual
maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
cost value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities:
Due within one year $ 250,000 249,395
Due after one year through five years 398,813 389,806
Due after five years through ten years 500,000 432,278
Due after ten years 250,000 249,375
- ------------------------------------------------------------------------------------------------------------
$ 1,398,813 1,320,854
- ------------------------------------------------------------------------------------------------------------
Securities available for sale:
Due within one year 221,176 221,481
Due after one year through five years 2,972,946 2,961,533
Due after five years through ten years 8,179,941 8,109,219
Due after ten years 6,801,053 6,700,601
- ------------------------------------------------------------------------------------------------------------
$ 18,175,116 17,992,834
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Loans and Allowance for Loan Losses
The composition of loans at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 35,104,371 32,143,461
Real estate - construction 3,399,801 3,118,769
Real estate - mortgage 2,885,286 2,702,213
Installment 6,384,310 4,105,772
Home equity 325,138 217,937
Bank card 381,161 336,052
- -----------------------------------------------------------------------------------------------------------
$ 48,480,067 42,624,204
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
13
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(4) Continued
Activity in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 614,604 581,303 575,734
Provision charged to expense 130,000 50,000 245,000
Loans charged off (120,387) (148,279) (270,155)
Recoveries 130,120 131,580 30,724
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 754,337 614,604 581,303
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Loans for which the accrual of interest has been discontinued totaled
approximately $755,920 at December 31, 1996 and $266,850 at December
31, 1995. The effect on interest income from non-accrual loans was
approximately $43,900, $20,000 and $35,700 for the years ended in 1996,
1995 and 1994, respectively.
At December 31, 1996 and 1995, the recorded investment in loans which
have been identified as impaired loans, in accordance with SFAS 114, as
amended, totaled $755,920 and $266,850, respectively. Of this amount at
December 31, 1996, $110,852 related to loans with no valuation
allowance and $645,068 related to loans with a corresponding valuation
allowance of $73,300. At December 31, 1995, $30,000 related to loans
with no valuation allowance and $236,850 related to loans with a
corresponding valuation allowance of $24,185.
For the years ended December 31, 1996 and 1995, the average recorded
investment in impaired loans was approximately $799,500 and $237,850,
respectively, and no interest income was recognized on these impaired
loans. Impaired loans at January 1, 1995, the date the Bank adopted
SFAS 114, as amended, totaled approximately $32,900. The initial
adoption of SFAS 114, as amended, did not require an increase to the
Bank's allowance for loan losses.
(Continued)
14
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(4) Continued
The Bank, in the normal course of business, makes loans to certain
directors and executive officers of the Company and certain
corporations and individuals related to such persons. These loans have
been made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other customers and did not involve more than the normal risk of
collectibility at the time made. Following is a summary of activity
during 1996 and 1995 for such loans:
Balance Balance
Year January 1 Additions Repayments December 31
----------------------------------------------------------------------
1996 $ 3,071,819 4,613,881 4,437,195 3,248,505
1995 2,500,994 5,241,837 4,671,012 3,071,819
---------------------------------------------------------
(5) Premises and Equipment
Premises and equipment at December 31, 1996 and 1995 is composed of the
following:
<TABLE>
<CAPTION>
Estimated
lives
(years) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land - $ 447,988 447,988
Building and improvements 1-40 871,790 871,790
Furniture, fixtures and equipment 3-40 940,932 873,958
Computer equipment 5 355,569 341,168
Vehicles 5 24,505 26,835
Construction in progress (new branch) - 560,427 -
-------------------------------------------
3,201,211 2,561,739
Less accumulated depreciation 1,398,998 1,276,465
- ----------------------------------------------------------------------------------------------------------
Premises and equipment, net $1,802,213 1,285,274
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
15
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(6) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996,
1995 and 1994 consists of:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current - federal $ 382,348 260,234 123,260
Deferred - federal (92,348) (70,234) 31,740
- -----------------------------------------------------------------------------------------------------------
$ 290,000 190,000 155,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" income tax expense (computed by applying the statutory U.S.
federal corporate income tax rate to "income before income taxes") as
follows:
<TABLE>
<CAPTION>
Percent of pretax income
-------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
Tax-exempt income (8.0) (11.3) (10.7)
Other, net (.1) .6 (.1)
- ---------------------------------------------------------------------------------------------------------
25.9% 23.3% 23.2%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
16
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(6) Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to the allowance for loan losses $ 132,948 64,792
Deferred loan fees 1,775 6,238
Other real estate owned, principally due to the allowance for losses 50,268 26,096
Unrealized losses on securities available for sale 61,976 -
- ------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 246,967 97,126
Deferred tax liabilities:
Unrealized gains on securities available for sale - 38,083
Premises and equipment, principally due to depreciation 45,817 50,300
- ------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 45,817 88,383
- ------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 201,150 8,743
- ------------------------------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon
recent levels of taxable income and projections for future taxable
income over the periods in which the deferred tax assets are expected
to become deductible, management believes it is more likely than not
the Company will realize the benefits of all deductible differences.
(7) Stockholders' Equity and Regulatory Matters
In October 1995, through a public and rights offering, the Company
issued 259,075 shares of its common stock and realized $2,569,703 in
net proceeds.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated
(Continued)
17
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(7) Continued
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31,
1996, that the Bank meets all capital adequacy requirements to which it
is subject.
The most recent notification from the Federal Reserve Bank as of
September 30, 1995, categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action (PCA). To
be categorized as adequately capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
Required in order
Required to be well
for capital capitalized under
As of December 31, 1996 Actual adequacy purposes PCA provisions
- -----------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 8,710,838 14.9% 4,672,657 8.0% 5,840,821 10.0%
Tier 1 capital
(to risk weighted assets) 8,710,838 14.9% 2,336,329 4.0% 3,504,493 6.0%
Tier 1 capital
(to average assets) 8,710,838 11.5% 2,988,226 4.0% 3,735,283 5.0%
- -----------------------------------------------------------------------------------------------
As of December 31, 1995
Total capital
(to risk weighted assets) 7,927,911 15.6% 4,062,572 8.0% 5,078,215 10.0%
Tier 1 capital
(to risk weighted assets) 7,927,911 11.7% 2,712,649 4.0% 3,390,811 6.0%
Tier 1 capital
(to average assets) 7,927,911 11.6% 2,712,649 4.0% 3,390,811 5.0%
- -----------------------------------------------------------------------------------------------
</TABLE>
(Continued)
18
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(8) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the
contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and standby letters of credit as it does
for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral 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 accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties. At December
31, 1996 and 1995, the Bank had approximately $2,493,446 and $2,603,722
in outstanding commitments to extend credit, respectively.
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, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing standby letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Bank had outstanding standby letters of
credit of approximately $1,011,943 and $642,611 at December 31, 1996
and 1995, respectively.
A geographic concentration exists within the Bank's loan portfolio as
most of the Bank's business activity is with customers located in
Chesterfield County, Virginia.
(Continued)
19
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(9) Stock Option Plan
During 1994, the Company adopted a stock option plan which provides for
the granting of options to key executives and directors of the Company
to purchase shares of the Company's common stock at the greater of book
value or fair market value at the date of grant. The plan provides for
the granting of stock options for 90,000 shares of the Company's common
stock and an option's maximum term is 10 years.
A summary of the status of the Company's stock option plan as of
December 31, 1996, 1995 and 1994, and changes during those years is
presented as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 72,000 $ 8.19 72,000 8.19 - -
Options granted 18,000 13.50 - - 72,000 8.19
Options exercised - - - - - -
- ---------------------------------------------------------------------------------------------
Options outstanding at
end of year 90,000 $ 9.25 72,000 8.19 72,000 8.19
- ---------------------------------------------------------------------------------------------
</TABLE>
All options are exercisable upon date of grant. The remaining
contractual lives of the options granted in 1996 and 1994 are 9.8 years
and 7.5 years, respectively, at December 31, 1996. The weighted average
remaining contractual life of total options is 8.0 years at December
31, 1996.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date consistent
with the methods of FASB Statement 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts
indicated below. In accordance with the transition provisions of FASB
Statement 123, the pro forma amounts reflect options with grant dates
subsequent to January 1, 1995 (none in 1995).
(Continued)
20
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(9) Continued
Year ended
December 31, 1996
---------------------------------------------------------------
Net income:
As reported $ 830,517
Pro forma 782,047
Net income per share:
As reported 1.05
Pro forma .99
---------------------------------------------------------------
For purposes of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with the following assumptions for
the grant in 1996: dividend yield of 2%, expected volatility of 30%,
risk-free interest rate of 5.8% and an expected option life of 5 years.
The fair value of each option granted during 1996 was $4.
(10) Employee Benefit Plans
Under the Company's 401(k) Plan, all full-time employees over 21 years
who have completed 90 days of service may elect to contribute up to 19%
of their salaries. Participants have the option of investing in several
investment funds. The Company contributed an amount equal to 100% of
the participant's contribution limited to 3% of the employee's
compensation along with a discretionary contribution at year end as
authorized by the Board of Directors. The Company's contributions are
fully vested to the participant after 7 years. The Company's
contributions to the Plan approximated $40,800, $27,500 and $11,600 in
1996, 1995 and 1994, respectively.
In 1996, the Company established a nonqualified deferred compensation
plan for executives providing for fixed annual benefits payable over a
period of 10 years in the event of death, disability or retirement at
age 65. Benefits will be funded by the Company. The cost of these
benefits is being charged to expense and accrued using a present value
method over the expected term of employment. During the year ended
December 31, 1996, the Company expensed approximately $16,000
associated with this plan.
(Continued)
21
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(11) Disclosures About Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that fair value.
Cash and Due from Banks, Federal Funds Sold and Interest-Bearing
Deposits in Other Depository Institutions
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities and Securities Available for Sale
For investment securities and securities available for sale, fair value
is determined by quoted market price. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans
The fair value of performing loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. Fair values for significant nonperforming loans
is based on recent external appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Deposits
The fair value of demand deposits, interest-bearing transaction
accounts and savings accounts is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar terms and remaining
maturities.
(Continued)
22
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(11) Continued
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated costs
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. At December 31, 1996, the
carrying amount and fair value of loan commitments and standby letters
of credit were immaterial.
The carrying amount and estimated fair values of the Company's
financial instruments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------
Carrying Fair
Amount Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 3,552,843 3,552,843
Federal funds sold 4,418,000 4,418,000
Interest-bearing deposits in other depository institutions 1,170,024 1,170,024
Investment securities 1,398,813 1,320,854
Securities available for sale 17,992,834 17,992,834
Net loans 47,725,730 47,006,228
- ------------------------------------------------------------------------------------------------------------
Financial liabilities -
Deposits $ 70,402,092 71,689,242
- ------------------------------------------------------------------------------------------------------------
1995
------------------------------------
Carrying Fair
Amount Value
- ------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 2,282,871 2,282,871
Federal funds sold 3,228,000 3,228,000
Interest-bearing deposits in other depository institutions 865,226 865,226
Investment securities 1,398,371 1,295,000
Securities available for sale 21,055,076 21,055,076
Net loans 42,009,600 42,473,752
- ------------------------------------------------------------------------------------------------------------
Financial liabilities -
Deposits $ 65,068,888 65,642,464
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
23
<PAGE>
COUNTY BANK OF CHESTERFIELD AND SUBSIDIARY
Notes to Consolidated Financial Statements
===============================================================================
(12) Subsequent Event
On January 14, 1997, the Board of Directors voted to enter into an
Agreement and Plan of Reorganization (the Agreement) with Community
Bankshares Incorporated, a two-bank holding company with operations
principally in Petersburg and Richmond, Virginia. In accordance with
the Agreement the Company will become a wholly-owned subsidiary of
Community Bankshares Incorporated through the exchange of each
outstanding share of common stock of the Company for 1.1054 shares of
the common stock of Community Bankshares Incorporated. The consummation
of the Agreement is subject to a number of conditions including
shareholder and regulatory approvals.
24
<PAGE>
Appendix C
OPINION OF MCKINNON & COMPANY, INC.
February 26, 1997
Board of Directors
County Bank of Chesterfield
10400 Hull Street
Midlothian, Virginia 23112-3306
Dear Board Members:
In connection with the proposed acquisition of County Bank of
Chesterfield ("CBOC") 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 January 14, 1997 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 CBOC. Under the terms of the Agreement and Share Exchange, holders of all
outstanding shares of CBOC stock will receive consideration equal to 1.1504 CBI
shares prior to the effective date of the Reorganization (the "Reorganization
Effective Date") for each CBOC 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 nine years McKinnon has been lead managing underwriter in
approximately twenty four 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,
CBOC, and, on a pro forma basis, CBI and CBOC combined, and material proposed in
connection with the Agreement and Share Exchange, including, among other things,
the following:
(1) the Agreement and Share Exchange, dated as of January 14, 1997
among CBI and CBOC;
(2) CBI's and CBOC's financial results for fiscal years 1990
through 1996, and certain documents and information we deem relevant to our
analysis;
(3) held discussions with senior management of CBI and CBOC
regarding past and current business operations of, and outlook for, CBI, CBOC,
including trends, the terms of the proposed Reorganization, and related matters;
(4) reviewed the reported price and trading activity of CBI and
CBOC Common Stock and compared financial and stock market information (when
available) for CBI and CBOC 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;
(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 CBOC;
(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 CBOC. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of CBI or CBOC. With respect to financial forecasts, we have relied on
information furnished to us by CBI and CBOC and we have assumed that they have
been reasonably prepared and reflect the best currently available estimates of
CBI's and CBOC's management as to the expected future financial performance of
CBI and CBOC, as the case may be. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience 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 and CBOC listed on the NASDAQ Small Cap Market. Our opinion is
directed to the Board of Directors of CBOC. 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 CBOC Common Stock.
Very truly yours,
McKinnon & Company, Inc.
<PAGE>
Appendix D
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:
D-1
<PAGE>
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 o a dissolution on which the
shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant
to court order, or (ii) a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of
sale;
4. Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
B. A shareholder entitled to dissent and obtain payment for his
shares under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with
respect to a plan of merger or share exchange or a sale or exchange of property
there shall be no right of dissent in favor of holders of shares of any class or
series which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation
issuing such shares provide otherwise;
2. In the case of a plan of merger or share exchange,
the holders of the class or series are required under the plan of
merger orshare 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
D-2
<PAGE>
3. The transaction to be voted on is an "affiliated
transaction" and is not approved by a majority of "disinterested
directors" as such terms are defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of
the fair value of his shares shall terminate upon the occurrence of any one of
the following events:
1. The proposed corporate action is abandoned or
rescinded;
2. A court having jurisdiction permanently enjoins or
sets aside the corporate action; or
3. His demand for payment is withdrawn with the written
consent of the corporation.
ss. 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
1. He submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he
is the beneficial shareholder or over which he has power to direct
the vote.
ss. 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights
under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
B. If corporate action creating dissenters' rights under
ss. 13.1-730 is taken without a vote of shareholders, the corporation, during
the ten-day period after the effectuation of such corporate action, shall 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
D-3
<PAGE>
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.
D-4
<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
D-5
<PAGE>
fair value of the shares and of how the interest was calculated, and a statement
of the dissenter's right to demand payment under ss. 13.1-739.
ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of
his own estimate of the fair value of his shares and amount of interest due, and
demand payment of his estimate (less any payment under ss. 13.1-737), or reject
the corporation's offer under ss. 13.1-738 and demand payment of the fair value
of his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this
section unless he notifies the corporation of his demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for his shares.
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains unsettled,
the corporation shall commence a 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
D-6
<PAGE>
corporation or (ii) for the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to withhold payment
under ss. 13.1-738.
ss. 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under
ss. 13.1-740 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters did not act in good
faith in demanding payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and expenses
of experts, excluding those of counsel, for the respective parties, in amounts
the court finds equitable:
1. Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in
favor of any other party, if the court finds that the party against
whom the fees and expenses are assessed did not act in good faith
with respect to the rights provided by this article.
C. If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
D. In a proceeding commenced under subsection A of
ss. 13.1-737 the court shall assess the costs against the corporation, except
that the court may assess costs against all or some of the dissenters who are
parties to the proceeding, in amounts the court finds equitable, to the extent
the court finds that such parties did not act in good faith in instituting the
proceeding.
D-7
<PAGE>
Appendix E
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED FINANCIAL REPORT
December 31, 1996
<PAGE>
C O N T E N T S
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
- -------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3 - 4
Consolidated statements of stockholders' equity 5
Consolidated statements of cash flows 6 - 7
Notes to consolidated financial statements 8 - 29
- -------------------------------------------------------------------------------
<PAGE>
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 subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
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 did not audit the financial statements of
Commerce Bank of Virginia, a wholly-owned subsidiary. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Commerce Bank of
Virginia, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Community Bankshares Incorporated
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Mitchell, Wiggins & Company, LLP
Petersburg, Virginia
January 17, 1997
-1-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 9,337,968 $ 7,608,418
Federal funds sold 5,392,000 6,044,000
------------- -------------
Total cash and cash equivalents 14,729,968 13,652,418
Securities available for sale 19,337,299 10,975,301
Securities held to maturity (approximate market value,
$16,793,202 in 1996 and $23,430,785 in 1995) 16,885,814 23,282,101
Loans, net 115,135,240 107,405,161
Bank premises and equipment, net 2,652,610 2,847,981
Other real estate owned 766,579 784,443
Accrued interest receivable 1,081,163 982,274
Other assets 1,425,417 1,147,439
------------- -------------
$ 172,014,090 $ 161,077,118
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 28,498,042 $ 23,532,250
Interest-bearing demand deposits 39,864,913 40,568,447
Savings deposits 27,478,841 24,387,463
Time deposits, $100,000 and over 10,751,753 10,979,834
Other time deposits 45,412,749 44,103,097
------------- -------------
152,006,298 143,571,091
Accrued interest payable 478,090 489,824
Other liabilities 541,583 793,782
Guaranteed debt of Employee Stock Ownership Trust 240,000 330,000
------------- -------------
153,265,971 145,184,697
------------- -------------
Commitments and Contingencies
(Note 16)
Stockholders' Equity
Capital stock, par value $3; authorized 4,000,000 shares;
issued 1996 1,901,080 shares; 1995 1,853,975 shares 5,703,240 5,561,925
Surplus 1,712,201 1,688,322
Retained earnings 11,716,193 8,885,976
Net unrealized gain (loss) on available for sale securities
net of tax (144,982) 86,198
------------- -------------
18,986,652 16,222,421
Unearned ESOP shares (238,533) (330,000)
------------- -------------
18,748,119 15,892,421
------------- -------------
$ 172,014,090 $ 161,077,118
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 11,348,077 $ 10,563,448 $ 8,614,800
Interest on investment securities:
U. S. Government agencies and corporations 2,129,199 1,561,989 1,235,943
Other securities 90,200 132,603 157,465
States and political subdivisions 59,384 47,513 64,655
Interest on federal funds sold and securities
purchased under agreements to resell 265,570 376,581 147,321
------------------------------------------
Total interest income 13,892,430 12,682,134 10,220,184
------------------------------------------
Interest expense:
Interest on deposits 5,350,688 5,080,578 3,722,487
Interest on federal funds purchased and securities
sold under agreements to repurchase 4,732 16,624 8,961
------------------------------------------
Total interest expense 5,355,420 5,097,202 3,731,448
------------------------------------------
Net interest income 8,537,010 7,584,932 6,488,736
Provision for loan losses 401,500 442,000 265,838
------------------------------------------
Net interest income after provision for
loan losses 8,135,510 7,142,932 6,222,898
------------------------------------------
Other income:
Service charges, commissions and fees 1,024,546 977,388 1,027,763
Security gains 6,047 29,763 47,800
Gain (loss) on sale of other real estate 54,975 -- (33,980)
Other operating income 128,910 127,446 189,486
------------------------------------------
Total other income 1,214,478 1,134,597 1,231,069
------------------------------------------
Other expenses:
Salaries, wages and employee benefits 2,800,070 2,599,266 2,441,656
Net occupancy 357,811 337,260 350,682
Furniture and equipment 387,227 336,420 447,716
Other operating 428,460 440,133 448,468
Insurance, general 36,206 55,839 104,641
Professional fees 202,481 202,272 102,828
Directors' fees 153,827 131,932 122,602
FDIC assessments 4,000 134,857 268,033
Postage 116,171 117,922 130,279
Stationery and supplies 139,060 135,486 143,150
Taxes 246,264 207,588 209,452
------------------------------------------
Total other expenses $ 4,871,577 $ 4,698,975 $ 4,769,507
------------------------------------------
</TABLE>
(Continued)
-3-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 4,478,411 $ 3,578,554 $ 2,684,460
Income taxes 1,422,297 1,223,892 885,619
------------------------------------------
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
------------------------------------------
Earnings per common and common equivalent share $ 1.55 $ 1.2 $ 1.00
------------------------------------------
Earnings per common share, assuming full dilution $ 1.55 $ 1.2 $ 1.00
------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Capital Retained
Stock Surplus Earnings
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1994 $ 3,517,56 $ 1,919,285 $ 5,793,097
Issuance of common stock pursuant to
exercise of stock options 9,270 2,450 --
Net income for the year ended
December 31, 1994 -- -- 1,798,841
Cash dividends declared -- -- (171,000)
Unrealized loss on available for
sale securities, net -- -- --
------------------------------------------
Balance, December 31, 1994 3,526,830 1,921,735 7,420,938
Issuance of common stock pursuant to
exercise of stock options 15,000 47,500 --
Stock split effected in the form of a 100%
stock dividend 1,725,000 (1,036,432) (688,568)
Proceeds from sale of stock 295,095 755,519 194
Net income for the year ended
December 31, 1995 -- -- 2,354,662
Cash dividends declared -- -- (201,250)
Unrealized gain on available for sale
securities, net -- -- --
Leveraged ESOP stock purchase -- -- --
Release of ESOP shares -- -- --
------------------------------------------
Balance, December 31, 1995 5,561,925 1,688,322 8,885,976
Issuance of common stock pursuant to
exercise of stock options 130,420 78,880 --
Cash settlement of options -- (123,750) --
Proceeds from sale of stock to ESOP 10,895 29,188 --
Purchase of fractional shares -- (1,918) --
Net income for the year ended
December 31, 1996 -- -- 3,056,114
Cash dividends declared -- -- (232,000)
Unrealized loss on available for sale
securities, net -- -- --
Release of ESOP shares -- 41,479 6,103
------------------------------------------
Balance, December 31, 1996 $ 5,703,240 $ 1,712,201 $ 11,716,193
==========================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Securities Unearned
Gain ESOP
(Loss) Shares
-------------------------------
<S> <C> <C>
Balance, January 1, 1994 $ -- $ --
Issuance of common stock pursuant to
exercise of stock options -- --
Net income for the year ended
December 31, 1994 -- --
Cash dividends declared -- --
Unrealized loss on available for
sale securities, net (14,990) --
-------------------------------
Balance, December 31, 1994 (14,990) --
Issuance of common stock pursuant to
exercise of stock options -- --
Stock split effected in the form of a 100%
stock dividend -- --
Proceeds from sale of stock -- --
Net income for the year ended
December 31, 1995 -- --
Cash dividends declared -- --
Unrealized gain on available for sale
securities, net 101,188 --
Leveraged ESOP stock purchase -- (365,500)
Release of ESOP shares -- 35,500
-------------------------------
Balance, December 31, 1995 86,198 (330,000)
Issuance of common stock pursuant to
exercise of stock options -- --
Cash settlement of options --
Proceeds from sale of stock to ESOP -- --
Purchase of fractional shares -- --
Net income for the year ended
December 31, 1996 -- --
Cash dividends declared -- --
Unrealized loss on available for sale
securities, net (231,180) --
Release of ESOP shares -- 91,467
-------------------------------
Balance, December 31, 1996 $(144,982) $(238,533)
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 347,958 295,455 405,065
Deferred income taxes (56,072) (43,984) (35,647)
Provision for loan losses 401,500 442,000 265,838
Amortization and accretion of investment securities 116,509 8,120 28,498
Gain on sale of securities (6,047) (29,763) (47,800)
(Gain) loss on sale of other real estate (54,975) -- 33,980
Gain on sale of bank premises and equipment -- (26,975) (14,181)
Release of ESOP shares 49,049 -- --
Changes in operating assets and liabilities:
Increase in mortgage loans held for sale -- -- 2,125,261
Increase in accrued interest receivable (98,889) (115,129) (215,444)
Increase (decrease) in accrued expenses (126,737) 125,486 118,336
Net change in other operating assets and liabilities (338,622) (5,693) (17,572)
--------------------------------------------
Net cash provided by operating activities 3,289,788 3,004,179 4,445,175
--------------------------------------------
Investing Activities
Proceeds from maturity of investment securities 12,417,633 9,720,196 8,070,530
Proceeds from sale of investment securities 191,946 78,700 87,800
Purchase of investment securities (14,927,496) (20,148,829) (8,077,085)
Net increase in loans (8,391,282) (7,739,338) (12,484,587)
Proceeds from the sale of bank premises and equipment -- 98,561 19,750
Proceeds from the sale of other real estate 565,556 -- 19,603
Capital expenditures (151,940) (530,167) (325,430)
(Increase) decrease in other assets (9,917) (8,530) 26,319
Purchase of other real estate (233,660) (328,900) --
--------------------------------------------
Net cash used in investing activities (10,539,160) (18,858,307) (12,663,100)
--------------------------------------------
Financing Activities
Net increase in deposits 8,435,207 19,678,772 1,679,554
Cash settlement of options (123,750) -- --
Payment for fractional shares (1,918) -- --
Proceeds from sale of stock to ESOP 40,083 -- --
Net increase (decrease) in federal funds purchased -- (793,000) 793,000
Dividends paid (232,000) (201,250) (171,000)
Net proceeds from issuance of common stock 209,300 1,113,308 11,720
--------------------------------------------
Net cash provided by financing activities $ 8,326,922 $ 19,797,830 $ 2,313,274
--------------------------------------------
(Continued)
</TABLE>
-6-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents $ 1,077,550 $ 3,943,702 $ (5,904,651)
Cash and cash equivalents, beginning 13,652,418 9,708,716 15,613,367
--------------------------------------------
Cash and cash equivalents, ending $ 14,729,968 $ 13,652,418 $ 9,708,716
--------------------------------------------
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 5,366,926 $ 4,980,649 $ 3,712,327
--------------------------------------------
Income taxes paid $ 1,811,649 $ 1,191,836 $ 803,000
--------------------------------------------
Supplemental Disclosure Of Noncash Investing
Activities
Acquisition of other real estate:
Purchase price $ 1,082,521 $ 545,882 $ 25,000
Reduction of loans (848,861) (216,982) (25,000)
--------------------------------------------
Cash paid to acquire other real estate $ 233,660 $ 328,900 $ --
--------------------------------------------
Sale of other real estate:
Sales price, net of closing cost $ 1,119,714 $ 35,000 $ 150,838
Increase in loans (554,158) (35,000) (131,235)
--------------------------------------------
Cash proceeds from sale of other real estate $ 565,556 $ -- $ 19,603
--------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-7-
<PAGE>
COMMUNITY BANKSHARES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of operations: Community Bankshares Incorporated is a bank holding
company headquartered in Petersburg, Virginia. The Corporation's subsidiaries,
The Community Bank and Commerce Bank of Virginia, provide a variety of financial
services to individuals and corporate customers from its branches located
throughout the Richmond Metropolitan Area and Southside Virginia.
Consolidation and basis of financial statement presentation: The accompanying
consolidated financial statements include the accounts of Community Bankshares
Incorporated, and its subsidiaries, The Community Bank and Commerce Bank of
Virginia. All significant intercompany transactions and balances have been
eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management uses estimates and assumptions. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. A substantial portion of the Corporation's loans are
secured by real estate in local markets. In addition, foreclosed real estate is
located in this same market. Accordingly, the ultimate collectibility of a
substantial portion of the Corporation's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Cash and cash equivalents: For purposes of reporting the consolidated statements
of cash flows, the Corporation includes cash on hand, amounts due from banks,
federal funds sold and all highly liquid debt instruments purchased with a
maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash flows from deposits and loans are
reported net.
The Corporation maintains amounts due from banks which, at times, may exceed
federally insured limits. The Corporation has not experienced any losses in such
accounts.
Investment securities: Securities are classified as held to maturity when
management has the positive intent and the Corporation has the ability at the
time of purchase to hold them until maturity. These securities are carried at
cost adjusted for amortization of premium and accretion of discount, computed by
the straight-line method over their contractual lives. If the interest method of
accounting for amortization of premiums and accretion of discounts was used, it
would not have a material effect on the consolidated financial statements. Gains
and losses on the sale of such securities are determined by the specific
identification method.
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
accounted for at market value on an aggregate basis. These include securities
used as part of the Corporation'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, 1996, 1995, and 1994.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid
principal, reduced by unearned discount and fees and an allowance for possible
loan losses.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is accrued
daily on the outstanding balances.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Corporation 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 Corporation is generally amortizing these amounts over the
average contractual life of the related loans.
Effective January 1, 1995, the Corporation adopted the SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan". This Statement, as amended by SFAS No.
118, generally requires impaired loans to be measured on the present value of
expected future cash flows discounted at the loan's effective interest rate or
as an expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Individually identified impaired loans are measured based on the present value
of payments expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement also may be based on observable
market prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. The
Corporation does not aggregate loans for risk classification. Loans that are to
be foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for credit
losses. 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, therefore, there
is no impact on the comparability of credit risk information.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
The basic policy of the Corporation is to charge off loans when the loss can be
readily determined. Changes in the allowance for loan losses relating to
impaired loans are charged or credited to the provision for loan losses.
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. Loans may be returned to accrual status when all
principal and interest amounts contractually due are reasonably assured of
repayment.
When a loan is classified as nonaccrual, all interest receivable on that
particular loan is charged back to income at that time. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. On charged-off loans, cash receipts in excess of the
amount charged to the allowance for loan losses are recognized as income on the
cash basis.
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. Expenditures for
betterments and major renewals are capitalized and ordinary maintenance and
repairs are charged to operations as incurred.
Foreclosed properties: Foreclosed properties represents real estate held for
resale acquired through foreclosure or other proceedings. Foreclosed properties
are held for sale and are recorded at the lower of the recorded amount of the
loan or fair value of the properties less estimated costs of disposal. Any
write-down to fair value at the time of foreclosure is charged to the allowance
for loan losses. Property is evaluated regularly to ensure the recorded amount
is supported by its current fair value and valuation allowances to reduce the
carrying amount to fair value less estimated costs to dispose are recorded as
necessary and are charged to expense.
Income taxes: The provision for income taxes relates to items of revenue and
expenses recognized for financial accounting purposes during each of the years.
The actual current tax liability may be more or less than the charge against
earnings due to the effect of deferred income taxes.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings per share: All per share calculations are based on the weighted average
number of shares outstanding of common and common equivalent shares during each
year. Calculations are based on 1,964,894 shares outstanding in 1996, 1,853,627
shares outstanding in 1995, and 1,798,073 shares outstanding in 1994.
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Current accounting developments: In June 1996, the Financial Accounting
Standards Board issued its Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. After a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. In addition, a transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management does not expect the application of this pronouncement
to have a material effect on the consolidated financial statements of the
Corporation.
Reclassifications: Various items in the consolidated statements of income and
cash flows for the years ended December 31, 1995 and 1994 have been reclassified
to conform to the classifications used at December 31, 1996. These
reclassifications have no effect on net income.
Note 2. Securities
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U. S. Treasury and agency securities $12,134,231 $ 8,412 $ (187,418) $11,955,225
Mortgage-backed securities 5,932,769 5,053 (50,215) 5,887,607
State and County Municipal Bonds 1,179,144 6,758 (2,260) 1,183,642
Other 310,825 -- -- 310,825
------------------------------------------------------
$19,556,969 $ 20,223 $ (239,893) $19,337,299
======================================================
Held to Maturity
U. S. Treasury and agency securities $ 2,449,331 $ 6,213 $ (21,339) $ 2,434,205
Mortgage-backed securities 13,028,030 46,342 (145,836) 12,928,536
Corporate securities 399,936 3,048 -- 402,984
State and County Municipal Bonds 1,008,517 24,502 (5,542) 1,027,477
------------------------------------------------------
$16,885,814 $ 80,105 $ (172,717) $16,793,202
======================================================
</TABLE>
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (Continued)
The amortized cost and estimated market values at December 31, 1996, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Available for Sale
Due in one year or less $ 425,942 $ 425,980
Due after one year but less than five years 5,879,998 5,825,959
Due after five years but less than ten years 7,893,993 7,768,958
Due after ten years 5,357,036 5,316,402
-------------------------
$19,556,969 $19,337,299
-------------------------
Held to Maturity
Due in one year or less $ 1,877,061 $ 1,886,542
Due after one year but less than five years 1,172,878 1,162,523
Due after five years but less than ten years 2,053,948 2,040,960
Due after ten years 11,781,927 11,703,177
-------------------------
$16,885,814 $16,793,202
-------------------------
</TABLE>
The amortized cost and fair market value of mortgage-backed securities are
presented in the available-for-sale and held-to-maturity categories by
contractual maturity in the preceding table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations without call or prepayment penalties.
A summary of the amortized cost and estimated market values of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale
U. S. Treasury and agency securities $ 5,253,137 $ 51,368 $ (3,970) $ 5,300,535
Mortgage-backed securities 5,318,010 89,212 (6,006) 5,401,216
Other 273,550 -- -- 273,550
------------------------------------------------------
$10,844,697 $ 140,580 $ (9,976) $10,975,301
------------------------------------------------------
Held to Maturity
U. S. Treasury and agency securities $ 7,990,490 $ 48,438 $ (9,883) $ 8,029,045
Mortgage-backed securities 12,899,676 139,000 (81,696) 12,956,980
Corporate securities 1,256,485 13,647 (392) 1,269,740
State and County Municipal Bonds 1,135,450 41,585 (2,015) 1,175,020
------------------------------------------------------
$23,282,101 $ 242,670 $ (93,986) $23,430,785
------------------------------------------------------
</TABLE>
-12-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (Continued)
Proceeds from sales of securities available for sale were $191,946, $78,700 and
$87,800 during 1996, 1995 and 1994, respectively, resulting in gross gains of
$6,047, $29,763 and $47,800 and no losses.
Securities with an amortized cost of $4,878,208 and $7,697,795 and a market
value of $4,792,546 and $7,697,647 as of December 31, 1996 and 1995,
respectively, were pledged as collateral to secure public funds as required by
law.
Note 3. Loans
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Commercial $ 12,496,652 $ 11,971,254
Installment 8,354,731 10,348,203
Real estate 93,129,107 84,941,282
Other 3,332,970 2,529,000
-------------------------------------
117,313,460 109,789,739
Less unearned discount (932,151) (1,148,964)
-------------------------------------
116,381,309 108,640,775
Allowance for loan losses (1,246,069) (1,235,614)
-------------------------------------
Loans, net $ 115,135,240 $ 107,405,161
-------------------------------------
</TABLE>
An analysis of the transactions in the allowance for loan losses is given below:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,235,614 $ 1,099,233 $ 938,383
Loans charged off (568,967) (357,934) (251,774)
Recoveries credited to reserve 177,922 52,315 146,786
Provision charged to operations 401,500 442,000 265,838
----------------------------------------------------
Balance, end of year $ 1,246,069 $ 1,235,614 $ 1,099,233
----------------------------------------------------
</TABLE>
-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
At December 31, 1996 and 1995, the Corporation had loans totaling approximately
$736,000 and $426,000, respectively, for which impairment had been recognized.
Of the total loans impaired, $51,000 and $64,000, respectively, were valued on
the present value of future cash flows and $685,000 and $362,000, respectively,
were valued according to the underlying collateral. The average balance of the
impaired loans amounted to approximately $888,000 and $460,500 for the years
ended December 31, 1996 and 1995, respectively. The allowance for loan losses
related to these loans totaled approximately $184,000 and $174,000 at December
31, 1996 and 1995, respectively. The following is a summary of cash receipts on
these loans and how they were applied for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Cash receipts applied to reduce principal balance $ 52,008 $ 14,683
Cash receipts recognized as interest income 66,584 10,241
---------------------------
Total cash receipts $ 118,592 $ 24,924
---------------------------
</TABLE>
At December 31, 1996 and 1995, the Corporation had nonaccrual loans of
approximately $240,000 and $220,000, respectively. If interest on these loans
had been recognized at the original interest rates, interest income would have
increased approximately $6,000 and $12,000 in 1996 and 1995, respectively.
Note 4. Bank Premises and Equipment
Major classifications of bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Land $ 423,647 $ 423,647
Bank premises 2,628,585 2,587,190
Furniture and equipment 2,678,089 2,567,542
-------------------------------
5,730,321 5,578,379
Less accumulated depreciation 3,077,711 2,730,398
-------------------------------
$ 2,652,610 $ 2,847,981
-------------------------------
</TABLE>
Note 5. Maturities of Certificates of Deposits
The scheduled maturities of certificates of deposits at December 31, 1996 are as
follows:
Year Ended December 31,
- -----------------------
1997 $ 39,571,495
1998 6,940,304
1999 2,838,452
2000 5,059,951
2001 1,754,300
----------------
$ 56,164,502
----------------
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes
The components of the income tax provision for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
------------------------------------------------
Currently payable $ 1,404,535 $ 1,302,586 $ 921,286
Deferred 17,762 (78,694) (35,667)
-------------------------------------------------
$ 1,422,297 $ 1,223,892 $ 885,619
-------------------------------------------------
A reconciliation of the expected income tax expense computed at 34 percent to
the income tax expense included in the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Tax provision computed by applying current Federal
income tax rates to income before income taxes $ 1,522,660 $ 1,216,708 $ 912,716
Cash settlement of nonstatutory stock options (42,075) -- --
Exercise of nonstatutory stock options (72,400) -- --
Municipal bond interest (13,900) (9,562) (22,000)
Other 28,012 16,746 (5,097)
---------------------------------------
$ 1,422,297 $ 1,223,892 $ 885,619
---------------------------------------
</TABLE>
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes (Continued)
The deferred income taxes result from timing differences in the recognition of
certain income and expense items for tax and financial reporting purposes. The
sources of these timing differences and their related tax effect are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Difference between the depreciation methods
used for financial statements and for income
tax purposes $ (3,905) $ 26,951 $(21,200)
Difference between loan loss provision charged
to operating expense and the bad debt deduction
taken for income tax purposes 5,599 (46,140) (54,642)
Accretion of discount recognized on financial
statements but not recognized for income tax
purposes until realized 631 708 749
Difference between accrual method used for
financial statement and cash method used
for income tax purposes 907 (20,448) 54,032
Deferred compensation 14,530 (39,765) (14,606)
--------------------------------
$ 17,762 $(78,694) $(35,667)
--------------------------------
</TABLE>
Net deferred tax assets consist of the following components as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $311,225 $316,824
Deferred compensation 79,758 94,288
Unrealized loss on available for sale securities 74,688 --
--------------------
$465,671 $411,112
--------------------
Deferred tax liabilities:
Accrual to cash basis adjustment $130,887 $130,031
Investment securities 10,300 9,669
Property and equipment 35,102 39,007
Unrealized gain on available for sale securities -- 44,406
--------------------
$176,289 $223,113
--------------------
Deferred tax assets, net $289,382 $187,999
--------------------
</TABLE>
-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deferred Compensation Agreements
The Community Bank had deferred compensation agreements for certain officers
providing for payments upon retirement, death or disability. During the year
ended December 31, 1996, the Board of Directors of The Community Bank voted to
cancel all individual contracts that were not vested as of December 31, 1995. In
addition, the Board voted to accelerate the liquidation of the vested contracts
by making full and complete payment during January 1996. These agreements
consisted of individual contracts with specific terms determined on an
individual-by-individual basis. The estimated actuarial values of the benefits
were being charged to operations over the period from the effective dates of
each agreement to the normal retirement dates of the officers. Contributions
amounted to $44,201 and $20,412 for the years ended December 31, 1995 and 1994,
respectively.
Commerce Bank of Virginia has a Deferred Compensation Plan (the Plan) for the
benefit of its directors. Contributions amounted to approximately $23,700,
$38,900 and $24,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Plan provides each director with an annual benefit payment
upon attaining 70 years of age. In addition, benefit payments are available upon
early retirement, termination and death as defined by the Plan document.
During 1995, Commerce Bank of Virginia adopted a Deferred Compensation Plan
(Officers' Plan) for the benefit of certain officers. Contributions of
approximately $29,200 and $28,000 were made to the Plan during the years ended
December 31, 1996 and 1995, respectively. The Officers' Plan provides each
covered officer an annual benefit payment upon retirement. In addition, benefit
payments are available upon death or early termination as defined by the Plan
document.
Note 8. Employee Benefit Plans
Effective January 1, 1993, the Corporation through its subsidiary, The Community
Bank, established an Employee Stock Ownership Plan with 401(K) provisions by
restating, amending and consolidating the Employee Stock Ownership Plan
originally effective January 1, 1987, and the Profit-Sharing and Thrift Plan
originally effective December 31, 1981. All participants of the pension plans
are eligible to participate. Thereafter, each employee will become eligible to
participate in the plan on the first anniversary date, December 31, following
their initial date of service. The employee must be at least 18 years old and be
employed in a full-time position requiring at least 1,000 hours of service for
the plan year ending on that anniversary date. The Corporation matches 75% of
employee contributions up to 5% of the participant's compensation. Annual
contributions to the ESOP are made at the discretion of the Board of Directors.
During the year ended December 31, 1995, the ESOP purchased additional shares
through the proceeds of a $365,500 direct bank loan. The shares purchased were
pledged as collateral for its debt. As the debt is repaid, shares are released
and allocated to participants. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the shares pledged are reported as
unearned ESOP shares in the balance sheet. As shares are released, the Company
reports compensation expense equal to the current market price of the shares,
and the shares then become outstanding for earnings per share (EPS) computation.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. Dividends on unallocated ESOP shares are recorded as a reduction of
debt and interest.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Employee Benefit Plans (Continued)
Compensation expense for the 401(k) match and the ESOP was $143,600, $105,000
and $90,000 for the three years ended December 31, 1996, 1995 and 1994,
respectively. The ESOP shares as of December 31 were as follows:
1996 1995
----------------------------
Allocated shares 154,551 138,344
Unreleased shares 21,755 30,515
----------------------------
176,306 168,859
----------------------------
Fair value of unreleased shares $ 386,151 $ 404,327
----------------------------
In addition, the Corporation through its subsidiary, Commerce Bank of Virginia,
sponsors a non-contributory Employee Stock Ownership Plan (ESOP) covering
substantially all employees. Contributions to the ESOP, which are recorded as
compensation expense, and can be cash or stock at fair value, are at the
discretion of the Board of Directors and amounted to $50,000, $40,000 and
$30,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, there were 21,500 shares allocated to participants which are
considered outstanding for purposes of computation of earnings per share.
Effective June 1, 1992, the Commerce Bank of Virginia adopted a 401(k)
profit-sharing plan (the Plan) covering substantially all employees.
Participants may contribute up to 15% of their compensation to the Plan. The
Bank contributes 50% of the participant's contribution, up to 6% of the
participant's compensation, as a matching contribution. Contributions to the
Plan by the Bank were approximately $23,500, $16,800 and $12,100 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Note 9. Business Combination
On July 1, 1996, the Corporation acquired Commerce Bank of Virginia in a
business combination accounted for as a pooling of interests. Commerce Bank of
Virginia, a state-chartered member bank, became a wholly-owned subsidiary of the
Corporation through the exchange of 741,080 shares of the Corporation's common
stock for all of the outstanding stock of Commerce Bank of Virginia. The
accompanying consolidated financial statements for 1996 are based on the
assumption that the companies were combined for the full year, and the
consolidated financial statements for prior years have been restated to give
effect to the combination.
-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Business Combination (Continued)
Summarized results of operations of the separate companies for the period from
January 1, 1996 through July 1, 1996, the date of acquisition, are as follows:
Community Commerce
Bankshares Bank of
Incorporated Virginia
---------------------------------
Net interest income $ 2,384,082 $ 1,728,000
---------------------------------
Net income $ 862,955 $ 537,750
---------------------------------
Following is a reconciliation of the amounts of net interest income and net
income previously reported for 1995 and 1994 with restated amounts:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------
1995 1994
---------------------------------
<S> <C> <C>
Net interest income:
As previously reported $ 4,472,171 $ 3,783,609
Acquired company 3,112,761 2,705,127
---------------------------------
As restated $ 7,584,932 $ 6,488,736
---------------------------------
Net income:
As previously reported $ 1,622,996 $ 1,312,012
Acquired company 731,666 486,829
---------------------------------
As restated $ 2,354,662 $ 1,798,841
---------------------------------
</TABLE>
Note 10. Agreement and Plan of Reorganization
On January 14, 1997, the Board of Directors entered into an Agreement and Plan
of Reorganization (the Plan) with County Bank of Chesterfield to combine their
businesses. County Bank of Chesterfield is a Virginia state chartered bank with
its principal office located in Chesterfield, Virginia. The combination of the
two companies will be consummated through a Share Exchange under Virginia law.
Under the terms of the Plan, County Bank of Chesterfield would become a
wholly-owned subsidiary of Community Bankshares Incorporated. For each share
owned, the shareholders of County Bank of Chesterfield would receive 1.1054
shares of stock of Community Bankshares Incorporated. It is anticipated that the
transaction will qualify for and be accounted for as a pooling of interests. The
stockholders of Community Bankshares Incorporated and County Bank of
Chesterfield will be asked to consider and vote on the proposed Plan at their
Annual Meetings. If adopted by the shareholders, it is anticipated that the
transaction will become effective late in the second quarter of 1997. The
proposed transaction is subject to approval by regulatory authorities.
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Agreement and Plan of Reorganization (Continued)
If the transaction had been consummated prior to December 31, 1996, the
accompanying consolidated financial statements would have included the financial
position and results of operations of County Bank of Chesterfield. Interest
income, net income, and net income per share for the three years ended December
31, 1996 would have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income $ 20,060 $ 18,176 $ 14,922
Net income $ 3,887 $ 2,980 $ 2,313
Earnings per common and common equivalent share $ 1.37 $ 1.18 $ 0.97
Earnings per common share, assuming full dilution $ 1.36 $ 1.18 $ 0.97
</TABLE>
Note 11. Employment Agreements
The Corporation has entered into employment agreements with certain officers
which expire at dates through June 30, 1998. These agreements, which contain
continual self-renewing terms of one year subject to cancellation by the
Corporation, provide minimum salaries during the terms of the agreements and
certain severance benefits if a change of control and termination occurs as
defined in the agreements. The maximum severance benefits payable, if such a
termination upon change in control occurred at December 31, 1996, would have
been approximately $900,000.
Note 12. Incentive Compensation Plans
The Community Bank maintains a Cash Incentive Plan 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, 1996, 1995 and 1994 were
$146,294, $146,294 and $151,860, respectively.
Note 13. Incentive Stock Option and Nonstatutory Stock Option Plan
The Corporation has 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 Corporation's common stock, thus
increasing their personal and proprietary interest in the Corporation's
continued success. The options were granted at the market value on the date of
each grant. Options may be exercised from date of grant through periods ending
July 20, 2003 through October 18, 2004.
-20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Incentive Stock Option and Nonstatutory Stock Option Plan (Continued)
The following table presents a summary of options under the Plan at December 31:
<TABLE>
<CAPTION>
Shares Under Options
--------------------------------------------
Option Price 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year $6.25 - $ 9.75 203,705 213,705 206,795
Options granted 9.75 -- -- 10,000
Options exercised 6.25 - 12.12 (43,705) (10,000) (3,090)
Cash settlement of options 6.25 (10,000) -- --
------------------------------------------------------------------------
Outstanding, end of year $6.25 - $ 9.75 150,000 203,705 213,705
------------------------------------------------------------------------
</TABLE>
Note 14. Life Insurance
The Community 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, 1996, the cash surrender value of these policies was $491,764
which is included in other assets.
During the third quarter of 1994, the Bank was notified that the life insurance
carrier for the above policies, Confederation Life Insurance Company, had been
placed under regulatory control. Regulators have said that the insurance company
will continue to pay claims made; however, it will restrict access to cash value
until further notice. Rehabilitators and management are of the opinion that no
losses will occur as a result of the insurance company's rehabilitation and
accordingly, a provision for possible losses due to asset impairment is not
reflected in the accompanying consolidated financial statements.
Note 15. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
corporations to disclose the fair value of its financial instruments, whether or
not recognized in the balance sheet, where it is practical to estimate that
value.
Fair value estimates made as of December 31, 1996 are based on relevant market
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Corporation's entire holding of a particular financial instrument. In cases
where quoted market prices are not available, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets for cash and short-term instruments approximate those assets'
fair values.
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Fair Value of Financial Instruments (Continued)
Securities available for sale and investment securities: Fair values were based
on quoted market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
Loans: The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics were
considered fair values. For other loans, the fair market values were calculated
by discounting scheduled future cash flows using current interest rates offered
on loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio.
Accrued interest receivable and accrued interest payable: The carrying amounts
reported in the consolidated balance sheets for accrued interest receivable and
accrued interest payable approximate their fair values.
Deposit liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, savings, and money market deposits,
was, by definition, equal to the amount payable on demand as of December 31,
1996. The fair value of certificates of deposit was based on the discounted
value of contractual cash flows, calculated using the discount rates that
equaled the interest rates offered at the valuation date for deposits of similar
remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Corporation's financial assets and liabilities to include off-balance sheet
financial instruments as December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, noninterest bearing $ 9,337,968 $ 9,337,968 $ 7,608,418 $ 7,608,418
Federal funds sold and other short-term investments 5,392,000 5,392,000 6,044,000 6,044,000
Securities available for sale 19,337,299 19,337,299 10,975,301 10,975,301
Investment securities 16,885,814 16,793,202 23,282,101 23,430,785
Loans, net of reserve for credit losses 115,135,240 115,729,000 107,405,161 107,223,000
Accrued interest receivable 1,081,163 1,081,163 982,274 982,274
Financial liabilities:
Deposits $152,006,298 $153,331,000 $143,571,091 $144,156,000
Accrued interest payable 478,090 478,090 489,824 489,824
</TABLE>
At December 31, 1996, the Corporation had outstanding standby letters of credit
and fixed and variable rate commitments to extend credit. For fair value, the
fixed rate loan commitments were considered based on committed rates versus
market rates for similar transactions. Due to market constraints, rates have
remained relatively unchanged on these products, therefore, management has
determined fair value to be the same as the committed value. Standby letters of
credit and variable rate commitments are generally exercisable at the market
rate prevailing at the date the underlying transaction will be completed, and
therefore, they were deemed to have no current fair market value.
-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Commitments and Contingencies
Financial instruments with off-balance-sheet risk:
The Corporation 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 Corporation'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 Corporation uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. A
summary of the Corporation's commitments at December 31, 1996 and 1995 is as
follows:
1996 1995
----------------------------------
Commitments to extend credit $ 19,663,000 $ 15,871,000
Standby letters of credit 2,248,000 2,251,000
----------------------------------
$ 21,911,000 $ 18,122,000
----------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The
Corporation evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation 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, and residential and commercial real estate.
Standby letters of credit are conditional commitments issued by the Corporation
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 Corporation deems
necessary.
Fixed-rate commitments were $4,851,000 and $4,438,000 as of December 31, 1996
and 1995, respectively. The average rates charged on the fixed-rate commitments
were 8.5% - 10.5% for the years then ended.
All of the Corporation'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 3.
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Commitments and Contingencies (Continued)
Lease commitments:
The Corporation leases land, tenant space and certain equipment under operating
leases expiring at various dates to 2006. Total rental expense amounted to
approximately $101,300, $85,700 and $101,900 for the years ended December 31,
1996, 1995 and 1994, respectively. At December 31, 1996, minimum annual lease
payments in the aggregate were as follows:
Year Ended December 31,
- -----------------------
1997 $ 94,400
1998 62,800
1999 15,000
2000 15,000
2001 15,000
Thereafter 61,000
---------------
$ 263,200
---------------
Note 17. Related Party Transactions
At December 31, 1996, loans to officers and directors and corporations in which
officers and directors own a significant interest totaled $6,208,247. All such
loans were made in the normal course of business on substantially the same
terms, including interest and collateral, as those prevailing at the time for
comparable transactions.
An analysis of these related party transactions is as follows:
<TABLE>
<CAPTION>
Balance Balance
December 31, December 31,
1995 Additions Repayments 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Directors $ 2,979,084 $ 5,124,234 $ 2,361,911 $ 5,741,407
Officers and Employees 495,548 446,327 475,035 466,840
------------------------------------------------------------------
$ 3,474,632 $ 5,570,561 $ 2,836,946 $ 6,208,247
------------------------------------------------------------------
</TABLE>
Note 18. Capital Stock and Common Stock Split
On May 16, 1995, the Corporation changed its authorized capital from 1,000,000
shares of $3 par value common stock to 4,000,000 shares of $3 par value common
stock. On July 18, 1995, the Corporation's Board of Directors declared a two for
one split of the common stock effected in the form of a 100% stock dividend on
the outstanding stock to be distributed on August 31, 1995 to the stockholders
of record on July 31, 1995. The par value of the additional shares of common
stock was credited to common stock with reductions from surplus and retained
earnings.
All references in the accompanying consolidated financial statements to the
number of common shares and per share amounts have been restated to reflect the
stock split.
-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank. Failure
to meet minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must met specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios as set forth in
the table below of total and Tier I capital as defined in the regulations to
risk-weighted assets as defined, and of Tier I capital as defined to average
assets as defined. Management believes, as of December 31, 1996, that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Corporation
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 20,139 17.03% $ 9,460 8.00% $ 11,826 10.00%
Tier I Capital
(to Risk Weighted Assets) 18,893 15.98% 4,729 4.00% 7,094 6.00%
Tier I Capital
(to Average Assets) 18,893 11.51% 6,566 4.00% 8,207 5.00%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 17,041 15.09% 9,034 8.00% 11,293 10.00%
Tier I Capital
(to Risk Weighted Assets) 15,806 14.00% 4,516 4.00% 6,774 6.00%
Tier I Capital
(to Average Assets) 15,806 10.29% 6,144 4.00% 7,680 5.00%
</TABLE>
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Corporation's regulatory agency. Under that
limitation, the Corporation's subsidiaries could have declared additional
dividends of approximately $6,135,860 in 1996 without regulatory approval.
-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation
Financial statements for Community Bankshares Incorporated (not consolidated)
are presented below.
COMMUNITY BANKSHARES INCORPORATED (Parent Corporation Only) Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 535,614 $ 82,075
Investment in subsidiaries 18,403,205 16,171,348
Other assets 116,536 5,000
----------------------------
Total assets $ 19,055,355 $ 16,258,423
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Guaranteed debt of Employee Stock Ownership Trust $ 240,000 $ 330,000
Other liabilities 67,236 36,002
----------------------------
307,236 366,002
----------------------------
Stockholders' equity:
Common stock, par value $3 per share, authorized
4,000,000 shares; issued 1996 1,901,080 shares;
1995 1,853,975 shares 5,703,240 5,561,925
Surplus 1,712,201 1,688,322
Retained earnings 11,716,193 8,885,976
Net unrealized gain (loss) on securities available
for sale held by subsidiaries, net of taxes (144,982) 86,198
----------------------------
18,986,652 16,222,421
Unearned ESOP shares (238,533) (330,000)
----------------------------
Total stockholders' equity 18,748,119 15,892,421
----------------------------
Total liabilities and stockholders' equity $ 19,055,355 $ 16,258,423
----------------------------
</TABLE>
-26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 880,520 $ 140,000 $ 171,000
Gain on sale of securities -- 29,763 47,800
--------------------------------------
880,520 169,763 218,800
--------------------------------------
Expenses:
Professional fees 87,508 58,353 12,847
Stationary and supplies 17,451 3,782 2,008
Taxes, miscellaneous 850 850 850
Other 7,738 1,949 324
--------------------------------------
Total expenses 113,547 64,934 16,029
--------------------------------------
Income taxes (credits) (12,987) 3,002 10,802
--------------------------------------
Income before equity in
undistributed income
of subsidiaries 779,960 101,827 191,969
Equity in undistributed income of subsidiaries 2,276,154 2,252,835 1,606,872
--------------------------------------
Net income $ 3,056,114 $2,354,662 $1,798,841
--------------------------------------
</TABLE>
-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Securities Unearned
Capital Retained Gain ESOP
Stock Surplus Earnings (Loss) Shares
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $3,517,560 $ 1,919,285 $ 5,793,097 $ -- $ --
Issuance of common stock pursuant to
exercise of stock options 9,270 2,450 -- -- --
Net income for the year ended
December 31, 1994 -- -- 1,798,841 -- --
Cash dividends declared -- -- (171,000) -- --
Unrealized loss on available for
sale securities, net -- -- -- (14,990) --
-------------------------------------------------------------------
Balance, December 31, 1994 3,526,830 1,921,735 7,420,938 (14,990) --
Issuance of common stock pursuant to
exercise of stock options 15,000 47,500 -- -- --
Stock split effected in the form of a 100%
stock dividend 1,725,000 (1,036,432) (688,568) --
Proceeds from sale of stock 295,095 755,519 194 -- --
Net income for the year ended
December 31, 1995 -- -- 2,354,662 -- --
Cash dividends declared -- -- (201,250) --
Unrealized gain on available for sale
securities, net -- -- -- 101,188 --
Leveraged ESOP stock purchase -- -- -- -- (365,500)
Release of ESOP shares -- -- -- -- 35,500
-------------------------------------------------------------------
Balance, December 31, 1995 5,561,925 1,688,322 8,885,976 86,198 (330,000)
Issuance of common stock pursuant to
exercise of stock options 130,420 78,880 -- -- --
Cash settlement of options -- (123,750) -- -- --
Proceeds from sale of stock to ESOP 10,895 29,188 -- -- --
Purchase of fractional shares -- (1,918) -- -- --
Net income for the year ended
December 31, 1996 -- -- 3,056,114 -- --
Cash dividends declared -- -- (232,000) -- --
Unrealized loss on available for sale
securities, net -- -- -- (231,180) --
Release of ESOP shares -- 41,479 6,103 -- 91,467
-------------------------------------------------------------------
Balance, December 31, 1996 $5,703,240 $ 1,712,201 $ 11,716,193 $(144,982) $(238,533)
-------------------------------------------------------------------
</TABLE>
-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation (Continued)
COMMUNITY BANKSHARES INCORPORATED
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 3,056,114 $ 2,354,662 $ 1,798,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities -- (29,763) (47,800)
Release of ESOP shares 49,049 -- --
Undistributed earnings of subsidiary (2,276,154) (2,252,835) (1,606,872)
Changes in operating assets and liabilities:
(Increase) decrease in other assets (111,536) -- 10,077
Increase in other liabilities 31,234 24,700 11,303
-----------
Net cash provided by operating activities 748,707 96,764 165,549
-----------------------------------------
Investing Activities
Proceeds from sale of investment securities -- 78,700 87,800
Purchase of investment securities -- -- (48,938)
-----------------------------------------
Net cash provided by investing activities -- 78,700 38,862
-----------------------------------------
Financing Activities
Cash settlement of options (123,750) -- --
Payment of fractional shares (1,918) -- --
Dividends paid (232,000) (201,250) (171,000)
Net proceeds from issuance of common stock 62,500 62,500 --
-----------------------------------------
Net cash used in financing activities (295,168) (138,750) (171,000)
-----------------------------------------
Increase in cash 453,539 36,714 33,411
Cash, beginning 82,075 45,361 11,950
-----------------------------------------
Cash, ending $ 535,614 $ 82,075 $ 45,361
-----------------------------------------
</TABLE>
-29-
<PAGE>
Appendix F
OPINION OF MCKINNON & COMPANY, INC.
February 26, 1997
Board of Directors
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23803-1466
Dear Board Members:
In connection with the proposed acquisition of County Bank of
Chesterfield ("CBOC") 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 January 14, 1997 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 CBOC stock will receive consideration equal to 1.1504 CBI
shares prior to the effective date of the Reorganization (the "Reorganization
Effective Date") for each CBOC 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 nine years McKinnon has been lead managing underwriter in
approximately twenty four 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,
CBOC, and, on a pro forma basis, CBI and CBOC combined, and material proposed in
connection with the Agreement and Share Exchange, including, among other things,
the following:
(1) the Agreement and Share Exchange, dated as of January 14, 1997
among CBI and CBOC;
(2) CBI's and CBOC's financial results for fiscal years 1990
through 1996, and certain documents and information we deem relevant to our
analysis;
(3) held discussions with senior management of CBI and CBOC
regarding past and current business operations of, and outlook for, CBI, CBOC,
including trends, the terms of the proposed Reorganization, and related matters;
(4) reviewed the reported price and trading activity of CBI and
CBOC Common Stock and compared financial and stock market information (when
available) for CBI and CBOC 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;
(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 CBOC;
(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 CBOC. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of CBI or CBOC. With respect to financial forecasts, we have relied on
information furnished to us by CBI and CBOC and we have assumed that they have
been reasonably prepared and reflect the best currently available estimates of
CBI's and CBOC's management as to the expected future financial performance of
CBI and CBOC, as the case may be. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience 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 and CBOC listed on the NASDAQ Small Cap Market. 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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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:
5 Legal opinion of Williams, Mullen, Christian & Dobbins.
8 Tax opinion of Williams, Mullen, Christian & Dobbins.
23.1 Consent of Williams, Mullen, Christian & Dobbins (included in
Exhibits 5 and 8).
23.3 Consent of Mitchell, Wiggins & Company LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Vernon E. LaPrade, Jr.
23.6 Consent of Jack W. Miller, Jr.
23.7 Consent of H.E. Richeson
24 Powers of Attorney (included on Signature Page).
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;
(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
II-1
<PAGE>
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 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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
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 April 15, 1997.
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, as amended,
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 April 15, 1997
- -------------------------------------------
Nathan S. Jones, 3rd Officer and Director
(Principal Executive Officer)
*
- ------------------------------------------- Chief Financial Officer April __, 1997
Thomas H. Caffrey, Jr. (Principal Financial and
Accounting Officer)
*
- ------------------------------------------- Secretary and Director
Phillip H. Kirkpatrick
* Chairman of the Board
- -------------------------------------------
Sam T. Beale
* Vice-Chairman of the Board
- -------------------------------------------
W. Courtney Wells
*
- ------------------------------------------- Director
James E. Bloom
*
- ------------------------------------------- Director
James A. Boyd
*
- ------------------------------------------- Director
James R. V. Daniel
*
- ------------------------------------------- Director
Lawrence F. DeSouza
*
- ------------------------------------------- Director
B. Glenn Holden
*
- ------------------------------------------- Director
David E. Hudgins
*
- ------------------------------------------- Director
Richard C. Huffman
*
- ------------------------------------------- Director
Barry M. Kornblau
- ------------------------------------------- Director
Elinor B. Marshall
*
- ------------------------------------------- Director
Lawrence B. Nuckols
*
- ------------------------------------------- Director
John D. Seal, III
*
- ------------------------------------------- Director
Alvin L. Sheffield
*
- ------------------------------------------- Director
Louis C. Shell
*
- ------------------------------------------- Director
Harold L. Vaughn
</TABLE>
* Nathan S. Jones, 3rd, by signing his name hereto, signs this
document on behalf of each of the persons indicated by an asterisk above
pursuant to powers of attorney duly executed by such persons and previously
filed with the Securities and Exchange Commission as part of the Registration
Statement.
Date: April 15, 1997 /s/ Nathan S. Jones, 3rd
----------------------------------
Nathan S. Jones, 3rd
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
5 Legal opinion of Williams, Mullen, Christian & Dobbins.
8 Tax opinion of Williams, Mullen, Christian & Dobbins.
23.1 Consent of Williams, Mullen, Christian & Dobbins (included
in Exhibits 5 and 8).
23.3 Consent of Mitchell, Wiggins & Company LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Vernon E. LaPrade, Jr.
23.6 Consent of Jack W. Miller, Jr.
23.7 Consent of H.E. Richeson
24 Powers of Attorney (included on Signature Page).
[Williams, Mullen, Christian & Dobbins letter]
April __, 1997
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 February 27, 1997, 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 876,776 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, dated January
14, 1997, between County Bank of Chesterfield and the Company (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:
---------------------------------
Wayne A. Whitham, Jr.
Exhibit 8
[Williams, Mullen, Christian & Dobbins]
February ___, 1997
Board of Directors
Community Bankshares Incorporated
200 North Sycamore Street
Petersburg, Virginia 23804
Board of Directors
County Bank of Chesterfield
Richmond, Virginia
Re: Tax Opinion - Exchange of Stock
of County Bank of Chesterfield 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 County Bank of Chesterfield ("CBOC") for shares of common stock of
Community Bankshares Incorporated ("CBI") pursuant to the Agreement and Plan of
Reorganization by and between these parties dated January 14, 1997 (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 two subsidiaries. The first subsidiary is 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. The second subsidiary, Commerce Bank
of Virginia, 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.
CBOC is a Virginia-chartered bank and member of the Federal Reserve
system which provides commercial and consumer banking services to am client base
located primarily in Chesterfield County, Virginia, in the Richmond metropolitan
area. CBOC's principal executive offices are located in Chesterfield.
Pursuant to the Share Exchange Agreement, all shares of outstanding
common stock of CBOC 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
CBOC will be exchanged for 1.1054 shares of common stock of CBI and cash in lieu
of any fractional share. After the Share Exchange, CBOC 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 Registration Statement of CBI on Form S-4, dated
February 27, 1997 (the "Registration Statement"), including the Joint Proxy
Statement/Prospectus 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 CBOC (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 management of CBI and the management
of CBOC, respectively, in the Officers' Certificates upon which we have been
authorized to rely:
A. The fair market value of the CBI stock received by CBOC
shareholders in the Share Exchange will be approximately equal to the fair
market value of the CBOC stock surrendered by such shareholders in exchange
therefore.
B. To the best of the knowledge of the management of CBI
and the management of CBOC, there is no plan or intention on the part of CBOC'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 CBOC, as of the date of the same date. For
purposes of this representation, shares of CBOC stock surrendered by dissenters
or exchanged for cash in lieu of fractional shares of CBI stock will be treated
as outstanding CBOC stock on the date of the transaction. Moreover, shares of
CBOC stock and shares of CBI stock held by CBOC 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 CBOC acquired in the Share Exchange except for dispositions
made in the ordinary course of business.
E. CBI has no plan or intention to liquidate CBOC, to merge CBOC
into another corporation, to sell or otherwise dispose of the stock of CBOC or
to cause CBOC to issue additional shares of stock that would result in CBI
losing control of CBOC 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, CBOC will not have outstanding
any warrants, options, convertible securities, or any other type of rights
pursuant to which any person could acquire stock in CBOC that, if exercised or
converted, would affect CBI's acquisition or retention of control of CBOC, 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 CBOC.
H. There is no intercompany indebtedness of CBI or CBOC 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 CBOC. For this representation, CBOC stock redeemed for cash or other property
furnished by CBI will be considered as acquired by CBI. Further, no liabilities
of CBOC or its shareholders will be assumed by CBI, nor will any of the CBOC
stock acquired be subject to any liabilities.
J. CBOC 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 CBOC 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, CBOC 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 CBOC will exceed the sum of its liabilities, including any
liabilities to which its assets are subject.
N. CBOC 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, CBOC and the shareholders of CBOC 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 CBOC pursuant to the Share Exchange are or will be
consideration for services rendered. Any compensation paid to any
stockholder-employee of CBOC 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 CBOC 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 CBOC as a result of the Share Exchange.
3. No gain or loss will be recognized for federal tax purposes
by the shareholders of CBOC as a result of the exchange of their common stock
solely for the common stock of CBI.
4. Any dissenting shareholder of CBOC who receives solely
cash in exchange for shares of CBOC 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 CBOC 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 CBOC stock allocable to such fractional share interest.
6. The aggregate tax basis of the shares of CBI stock received
by each shareholder of CBOC will be equal to the aggregate tax basis of such
shareholder's shares of CBOC 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 CBOC will include the
holding period for the shares of CBOC stock of such shareholder surrendered
therefore in the Share Exchange, provided that the CBOC shareholder held such
stock as a capital asset on the date of the Share Exchange.
8. CBI's basis in each CBOC share received in the exchange will
equal the basis of that share in the hands of the CBOC shareholder.
9. The holding period under Section 1233 of the Code of each CBOC
share received in the Share Exchange by CBI will include the period during which
that share was held by the CBOC shareholder.
In rendering our opinion, we have considered the applicable provisions
of the Code, Treasury Regulations promulgated thereunder, 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 CBOC and
its 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/Prospectus 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 23.3
[MITCHELL, WIGGINS & COMPANY LLP]
Board of Directors
Community Bankshares Incorporated
We consent to the use of our report on the balance sheets of Community
Bankshares Incorporated as of December 31, 1996 and 1995, and the related
statements of income, 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
April 11, 1997
Exhibit 23.4
Consent of Independent Auditors
-------------------------------
The Board of Directors
County Bank of Chesterfield:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the joint proxy statement.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
April 15, 1997
Exhibit 23.5
CONSENT OF VERNON E. LaPRADE, JR.
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person about to become a director of Community Bankshares Incorporated, a
Virginia corporation (the "Company"), in the Joint Proxy Statement constituting
a part of the Company's Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission pursuant to the Act.
Dated: April 10, 1997
/s/ Vernon E. LaPrade, Jr.
Vernon E. LaPrade, Jr.
Exhibit 23.6
CONSENT OF JACK W. MILLER, JR.
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person about to become a director of Community Bankshares Incorporated, a
Virginia corporation (the "Company"), in the Joint Proxy Statement constituting
a part of the Company's Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission pursuant to the Act.
Dated: April 15, 1997
/s/ Jack W. Miller, Jr.
Jack W. Miller, Jr.
Exhibit 23.7
CONSENT OF H. E. RICHESON
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person about to become a director of Community Bankshares Incorporated, a
Virginia corporation (the "Company"), in the Joint Proxy Statement constituting
a part of the Company's Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission pursuant to the Act.
Dated: April 10, 1997
/s/ H. E. Richeson
H. E. Richeson
